Fortress Investment Group LLC (FIG)

FIG 
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Fortress Investment Group LLC (FIG)

Q1 2011 Earnings Call

May 05, 2011 8:30 am ET

Executives

Stuart Bohart - President of Liquid Markets, Senior Managing Director of Strategy, Member of Management Committee and Member of Operating Committee

Wesley Edens - Co-Founder, Co-Chairman, Principal and Member of Management Committee

Peter Briger - Co-Chairman, Principal and Member of Management Committee

Gordon Runté -

Daniel Bass - Chief Financial Officer

Daniel Mudd - Chief Executive Officer, Director and Member of Management Committee

Analysts

Gerald O'Hara - Jefferies & Company, Inc.

Robert Lee - Keefe, Bruyette, & Woods, Inc.

Marc Irizarry - Goldman Sachs Group Inc.

Roger Smith - Macquarie Research

Roger Freeman - Barclays Capital

Presentation

Operator

Good morning. My name is Laurie, and I'll be your conference operator. At this time, I would like to welcome everyone to the Fortress First Quarter Earnings Conference Call. [Operator Instructions] I'll now turn the call over to Gordon Runté. Please go ahead, sir.

Gordon Runté

Thank you, Laurie. Good morning, everyone, and welcome to our first quarter 2011 earnings conference call. We will begin our call with opening remarks from Fortress Chief Executive Officer, Dan Mudd; and Chief Financial Officer, Dan Bass. After these remarks, we'll save most of our time today for your questions. And we have Fortress Co-chairman, Wes Edens and Peter Briger; Principal Mike Novograt; Senior Managing Director, Stu Bohart; and other members of our executive team to join us for that portion of the call.

Before we begin, let me remind you that statements made today that are not historical facts may be forward-looking statements. Such statements are, by their nature, uncertain and may differ materially from actual results. We encourage you to read the forward-looking statement disclaimer in today's earnings release, in addition to the risk factors described in our quarterly and annual filings.

With that, let me hand off to Dan Mudd. Dan?

Daniel Mudd

Okay. Thanks, Gordon, and thanks everybody for joining us today. I think the progress and the performance in the first quarter put us on a solid start for 2011 and positioned us for another strong year.

Pretax DE for the first quarter was $103 million or $0.20 a share. That was the strongest first quarter at Fortress since 2007 and the second consecutive quarter with pretax earnings over $100 million.

As in the last few quarters, management fees were strong and stable, again reflecting the benefit of having nearly 80% of our AUM in longer-term lockups structures. And in this quarter, incentive income was substantial, representing about 50% of revenues.

The results, I think, continue to reflect the very attractive earnings dynamics of a diversified asset manager delivering strong returns for its LPs. Incentive income follows directly from that strong performance, which we delivered across the franchise even in a market that was unsettled by events that ranged from unpredictable to unthinkable. So let me start with that environment.

Global uncertainty prevails. Year-on-year, oil and gold are up over 30% after a moment where lip service was devoted to deflation, there are now solid expectations of a global inflationary cycle. Central banks in India, Southeast Asia and Europe have commenced formal tightening, and China continues policy tightening.

The U.S. now effectively on credit watch, continues to maintain 10-year rates below 4% with a fiscal deficit at $1.6 trillion, which is 11% of GDP, slow relative growth, all of those things putting dead weight on the dollar.

Corporate profits are running at an annualized $1.6 trillion, a level that we last saw in the second quarter of 2007. The difference between 2007 and 2011, same level of corporate profits, is that we're doing that with 7 million fewer U.S. workers. Those jobs seem unlikely to come back in the near term, keeping a strain on municipalities, the U.S. housing market and the consumer sector.

Commercial property, trophies aside, remains under occupied and difficult to finance. And an immense overhang of regulatory uncertainty continues to weigh on the financial sectors, important elements of Dodd-Frank, housing policy and trade policy all remain unresolved.

So for us, this all adds up to a fragile, hair-triggered environment. Accordingly, events, tsunamis, revolutions, oil well blow out, sovereign crisis on the downside. And on the upside, victories in the war on terror, positive economic numbers and political progress, all have a magnified albeit transient impact on the markets.

Amidst all of these, we have equity markets trading at post 2008 highs and volatility at the lows. In our view, this environment calls for the kind of tactical, opportunistic, high-intensity investment approach that is Fortress' specialty.

Let me go through the businesses. First, in Liquid markets, our macro fund produced net returns of 1.9% in the quarter while many other funds in the space struggled. Our new Fortress Asia Macro Fund generated net returns of 3.5% in March alone, its first month of existence and a month in which a lot of similar funds were stopped out.

Fortress Commodities Fund delivered 3% for the quarter. Although we've given back a little bit in April and the start of May, Fortress Macro remains in positive territory year-to-date. Asia Macro is still up over 3% and Commodities, over 2.6%.

In our Credit Hedge Funds, our main DBSO funds continued to perform very well, generating net returns ranging from 5% to 6% for the quarter. This follows exceptional full year returns in 2010 ranging from 25% to 30%.

In Credit Private Equity, the inception to date return in our flagship Opportunities Fund was 32% net, 42% gross. And at the end of the first quarter, net asset value surplus is across the Credit PE Funds increased to $2.7 billion, which was up 16% from the end of the year in December.

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