Fortress Investment Group LLC Management Discusses Q1 2013 Results - Earnings Call Transcript

May. 2.13 | About: Fortress Investment (FIG)

Fortress Investment Group LLC (NYSE:FIG)

Q1 2013 Earnings Call

May 02, 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

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

Peter Lionel Briger - Co-Chairman of the Board, President, Principal, Head of Credit & Real Estate Business and Member of Management/Organization Development Committee

Analysts

Mark Deluzio - Crédit Suisse AG, Research Division

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

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

Roger A. Freeman - Barclays Capital, Research Division

Daniel Thomas Fannon - Jefferies & Company, Inc., Research Division

Operator

Good morning. My name is Holly, and I'll be your conference operator today. At this time, we'd like to welcome everyone to the Fortress Investment Group First Quarter Earnings Conference Call. [Operator Instructions] I'd now like to turn today's conference over to Gordon Runté. Please go ahead, sir.

Gordon Runté

Okay. Thank you, Holly. Good morning, everyone, and welcome to the Fortress Investment Group First Quarter 2013 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. After these remarks, we'll save most of our time for your questions.

Joining us for that portion of our call, we have Co-Chairman and Co-Head of Credit, Pete Briger; Co-Chairman and Head of Private Equity, Wes Edens; Co-CIO of Credit, Dean Dakolias; and President of Liquid Markets, Stu Bohard, in addition to other members of our management team.

Before we begin, let me remind you that statements made today that are not historical facts may be forward-looking statements, and these statements are, by their nature, uncertain and may differ materially from actual results. So we encourage you to read the forward-looking statement disclaimer in both today's earnings release, in addition to the risk factors described in our quarterly and our annual filings.

And with that, let me hand off to Randy.

Randal Alan Nardone

Thanks, Gordon, and thanks, everyone, for joining us today. On our last call, we discussed our strong finish to 2012 and a strong start to 2013. Our first quarter results reflect a continuation of that trend with broad-based strength across all of our businesses.

Pre-tax distributable earnings was over $100 million for a second quarter in a row. That's an increase of 75% over the first quarter last year. Key drivers of our business, investment performance, capital raising and AUM growth, put us in a strong position going forward. Based on our performance, our board approved a $0.06 per share dividend for the first quarter.

Before taking a closer look at the quarter, let's provide a quick overview of Fortress today. At our core, we have 3 established non-correlated businesses in the alternative space. These businesses are supplemented by a growing traditional asset management platform. Together, our 4 businesses form a diversified global asset management firm with a model intended to provide resilience and strength through a range of market cycles.

From a revenue perspective, we have a stable and predictable base of management fees with substantial performance-driven upside. From a growth perspective, we have a good foundation to selectively expand our offerings and reach, most often by leveraging investment expertise coming out of our core strategies.

Here's the highlights of the first quarter. Our AUM increased to nearly $56 billion, an all-time high, even as we returned over $1.5 billion to our investors. We raised more than $1.5 billion of capital for alternatives, with most of that immediately added to fee-generating AUMs. This is our sixth consecutive quarter with over $1 billion in alternative capital raise. Additionally, net inflows of Logan Circle were a solid $1.2 billion.

Investment performance in every business was strong. A very good first quarter in all of our hedge funds and our main credit PE funds contributed to incentive income of over $116 million for the first quarter. That's more than double what we recorded in the first quarter of last year.

In our PE business, we built on a 4-year trend of substantial valuation gains in our main funds. With about $800 million in appreciation in the first quarter, NAV grew to an all-time high of over $16 billion. And at Logan Circle, we outperformed benchmarks in all of our strategies.

Strong investment performance, especially in the PE Funds, continued to drive increases in our balance sheet value. Net cash and investments totaled just under $3 a share at the end of the quarter, which represents nearly half of our share price today.

We addressed the catalysts for earnings and valuation upside on our last call. Here's an update. The key driver of management fee growth is increased AUM, coming from capital raise in existing funds and the introduction of new strategies. We have positive developments on both fronts.

First, all of our businesses are in the market-raising capital. We've closed on approximately $500 million in hedge fund commitments since quarter end. Asia Macro is now over the $1 billion mark from the a standing start just 2 years ago, the great example of growth from the introduction of a focused strategy developed within one of our core platforms.

Our PE business launched 2 new sector-specific funds in recent weeks: a second MSR fund and a second transportation and infrastructure fund. And we just announced last week the record date for the spinoff of our new residential mortgage REIT, more good examples of new businesses incubated within a core investment platform.

At Logan Circle, we added a growth equities business to our core fixed income offerings. Logan's organic growth has been strong, with AUM almost doubling since our acquisition in 2010. The addition of an equities capability illustrates the scalability and flexibility of Logan's platform. We believe the business can provide a meaningful new engine for traditional AUM growth over time.

We closed the quarter with ample dry powder available for general investments. This is another potential driver for management fee growth, which Dan will cover in a few minutes.

As I mentioned earlier, investment performance was strong across the house in the first quarter, which led to higher incentive income. Looking ahead, a number of factors point to potential for more good news here as well.

First, our gross undistributed incentive income, which is recognized in DE when investments are realized, increased to over $730 million. About $550 million of that amount is in our credit PE Funds, which remained well above incentive threshold. And a growing component of that total, nearly $70 million at the end of Q1, reflects the value of options in Newcastle. Key point here is that even with no assumptions about further investment gains, we had $1.50 per share of gross embedded incentive income that's not been included in DE to date. This bodes well for higher incentive income in future periods.

Second, in Liquid Markets, NAV above high-water marks increased from $1 billion just over a year ago to $4 billion today. The strength of first quarter returns in both our main Macro and Asia Macro Funds was bolstered by an exceptional April. Net returns are now about 9% and 7%, respectively, year-to-date. Sometimes, the best strategy of all is just to make outsized returns. 4 months into 2013, we're feeling very good about how our full year incentive income will play out in Liquid Markets.

Third, valuation gains in our private equity main funds now total nearly $9 billion since 2009. Incentive threshold gaps in our most recent vintage funds continue to close. We have a strong group of portfolio companies, including market leaders in sectors with outstanding growth dynamics. And we believe there's substantial upside in many of our largest investments. These factors point to strong prospects for generating incentive income over time and for further valuation gains for our balance sheet investments.

So the benefits and potential of our model are taking shape in a variety of ways. The disciplined buildout in our already diversified business is leading to growth and growth potential on multiple paths. Our core investment platforms continue to support the introduction of more focused strategies to meet evolving LP needs. Our earnings continue to benefit from the stability that comes from long-term investment structures and increasingly from permanent equity vehicles.

With investment returns strong across the board, we're beginning to see the significance of performance-driven upside. And the strength of our investment performance supports capital-raising efforts, which leads to growth in AUM and ultimately, a new baseline from which to grow our revenues further.

In sum, in terms of investment performance, financial results and strategic progress, it was a good quarter for our LPs, a good quarter for Fortress and a good quarter for our shareholders.

With that, let me hand it off to Dan.

Daniel N. Bass

Thanks, Randy. Good morning, everyone. Earnings in the first quarter built on successes we delivered last year. Pre-tax DE grew by 75% year-over-year, finishing the quarter at $100 million or $0.20 per share. Three primary drivers account for the year-to-year DE growth: One, incentive-eligible assets in our liquid business grew by nearly $3 billion; two, there was and is sustained positive fund performance across our funds; and three, an increase in fund realizations in our PE-style funds.

Looking closer into the result, management fees were up 12%, an increase in each business year-over-year. Incentive fees were up 120% during that same time period. This contributed to year-on-year revenue growth of 46%, which led to the bottom line growth in DE, which are referred to in the opening.

Moving to AUM. AUM increased by another $2.2 billion or 4% during the first quarter, finishing at $55.6 billion. This marks the sixth consecutive quarter of AUM growth and represents growth of over $9 billion or 20% since the first quarter of last year. During the first quarter, we returned nearly $1.7 billion of capital to our investors in various forms, while at the same time, deploying about $600 million.

We also raised $740 million in our hedge funds and another $760 million in equity raises at Newcastle. And as mentioned, we had $1.2 billion of net client inflows into our traditional asset management business, Logan Circle. Finally, at the end of the quarter, we still have $6.7 billion of dry powder, of which $5.3 billion is available for general investment purposes.

Now let me talk about the businesses. First, in private equity, DE was $32 million in our traditional PE Funds in Castles business, a 10% increase year-over-year. Management fees were up 15% year-to-year, largely from the equity raises at Newcastle and called capital in our transportation and MSR funds.

In the first quarter, the underlying value on our PE fund investments appreciated by almost $800 million or 5.2%, following over 25% appreciation last year. This is now over $4 billion of appreciation in the last 5 quarters. Public company valuations were the main driver in this result, up 13% in the quarter, headlined by a 90% increase in Nationstar.

In our credit funds, DE was $41 million in the quarter, up nearly 60% year-to-year and was highlighted by increased realizations in our credit PE Funds. During the first quarter, we recognized $81 million of incentive income in aggregate, $33 million in our hedge funds and $48 million in our Credit PE Funds. Net returns of 4% in DBSO was the catalyst in our hedge fund incentive. And in our credit private equity funds, $40 million of the incentive came from our Credit Opportunities Funds, with the remainder coming from our Japan Funds.

Unrealized incentive income also continued to grow in Credit -- in our Credit PE Funds as well. The gross value is now $545 million, which represents growth of $260 million or over 90% from the same time last year. And we also have another $100 million of unrealized PE-style incentive income in the liquidating RCA classes of our Credit Hedge Funds.

In our liquid funds, DE was $25 million in the quarter versus $45 million for all of last year. We also raised nearly $700 million in capital in the quarter in our liquid funds, which was a main contributor to our 15% quarterly growth in management fees. Net returns at 3.8% in our macro fund and 2.8% in our Asia Fund enabled us to generate $32 million of incentive income in the quarter.

And now we have over $4 billion of capital above the high-water marks in the segment. And with strong April returns, we are well positioned to recognize significant amount of incentive income in this business through the remainder of the year.

And finally, on Logan Circle, AUM now stands at $22 billion, 36% higher than last year. Average inflows into the business has been $1.4 billion over the past 5 quarters. This has led to management fee growth of 50% during the last year.

And a final point on Logan Circle, the investment in the growth equity business increases the earnings potential in this segment. What we are doing here is adding a second revenue stream while leveraging the current infrastructure in that business, which is already in place.

Quickly on the balance sheet. The value of our net cash investment stands at over $1.4 billion or $2.95 per share. This is up nearly 50% or $1 per share from a year ago.

Before I close, a couple of points on margins and taxes. First, on margins, our first quarter operating margin was 39% compared to 33% in the first quarter last year. The higher margin this year reflects a greater amount of incentive income, particularly coming from our Liquid business.

Second on taxes. As we sit here today, we expect our full year rate to be 6% to 10%, as equity-based deductions will continue to keep our tax rate low through the end of this year.

Now a few closing comments that reflect successful execution of our business strategy in the past year. One is the uniform strength across all of our key financial metrics. Since the beginning of last year, we nearly doubled our earnings per share, raised nearly $9 billion of capital and substantially grew our AUM. Two is the growth in the embedded value of the firm. Undistributed incentive income is now $1.50 per share, and our balance sheet is now worth almost $3 per share, both up substantially in the past year. Three and finally, we are capitalizing on strategic growth initiatives. Already, this year, we have raised $1 billion of capital in both private equity and our hedge funds, and the addition of new strategy at Logan Circle adds to the growth potential in that business.

Thank you. We will now take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question will come from the line of Craig Siegenthaler, Credit Suisse.

Mark Deluzio - Crédit Suisse AG, Research Division

This is Mark Deluzio here for Craig. This question is for Wes. Can you give us any color around MSR 2 and the second infrastructure fund, as far as fund-raising targets, opportunities or timelines there?

Wesley Robert Edens

Yes. We've just launched the capital formation for the second MSR fund, and I think it's going to be a pretty short process. Just early indications from both existing investors as well as other people that were interested in the strategy that didn't participate the first time around, indicate that we're going to hit our target on it relatively quickly. I think we expect to have a closing sometime this quarter. And so hopefully, by the time we have our next earnings call, we'll give you color about the size and the amount of it and whatnot. But I think the early returns on the first fund look very promising. We've committed about a little over 2/3 of the capital in total, and so far so good. On the transportation side, it's kind of a paired strategy, it's the way I think of it. We completed the capital formation for our private vehicle. But we intend to become a listed vehicle, it's called worldwide transportation and infrastructure. It's a $400 million capital vehicle that we will invest up and then intend to list hopefully sometime before the end of the year. And that company, we think, could be a very scalable company. When you look at the $2.4 trillion in assets in that industry, there is a lot of opportunities. And given the worldwide reach of it between airplanes, helicopters, engines, ships, et cetera, et cetera, we think that there's a long, long way to go there, and we're very excited about that part of it. The private infrastructure fund raise is designed to complement that with more private equity type opportunities, both for our assets and for companies, and we have just started the process with that. My guess is that the first close of that will happen sometime in the third quarter. And we expect to have real success with it. In terms of the specific fund size and whatnot, I think that's not the right thing to do. But in the aggregate, I think that, that fund complex between the public and the private aspect of it, eventually, can be many, many, many billions of dollars. So it's a very, very large opportunity and something we're really excited about.

Mark Deluzio - Crédit Suisse AG, Research Division

Great. And then a quick follow-up. Do you have any targets or expectations for Logan Circle's growth equity business? Are there any update on the progress since the launch?

Wesley Robert Edens

It just started. I mean, we made the announcement in terms of the personnel changes that they have yet to show up. So the minute that they do, we'll have some expectations for them. But we're excited about the business. I think stylistically, their -- their investing style actually is a public version of how we think of things around here. They're a deep-value long-term investor. They've got a great track record with a bunch of individuals. And I think Jude and the gang in Logan Circle did a great job in identifying the opportunity and finding the right people for it. So that's a business that can be and is, in other places, a very, very significant one. In this market in particular, I think it'll have a lot of resonance with people on the stock pickers market, and these guys are long-term concentrated stock pickers and have done so with a lot of success. So I mean, stylistically, it's a great thing and I think, as the guy said earlier, I think this will be the first step in what could be a real cornerstone in the addition of an equity strategy to Logan Circle.

Operator

The next question comes from the line of Marc Irizarry, Goldman Sachs.

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

Wes, can you talk a little bit about the PE portfolio, where it stands today in terms of valuations, and to the extent that you can give us some color on maybe what the harvesting realization activity might look like for the portfolio going forward?

Wesley Robert Edens

Yes, I think -- look, as the guy said earlier, the valuation upticks over the last really number of years, but in particular, the last 1.25 years have been very substantial. Total gains since the end of 2009, about $9 billion. Total gains last year, up 25%. This year first quarter, up $800 million, up about another $100-plus million in the month of April. So things are good. I'd say, just in terms of the context of it, our biggest investments are the ones that we think are, for the most part, our best ones. We've got very substantial investments in the financial services business, the biggest of them being Nationstar, and then our consumer finance business, Springleaf, which had a very, very good first quarter, that I'll come back and talk about. On the transportation side, we've actually had a number of liquidations. We really have one major company that we're very keen on, which is our chassis leasing business, which is still in the private equity funds that we think is moving down the tracks. And then, lastly, in Florida, we've got just a whole myriad of investments that are all under the heading of Florida East Coast Industries. But that's effectively the equivalent of a private equity fund by itself. It's $2.5 billion in capital and it happens to be great infrastructure assets and great real estate assets in exactly the right place at the right time. So we've seen some very meaningful developments there that I think are going to really bear fruit here in the second half of this year. In terms of the liquidations, I would say that the -- in the financial services space, we've had this great run over the last couple of years. I think it gets more competitive in the investment side there every day. And we still have found lots of things to do because we've been building out where we have competitive strengths. And I think that we bought this $4 billion portfolio, consumer loans in the first quarter that really doubles the size of the consumer book at Springleaf, and that's a good example of what the benefit is of being a strategic investor. But there's no doubt that it -- the cycle is gradually turning from one of risk-off to risk-on in the part of the financial institutions. And I think that, that means that some of these investments are closer to being harvested than not. There is nothing that is immediately on the horizon, but we have real aspirations around that. My goal for the year is to generate some significant liquidity from a handful of things that we've got teed up and also generate some meaningful gains. And I think that these big investments have got the real prospects for doing so.

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

Okay. And then just quickly on the new PE Funds and I guess MSR 2, and I guess you said 2/3 of capital has been committed to MSR 1. When you're going out and raising that money, how should we think about the velocity of investing in those products versus some of the other PE Funds that you might raise? I mean, are we looking at sort of a quicker investment cycle and sort of high -- quicker return on capital and some of those products. How should we think about that versus your others?

Wesley Robert Edens

Yes, I think that they are -- that particular investment vehicle was targeted to be capital that we can invest in, in a relatively short period of time and that, in fact, was what's going to come to pass. We closed that fund I think in either June or July of last year and raising Fund 2 in May of this year. So in less than a year, we've committed 2/3 of it and we're on track to invest the rest of that, I think, in a relatively short period of time. The opportunities have been there. As I said, it gets more competitive all the time. But we're a big player in that market, and the returns thus far have been great. The best snapshot is that as we just look at the disclosure of Newcastle, now NRZ, new resi, which is the spin co, they've got a portfolio that mirrors, to a certain extent, some of the investments in the fund, and they've had a lot of good returns and success thus far. So on that side, it's been great. The infrastructure fund, I think, is going to be much more of a traditional private equity vehicle, and we'll have a longer investing timeline in some of our holding periods to what the rest of the funds are. We've also got other funds around the horizon as well. But I think that, that's where those are.

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

Okay. And then on Eurocastle, on the management fee, I guess this -- you called out in the release a stepdown in Eurocastle's management fee related to the restructuring. Can you talk about -- to the outlook there, now that, that restructuring is done? And how should we think about the impact to fee-related earnings or net management fees from that change?

Wesley Robert Edens

Yes. That company has had a tough road. There's a lot of vehicles we've had in Europe that had kind of pre-crisis investments. Having restructured the balance sheet and stabilized things, we thought it was the right time to go back and look at the asset management contract, resize it properly and put it in a position to attract capital and grow. We think that there are some excellent investment opportunities, in particular in Italy, where we've got, again, a big, competitive advantage. We're the largest servicer in Italy, and we think there's some good investments there, both for the private equity funds as well as for that vehicle on a more modest basis. And we wanted to get things kind of rightsized and be in a position to raise capital and grow it. I mean, the most successful version of that in our history has been the whole Newcastle experience, where you got a company where we raised capital, gosh, a little over a year ago, for our first MSR investment at about $4.60 or so. And now the company trades at $11 and change, so -- and we've attracted a lot of capital and made investors a lot of money, so we can't guarantee those kinds of returns obviously, but that's the playbook that we're trying to follow with respect to Eurocastle.

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

And then any P&L impact we should be thinking about from the change in the management fee there, is there a benefit, a better view on that?

Wesley Robert Edens

Yes, it does step it down. It's all in the sauce and you can go through with Dan kind of the pluses and minuses. But definitely, there's a reduction there. We've had, on the flip side, in our other PE businesses, we had some pretty good capital formation, both this year and last year and prospectively, a lot more through the remainder of the year, but there's definitely a reduction that's part of that restructuring.

Operator

Next question will come from the line of Robert Lee, KBW.

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

A couple of questions. First one is just maybe a general kind of capital question. A couple of your peers have kind of altered their distribution policy in the last several quarters to, I guess, to more closely reflect the timing of their distributions to the timing of their realization activity. So I don't know, any thought that maybe that's something you would think about or consider going forward, particularly as you have a lot of potential incentive generation coming up, maybe not waiting till year end to do something more than the basic sense [ph]?

Randal Alan Nardone

It's Randy. Certainly, our regular quarterly dividend policy is based on net management fees. We and the board will certainly take into account, looking at our regular dividends as management fee growth, taking into account management fee growth. When it comes to harvesting investments and generating incentive income and as our balance sheet starts to liquefy, we'll certainly -- that will all provide funds to -- that could be a source of dividends going forward that will obviously be considered when the funds appear.

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

Okay. And maybe going into the accrued incentives, is it possible to get a sense of what kind of a net number would be? I mean, obviously, that's continued to grow. But if we think of the $700-odd million of kind of gross, what would that kind of be on a net basis if, theoretically, you realized all that soon? Is that going to be 50% or 40%, you think?

Daniel N. Bass

I would say it's in the 50% to 60%. A lot of it's in credit, and that's really where those numbers come out, around the 50%.

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

Okay, great. And I noticed -- I think maybe some time the end of last year or last year, it seemed like you started a business where you're actually within Castles, I think, where you're actually managing some nursing homes for, I guess, Brookdale and maybe some others and -- I mean, is that a kind of start-up nascent kind of business that you're -- that we actually could maybe start to see generate some revenues over time that you're focused on? Or is that really just kind of a more of a one-off kind of opportunistic thing to help out an affiliated company?

Randal Alan Nardone

Well, inside of Newcastle, we have started a program about a year ago to invest in senior housing. As a firm, we have very substantial investments in the space, where a large shareholder in Brookdale, which is a public company. We are a very large holder in Holiday, which is a large company. They're not nursing homes. They're actually, for the most part, independent living, to a lesser extent, assisted living. So on the continuum of care, they're more like apartments with food and services, as opposed to the more pronounced care and acute care of a nursing home. As we started to make the investments in Newcastle, we thought that the best way to ensure that we generated the returns that we wanted to was by managing the properties ourselves. So the company, Blue Harbor, that you see that we own on balance sheet manages those properties directly. We've made about $100 million in equity investments in senior housing in Newcastle. It's been very successful in the short time we've owned it. Leverage returns of those assets came in at about 12%. They now generate about 17%, and we think that there'll be eventually 20-plus percent equity returns. So to the extent that business can grow and continue to prosper, that also could be a source of an additional vertical of a stand-alone company, much along the veins of what we've managed to do on the residential side of the MSR business at NRZ. So it's -- I do think that there is the prospect to make money in the business, of course. It's a for-profit operator, and it does make money, it makes a little bit of money. But the primary issue is to really protect and provide operations to support the capital investment that we have in Newcastle for it.

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

All right, great. I do have just one more question for Randal. When do we get to take the interim of the CEO title?

Randal Alan Nardone

Well, I'd say to be determined. We don't -- we certainly don't feel any urgency to make a change now in terms of talking to other guys. We're happy with how everything is working. But this is something we talk about from time to time. Maybe by next call, there will be more news there.

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

I mean, is there actually a formal CEO search going on or is it...

Randal Alan Nardone

There is none.

Operator

Your next question comes from the line of Roger Freeman, Barclays.

Roger A. Freeman - Barclays Capital, Research Division

I guess, Pete, if you're there, just curious -- any thoughts do you have on sort of the opportunities within credit? Currently, I know, last couple of quarters, you thought that the opportunities that was somewhat limited with the valuations kind of stretched. Is it still the same to you?

Peter Lionel Briger

Yes. Everything that we're doing from a credit investing perspective today is idiosyncratic, meaning there has to be a special situation involved. The opportunities in credit are not there today. There's a possibility that things will break loose in Europe. But for the most part, there are very few opportunities in credit. And I'd have to say that our views have gotten more -- the markets gotten more competitive in the last quarter rather than less competitive. I would sort of characterize it as a food fight or an arm's race. Sort of maybe a few times in history have people fought so hard for so little.

Roger A. Freeman - Barclays Capital, Research Division

So I guess what are the implications there that doesn't change with respect to kind of growing that business? And actually, a sort of corollary, did the Credit PE Funds, did it have a negative return that shows the income loss in the kind of AUM walk-through? I know there's are other items in there, but...

Peter Lionel Briger

So just first of all, I'd say I don't see a great opportunity for us to grow our opportunistic Credit business in this type of a market. So I'm not speaking about Logan Circle, but really towards our opportunistic Credit business. You would expect in a time like this, we would be harvesting positions, harvesting investments and we would be contracting, if anything, but not growing into this type of opportunity where perceived risk is, in most cases, lower than actual risk. And maybe, Dan or Glenn, if you can comment on that -- but no, we did not have negative...

Daniel N. Bass

No, no. The reason for -- in that line is FX, and we have significant yen-denominated funds and that, from a dollar perspective, has caused the AUM to go down.

Roger A. Freeman - Barclays Capital, Research Division

Yes. Okay, I figure that might be the case. All right, great. And then I guess, Wes, on the -- there's been a lot of discussion already the funds you're raising, et cetera. Is it fair to say that you kind of think about it going forward as sort of specialized fund launch? Do you have any -- you've kind of talked on and off about whether to do another general-purpose raise, although not so recently? But is that still something that you'd consider at some point or...

Wesley Robert Edens

Yes. I mean, the strategy, as at least I think of it, is this combination of the kind of listed permanent vehicles as well as kind of their counterparty on the private side. And I think that both sides have the potential to be very substantial. On the listed side, we had 2 vehicles, Eurocastle and Newcastle, historically. As of today, with the trading for NRZ, that's another $1.1 billion in fully invested capital that now is free to trade. The worldwide transportation infrastructure, that's the $400 million that we raised earlier this year that we expect to be public. And we've got 2 other verticals that we think have got good prospects for being public in the relatively near term. So if you just think about that side of it, from a couple of billion dollars in capital, we have aspirations that to be a very large chunk of our capital structure, and it's very attractive in terms of the permanent nature of it. It provides a lot of stability in management fees and performance fees if we're successful in doing so. And my long-term aspiration is for that to be a $10 billion or $20 billion business across the handful of different strategies around the globe. The corresponding private equity funds are in -- raised where we see the opportunities. So the MSR stuff is one where we were fortunate enough to identify early on and have some good success and now have made the first fund, and now the second fund is in process. Infrastructure, likewise, we've been one of the biggest investors in private equity formats and infrastructures that we think can be a very, very large vertical. Other things we're looking at are things that we have had a lot of success whether it's been senior housing and health care or some of the financial services stuff, et cetera. So I think that if it all kind of goes as we hoped that it will, you'll see this play out in very kind of clear relief over the next handful of quarters and a couple of years to the plays where you've got these kind of 2 big complementary businesses side-by-side. And that I think is -- in this market, I think that, that's really the right way to think about it.

Roger A. Freeman - Barclays Capital, Research Division

Okay. And just lastly, just on the cash investments, $3-ish a share. Is that a level that's sort of sized with your expected use of capital in growing the business, investing alongside the fund, et cetera, or is -- does that -- do you see that growing over time, or is there a portion there to be considered for distribution at some point?

Randal Alan Nardone

It's Randy. I guess I mentioned earlier, as the balance sheet liquefies, that will provide funds that we'll consider as dividendable. I'd say I'd expect the balance sheet to grow because we expect the investments to appreciate. But as the investments are turned into money or monetized, we expect to -- we don't expect to bulk up the balance sheet continually.

Operator

[Operator Instructions] And your next question will come from the line of Dan Fannon, Jefferies.

Daniel Thomas Fannon - Jefferies & Company, Inc., Research Division

Wes, a question, I might have missed it. I know you mentioned the sizable gains in the PE Funds, but did you give where you stand versus the carry threshold across the funds?

Wesley Robert Edens

Well, in the aggregate, we've got net investments in all the funds of $9.5 billion. Carrying value as of the end of the year was $15.5 billion and it's about $1 billion higher now, so kind of $16.5-ish billion on $9.5 billion of paid-in capital, so there's a fairly substantial gain in the aggregate. But then it really varies fund by fund. I do think that all of the core funds, 1 through 5, are going to produce substantial performance fees. I mean, they're all in the process of continuing to evolve. But it's my view that we're all going to hit some version of the thresholds that we set out, which is kind of 2x people's money. And that should generate good returns. There's -- for the most recent vintages, they were more challenged. Obviously, there's been a delay in all that. But the depreciation has been relatively dramatic over the last couple of years, but I think it's got a long ways to go.

Daniel N. Bass

The fund by fund will be in the 10-Q that will -- that you'll see later today when it gets filed.

Daniel Thomas Fannon - Jefferies & Company, Inc., Research Division

Okay, that's helpful. And then I guess on the management fees, in the quarter, were there any catch ups from funds that maybe came online that were not accruing fees for some period of time, and/or do you expect that in the near term, for maybe 2Q or something? Is there any other kind of changes in the management fee trajectory that we should be thinking about?

Daniel N. Bass

No. Other than the Eurocastle stuff we talked about, no catch ups in the quarter.

Daniel Thomas Fannon - Jefferies & Company, Inc., Research Division

Okay. So that -- on that -- for the year -- for the Castles, all else equal, would the management fee go down in 2Q?

Daniel N. Bass

It should, yes, other than the fact that we also raised $1 billion of capital in Newcastle in the first quarter, so it will be a net effect.

Daniel Thomas Fannon - Jefferies & Company, Inc., Research Division

Okay. And then one last kind of modeling question. I guess just in terms of the share count, how should we think about the share count growth over the next kind of year or so?

Daniel N. Bass

We have 490 million shares outstanding, and we probably have about 20 million shares to come online in the next couple of years as we deliver them under our compensation plans. But it's about 490 million right now.

Operator

Your next question is a follow-up question from the line of Robert Lee, KBW.

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

I have a question for Pete. Just kind of curious, I mean, given your outlook -- or continued outlook for kind of the opportunities you see over the -- at least over the near or intermediate term. I mean, a lot of the kind of committed but kind of -- the committed but unused capital, I believe, is in your business. So could you maybe update us on kind of the life of that committed capital? I mean, if you don't use it in the next year or 2 because the opportunities aren't there, does that go away? Just maybe trying to get a feel for how, if the opportunities don't develop, how that pool of capital may diminish.

Peter Lionel Briger

Well, I'd rather not go into the specifics of those funds. But what I would say is we do have a pretty regular dialogue with our LPs about whether or not they would like us to have those commitments in this environment. And I would say, pretty uniformly, they would and have even mentioned extending those commitments. I don't feel in any way that we have a problem raising capital or having the capital available to go after good opportunities or if the market environment should change, increasing the capital commitments that we have today. The issue really is finding investments. And as I say, I don't think that there are any significant amount of our LPs that want us to give the money back and quite the opposite, have talked about extending the commitments.

Operator

That concludes the question-and-answer session on today's call. I'd now like to turn today's conference over to Randy Nardone for closing remarks.

Randal Alan Nardone

Thanks, everybody. A quick recap before we go. Strong start to 2013. Across the board, businesses have delivered outstanding returns for our investors. Capital formation momentums continued and new strategies have opened up new paths for disciplined growth. Embedded value has continued to grow. Financial results are beginning to reflect the substantial potential of our company when all of our businesses are operating at or near full potential. We're happy with our performance so far and optimistic about our prospects for the remainder of 2013 and beyond. Thanks for joining us today and thanks for your interest in Fortress.

Operator

Thank you for participating in today's conference call. You may now disconnect.

Wesley Robert Edens

Thank you, Holly.

Operator

Thank you.

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