Fortress Investment Group LLC (FIG)

FIG 
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Fortress Investment Group LLC (FIG)

Q3 2012 Earnings Call

November 02, 2012 10:00 am ET

Executives

Gordon Runté

Randal Alan Nardone - Co-Founder, Interim Chief Executive Officer, Principal and Director

Daniel N. Bass - Chief Financial Officer

Peter Lionel Briger - Co-Chairman of the Board, President, Principal and Member of Management/Organization Development Committee

Wesley Robert Edens - Principal, Co-Chairman of the Board, and Member of Management Committee

Analysts

Roger A. Freeman - Barclays Capital, Research Division

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

Marc S. Irizarry - Goldman Sachs Group Inc., Research Division

Christoph M. Kotowski - Oppenheimer & Co. Inc., Research Division

Presentation

Operator

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

Gordon Runté

Thank you, Holly. Good morning everyone, and welcome to the Fortress Investment Group's Third Quarter 2012 Earnings Conference Call. First, thank you for rearranging your calendars to be with us today. We thought it would be prudent to reschedule our call given all the storm-related issues that I know are far too familiar to many of you. So thank you for your patience, and more importantly, we hope that you and your state are well clear of harm's way.

We will begin our call today with opening remarks from Fortress interim Chief Executive Officer, Randy Nardone; and Chief Financial Officer, Dan Bass. After these remarks, we'll save most of our time this morning for your questions.

Joining us for that portion of our call, we have with us co-Chairman and Head of Private Equity, Wes Edens; co-Chairmen and Head of Credit, Pete Briger; Principal and Head of Liquid Markets, Mike Novogratz; Principal and Director, Rob Kauffman; co-CEO of Credit, Dean Dakolias, along with other members of our management team.

Now before we begin, let me remind you that statements made today that are not historical facts may be forward-looking statements. These 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 Randy.

Randal Alan Nardone

Thanks, Gordon, and thanks, everyone, for joining us today. Fortress had a solid third quarter with pretax distributable earnings of $64 million. That's a 28% increase over Q2. Third quarter and year-to-date investment returns and capital raising have been strong across all of our businesses. These are the clearest leading indicators of performance, and we believe they point to earnings and valuation upside.

Here's the highlights. Our AUM eclipsed $50 billion, up 8% in the third quarter and 18% for the year. We raised over $5 billion in new commitments through the third quarter, and each of our businesses is currently in the market raising capital.

We delivered strong investment performance in the quarter and year-to-date in all of our businesses. Through September, we had double-digit returns for our main credit and Macro Funds and over 20% valuation gains across our PE Funds. Logan Circle continued to outperform benchmarks in virtually all strategies.

Strong investment performance contributed to an increase in the value of our balance sheet, which I'll address further in a minute. And we paid off all remaining corporate debt in October. From a peak of over $800 million in 2009, we are now debt-free and will have greater capital management flexibility going forward.

Based on our performance to date, our financial strength and our confidence in our prospects going forward, our board approved a dividend of $0.05 a share for the third quarter.

Looking more closely at our financial results. Our distributable earnings continued to benefit from a stable, predictable stream of management fees. This reflects the high proportion of AUM in long-term and permanent structures. From the third quarter, we had management fees of $116 million. We expect to see continued growth in AUM, which will result in higher management fees in the near to medium term.

We finished the quarter with over $7 billion in dry powder that's not yet generating management fees. Obviously, the extent and pace at which we invest this will be determined by the opportunities we see in the market. But rough math is about $15 million in incremental management fees on each $1 billion invested. And as I mentioned, we're still raising capital in every one of our businesses.

Incentive income for the quarter was $65 million, up nearly 40% from Q2. As with management fees, we have visibility of higher incentive income in future periods. Our gross undistributed incentive income is over $540 million in PE style funds. That's up over 20% from Q2. Most of this resides in our credit funds, where 100% of NAV is above incentive thresholds. This should generate incentive income when realizations pick up, without any assumptions about incremental investment gains.

We've also had standout performance on our Macro Funds this year. Nearly all Macro NAV and all Asia Macro NAV is above high watermarks. In Private Equity, we've continued to see substantial gains in investment valuations. That moves us closer to preferred thresholds in our most recent funds. We need continued outperformance to hit those marks, and we have years left before these funds mature.

Strong investment performance typically leads to success in attracting new capital. I'd like to highlight a few key points on our fundraising in 2012. We broadened and deepened our LP relationships. Over 220 investors have committed capital to our funds in 2012. About 1/3 are new to Fortress, accounting for over $1.2 billion in commitments. We also continued to benefit from a geographically diverse investor base. Approximately 1/4 of the capital raised this year has come from investors in Europe, Asia, Australia and the Middle East. Every one of our businesses has had a strong year raising capital.

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