Fortress Second-Quarter Profit Triples on Hedge-Fund FeesDevin Banerjee
Fortress Investment Group LLC, the first publicly traded private-equity and hedge-fund manager in the U.S., said second-quarter profit tripled as fees for beating certain benchmarks rose.
Pretax distributable earnings, which exclude some compensation costs and other items, increased to $148 million, or 30 cents a share, from $50 million, or 9 cents, a year earlier, New York-based Fortress said today in a statement. The average estimate of seven analysts surveyed by Bloomberg was an adjusted profit of 20 cents a share.
Fortress, which today said it appointed co-founder Randal Nardone chief executive officer, benefited from a fourfold increase in incentive income tied to fund performance. Fortress’s macro hedge funds that invest across asset classes and geographies were the biggest contributors to earnings after beating global markets in the quarter.
Distributable earnings reflected “the strongest quarter since our very first as a public company,” Nardone said on a conference call today with investors and analysts. “The incentive income comes from investment performance. We feel very good about prospects for the remainder of the year.”
Fortress rose 1.7 percent to $7.98 at the close of trading in New York, bringing its gain this year to 82 percent. The stock is down 57 percent since the company’s 2007 initial public offering, when it sold shares at $18.50 apiece to become the first U.S.-listed buyout and hedge-fund manager.
The firm’s macro hedge fund, which has more than $3 billion under management, returned 9.1 percent in the quarter, and its Asia macro fund gained 9.8 percent, compared with a decline of 1.2 percent for global stocks.
Fortress appointed Nardone CEO after Daniel Mudd resigned last year amid a U.S. government lawsuit stemming from his tenure as chief of mortgage-financing company Fannie Mae. Nardone, 58, was serving as CEO on an interim basis.
Fortress’s businesses include private equity, credit, liquid hedge funds and a traditional money manager called Logan Circle Partners, the company’s biggest unit by assets. Total assets fell 1.8 percent to $54.6 billion in the quarter even as the firm raised $1.2 billion. The decline was driven by a recapitalization of its publicly traded Eurocastle unit, which manages German commercial real estate assets.
Incentive income, which Fortress earns when its funds exceed certain performance thresholds, more than quadrupled to $199 million in the second quarter, compared with $47 million a year earlier. The increase was driven by the macro hedge funds, where incentive income surged to $92 million in the quarter, from $4 million a year earlier. Management fees, earned for overseeing client assets, rose 13 percent to $129 million.
The firm’s private-equity portfolio appreciated 1.8 percent during the quarter, resulting in $30 million of pretax distributable earnings, compared with $27 million a year earlier. Blackstone Group LP’s private-equity holdings gained 5.4 percent in the quarter, while KKR & Co.’s increased 0.9 percent.
Fortress’s distributable earnings differ from U.S. generally accepted accounting principles. Under those rules, known as GAAP, the company showed net loss attributable to Class A shareholders of $2.1 million, or 1 cent a share, compared with net income of $5 million, or a loss of 12 cents, a year earlier.
Blackstone, the world’s biggest private-equity firm by assets, reported net income of $211.1 million for the second quarter, compared with a loss of $75 million a year earlier. KKR reported a second-quarter profit of $15.1 million, compared with $146.3 million a year earlier as weak performance in its buyout holdings lowered its fund valuations. Both firms are based in New York.
Private-equity firms pool money from investors including pension plans and endowments with a mandate to buy companies within about five to six years, then sell them and return the funds with a profit after about 10 years. The firms, which use debt to finance the deals and amplify returns, typically charge an annual management fee equal to 1.5 percent to 2 percent of committed funds and keep 20 percent of profit from investments.
The company said investors pulled $177 million from its liquid hedge funds and $2 million from its credit hedge funds in the quarter. That brought redemptions to $566 million this year, compared with $1.6 billion in the same period last year.
Fortress last month finished raising about $1.7 billion for its Asia macro hedge fund, according to a letter sent to investors. Macro hedge funds seek to profit from macroeconomic trends by trading stocks, bonds, currencies and commodities.