Fortress First-Quarter Profit Falls on Hedge Fund Fees
Fortress Investment Group LLC (FIG), the first publicly traded private-equity and hedge fund manager in the U.S., said first-quarter profit fell 45 percent on lower management fees and incentive income.
Pretax distributable earnings, which exclude some compensation costs and other items, declined to $57 million, or 11 cents a share, compared with $103 million, or 20 cents, a year earlier, the New York-based company said today in a statement. That beat the 10-cents average estimate of seven analysts surveyed by Bloomberg.
Fortress joins Blackstone Group LP and Och-Ziff Capital Management Group LLC in reporting falling profit as financial markets pause amid the sovereign debt crisis in Europe. Fortress is under the leadership of 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.
“I have great confidence in our ability to grow our assets and generate substantial, stable cash flows,” Daniel Bass, Fortress’s chief financial officer, said on a call today with analysts and investors. “When the market is more conducive to realizations, we have a large amount of embedded earnings, both in our funds and through our balance sheet.”
Fortress fell 0.6 percent to $3.62 in New York trading. The stock has risen 7.1 percent this year. The shares are down 80 percent since Fortress’s February 2007 initial public offering, when the company sold stock at $18.50 a share to become the first U.S.-listed buyout and hedge-fund manager. Blackstone (BX), which followed four months later, has lost more than half of its value.
Global hedge funds rose 4.4 percent on average in the first quarter, according to data compiled by Bloomberg. The Standard & Poor’s 500 Index, which tracks the largest U.S. companies, rose 12 percent in the first quarter.
Fortress said assets under management rose to $46.4 billion from $43.7 billion at the end of the fourth quarter. Assets in the private-equity business rose to $13.2 billion from $12.5 billion during the same period, as the value of holdings gained.
The company gathered $2.9 billion from 150 investors during the quarter, the most in any quarter since 2008. Fortress’s base of limited partners is growing, with 30 percent of the commitments coming from new investors and 30 percent coming from outside the U.S., Nardone said during the conference call. Fortress may begin raising a new buyout fund in the second half of the year, Wesley Edens, the firm’s co-chairman, said on the call.
Fortress’s distributable earnings don’t comply with U.S. generally accepted accounting principles. Under those rules, the company’s net loss attributable to Class A shareholders narrowed to $30 million, or 16 cents a share, from $103 million, or 58 cents, a year earlier.
The firm also said it will pay a dividend of 5 cents a share to unitholders on May 21.
Blackstone, the world’s biggest buyout company and a bellwether for the private-equity industry, last month reported economic net income fell 24 percent to $432.3 million as its private-equity holdings rose at a slower pace.
Och-Ziff Capital Management Group LLC (OZM), the hedge fund run by Daniel Och, yesterday reported a 12 percent drop in first- quarter distributable profit on lower incentive income.
Private-equity firms pool investor money with a mandate to use it to buy companies, using mostly debt, with the intention of later selling the companies or taking them public for a profit. 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, traditionally 1.5 percent to 2 percent, and receive a portion of investment gains equal to 20 percent.
Nardone, a Fortress principal, is serving as interim chief executive officer after Mudd resigned to respond to allegations by the U.S. Securities and Exchange Commission that he understated by hundreds of billions of dollars the subprime loans held by Fannie Mae, where he was CEO from 2004 to 2008. Fortress last month said it paid Mudd $4.6 million in 2011.
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