Fortress Investment Group LLC (FIG)

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Fortress Investment Group LLC (FIG)

Q4 2009 Earnings Call

February 25, 2010 08:00 a.m. ET

Executives

Lilly Donohue - IR

Dan Mudd - CEO and Director

Dan Bass - CFO

Analysts

Roger Freeman - Barclays Capital

Robert Lee - KBW

Chris Kotowski - Oppenheimer

Craig Siegenthaler - Credit Suisse

Dan Fannon - Jefferies

Roger Smith - Macquarie

Roger Freeman - Barclays Capital

Presentation

Operator

Good morning, my name is Brooke and I'll be your conference operator today. At this time, I would like to welcome everyone to the Fortress fourth quarter year end earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions).

Thank you, Miss Lilly Donohue; you may begin your conference.

Lilly Donohue

Thanks Brooke. Good morning everyone. I'd like to welcome you all this morning February 25, for our fourth quarter and year end 2009 earnings conference call. Joining me today is Dan Mudd our CEO, Dan Bass our CFO; we also have with us today Wes Edens, Pete Briger and Mike Novogratz.

I would like to point out that statements today which are not historical facts may be forward-looking statements. Our actual results may differ materially from the estimates or expectations in any forward-looking statements. These statements represent the company's beliefs regarding events that by their nature are uncertain and outside of the company's control. I would encourage you to review the forward-looking statement disclaimer in our quarterly earnings release including the recommendation to review the risk factors that are contained in our quarterly reports that are filed with the SEC.

Now with that I'd like to turn it over to Dan Mudd. Dan.

Dan Mudd

Thanks Lily and good morning everybody and thanks for joining us. Let me give you my views on the quarter and the year. I think the year '09 at Fortress was really a reflection of the global economy and the markets we invest in. There was progress, there was positive momentum and there were a few bumps along the way.

Let's start with the three key indicators that we focus on assets, distributable earnings and performance. AUM is at $31.8 billion at year-end which is up 8%. Pretax DE was a $126 million for the full-year versus a loss of $162 in 2008. Q4 DE was $1 million, a result of $67 million in non-cash items which had already been marked down on the balance sheet that we took through earnings.

Even so that for the quarter reversed a loss from a year ago, and importantly fund performance continued to improve across all of our businesses. The macro and credit funds recovered from negative returns in '08 ending '09 with strong positive returns including reaching some high watermarks. As of year end $1.3 billion of assets in the liquid hedge funds were at their respective high watermarks, and thus eligible to earn performance fees.

I'll spend a few minutes providing some detail and some perspective, then Dan Bass will go through the results in detail, will spend the bulk of the time on your questions.

First the market, in the fourth quarter, the markets played out 2009's recovery, slow, shallow bumps along the way, if you think about Dubai, Greece and beyond. We are thinking about the art of this market in three phases. The first phase really transpired in 2008 and 2009. As you all know, the system basically ceased to function, panic set in places, stop gaps were rushed in to place. We witnessed that through the dislocation of our private equity business in our macro fund. Although we found some opportunities to bottom fish distress securities at our hybrid business.

In response to all that, we cut costs, we rebalanced our portfolios. We addressed our capital structure and helped our investors manage their portfolio issues. We made adjustments of our own, regained initiative and I think that’s evidenced by the capital raising and acquisition and strong investment performance since mid year '09.

The second phase began in late ‘09 and it continues today, we think the extraordinary government intervention has created a broad directionality in terms of central bank policies, liquidity, deleveraging in other words the system is functioning but the timing is still uncertain and highly subject to volatility.

In Phase-II the world is going to change over 1,000 banks could fail, companies will sell or liquidate entire lines of business and deleveraging and restructuring will proliferate. Having made the adjustments at Fortress, we think this environment sets up well for our macro business which can benefit from the volatility and our distress credit business which is all about restructuring and managing complexity.

Finally we think we will enter a surge phase over the course of the next couple of years. For some it will be a new normal but we think that companies will not actually be able to participate in the new normal economy until they have come through the necessary deleveraging restructuring, consolidation or other painful adjustments. And that we think of course is the classic environment for controlled private equity. So, in short I think having survived the turmoil over the past two years we have three and soon to be four businesses that position us well to invest across the cycles.

Now lets go through the company and review our the three levers that build value performance, capital formation and business development. On the performance side and our assets under management as you know refers to the amount on which we earn management fees was at $31.8 billion up 8% on the year. That number was essentially flat to Q3 as capital inflows and positive performance offset capital distributions actually paid out and redemptions actually paid out in the quarter.

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