Fortress Third-Quarter Profit Rises 49% on Incentive Income

Fortress Investment Group LLC, the first publicly traded private-equity and hedge-fund manager in the U.S., said third-quarter profit rose 49 percent on higher fees paid to the firm for managing its funds.

Pretax distributable earnings, which exclude some compensation costs and other items, increased to $64 million, or 12 cents a share, from $43 million, or 8 cents, a year earlier, New York-based Fortress said today in a statement. Analysts had expected profit of 11 cents a share, according to the average of seven estimates in a Bloomberg survey.

Rising stock markets are lifting the value of fund holdings and the fees for overseeing them. Fortress’s macro hedge fund, which invests across products and geographies, returned 11 percent in this year’s first nine months, the firm said in an October regulatory filing, recouping a 9.4 percent loss from last year. Fortress is being led by co-founder Randal Nardone after former Chief Executive Officer Daniel Mudd resigned in January amid a government lawsuit stemming from his tenure as the chief of mortgage financing company Fannie Mae.

“With no corporate debt, and substantial balance sheet value, we have never operated from a position of greater financial strength,” Nardone said in the statement.

Incentive income, which investors typically pay managers once their fund reaches a certain threshold, was $65 million, compared with $14 million a year ago, Fortress said.

Portfolio Gain

Fortress rose 2.3 percent to close at $4.55 in New York trading, bringing its gain this year to 35 percent. The shares have declined 75 percent since the February 2007 initial public offering, when Fortress sold shares at $18.50 to become the first U.S.-listed buyout and hedge-fund manager. Blackstone Group LP, which followed four months later, has lost about half of its value.

The value of Fortress’s private-equity portfolio increased 9.4 percent during the quarter, compared with 7.1 percent for Blackstone and 6.1 percent for KKR & Co. Fortress has $14.7 billion of private-equity assets under management, up 16 percent from a year ago.

Blackstone, the world’s biggest private-equity firm by assets, last month reported net income of $129 million, compared with a loss of $275 million a year ago. KKR, the buyout firm run by Henry Kravis and George Roberts, reported a third-quarter profit of $127 million after a loss of $243 million a year earlier as strong performance in its buyout holdings boosted earnings. Both firms are based in New York.

Total assets under management at Fortress rose 8 percent to $51.5 billion since the end of the second quarter. The company said it paid off $181 million of outstanding debt after the third quarter ended, and it will pay a dividend of 5 cents a share on Nov. 19.

RailAmerica Sale

Fortress’s distributable earnings don’t comply with U.S. generally accepted accounting principles. Under those rules, known as GAAP, the company’s net income attributable to Class A shareholders was $1 million, or 4 cents a share, compared with a net loss of $142 million, or 83 cents, a year earlier.

Private-equity firms pool money from investors including pension plans and endowments with a mandate to buy companies within about five to six years, overhaul and then sell them, and return the funds with a profit after about 10 years. Hedge funds are mostly private pools of capital whose managers participate substantially in the profits from their speculation on the price of assets.

Managers of both types of funds charge annual management fees, typically 1.5 percent to 2 percent, and receive a portion of investment gains, traditionally equal to 20 percent.

Fortress in July agreed to sell RailAmerica Inc. to Genesee & Wyoming Inc. for $1.4 billion, combining North America’s two largest short-line and regional rail operators. Fortress invested $450 million in cash when it bought the Jacksonville, Florida-based company in February 2007 for $1.1 billion including debt.

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