Fortress Investment Group LLC (FIG)

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Fortress Investment Group LLC (FIG)

Q2 2011 Earnings Call

August 04, 2011 8:30 am ET


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

Michael Novogratz - Principal, Director and Member of Management Committee

Gordon Runté -

Daniel Bass - Chief Financial Officer

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


Craig Siegenthaler - Crédit Suisse AG

Daniel Fannon - Jefferies & Company, Inc.

Roger Freeman - Barclays Capital



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

Gordon Runté

Thank you, Darla. Good morning, everyone, and welcome to our second quarter 2011 earnings conference call. We will begin our call with opening remarks from Fortress Chief Executive Officer, Dan Mudd; Principal, Mike Novogratz, and Chief Financial Officer, Dan Bass. After these remarks, we will save most of our time today for your questions. And we have Fortress Co-Chairman, Wes Edens and Pete Briger; and other members of their 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. As you know, in conjunction with our earnings release this morning, we made 2 announcements that I believe some, too extremely positive news for Fortress and our investors, the reinstatement of our dividend and the renewed 5-year employment agreements for our principals. Since this is an earnings call, today, I'm going to begin with an overview of results and the drivers behind them. And then, we will go to cover those additional matters. DE was down, which reflected difficult second quarter markets in Macro, but on a number of other fronts, as indicated there is positive news to dividend. The principals agreement, I think, both expressed a continued view that the markets are very far from whatever we consider to be the new normal, and that the transition from where we are to that new normal will continue to present extraordinary opportunities for Fortress.

Let me go to the financials. DE was $46 million, down from $73 million a year ago, and $103 million from the first quarter. While that's not far off from the pace of DE midway through last year, it fall short of where we'd like it to be. The short take here is that we have 3 big alternatives businesses. They're putting a great deal of capital to work across geographies and asset classes. And then, we have a broad range of investment mandates. Our global Macro Fund and our Commodities Fund operate against annual high watermarks, and following a strong first quarter, they crossed under their mark so while our management fee stream continues to be very strong, incentive income was not. I would say, and Mike's going to cover this in a minute. In Macro, political uncertainty clearly dominated the market from the European sovereign debt crisis to Asia, China, inflation concerns, to the pace of recovery or potential deterioration of the U.S. economy, and all the way through the debt ceiling debate. In a longer to context, I would say we remain focused on our core structural themes, and we're optimistic about the prospects to deliver stronger investments performance and financial results in the second half of the year. Mike, as I said, will get to that in a few minutes.

Longer-term investment themes, outside of macro, continue to play out, centered in large part on this financial system continuing to stumble and meander towards a new normal. Regulated and nonregulated financial institutions continuing to sell distressed assets to sanitize their balance sheets, institution struggling to refinance maturing debt, institutions offloading core platforms and the continued unwinding and reconfiguration of overly complex capital structures. With that in credit, given the longer themes that I just noted, it remains a very good time for our business with deep experience and structured finance and intensive asset management that can focus on what we're calling financial services garbage collection. Our success, in fact, in this arena are in our Credit business, the institutional investor Credit Focused Hedge Fund Of The Year Award.

In the second quarter, credit PE had a more moderate realizations than we saw in the first quarter, which resulted in somewhat lower incentive income versus what was an exceptionally strong first quarter. That's just a reflection of the fact that PE realizations don't occur on a fixed schedule. In fact, strong investment performance in these funds continue to produce unrealized incentive income, which is now grown to nearly $300 million across our credit funds.

Also in credit, the Credit Hedge Funds continued to shine up between 7% and 9% on the year so far, and returns have been strong in our Japan opportunities fund, with a 14% increase in the net asset value surplus for the quarter. In private equity, the main story is that the trend of investments valuation increases continued into the second quarter. Main fund investments in PE, we've seen valuation increases in 8 of the last 9 quarters, which equates to appreciation of 77%, or just under $6 billion. So very positive and sustained valuation trends in private equity.

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