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Shares in the hedge fund operator surged in their public debut Friday -- and the rousing reception may make more such deals likely
In the most widely anticipated public offering of the young year, Fortress Investment Group (FIG), the first U.S.-based hedge fund to go public, stormed the ramparts. Shares in the alternative investment outfit were trading around $32 in the early going Feb. 9 -- 73% above the offering price set the previous day but down from the intra-day high of $37. The shares opened trading at $35.
At that level the company had a market capitalization of more than $12 billion. A group of five company insiders hold more than three quarters of the company's shares.
The deal priced late Feb. 8 at $18.50 per share, at the top end of the estimated range, raising $634 million for the company. The 34.3 million shares in the offering represent about 8.6% of the company.
New York-based Fortress manages almost $30 billion in three primary businesses: private equity, hedge funds and “the castles” two publicly traded companies managed by Fortress that invest mainly in real estate and real estate debt instruments. For 2005 the company reported net income of $192.7 million on revenues of about $1 billion.
Fortress's strong pop out of the gate reflects a widespread interest in hedge funds and other complex investments that can produce huge returns but are closed to many investors. Having watched Fortress's remarkable offering, peers in the alternative investment space are likely to follow its path. A couple of European hedge-fund outfits -- Switzerland-based Partners Group and RAB Capital, which trades on the London Stock Exchange -- had already successfully tested the IPO waters last year.
Prior to the company's initial offering, Donald Putnam, founder of Grail Partners, an advisory merchant bank, predicted that "if the Fortress deal goes through, I think there'll be 30 hedge fund IPOs in the next 18 months" (see BusinessWeek, 12/11/06, "A Peek Into The Hedges").
Even in the light of the Fortress IPO some remain skeptical of hedge funds. The offering came as a senior official at CalPERs, California's $200 billion plus public employee pension fund, complained to Bloomberg that hedge funds' performance frequently doesn't justify their exorbitant management costs. Though no analysts cover the company and there are not any other public U.S. hedge funds, the remark did not seem to dampen enthusiasm for the company.
Goldman Sachs and Lehman Brothers were the lead underwriters of the deal. Prior to the offering, the Japanese bank Nomura acquired 55.1 million shares, giving it a 15% stake.