Fortress Investment Group LLC (FIG)

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Fortress Investment Group LLC (FIG)

Q3 2010 Earnings Call

November 5, 2010 8:30 am ET

Executives

Dan Mudd - CEO

Dan Bass - CFO

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

Pete Briger - Principal and Co-Chairman

Stu Bohart - President of Liquid Markets and Senior Managing Director of Strategy

Analysts

Robert Lee - KBW

Dan Fannon - Jefferies

Roger Freeman - Barclays

Chris Kotowski - Oppenheimer & Company

Presentation

Operator

At this time, I would like to welcome everyone to the Fortress third quarter earnings call. (Operator instructions)

Thank you. Ms. Donohue, you may begin the conference.

Lilly Donohue

Thanks, Amanda, and good morning, everyone. I'd like to welcome you all today November 5 to our third quarter earnings call. Joining me today is Dan Mudd, our CEO; Dan Bass, our Chief Financial Officer. And we also have with us Wes Edens, Pete Briger and Stu Bohart.

I'd also 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 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 also encourage you to review our 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.

Now I'd like to turn the call over to Dan Mudd.

Dan Mudd

Thanks, Lilly. Good morning, everybody. Thanks for joining us. I think it was a very solid quarter. We made a lot of progress really across Fortress. Financial results were strong and improved. The capital raising momentum continued from the second quarter. And the businesses, the deal flow and the pipelines continued to build.

As you may have noted, we announced steps to build out our global organization with the opening of an Asian hub in Singapore. And I think overall and probably most importantly, the businesses continued to capitalize on investment opportunities that are really aligned with the greatest strengths at Fortress.

Performance was strong across the vast majority of the funds, and the performance carried through into October. As one common indication, nearly 100% of AUM for the main credit and macro hedge funds ended October above their high watermarks.

I think the backdrop of the third quarter was really the continuation of a muted, choppy, messy recovery. Uncertainty in the market continued to drive risk aversion that stifled growth, particularly I think in the developed world. The big challenges that are facing both public and private decision makers, while we work through what's really going to be not just the next several quarters, but probably the next several years in terms of developing clarity on how policy and how regulator prescriptions and how investment themes are going to work their way out.

It seems to us unlikely that this pattern of kind of moribund growth is going to achieve sufficient velocity to get up to escape velocity and into a more robust recovery anytime next year.

If you think about what are the upsides in all the investment themes, the upside is at some level things don't get any worse in the continuation of where things are. The downside, particularly with reflection on the QE2 program that was just announced, consumers and CEOs remain unconvinced, and we backslide or double-dip or trip backwards.

But I think in most of the medium term and most likely scenarios, what works well for us here is the continuation of the themes that have worked well over the past many quarters. The great liquidation continues and the investment strengths here at Fortress produce value for the firm and for the clients.

I think that in that, the third quarter really represents a more typical quarter for what we'll see going forward, which is a franchise well positioned to capitalize on these opportunities and to take advantage of them as the kind of new normal economy takes shape.

So today, I'll give you an overview and some perspective on our financial performance, talk about the key elements that drove that. Dan Bass will go into more details on the results. Wes, Pete are here. Novogratz and Levinson are upstairs. As you know, payrolls just came out. They're focused on that. And we welcome Stu to the call.

Pre-tax distributable earnings for the quarter were $78 million, an increase of about 40% over the prior year. On a year-to-date basis, we recorded pre-tax DE of $247 million through the third quarter. That $247 million through Q3 roughly doubles what we did in the first nine months of 2009.

The two key drivers are straightforward and I think pretty obvious. One, management fees have continued to benefit the growth in AUM. And two, there is kind of the second cylinder of the business; incentive fees are beginning to reflect the strength in the performance of the funds. Incentive income of $75 million in the quarter equaled the total incentive income that we earned in '09.

Let me talk about investment performance for a second. That's a key lever for changing the earnings dynamics in the business. We had strong, absolute and relative performance in our macro funds. Those funds were invested consistent with the theme of low rates and low growth in the U.S. I think we enforced this week positive rate in commodity trends in China and the emerging markets, and a U.S. consumer that's still very much undecided is now on the sidelines.

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