Fortress Investment Group LLC (FIG:US), the first publicly traded private-equity and hedge-fund manager in the U.S., said fourth-quarter profit more than doubled on higher fee income from managing funds.
Pretax distributable earnings, which exclude some compensation costs and other items, increased to $107 million, or 20 cents a share, from $50 million, or 9 cents, a year earlier, New York-based Fortress said today in a statement. The average (FIG:US) estimate of seven analysts in a Bloomberg survey was for profit of 14 cents a share.
Income tied to fund performance almost doubled as stronger equity markets lifted returns, with Fortress’s macro hedge fund gaining 18 percent in 2012 and the Asia macro fund rising 21 percent. Fortress is being led by co-founder Randal Nardone after former Chief Executive Officer Daniel Mudd resigned last year amid a government lawsuit stemming from his tenure as chief of mortgage financing company Fannie Mae.
“Better-than-anticipated performance fees in both liquid hedge funds and credit hedge funds, coupled with lower-than- expected performance-fee compensation, drove the beat versus our estimates,” said Roger Freeman, a New York-based analyst at Barclays Plc. “Flows came in somewhat weaker than expected,” he added, referring to new money raised and increases in invested capital. Freeman rates the stock overweight.
Fortress fell 0.3 percent to $6.21 at the close of trading in New York. The stock, which has gained 41 percent this year, is down (FIG:US) 66 percent since the company’s 2007 initial public offering, when the company sold shares at $18.50 apiece to become the first U.S.-listed buyout and hedge-fund manager. Blackstone, which followed four months later, has lost (BX:US) 39 percent of its value.
Fortress’s distributable earnings differ from U.S. generally accepted accounting principles. Under those rules, known as GAAP, the company’s net income attributable to Class A shareholders was $102 million, or 24 cents a share, compared with a net loss of $91 million, or 49 cents, a year earlier.
Revenue rose 51 percent to $417.6 million, helped by an 87 percent jump in incentive income at Fortress affiliates, to $207.4 million. Expenses fell 51 percent to $254 million after a principals’ compensation agreement expired. Assets under management rose to $53.4 billion from $51.5 billion at the end of the third quarter, with the biggest gains in credit funds and liquid markets.
Blackstone Group LP (BX:US), the world’s biggest private-equity firm by assets, last month reported net income of $106 million after a loss of $23 million a year ago. KKR & Co. (KKR:US) reported a fourth-quarter profit of $97 million, compared with $46 million a year earlier, helped by the rising value of its buyout holdings. Both firms are based in New York.
Fortress earned the most from its credit-style funds, which produced $46 million of pretax distributable earnings, up 59 percent from a year earlier.
“Looking at investment opportunities today, we believe the credit markets continue to price in far too much optimism,” Peter Briger, Fortress’s co-chairman, said in the statement. Briger said compelling opportunities may arise when European banks accelerate selling of distressed assets.
The firm’s private-equity funds gained about 4 percent in value in the fourth quarter, compared with 9 percent at Apollo Global Management LLC (APO:US), 7 percent at Blackstone, 5 percent at Carlyle Group LP (CG:US) and 4 percent at KKR. Pretax distributable earnings in the business rose to $31 million from $29 million a year ago.
Private-equity firms pool money from investors including pension plans and endowments with a mandate to buy companies within about five to six years, then sell them and return the funds with a profit after about 10 years. The firms, which use debt to finance the deals and amplify returns, typically charge an annual management fee equal to 1.5 percent to 2 percent of committed funds and keep 20 percent of profit from investments.
Fortress’s liquid hedge funds generated $30 million in pretax distributable earnings and 41 percent of the $114 million of incentive income that the firm’s main businesses produced in the quarter. Fund managers reap incentive fees from investors when their pools reach certain performance thresholds.
The liquid hedge funds raised $546 million during the fourth quarter, partly offset by $80 million in redemptions, Fortress said. The firm had about $400 million in redemption requests outstanding at the end of the year, most of which will be fulfilled this quarter.
Fortress raised its base quarterly dividend for shareholders to 6 cents a share from 5 cents and said it bought back 51.3 million dividend-paying shares, or about 10 percent of the total, at $3.50 each. The dividend is scheduled to be paid on March 15.
Robert Kauffman, one of three Fortress co-founders, retired from the company during the quarter after 15 years at the firm. Kauffman said in an interview at the time that his decision was partly due to higher tax rates on top earners that took effect at the beginning of the year. He most recently oversaw the company’s long-only fixed-income business, called Logan Circle Partners.
That business, which Fortress acquired in 2010, narrowed its loss in the quarter to $3 million, compared with a loss of $5 million a year ago. Logan Circle has the most assets among Fortress’s four businesses, with $20.7 billion of bonds, investment-grade credit, high-yield junk bonds and emerging market debt.
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