Fortress Investment Group LLC (FIG)

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Fortress Investment Group LLC (FIG)

Q2 2010 Earnings Call Transcript

August 5, 2010 8:00 am ET

Executives

Lilly Donohue – Managing Director and Head, Public Shareholder Relations and Media Relations

Dan Mudd – CEO

Dan Bass – CFO

Wes Edens – Co-Founder, Principal and Co-Chairman

Pete Briger – Principal and Co-Chairman

Mike Novogratz – Principal and Director

Analysts

Robert Lee – KBW

Roger Freeman – Barclays Capital

Alex Blostein – Goldman Sachs

Dan Fannon – Jefferies

Roger Smith – Macquarie

Presentation

Operator

Good morning. My name is Brooke, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fortress Investment’s second quarter 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) I will now turn the conference over to Lilly Donohue, Managing Director of Investor Relations. Thank you, Ms. Donohue. You may begin your conference.

Lilly Donohue

Thanks, Brooke. Good morning, everyone. Welcome to our second quarter earnings call. Today is August 5, 2010. Joining me today is Dan Mudd, our CEO; Dan Bass, our CFO; and we also have with us Wes Edens, Pete Briger, and Mike Novogratz.

Before I turn the call over to Dan, I’d just want 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 statement. These statements represent the company’s beliefs regarding events that by their nature are uncertain and outside of the company’s control.

I’d like to encourage you to review the forward-looking statement disclaimer in our quarterly earnings release as well as the recommendation to review the risk factors that are contained in our annual and quarterly reports that are filed with the SEC.

With that, I'd like to turn over to Dan Mudd. Dan?

Dan Mudd

Okay. Thanks, Lilly. Good morning, everybody, and thanks for joining us today. In the second quarter, Fortress delivered solid financial performance, strong new business momentum in a market environment that I think range from challenging to treacherous. To recap that a little bit, in early April, market expectations generally centered on a theme of steady recovery and gathering strength in the economy. Volatility continued to decline. (inaudible) was at its lowest level since May of ’08. And I think investor sentiment was broadly positive around the beginnings of a steady recovery.

By late April, following the onset of the European sovereign debt crisis, negative pressures mounted, economic data became consistently weaker, government struggled to define credible plans to reduce fiscal deficits without jeopardizing their recovery, regulatory uncertainty was unabated, even worsened actually with the passage of legislation, and anxieties got amplified through the Gulf oil spill and flare-up in Korea and the Middle East.

In the end, the concerns mounted as the recovery was losing its momentum, volatility returned, investor sentiment cratered, and we saw dramatic declines in global equity indices. S&P and the Dow, for example, declined by 12% and 10% respectively between March and June. So in our case, against that backdrop, we generated $73 million or $0.14 a share in pretax distributable earnings, which was up from $59 million in the second quarter of 2009.

Our assets under management rose slightly to $41.7 billion despite the double-digit declines in most of those global equity indices. We raised $1.9 billion in third-party capital, terrific story, which more than doubled the amount of capital that we had raised in the first quarter. Fund performance was very strong, and credit down slightly in macro and up a bit for the quarter in commodities.

From a standpoint of strategic progress at Fortress, we closed our acquisition of Logan Circle and continued to build our presence in Japan, which is marked by the successful close of our Japan Opportunities Fund reaching its cap. And yesterday, we announced that Stu Bohart, who served as the co-head of Morgan Stanley Investment Management after leading the alternatives business there, will join our leadership team as the President of Fortress Liquid Markets.

Stu will take on all the non-investment activities of the business, which will allow our CIOs and the core investment teams to focus exclusively on investing, reiterating a thing that I think is accurate across Fortress in of course the past year. In addition to that, Stu will focus on strategies to build our platform, strengthen our culture, and meet the needs of our investors broadly. So we very much look forward to Stu joining the team. So even in the phase of a very different backdrop, I think my broad view of steady progress, growing momentum, significant opportunities, more to do. It hasn’t really changed very much since our last call.

Let me put a little bit of numbers behind that, provide a little bit more detail on investment performance, our capital raising, business development efforts, and how the thesis that we’ve talked to you about before, the great liquidation continues to align with the strengths of our business. Then I’ll hand it off to Dan Bass for more details on the results. Then we’ll leave time – the majority of the time for your questions. And as Lilly indicated, all of our principals are here to talk about their respective businesses.

First, on performance, in our liquid funds, Fortress Macro and Drawbridge Global Macro were each up more than 2% year-to-date at June 30th. On a relative basis, these funds outperformed with declines in the second quarter, the proportion of main fund AUM above high watermarks declined to 36% from 66% in Q1. An additional 58% of AUM was within 3% of high watermarks. I should also mention, in July, performance in our Macro Funds was down 1.4% although overall the funds remain up about 1% for the year.

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