Fortress Beats Estimates as Credit Offsets Macro Losses

Fortress Investment Group LLC, the first publicly traded private-equity and hedge-fund manager in the U.S., posted first-quarter earnings that beat analyst estimates after gains in its credit business made up for losses in some hedge funds.

Pretax distributable earnings, which exclude some compensation costs and other items, decreased to $97 million, or 21 cents a share, from $100 million, or 20 cents a share, a year earlier, New York-based Fortress said today in a statement. The results exceeded the 15-cent average per-share estimate by seven analysts in a Bloomberg survey.

Earnings were pushed down from the year-earlier period by higher expenses and lower incentive income as some of the firm’s hedge funds posted losses and private-equity fund valuations declined 0.2 percent. Fortress’s macro fund, which invests across products and geographies, lost 5.5 percent and its Asia macro fund declined 3.6 percent. The firm’s credit business reported a 24 percent increase in pretax distributable earnings, the only group to post a gain from a year ago.

“Obviously we’re disappointed with our 2014 results to date,” Chief Executive Officer Randy Nardone said on a call today with analysts and investors, referring to the liquid markets business, which encompasses the macro funds. “We have eight months left of the year and a hole to fill. We think we’ll fill it.”

Beats Expectations

Fortress rose 3.1 percent to $7.37 at the close of trading in New York, reducing losses since the start of the year to 14 percent, as gains in its private equity-style credit funds lifted earnings above analysts’ expectations. The stock is down 60 percent since the company’s February 2007 initial public offering, when it sold shares at $18.50 apiece to become the first U.S.-listed buyout and hedge-fund manager.

Fortress’s distributable earnings differ from U.S. generally accepted accounting principles. Under those rules, known as GAAP, the company’s net income attributable to Class A shareholders was $2.94 million, or 1 cent a share, compared with $14.3 million, or 5 cents, a year earlier.

Fortress’s businesses include private equity, credit, liquid hedge funds and a traditional-asset management unit called Logan Circle Partners, the largest by assets under management. The firm’s assets rose to $62.5 billion from $61.8 billion at the end of the fourth quarter.

Russia Risk

Fortress invested $200 million from its private equity-style credit funds in the quarter as the firm encountered high prices and high risk in potential deals.

“The macro view on credit is still: it is very difficult to find good investments,” Pete Briger, Fortress’s co-chairman and the executive overseeing its credit and real estate groups, said on the call. “Nothing in Eastern Europe has changed my opinion on that,” he added, referring to the escalating conflict on the border between Russia and Ukraine.

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 in a cycle lasting about 10 years. The firms, which use debt to finance the deals and amplify returns, typically charge an annual management fee equal to 1 percent to 2 percent of committed funds and keep 20 percent of profit from investments as a carried interest.

Hedge funds are mostly private pools of capital whose managers participate substantially in the profits from their speculation on whether the price of assets will rise or fall.

Fortress had $6.6 billion in capital available to invest, known as dry powder, as of March 31. The firm said it will pay stockholders a dividend of 8 cents a share on May 16.

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