Check out a moment of honesty from sartorial legend and hedge fund veteran Michael Novogratz of Fortress. One paragraph from Institutional Investor captures both the central contradiction of hedge funds and the misguided attempt by institutions to pretend it doesn’t exist:
“It’s hard to teach young traders this,” he says, referring to macro investing. “You’re either good at it or you’re not.” Most asset managers won’t say they’re smart — at least, not in public — because their investors want to hear about a formal investment process that can be taught and repeated. They want alpha to be sustainable. Of course, if the process of delivering can be easily documented, others can – and will – copy it, and returns should go down over time.
When good opportunities are scarce, hedgies will seek them in rather unlikely places.
Take Sareb, the Spanish ‘bad bank’ in the process of raising €250m in new equity for the second round of asset transfers from the country’s beleaguered lenders. Read more
Fortress Investment Group’s CEO Daniel Mudd has announced that he is taking a leave of absence from the hedge fund, the WSJ reports. This comes after being named as a defendant in a civil securities-fraud lawsuit brought by the SEC last Friday, with respect to his prior role as the CEO of Fannie Mae. The suit alleges that risks that the firm was taking on, with respect to mortgage holdings, were not accurately disclosed to investors. While representatives of Fortress have stated that the suit doesn’t affect their business, there was concern among executives that it could alienate investors.
Apollo Global Management said on Tuesday night it had priced its initial public offering at $19 a share, raising $408.5m, reports DealBook. The offering, which drew strong investor demand, was expanded to 21.5m shares from 18m, the firm said. Existing investors in Apollo, including Goldman Sachs, also sold nearly 8.3m shares. Apollo’s underwriters have the option of selling an additional 4.5m shares if necessary, meaning the firm could raise a total of $494m. Apollo’s shares are set to begin trading on Wednesday morning on the New York Stock Exchange, under the ticker “APO.” The offering finally admits Apollo into a small club of publicly traded buyout firms that includes Blackstone, KKR and Fortress.
US private equity firms Cerberus Capital Management, Lone Star and Fortress Group are among potential bidders for the failed Japanese consumer lender Takefuji Corp, in a deal that could be worth as much as $955m, reports Reuters, citing sources familiar with the deal. The first bidding round, in which firms must state the size of their offer and plans for restructuring Takefuji, will close on Dec 15. Bidders are likely to offer Y60bn to Y80bn ($715m-$955m) for the business. US buy-out firm JC Flowers, the top shareholder of Shinsei Bank, and Elliott Management, which operates a loan servicing business in Japan, may also submit bids, one source said. Meanwhile, reports Bloomberg citing the Sankei newspaper, Shinsei has agreed to advice Takefuji on the appointment of a bankruptcy sponsor.
US hedge fund and buy-out groups BlackRock, Fortress Investment and Centerbridge Partners have expressed interest in buying Residential Capital, the mortgage arm of finance company GMAC, from the US government, reports the FT citing people familiar with the matter. GMAC was bailed out by the government last year along with its parent, the carmaker GM. The Treasury – which holds $11bn in preferred shares in GMAC, now called Ally Financial – is conducting an auction for ResCap which has caught the eye of several groups including asset manager BlackRock, and hedge fund/private equity groups Fortress and Centerbridge.
AIG has approached some of the world’s biggest investors with a view to them taking stakes in AIA, the insurer’s Asian operation, with strong interest from China, people familiar with the matter have told the FT. As a result, AIG is considering placing up to 30 per cent with institutional investors and wealthy tycoons, with the most probable cornerstones being provided by sovereign wealth funds. Meanwhile, AIG has sloughed off its money-losing American General Finance lending arm by selling 80 per cent to Fortress — removing a financial drag on the insurer’s recovery, reports the WSJ. The unit may be used by Fortress to buy up other struggling lenders, MarketWatch says.
AIG said on Wednesday it had agreed to sell most of its American General Finance consumer finance arm to US hedge fund and buy-out group Fortress and take a $1.9bn loss related to the sale, reports the FT. Fortress paid a fraction of American General’s $2.1bn book value for the 80% stake. AIG, majority US government-owned, will retain 20% of the company and expects to recoup much of the apparent loss through tax breaks. Other buy-out groups, including TPG and JC Flowers, also looked at American General.
One of the more interesting things to watch at the GAIM hedge fund conference in Monaco this year – more for light, than heat, truth be told – was Mike Novogratz, one of the founders of the giant Fortress Group, and Hugh Hendry, the voluble manager behind the definitely smaller but in some ways no less influential Eclectica Asset Management, slugging it out.
The GAIM organisers’ own blog post more or less neatly summed up the contest: Read more
Some US private equity chiefs have visited Washington in recent weeks to quietly lobby against Congressional proposals to raise taxes on the industry, reports the FT. The discreet campaign has included meetings between legislators and industry leaders including Apollo Management’s Leon Black; Steve Schwarzman of Blackstone; TPG’s David Bonderman; Carlyle’s David Rubenstein; Glenn Hutchins of Silver Lake Partners; and Wes Edens of Fortress Investments, say people familiar with the talks.
Daniel Mudd, appointed this week chief executive of Fortress Investment Group, plans to spearhead an acquisition strategy that could see the hedge fund buy other financial companies including banks, money management groups and other hedge funds. Mudd, former chief executive of Fannie Mae, joins Fortress as the hedge fund industry looks for signs that investor withdrawals are beginning to slow. Fortress manages $27bn.
Investment group Fortress is expected to approve the appointment of Daniel Mudd, the former chief executive of Fannie Mae, as chief executive. Mr Mudd will replace Wes Edens as the company, with $27bn under management, aggressively pursues a strategy to buy banks and other financial institutions. Fortress recently contemplated turning itself into a bank holding company.
Fortress Investment Group, the publicly traded US hedge fund and private equity house, on Wednesday reported a narrower Q1 loss as it continued to feel the impact of client redemptions and lower revenues from fees. Fortress reported a quarterly net loss of $67m, down from $68.9m last year. Fortress also said it has agreed to take over management of $2bn of credit investment funds from DB Zwirn & Co. that are being unwound.
Losses swelled in the fourth quarter at Fortress Investment Group, the first private equity and hedge fund firm to list just over two years ago, on writedowns in its private equity funds. The group lost a bigger-than-expected $140m last quarter, compared with a loss of $29m a year earlier. Pre-tax distributable earnings – its preferred measure of profits – showed losses of $258m last quarter after earning $78m the year before, as the group set aside reserves for clawback provisions.
Apparently, the Goldmanati are concerned.
For starters, the new Treasury Secretary, Timothy Geithner, never worked at The Firm. For a second, he’s not exactly got the confidence of the markets at the moment. Read more
The very suggestion that an entity like Fortress Investments, preaching the benefits of private ownership, was suitable for listing on the public markets always struck us as clownish idea.
The stock floated two years ago and promptly popped to a 68 per cent premium above the $18.50 IPO price, causing Roger Ehrenberg to ask at the time: 40xs earnings? Are you stoned? Read more
The casualties are mounting in the hedge fund industry where, with liquidations and redemption suspensions becoming the norm, an increasing number of investors feel they’re being slow-roasted on a financial spit fire.
For those stuck in funds that have put their gates up, the predictions of veterans such as George Soros are particularly resonant. Soros told US Congress last month that he expected the industry to shrink by about 75 per cent as a result of the combination of losses and withdrawals. Read more
Fortress Investment Group, the listed private equity and hedge fund group, has suspended redemptions at its flagship Drawbridge Global Macro Fund after investors sought to withdraw more than $3.5bn in funds, according to a regulatory filing Wednesday, reports the FT. Fortress, which had $8bn under management in September, took the action, at least in part, as it must keep minimum level of assets or risk having to unwind derivatives trades. Fortress shares closed down 25% at $1.87 in New York. It has lost about 88% of its value this year and now has a market cap of about $773m. In its SEC filing, Fortress estimated that the Drawbridge fund would have assets of $3.65bn by Jan 1. Meanwhile, Bloomberg reports, DE Shaw & Co, the investment firm run by David Shaw, and Farallon Capital Management have limited withdrawals by clients, joining more than 80 hedge-fund managers to impose restrictions in the past two months.
Fortress Investment Group, a listed alternative investor with $40bn under management, is taking action aimed at keeping two of the companies it owns afloat. Fortress’s difficulties will be closely followed in the financial world because they herald similar problems for other private equity firms and hedge funds. Fortress is battling to preserve the value of its investments in Intrawest, a ski resort company based in Canada that has $1.68bn in debt due on Oct 23, and Gagfah, a German residential real estate group that is seeking to raise additional equity to comply with the terms of its debt. Fortress controls Intrawest via a $1.37bn equity stake. With Intrawest’s debt trading at less than 70 cents on the dollar, Fortress has approached potential and existing lenders to discuss a refinancing involving $1.4bn in senior debt. Fortress is putting in $100m of additional capital to preserve its equity’s value. Meanwhile, investors in another Fortress vehicle were asked to provide additional capital to safeguard their investments in Gagfah.
Fortress Investment Group, the first major alternative fund group to go public, on Thursday announced a $55m Q2 loss. The results appeared to confirm investors’ fears that a public listing can lead firms to concentrate on increasing their assets under management instead of focusing on the performance of their funds. Fortress, which went public in Feb 2007, has $35bn under management, up 23% from a year ago, and generated management fees of $150m in the quarter. But it conceded that performance fees had fallen victim to the difficult markets this year. Fortress has $18bn invested in hedge funds and the rest in private equity and long-term credit funds.
Wall Street has shunned Hollywood film financing since the onset of the credit crunch but Fortress Investment, one of the largest publicly traded alternative investment funds, is bucking the trend to the tune of $300m. The group has begun investing its managed funds in film equity, building on its three years backing the debt business of Grosvenor Park, a film finance house. Disaster Movie, the first film to be produced with Fortress money, will launch at the end of August. The second, Defiance, is to open in December. Fortress has committed more than $300m to Grosvenor, of which $65m has been invested in the first two films. But its move into film ownership comes as other institutional investors have gone cold on Hollywood.
The $6.1bn private equity takeover of Penn National Gaming – one of the last remaining buy-out deals negotiated before the credit crisis – had been aborted, the company said Thursday, because of market conditions and the risk of spiralling legal costs. Fortress Investment Group and Centerbridge Partners agreed over a year ago to buy Penn for $67 a share before the debt markets froze and the gambling industry’s outlook weakened. Penn said that renegotiating a deal at a lower price was “not a viable option”. The company, which operates 19 gaming and racing facilities and makes much of its revenues from slot machines, said it would receive a termination fee of $225m and $1.25bn in redeemable preferred equity from the buyout partners and their affiliates, Wachovia and Deutsche Bank.
Any M&A bankers out there who thought the takeover bandwagon might be rolling once more? Go back to bed.
Friday saw two notable deals collapse. Read more
The long-awaited consolidation of the UK’s listed property sector began Tuesday after Mapeley, the outsourcing group, received a takeover approach worth about £250m from its majority shareholder, Fortress. The US hedge fund is understood to have offered about £19 a share to take the Guernsey-based property company private, a premium to Tuesday’s opening price of £14.53p but less than half its 12-month peak of about £40 per share. Analysts see the deal as the first of many in the property industry, where companies are seen as undervalued after a widespread sell-off of shares.
Credit-crippled was how we on Monday described private equity. And here’s one that’s limping.
NakedShorts notes that the weekend saw the first anniversary of the float of Fortress, the private equity and hedge fund group. In the heady days of February 2007, “when sub-prime meant finding gristle in a filet at Smith & Wollensky”, Fortress came to market, opened at $35, traded up to $37, and closed at $31. Read more
Bear Stearns held preliminary talks with Fortress Investments, a listed alternative asset management firm, regarding a possible combination in the weeks before Jimmy Cayne stepped down as chief executive of the investment bank, said people familiar with the matter. While the talks ultimately were called off, the discussions are a sign of how much pressure Bear Stearns is under to seek a partner following heavy losses on its mortgage-related holdings and declining revenue from its fixed-income business. Wes Edens, founder and chief executive of Fortress, is widely respected on Wall Street and is close to Cayne. The potential tie-up fell victim to issues including tax complications and price. Fortress executives believe their stock is undervalued while analysts think Bear shares, down more than 50% in the last year, may fall further.
A subprime mortgage unit of Fortress Investment Group, the $43bn hedge fund and private equity group, is to stop buying loans originated by brokers as it scales back operations. The move by Nationstar Mortgage, a wholly owned unit of Fortress, raises questions over the role that hedge funds and other relatively new entrants to the mortgage business in the market will play as a result of the subprime crisis. The subprime operations of Fortress were highlighted recently when John Edwards, a Democratic presidential aspirant, said he would divest his personal fortune from any lenders trying to foreclose on victims of Hurricane Katrina.
Fortress Investment Group Tuesday reported a 70 per cent jump in assets under management for the second quarter, but high compensation costs caused the US private equity and hedge fund group to post a $55m net loss. The mixed results disappointed Wall Street investors who sent Fortress shares down 6.65 per cent to $19.22 after a Monday rally on the back of strong Q2 results at Blackstone, its larger rival. Blackstone shares fell 4.43 per cent to $24.57 on Tuesday. The performances of Fortress and Blackstone are being watched by competitors to gauge investor response to the turmoil in the credit markets.
Hedge funds and private equity have one big thing in common, says Lex. Both charge whopping fees — typically 2 per cent of assets under management and 20 per cent of investment profits. Otherwise, the differences are huge.
So which of the two asset classes is more valuable when a management company goes public? The obvious answer, according to Lex, is private equity: Read more
Blackstone is clearly worth less today than it was a week ago, notes Lex. A proposed bill in the US Senate could kill the private equity group’s planned structure that would have seen it pay about 15 per cent corporation tax as a public company rather than 35 per cent. Investors seem to believe the bill could become law. Shares in Fortress Investment Group, a rival to Blackstone, which uses the same structure, fell 7 per cent on Friday. So should investors mark down Blackstone’s value by 23 per cent – the amount by which net income would fall under the new tax treatment?, asks Lex. No. Separately, the FT reports that Blackstone has paid $200m for Intelenet Global Services, an Indian business process-outsourcing operator that could soon provide services to other companies in Blackstone’s portfolio of investments. The deal comes as private equity seek synergies among their investment companies as their portfolios swell.