Among Top Private Equity Firms, Fortress Falls Short

Private equity firms tend to keep their returns to themselves, sharing some figures with potential investors. Now the firms that are publicly traded or considering going public are disclosing more of their results in regulatory filings, giving a detailed view of their performance for the first time. The comparisons are not flattering for Fortress Investment Group (FIG).

Wesley R. Edens has made $20.9 billion in private equity investments for pensions, endowments, and wealthy individuals since co-founding Fortress 12 years ago. The market value of his funds' holdings, including distributions already paid to clients, was $19.6 billion as of Mar. 31, according to a May 10 regulatory filing. The total decline in value: $1.3 billion.

Older firms that enjoyed the boom of the '90s have fared far better. Kohlberg Kravis Roberts (KFN), in business since 1976, has produced a $42.8 billion profit for investors. Since first putting money to work in 1987, Blackstone, the world's largest private-equity firm, has turned $32.3 billion in invested capital into $49.4 billion. Apollo Management has invested $29.3 billion since starting its first fund in 1990. That amount is now valued at $46.8 billion, including distributions.

The numbers for all four firms include distributions and the value of assets that have not yet been sold—which could change over time. Because the investments were made over different periods, it isn't possible to calculate a simple long-term return for each. Officials at the four New York-based firms declined to comment. Fortress and Blackstone are publicly traded; KKR and Apollo plan to list shares on the New York Stock Exchange. Carlyle Group and other large private equity firms that are privately held do not disclose detailed performance figures.

The filings make it easier for prospective clients to compare performance. Blackstone, run by co-founder Stephen A. Schwarzman, aims to close its seventh buyout fund this month. Fortress' Edens plans to raise a new fund next year, after abandoning an attempt in late 2009. "Managers have traditionally obfuscated performance," says 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."

Fortress' filing specified how much capital each of its funds 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 of its buyout funds are currently below that mark and collectively would need to rise in value by $9 billion to claim a share of profits. The funds haven't lost any companies they own to bankruptcy, and the holdings may recover. Fortress, like other firms, also collects management fees from its funds; investors in its funds do not share in that income.

The filings shed light on how difficult the going has been for private equity recently. Fortress' performance suffered in part because Edens has raised and deployed more than half his private equity funds since 2005, when prices for buyouts surged and then the financial markets collapsed. So far, Fortress has a paper loss of $5 billion on those investments. Blackstone had an unrealized loss of $861 million in the period since 2005, and KKR buyout funds are down $708 million. Funds at Leon Black's Apollo posted a $2.2 billion profit.

Among the losing investments Fortress has made since 2005 is ski resort operator Intrawest, which this year restructured its debt. Investors in Fortress funds had seen their $1.7 billion equity stake reduced to 4 cents on the dollar as of Oct. 31. The 2007 Fund V has lost $1.7 billion of $3.6 billion in initial assets, as investments in railway company Florida East Coast Industries and a portfolio of loans Fortress calls MBS Holdings soured.

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

Fortress got off to a good start. Two early private equity funds, raised in 1999 and 2002, have internal rates of return of 26 percent and 37 percent, respectively, since inception. Its Fund III, raised in 2004, returned an annualized 1.1 percent from inception through Mar. 31. The rate for the 2006 Fund IV is a negative 9.7 percent.

Potential investors in Fortress funds are more likely to focus on the later numbers. "If we were to consider investing in Fortress, the first issue would probably be the performance of the more recent, larger vintages," says William Atwood, who helps oversee about $10 billion as executive director of the Illinois State Board of Investment. "It might make sense to wait and see if things turn around."

As for investors who bought stock in Blackstone and Fortress, their results have been disappointing. As of June 16, Blackstone shares have lost 66 percent since the company went public in June 2007. Fortress shares have lost 80 percent since their debut in February 2007.

The bottom line: No matter how smart you are, timing matters. Private equity firms, like other investors, found it far easier to make money in the boom.

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