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Fortress Investment Group LLC (NYSE:FIG)

Q4 2012 Earnings Call

February 27, 2013 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 - President, Principal, Head of Credit and Real Estate Business, Co-Chairman of the Board and Member of Management/Organization Development Committee

Wesley Robert Edens - Co-Founder, Principal, Director, Co-Chairman of the Board, Private Equity Chief Investment Officer and Member of Management Committee

Analysts

Craig Siegenthaler - Crédit Suisse AG, Research Division

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

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

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

Gerald E. O'Hara - Jefferies & Company, Inc., Research Division

Operator

Good morning. My name is Christie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fortress year-end conference call. [Operator Instructions] It is now my pleasure to hand the program over to Mr. Gordon Runté. Please go ahead.

Gordon Runté

Okay. Thank you, Christie. Good morning, everyone, and welcome to the Fortress Investment Group Fourth Quarter and Full Year 2012 Earnings Conference Call. We'll begin our call today with opening remarks from Fortress Interim Chief Executive Officer, Randy Nardone; and Chief Financial Officer, Dan Bass. And 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 co-Chairman and Head of Credit, Pete Briger; co-Chairman and Head of Private Equity, Wes Edens; Principal and Head of Liquid Markets, Mike Novogratz, along with other members of our management team.

Before we begin, I'd like to point out that we posted a new investor presentation to our website 2 weeks ago. This presentation addresses many of the business dynamics and initiatives that we'll be discussing this morning. And I believe it goes a long way towards simplifying the Fortress story and our value proposition. We'll be posting an updated presentation with fourth quarter numbers, which we encourage you to review. Of course, we value your feedback on how we can further improve our materials, so please contact me directly with any thoughts on that.

Just a few housekeeping items 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. We went into 2012 with high expectations and aggressive objectives for investment performance, for capital raising, for building further on the scope and reach of our business and for delivering strong financial results and creating value for our shareholders. I'd say we met those objectives. And we finished strong with pretax distributable earnings of $107 million in the fourth quarter. That's our highest quarter of DE in the last 2 years. This performance reflects strength across all of our businesses. We believe it's only an indication of what this company can deliver and we're firing on all cylinders. And we had a good start to 2013. If we can multiply by 6 the results of the first 2 months of the year, we'll have a very good year.

Here's the highlights for 2012. Our AUM increased to over $53 billion, an all-time high. In our alternatives businesses, we raised over $1.5 billion of capital in the fourth quarter and over $6.5 billion for the year. That's more than we've raised in any year since the financial crisis. On top of that, we had almost $6 billion in net flows at Logan Circle, our fixed income manager. We delivered strong investment performance in all of our businesses. Our main credit and Macro Funds were up each nearly 18% net for the year. Asia Macro topped 21%. Investment valuations rose by over 25% in Private Equity and Logan Circle continued to outperform benchmarks in virtually all strategies.

Looking at our balance sheet, net cash and investments reached almost $2.50 a share, or approximately 40% of our share price today. With strong capital raising and expectations for further growth in AUM, we have visibility of higher management fees going forward, which I'll get to in a minute. This provided the basis for a 20% increase in our regular quarterly dividend to $0.06 a share. The increase is effective for the fourth quarter of 2012, bringing distributions for the year to $0.21 in total. A pro forma $0.24 for base dividends in 2013 represents a dividend yield of approximately 4%. As you know, we invested $180 million in December to repurchase about 10% of our outstanding shares. The purchase price of $3.50 was nearly a 20% discount at the time and about a 40% discount today. At a cost of about $0.36 a share, we paid out more than our DE for the year with this transaction plus our regular dividends.

Looking more closely at our financial results, our fourth quarter management fees were $131 million, up from $121 million in the third quarter. With anticipated growth in AUM, we expect to see a corresponding increase in management fees going forward.

Let me give some color on the key drivers here. We're in the market raising additional capital in every Fortress business. In just the first 2 months of 2013, we've raised over $1.5 billion in new alternative capital, so a very strong start to the year. Nearly half of that was permanent equity raised by Newcastle. Wes is here and he could talk about how we think about opportunities for permanent capital and sector-specific funds in a few minutes. AUM rose by over 50% to nearly $21 billion at Logan Circle, leading to a 60% increase in management fees. Logan's investment performance and pipeline remain strong. The platform is highly scalable. Our expectations for business growth here are high and we're getting closer to our goal of Logan becoming a meaningful contributor.

Last point on potential management fee growth. We finished the quarter with over $6 billion in dry powder, most of it in newer vintage funds. I should point out that there are no guarantees about the pace or extent to which this gets invested, but the arithmetic is approximately $15 million in management fees on each billion dollars invested. So a good quarter for building on management fees and catalysts are in place for growth in near and longer terms.

As I mentioned earlier, investment performance was strong for the quarter and the full year. This had a positive impact on incentive income, particularly in Q4 when we had a full quarter of AUM above high-water marks in Macro. Incentive income totaled $114 million in the fourth quarter, up from $65 million in the third quarter and $46 million in Q4 last year.

As for management fees, a number of factors point to potential incentive income growth. One, our gross undistributed incentive income grew to nearly $650 million in total or about $1.30 a share. Over $500 million of that amount is in our credit PE Funds, which are well above incentive thresholds. So even with no assumption about further investment gains, there's visibility of higher incentive income as investments are realized.

Two, we began 2013 above high-water marks in our main Macro Fund. This means we have over $3 billion in Liquid Markets AUM able to generate incentive income on each incremental dollar of gain. Year-to-date, Macro is already up about 4% net.

Three, with over $8 billion of new alternative capital raised over the last 14 months, incentive-eligible AUM will increase to the extent this capital is invested.

Four, looking further out, we've had valuation gains over $6 billion in our Private Equity main funds since 2009. We've made a lot of progress in closing the incentive threshold GAAP in our most recent vintage funds, and realization activity has picked up.

The key drivers for future growth here are companies like Nationstar and Florida East Coast, Springleaf and Holiday. These are companies we believe have strong prospects for future business growth, increased profitability and valuation gains.

I've covered a lot of ground today: fourth quarter results that included our highest DE in 2 years; strong investment performance across all of our businesses; and our most successful year for attracting new capital since 2008. On all fronts, we met our objectives for the year. More importantly, we believe that our performance is only beginning to reflect the inherent potential of our company. Embedded value, momentum and the specific catalysts, as described in each of our businesses, point to the potential for substantial earnings and valuation upside. We're pleased with our performance to date and optimistic about our prospects going forward.

With that, let me hand it off to Dan.

Daniel N. Bass

Thanks, Randy. Good morning, everyone. Today, I'll provide details around our fourth quarter and full year 2012 results, as well as the key metrics that drove our financial performance last year. A strong fourth quarter capped what was a strong year here at Fortress. Pretax DE of $107 million or $0.20 per share was up nearly 70% quarter-over-quarter. Management fees were up 13% and incentive fees were up 75% in the quarter alone.

For the full year, pretax DE was $278 million or $0.52 per share. This is a 15% year-on-year growth. Growth was driven by a 7% increase in total revenues, including a 40% increase in incentive income. Our AUM continued to climb in the quarter as well. AUM increased by nearly $2 billion or 4% in the fourth quarter and ended the year at $53.4 billion.

For the full year, AUM grew by nearly $10 billion or 22%. Driving this was alternative asset growth of 8% and traditional asset growth of over 50%. The 22% annual growth is inclusive of returning $3 billion of capital to our investors and paying out another $3 billion of redemptions and scheduled payments in our hedge funds. Within AUM, we deployed $3 billion of dry powder, $900 million coming from in the fourth quarter alone.

At the end of the year, over $6 billion in dry powder remains, of which $5 billion were as in newer vintage funds and available for general investment purposes. Additionally, in the first quarter, we expect approximately $350 million of this capital to be called in our MSR fund relating to Nationstar's acquisition of MSRs from the Bank of America.

On to capital raising, which continued to be a strength, the $6.7 billion of capital raised during the year represents a 60% increase over 2011 and brings our 3-year total to $16 billion. This was the first post year -- first year post-crisis that all of our businesses together have seen significant momentum. In fact, every business raised $1 billion of capital for the first time since 2008.

Additionally, the fourth quarter raise of $1.5 billion marked the 5th consecutive quarter in which we raised over $1 billion of capital and since we've already raised $1.6 billion of capital in the first quarter of '13, now makes it 6 straight quarters.

Now let me turn to investment performance where strong returns continued across all of our funds. In our traditional PE Funds, fund appreciation of over 25% for the year outpaced major indices by a significant margin. Our private company valuations were up 11% and public company valuations, which account for about 30% of our portfolio, were up 65% for the year. Nationstar, one of the top IPOs in 2012 and GAGFAH were the 2 main drivers, up 60% and 130%, respectively.

In our Liquid Hedge Funds, top-tier returns allowed us to generate $47 million of incentive income in the segment during the fourth quarter alone. This was over 2/3 of the total recorded in the Liquid business for the entire year. It clearly demonstrates the earnings potential of our Liquid business when our funds are in excess of high-water marks for a full quarter.

In our Credit Hedge Funds, annual net returns of 18% in our DBSO funds generated $130 million of incentive income in the segment. This segment now has nearly $5 billion of capital eligible for incentive income and 11% net annualized track record over the last 10-plus years. In our Credit PE Funds, outstanding fund performance is demonstrated by the stockpiling of embedded value in our funds, which will become DE when it is realized.

In these funds, we have $509 million or over $1 per share of gross embedded incentive income. This is more than double the value at the end of last year despite recognizing nearly $70 million of incentive income during the year.

Switching to the balance sheet where we had several positive developments. First, as previously stated, we paid down all $180 million of our outstanding long-term debt in the first few days of the fourth quarter. Second, we financed the share buyback transaction using $30 million in cash and $150 million note, carrying a 5% interest rate, which will be paid off approximately 1 year from now. After these events, our balance sheet value matched by cash -- net cash and investments was still up 5%, ending the year at $2.48. This is up 14% from the end of '11 and up 36% over the last 2 years.

Finally, yesterday, we upsized and extended our revolving debt facility. Our new facility is $150 million with a 3-year maturity and is fully undrawn as of now. As I look back on 2012, not only did we have strong performance, but we created additional shareholder value in 3 fundamental ways: paying off long-term debt; executing the stock repurchase; and completing our first full year of dividends. Taken together, these actions created significant value for our shareholders.

Two additional points in this regard. One, on a pro forma basis, the stock repurchase would have added $0.05 of pretax earnings per share to our 2012 results. And on a go forward basis, our dividend paying share count is now down approximately 10% or 51 million shares lower, which will positively affect future years' earnings per share as well. Two, increasing the quarterly base dividend by 20% underscores our confidence in the strength of our business and our prospects for future growth.

Finally, before I close, a few comments on taxes. For the full year 2012, our DE tax rate was 8%. Again, let me remind you, equity base deductions will continue to keep our tax rate low through the end of this year. In closing, let me revisit 3 key points. First, raising capital has been a key area of strength, positive sector tailwinds, strong underlying fund performance and new offerings are all expected to help our capital raising momentum. Second, the fourth quarter results offer a clear snapshot of our earnings potential when we have all of our businesses contributing significantly to the bottom line. And as Randy mentioned, there are a number of earnings growth catalysts across all of our businesses that are just now coming to fruition. And finally, creating value for our shareholders continues to be priority #1 here at Fortress. Examples of this include double-digit EPS growth, raising our quarterly dividend by 20%, long-term debt management and a stock buyback transaction that looks even better at today's prices.

With that, we will now take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Craig Siegenthaler with Crédit Suisse.

Craig Siegenthaler - Crédit Suisse AG, Research Division

So just to first touch on the Liquid Hedge Fund business had a really nice turnaround in 2012. Really, especially in this fourth quarter, we had massive inflows, low redemptions and strong performance. We probably shouldn't annualize the fourth quarter capital raise number, but can you provide some commentary around your capital raise outlook and also the redemption outlook for this year?

Daniel N. Bass

Yes, we did raise -- we raised significant dollars in the first quarter and capital raising outlook looks pretty good. Redemptions have slowed significantly and we're very positive about it.

Craig Siegenthaler - Crédit Suisse AG, Research Division

Got it, got it. Okay. And then maybe turning over to the Credit PE business. A significant level of capital was pulled in, in the fourth quarter. I was wondering if Pete could kind of share his some perspective on the investment environment because he sounded pretty bearish on the last few calls just given where credit spreads were and also given where government stimulus was sort of masking underlying fundamentals. So maybe he can provide us a quick update.

Peter Lionel Briger

I think the current environment for opportunistic credit investing is lousy, and it's probably gotten worse over time to the point where thematically, I don't think that there's a great credit environment anywhere in the world. We are still making investments in our credit PE business and certainly in our Drawbridge Special Opportunities Fund, which has the ability to be long and short, et cetera. But all of the credit investments that we are making today are idiosyncratic in nature, meaning that they're good investments based upon the specific circumstances. And almost all of the investments that we're making today on the long side are not purchased from the broker-dealer community, or the money center banking community, if you will, were not able to make investments in terms of buying at the supermarket. So our flows in PE credit have slowed substantially. To put this in perspective, in 2012 and year-to-date 2013, we've distributed about $3.5 billion to investors and called about $2.7 billion. And if you look at just 2013, we've distributed about $1.3 billion to investors and called less than $400 million. And so I would describe the credit markets right now as lousy. The investments that we're making are only on an idiosyncratic basis and what you really have out there is the optionality of European deleveraging beginning to occur at a quicker pace. But at least right now, government intervention all around the world, U.S., Europe, Asia, has put us in a bad place from a credit investing perspective, where the perception of risk is actually lower than the actual risk. And that's a metric that we actually focus on very closely. So thematically, we are not making investments in credit, risk of higher interest rates in the U.S. and essentially free money environment. I would say that we're not terrified of credit and I would say that because we're not in an '06 or '07 period, where the whole financial services system was leveraged. The U.S. banking system is continuing to deleverage and believe it or not, the European financial services system is deleveraging, albeit at a much slower pace. And so that is a big point in terms of the safety of the system. I don't think that we have the risk in the system because the financial services industry, the financial institutions themselves are deleveraging. But you are in a very easy money environment, especially if you're a middle-market [indiscernible] somebody needs to borrow money.

Craig Siegenthaler - Crédit Suisse AG, Research Division

Got it. And then maybe Dan Bass could just chime in. Given kind of the more negative outlook in the investment side, should we expect the undrawn capital levels in the Credit PE business to remain quite high? It looks like over the near term?

Daniel N. Bass

I mean, that's a Pete question. I'll let Pete address it.

Peter Lionel Briger

Yes, I think in the current environment, we're investing at a much slower pace and the types of return levels that we're looking to make investments in illiquid credit, we do not see, by and large, other than in idiosyncratic circumstances.

Operator

Your next question comes from the line of Marc Irizarry with Goldman Sachs.

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

A question for Wes, if you can just talk a little bit about the strategic evolution of the PE model for you, the use of permanent capitals in that business, and just how we should think about the mix of management fees, and maybe this is more for Dan Bass, for management fees versus realizations going forward?

Wesley Robert Edens

Sure. Our total capital in the Private Equity business is about $1 billion at the end of the year. I think there were $14.3 billion as the specific number and of that, we have about $3.5 billion from -- that is permanent capital specifically. In the first quarter of the year, we've raised almost $1 billion in permanent capital and we have a bunch of different initiatives for those different strategies as well as some other ones and also some funds that kind of supplement them. And I guess the way that we are thinking about it is that if we can continue to grow our -- the kind of listed or publicly capitalized vehicles in sectors where we think there are great opportunities and/or have real scalable opportunities, as we've done in financial services space with all the MSRs and the nonagency stuff with Newcastle and then new residential at spinoff, we had a significant closing on private capital raise for worldwide transportation and infrastructure, which we think will be a public vehicle in all probability, later this year but certainly in the next 12 months. And that's a gigantic sector there, $2.4 trillion in transportation assets worldwide. So we have broad aspirations for that. And then there are a handful of other things. I think what worked very well in those contexts are asset-heavy businesses where you can burrow them at good yields and use very modest amounts of leverage to generate real returns. I mean in the MSR space, we have not deployed any leverage. We've been able to generate kind of 20-ish percent returns. In the transportation infrastructure space, we're getting kind of low teens on leverage returns. So modest leverage gets you to a good place. Incremental to that, though there are significant Private Equity opportunities in those spaces as well. Transportation infrastructure is a good example of that. So having a Private Equity vehicle, kind of a sector-specific Private Equity vehicle side by side with that, gives you great overflow capacity and also the capacity to do corporate Private Equity-like transactions. So we did raise the 1 fund last year in the MSR space. That's something that has -- we've made a good, very good start in getting that capital deployed. And look, I think, aspirationally for the year, I'd like to see us raise $5-plus billion between the permanent and sector-specific funds. We're $1 billion kind of towards that goal right now and we -- obviously, that will be -- that'll have to be concurrent with investment opportunities, but we see in our big -- the spaces where we've got significant exposure, which is, really in the senior housing business and the transportation business and then of course, financial services here in the U.S. between the servicer, Nationstar, and then also this now a very large consumer finance business we have at Springleaf. We think the areas there is and is going to be a ton to do and so and that's how we think about it. So I think that matching up those permanent vehicles with sector-specific stuff, I think, is a great way to run the business.

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

Okay, and then just on realizations, particularly from some of the older vintage funds. Can you give us some perspective on how we should think about to promote that you guys might earn in the PE?

Wesley Robert Edens

Yes, we've got -- we had -- as Dan said, we had a great year last year. So the fourth consecutive year of very material returns in the Private Equity business. So the last 4 years in total have been kind of 21%, 16%, 9% and now 25%, so it's a big step in the right direction in terms of returns of all those. And we expect all of the significant funds to generate meaningful amounts of promote and some of the older vintage funds were closer to the end than the beginning, for sure. So hard to predict the timing of these. They can be very lumpy. There's obviously a couple of things that we have -- we are very specifically targeted on for the year that I can't detail because, as Dan said, about 1/3 of our investments in the PE funds are in public stocks so I don't want to get offsides on that. But I think with a little bit of good fortune in these markets, we think -- it's kind of the opposite of the PE problem is that a tough time to find opportunistic investments may be a great time to find opportunistic sales, right, as the asset prices go up and as the markets do a little better. So I think it should be a good complement to the rest of the business. And when you take the first 2 months of the year and multiply it times 6, I think we'd all be very satisfied with what the outcomes have been. So we'll have to wait and see.

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

Great. And then just quickly on, Pete, you mentioned there's no great environment globally it seems like for your business, but just can you give us some commentary on Europe and the opportunistic investing environment there? Maybe it's nonperforming loans in Italy, as -- Wes, as you sited, the PE business. Like where is Fortress taking advantage of just locations there?

Peter Lionel Briger

Well, as you know, there's been a tremendous amount of intervention in Europe over the last 2 years, government intervention across all markets, certainly Greece, Spain, Italy being the most intense. And so Europe has also been the most highly articulated opportunity in credit over the last 24 months, and there's been a ton of capital raised to invest in European credit opportunities. I don't think that any serious credit investor is interested in the credit opportunity in Europe right now. The sales that are taking place of assets that are being sold out of the banking system are highly competitive. As I say, the metric of perceived risk to actual risk is most distorted in Europe. So there's a tremendous amount of money that's been dedicated to Europe, people have itchy trigger fingers and they are occasionally pulling triggers. We saw one sale in a U.K. bank, a commercial mortgage portfolio, where the winner ended up being somebody who was not asked into the final round, who threw in a bid 20% higher than all of the other bidders. And so we're seeing some crazy things with capital being allocated to Europe right now. The opportunity is big, but it is, to date, potential. Every financial institution in Europe would love to sell loans off of its balance sheet, but there are no sales that are taking place that are actually accretive to capital. So what you have in Europe is a huge price gap and a tremendous amount of capital that's been dedicated to buying distressed debt and buying NPLs, in particular. I think we have great assets on the ground in terms of collection companies and servicers that we've set up, both recently and over the long term. So I think that we have lots of feet on the street, if you will. But the time to be investing in Europe, in my judgment, is certainly not now.

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

Okay, and then just one more if I can on the distribution decision not to have a sizable true-up this quarter. Was sort of the buyback in place for that and how should we think about the capital management strategy?

Peter Lionel Briger

I think if you look at the buyback, that's $0.36 a share and coupled with the regular quarterly dividends of $0.21 a share, we distributed to shareholders more than our DE for the last year. And so what we end up doing for 2013, we'll take everything into account, whether there are opportunities to buy back stock cheap or pay out a top up or whatever. We'll make the decision at the end of the year and the board -- it will be a board matter as well.

Operator

Your next question comes from the line of Chris Kotowski with Oppenheimer.

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

Just a follow-up for Pete on the Private Equity Fund or credit funds. Is that -- looking at Pages 15 and 17 of the press release though despite your caution, it sounds like you put $1.4 billion, $1.4 billion to $1.7 billion to work. Is that just a new Japan fund or is that the amount of, if you were able to put to work in what you call the idiosyncratic manner?

Randal Alan Nardone

Yes, no, the Japan fund is primarily in the capital raised number, which is not in the $1.4 billion. The $1.4 billion is -- sometimes, there's a lag on the call of capital versus the commitment of capital and so the numbers shown here are a function of that. I think Pete's comments stand on the pace of investing.

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

Okay, and then secondly, just going back to Wes' comments about the promote and the funds doing better, and I'm thinking back to the disclosure you always have in your 10-Q on Page 11. It still showed for -- I mean, it showed funds 3 and 4 certainly being above costs, but still a long way away from degenerating carry and fund 5 still being below cost at September 30. I'm curious, are all those funds above cost now? And did you mean just that they were in good shape for returning more than cost? Or did you think they can actually generate carry at some point in the future?

Daniel N. Bass

I definitely think they'll generate carry. I mean the big numbers in the Private Equity businesses, the paid-in capital is about $20 billion. We returned about $10 billion. We have a mark-to-market of about $15 billion, where we think that the potential for appreciation in substantial. So I mean those are very gross numbers, but it gives you some sense of kind of the big picture of what we think it means and the disclosure is accurate. It reflects -- I mean the fund probably [ph] is like 97% of cost. So it's basically there and we think that the underlying investments have got a tremendous amount of -- I mean, our biggest exposures are in the transportation side particularly in the railroad business and the related real estate in Florida. We're in about 1/3 of the development land, industrial development land in Dade and Broward Counties and what is probably the hottest market in the United States right now. Our railroad down there has had a tremendous run of it and seems poised to do very, very substantial things. We're working hard on building a passenger railway down there, so there's a lot of good stuff going on out there. Financial services space in the U.S., I think, is a firm. I really believe we have, by far, the best exposures across the firm for these things, right. We own one of the biggest mortgage servicers in the country. We own one of the biggest stand-alone consumer finance franchises. We own the largest commercial loan special servicer. We own a big chunk of a company that's the largest multifamily lender. So you add all those things up, if you think that those sectors have got real appreciation potential, which we do, then we're incredibly well positioned to take advantage of that. So all those things will result in kind of a leveraged return on our investments and much like we've had whatever x billion of dollars of appreciation the last couple of years, we think that there is a substantial amount of upside in them and thus they have the ability to pay for modes [ph].

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

Alright. And when you suggested you were hoping to raise up to $5 billion this year or aspirationally $5 billion, does that include it a sort of general-purpose, go-anywhere major flagship fund that's a successor to fund 5? Or is it going to be more of these targeted kinds of investments?

Daniel N. Bass

Unclear. We can't really comment on the specific capital formation for the private funds and what we're looking for. But I think there are combination of the underlying permanent vehicles as well as Private Equity Funds. I think that we think that the year is going to be a very good one, whatever the form of them is. So like I said, we've managed to raise about $1 billion in capital for those vehicles thus far and it's early.

Operator

Your next question comes from the line of Robert Lee with KBW.

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

I'd like to go back to the distribution and frankly, I'm still kind of a little confused as to why there wasn't a true-up in the fourth quarter. I understand you bought back the stock, but only $30 million of that was funded with cash, the rest was with notes. So if you add 50-odd cents of pretax DE, an 8% tax rate on that, and you distributed $0.21 and granted $30 million, a few sums -- pennies were used to fund the share buyback. Still not clear to me why there wasn't more of a true-up. So maybe you can kind of walk us through that? And then now we should think about it reconciling to a true-up going forward, particularly since next year, you have to pay the notes down for the share buyback. So is that going to impact the distribution or not?

Randal Alan Nardone

Well we have -- we financed $150 million of the $180 million of the stock buyback price. Our plan obviously is to payback that $150 million. Like I said earlier, to the extent we have -- we generate substantial incentive income this year, we will take a look at what the opportunities are at the end of the year, talk about it with the board and with management here. And I would say if we could buy back a bunch of stock cheap again at the end of the year, that will definitely get serious consideration here.

Daniel N. Bass

Quickly to your financing point, I mean we had a short-term financing. It was -- we received a lot of our incentive income in the first part of the year. So we view the financing as really related to 2012, and that's why we characterized it as that.

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

So we're -- so 1 year from now, we're going to assume that, that -- having to pay back that is not going to affect your potential true-up in 2013?

Daniel N. Bass

Yes, yes.

Operator

[Operator Instructions] Your next question comes from the line of Daniel Fannon with Jefferies.

Gerald E. O'Hara - Jefferies & Company, Inc., Research Division

This is actually Gerry O'Hara sitting in for Dan this morning. He's on the road. Just a quick one on management fees. You called out the increase in Private Equity, I believe, in the credit fund segment of management fees. And it's a fairly notable increase quarter-over-quarter, at least per our model and there may be some variances here. But was that driven by anything in particular that the capitals puts use to? Obviously, it increase in overall AUM, but perhaps management fee wise or anything along those lines?

Randal Alan Nardone

No, management fees just are directly tied to our call of capital and there's nothing out of the ordinary, just additional AUM. Our AUM increased by $10 billion over the year and $2 billion in the fourth quarter. So those are the main drivers.

Gerald E. O'Hara - Jefferies & Company, Inc., Research Division

Okay, fair enough. And then just a clarifying point. The $3.1 billion above high-water marks on the Liquid Hedge Funds, that's of the total, right? Over the total $5.1 billion or was that just any particular funds?

Randal Alan Nardone

No, it's mostly in the Macro Funds. The Fortress Partners Fund largely doesn't generate incentive and so that's the biggest difference between the $3.1 billion and the $5.1 billion.

Operator

That does conclude our question-and-answer session for today. It is my pleasure to hand the program back over to management for any further comments or closing remarks.

Randal Alan Nardone

Thanks, everybody. Just a quick recap before we go. Pleased with our results for 2012, most of all, because they reflect the strength and momentum across every one of our businesses. Investment performance, capital formation both strong in 2012 and it's carried into 2013. Embedded value continues to build and they're catalysts in place for potential earnings upside across the house. So we're pleased to have met our objectives for 2012, and we believe our performance only begins to reflect the inherent potential of our company. Thanks again for joining us today and we look forward to providing an update on our next call.

Operator

That does conclude today's conference call. You may now disconnect.

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Source: Fortress Investment Group LLC Management Discusses Q4 2012 Results - Earnings Call Transcript
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