Fortress Investment Group LLC (FIG)

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Fortress Investment Group Q4 2007 Earnings Call Transcript
Page 1 out of 10| posted on: March 25, 2008 | about stocks: FIG

Q4 2007 Earnings Call

March 25, 2008 10:00 am ET

Executives

Wes Edens - Chairman and CEO

Dan Bass - Chief Financial Officer

Pete Briger - Co-President and Head of Hybrid Hedge Fund Business

Mike Novogratz - President and Head of Liquid Market Hedge Fund Business

Randy Nardone - Chief Operating Officer

Lilly Donohue – Investor Relations

Analysts

Roger Freeman - Lehman Brothers

Marc Irizarry - Goldman Sachs

Craig Siegenthaler - Credit Suisse

Prashant Bhatia – Citigroup

Dan Fannon - Jefferies

Roger Smith - FPK

Robert Lee - KBW

Presentation
...
Lilly Donohue

Thanks Ashley. Good morning. I'm Lilly Donohue and I want to welcome you all to our fourth quarter and 2007 year-end earnings conference call. Joining me today is Wes Edens, our Chairman and CEO, Dan Bass, our Chief Financial Officer; we also have with us Pete Briger, Co-President and head of our hybrid hedge fund business, Mike Novogratz, President and head of our liquid market hedge fund business and Randy Nardone, our Chief Operating Officer.

And before I turn the call over to Wes, as Ashley mentioned, this call is going to be recorded. The replay number is 800-642-1687; that’s from within the United States and outside, it’s 706-645-9291. Access code is 37943758. This call will also be available on our website which is just www.fortress.com.
...

Wesley Edens

Great. Thanks Lilly and welcome everyone. Welcome to our 2007 fourth quarter and full year earnings call.

2007 was a historic year for the firm. It was our tenth year as a Company. We went public on February 7; this is the first New York Stock Exchange listed alternative assets management Company and most importantly, we set records in both distributable earnings and assets under management. Overall, it’s just a very good year for us here at Fortress. The financial results for the firm for both the quarter and the year were quite good.

For the fourth quarter, pretax distributable earnings was $78 million bringing our total distributable earnings for the year to $552 million. DE for 2006 was $397 million. So in total our earnings grew by 39% year-over-year, a terrific result.

Assets under management also experienced excellent growth. To remind you, we report assets under management in two distinct ways. The total assets under management, AUM, is meant to give you visibility on all of the assets we oversee but doesn’t necessarily reflect the assets on which we earn fees. At year end, our total AUM was $37.8 billion which compares the total AUM of $32.8 billion at year end of 2006.

Another measure that we track closely is management fee paying AUM which is a measure of the amount of capital that we earn management fees as well as performance fees on. At the end of 2006 we had $20.9 billion of MAUM. At the end of 2007, we had grown that total to $33.2 billion, so total growth in assets under management of nearly 59%.

I would like to think that distributable earnings provide the best scorecard for how the firm has performed looking backwards in time and that AUM and in particular management fee paying assets under management or MAUM provide the best estimate on how we are going to perform in the future.

Our business is a very high margin business here at Fortress in general through a combination of management fees and performance fees we earn about 4% on MAUM and bring about half or 2% of that to the bottom line.

Historically, if we took the average of MAUM for the year and multiplied it times 2%, this has been an excellent estimate of what our pretax DE is going to be for the year. For example, in 2005, our average management fee paying assets under management for the year was $10.6 billion and our DE was $224 million or 2.1% of MAUM.

In 2006, MAUM was $16.8 billion, DE $311 million, so it was 1.9% for that year and last year, the year we just completed, MAUM was approximately $28 billion on average and our DE was 1.9% of that. So a very good metric and an easy way to keep track of what we think our forecasts are going to be going forward. This is a rough estimate of course and implies a typical year for both management fees and performance fees.

Our forecast for average MAUM for Fortress this year is about $40 billion. We started the year at $33.2 billion. We’ve actually had a fair bit of capital formation already that Dan will detail and we expect to finish at around $50 billion. The key variables that will impact our earnings this year are primarily growth in assets under management and performance fee earned.

We have good visibility on the AUM growth. In total, we expect to rise between $15 billion and $20 billion in new capital between the private equity and hedge fund businesses. If this estimate is right, without any significant performance fees we’d earn about 1.25% to 1.5% on MAUM. The increment -- the difference between 1.25% and the 2.0% average is really just performance fees. It’s early in the year to make any real predictions but even with the volatility of the markets I think we all feel very good at Fortress about where we are right now. Let the year play out a bit to get a better estimate but we’ll see how it all turns out.

Now let's talk about the performance of our businesses. Hedge funds at Fortress total approximately $16.6 billion or 50% of MAUM. All of our hedge funds last year had excellent returns. Macro, which is an $8.1 billion hedge fund at year-end, had an 18.3% gross return, 12.7% net return. The credit funds which were $6.8 billion in MAUM likewise had a very good year with 15.2% gross and 10.2% net returns and our newest fund, the Partners Fund also had a very good year. This fund was launched in August of 2006. This has been in existence for just over a year but has grown tremendously to $1.7 billion MAUM at the end of the year; in its first full year, did very well. Total returns for 2007 were 10.1% gross and 8.8% net... (cont'd)

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