Fortress’ $5 Billion Buyout Loss Haunts Edens as Black Has Gain

Fortress $5 billion buyout losses, Black gains
Wes Edens, who co-founded Fortress and oversees private equity, plans to raise a fund next year after abandoning an attempt in 2009. Photographer:Adrian Moser/Bloomberg

Fortress Investment Group LLC has $5 billion in unrealized losses from private-equity funds started since 2005, the beginning of a two-year buyout boom, more than its largest New York rivals combined.

Blackstone Group LP, the biggest private-equity firm, had an unrealized loss of $861 million in the period and KKR & Co.’s buyout funds are down $708 million, according to regulatory filings in the past six weeks. Funds at Leon Black’s Apollo Global Management LLC posted a profit.

The numbers, some disclosed for the first time, show how the largest buyout firms have navigated the damage from investments made before the 2007 financial crisis and allow clients to compare performance as managers seek new money. Blackstone, run by co-founder Stephen Schwarzman, aims to close its seventh buyout fund this month. Wes Edens, who co-founded Fortress and oversees private equity, plans to raise a fund next year, after abandoning an attempt in 2009.

“If we were to consider investing in Fortress, the first issue would probably be the performance of the more recent, larger vintages,” said William Atwood, who helps oversee about $10 billion as executive director of the Illinois State Board of Investment in Chicago. “It might make sense to wait and see if things turn around.”

Edens’s funds invested about $13.8 billion in private equity since 2005. That amount has declined 36 percent to $8.8 billion, including distributions, according to a May 10 filing with the U.S. Securities and Exchange Commission. The loss can widen or turn into a profit depending on how the holdings fare in the future.

Incentive Income

The shortfall over the past five years more than offset gains in earlier funds, leaving Fortress’s private-equity investors with a paper loss of $1.3 billion on $20.9 billion in initial assets since the firm was founded in 1998, a decline of 6 percent. Clients received $9.1 billion in distributions.

Performance suffered in part because the firm made 66 percent of its private-equity investments in 2005 or later, more than peers over similar periods. Blackstone, KKR and Apollo all posted profits in their buyout funds over similar periods and over the life of their firms.

Officials at the four New York-based firms declined to comment for this story.

The Fortress filing broke down amounts on how much capital each fund invested, how much it returned to clients, and what the remaining holdings are worth. Fortress included information on how much its investments need to gain for the firm to earn incentive income. Those figures show 12 buyout funds are currently below that mark and together need to rise $9 billion to claim a share of profits. The funds haven’t lost any companies to bankruptcy and the holdings may recover.

‘Obfuscated Performance’

“Managers have traditionally obfuscated performance,” said Harold Bradley, chief investment officer of the Ewing Marion Kauffman Foundation, which oversees $1.7 billion. “That prohibited comparative analysis. The new data is a start.”

Blackstone started publishing similar information earlier this year, after an exchange of letters with the SEC. The firm, in a letter dated Dec. 15, agreed to comply with a request by the regulator to provide investors “with a more meaningful understanding” of the performance of each of the firm’s “significant” funds.

John Heine, an SEC spokesman, declined to comment on the discussions with Blackstone.

Blackstone, KKR

Blackstone invested $30.3 billion in buyout funds dated August 1997 and later, and added $14.1 billion, or 47 percent, in value including distributions, according to its May 10 filing. About 56 percent of the capital was spent since December of 2005, when it started Blackstone Capital Partners V. That fund is down $861 million on $16.9 billion invested, and has $4.4 billion left to put to work.

Blackstone said all private-equity funds that have fully invested their capital commitments are earning a share of profit, or carried interest. BCP V would need to gain $4.8 billion to reach the threshold. Blackstone doesn’t include real estate funds under private-equity.

KKR has invested $36.7 billion in traditional private equity since 1996 and posted a gain of $15.5 billion, or 42 percent, according to a June 3 filing. Funds started since 2005 account for $21.6 billion, or 59 percent, of the capital deployed and are down $708 million, or 3 percent.

KKR increased its holdings by $2.5 billion during the first quarter and Blackstone’s private-equity investments gained by about $3.4 billion. The figure includes realized and unrealized gains.


Apollo has invested $24 billion through funds dated 1998 or later, and distributed $20.2 billion to clients, according to a filing dated March 22. With assets worth $16 billion still held by the funds, investors got a return of $12.2 billion in the past 12 years. Two funds started since 2005 invested $15.3 billion and are up $2.2 billion, or 14 percent.

The 2006 Fund VI, which has invested $10.8 billion, was valued at $11.6 billion as of Dec. 31, including distributions. The fund had dropped to $6.5 billion in the first quarter of 2009, according to a person who has seen the marks and who asked not to be identified because the information is private.

It recovered because it bought debt in companies owned by Apollo, which gained with last year’s credit market rally. The fund’s $919 million investment in real estate company Realogy was marked at $74 million as of Dec. 31, according to a letter sent to investors in March.

Charles Zehren, a spokesman for New York-based Apollo, declined to comment.

Performance Suffers

Even with recent markups, returns of the younger funds are in many cases below those of older vintages. Two of Fortress’s earliest funds, raised in 1999 and 2002, posted annualized rates of return of 26 percent and 37 percent, respectively, since inception. Fund III, raised in 2004 and 40 percent larger than Fund II at $2.8 billion, produced a rate of return of 1.1 percent from inception through March 31. The rate for the 2006 Fund IV is a negative 9.7 percent.

Among the investments of Fund IV is Intrawest ULC, which this year restructured its debt after lenders threatened to auction assets of the ski resort operator. Investors in Fortress’s Fund IV, Fund IV Co and FICO funds had seen their collective $1.7 billion equity stake in the company reduced to 4 cents on the dollar as of Oct. 31. In the restructuring, Fortress agreed to buy additional equity in Intrawest for $150 million, a person briefed on the talks said in February.

Intrawest, Hilton

The 2007 Fund V has lost $1.7 billion of $3.6 billion in initial assets, as investments in Florida East Coast Industries Inc. and a portfolio of loans Fortress calls MBS Holdings soured.

Blackstone also had to restructure some of its biggest holdings. Its Hilton Worldwide hotel chain in April completed a deal to reduce debt by almost $4 billion and extend the maturity by two years. Blackstone bought Hilton in 2007 near the top of the real estate market in a deal worth about $26 billion, including assumed debt.

Still, since its first buyout fund, which began putting money to work in 1987, Blackstone has increased $32.3 billion in invested capital to $49.4 billion as of March 31. That number includes amounts already distributed to clients and the value of assets that have not yet been sold.

Track Record

Apollo’s private-equity funds invested $29.3 billion since the firm was started in 1990, and increased that to $46.8 billion, including distributions, with about 52 percent of the total invested coming from 2006 and 2008 funds.

KKR, in business since 1976, has produced a $42.8 billion profit for investors on $47.2 billion invested. Last year, the firm raised $543 million to shore up investments in Europe. KKR has $12.6 billion in unused capital commitments to funds raised since 2005.

Apollo disclosed figures through Dec. 31, 2009, and KKR through March 31 of this year. Both published the information in S-1 forms with the SEC, registration statements they are required to file because they plan to list shares on the New York Stock Exchange.

Blackstone will probably finish raising its seventh buyout fund by the end of June, said a person briefed on the plan who declined to be identified because the information is private. The fund, BCP VI, will have about $12 billion in capital commitments, according to the person. The firm had sought $15 billion to $20 billion when it started raising the fund in 2008.

Looking for Capital

Fortress in September released long-time investor Washington State Investment Board from a $300 million commitment to a new private-equity fund, according to the pension plan, which manages $74 billion. The firm had aimed to raise $6 billion for the fund, according to researcher Preqin Ltd.

Edens has said Fortress plans to market a new buyout fund “in the first part of next year.” Commitments to the younger funds have been largely deployed, leaving little cash to take advantage of any future investing opportunities.

The private-equity business has “a couple of billion dollars in capital,” Edens said on a conference call last month. The number shrinks to about $450 million when excluding cash at companies the funds hold, according to Bloomberg calculations based on the filing.

“Managers with little or no dry powder are generally looking for fresh capital,” said Craig Marmer of San Francisco- based Probitas Partners, which helps private equity firms raise funds.

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