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Fortress Investment Group LLC (NYSE:FIG)

Q2 2013 Earnings Call

August 01, 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 - Co-Chairman of the Board, President, Principal,Head of Credit & Real Estate Business and Member of Management/Organization Development Committee

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

Analysts

Craig Siegenthaler - Crédit Suisse AG, Research Division

Danielle Matsumoto - Goldman Sachs Group Inc., Research Division

Bulent S. Ozcan - RBC Capital Markets, LLC, Research Division

Roger A. Freeman - Barclays Capital, Research Division

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

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

Daniel Thomas Fannon - Jefferies LLC, Research Division

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Fortress Second Quarter 2013 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Gordon Runté, Head of Investor Relations. You may begin.

Gordon Runté

Okay, thank you, Victoria. Good morning, everyone, and welcome to the Fortress Investment Group's Second Quarter 2013 Earnings Conference Call. We will begin our call today with opening remarks from Fortress Chief Executive Officer, Randy Nardone; and Chief Financial Officer, Dan Bass. After these remarks, we will save most of our time for your questions.

Joining us for that portion of our call, we have in the room today co-Chairman and Head of Private Equity, Wes Edens; Principal and Head of Liquid Markets, Mike Novogratz; and the co-CIO of Credit, Dean Dakolias. We also have co-Chairman and Head of Credit Pete Briger, who has dialed in but on the move in Europe so we are hoping technology will be our friend with that connection.

Just a few housekeeping items before we begin. Let me remind you that statements made today that are not historical facts maybe forward-looking statements. 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 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. We had a great quarter and a great first half of the year.

Distributable earnings of $0.30 a share is our strongest quarter since our very first as a public company. At $0.51 a share for the first half of the year is only $0.01 shy of our DE for all of last year. We've spoken before about the potential of our business model when we start to run on all cylinders. This is what we meant. There are a lot of positives to cover today, but for the quarter it's really on about what strong investment performance means to our bottom line.

Here's a few key points. Our 3 alternatives businesses each generated incentive income in the second quarter. The total of nearly $200 million is our second highest ever. At the same time, gross unrealized incentive income rose to over $750 million, or $1.50 a share. We're set up well for the future. The incentive income comes from investment performance. With the hedge funds, it's the story of the 9s. Over 9% net returns in the second quarter in both our Macro and Asia Macro Funds. And over 9% net returns year-to-date for our Credit Hedge Funds. These performance led to liquid incentive income of over $90 million, which is nearly 3x Q1.

Credit Hedge Fund incentive income was over $60 million, nearly double Q1. With strong performance and new commitments, we ended the quarter with over $9.5 billion of hedge fund NAV above high watermarks.

In our Credit PE Funds, we had $37 million of incentive income in the quarter and $85 million year-to-date. That's more than we generated in all of 2012. In PE and the Castles, we generated about $6 million of incentive income. The Castle result is attributable to new residential, which we spun out of Newcastle in the quarter. Additionally, our unrealized incentive income includes almost $85 million in options value for the Castles. Our main PE Fund valuations increased by a couple of percent in the second quarter and 7% year-to-date, that's over $1 billion of appreciation for the year. Last 12 months, valuations are up almost 21%.

NAV is close to its all-time high and all main funds are above costs. There's still work to do but we expect to generate attractive returns in our main funds over time. While higher incentive income may be the centerpiece of our second quarter, here's some additional highlights. Our AUM was up approximately 14% from the second quarter last year. We're down slightly from the last quarter as a result of LP distributions and the restructuring of Eurocastle, but both of these were positive developments. Overall, we see a lot of potential for AUM growth given capital-raising activities across the firm.

We raised a total of nearly $3 billion in the first half of the year with about $1.6 billion in additional commitments in July, so $4.6 billion year-to-date. That includes our second MSR fund, which closed last week at it's cap of $1.1 billion. We're currently marketing 2 additional funds in private equity and infrastructure fund and a fund focused on nonperforming loans in Italy.

In Credit, we're actively raising capital on our onshore hedge fund and there's still meaningful uncalled capital in our main funds. We have nearly $170 million in commitments in the second quarter and about $250 million in the first half of the year.

In Liquid Markets, as you'd expect with our performance over the last 1.5 years, redemptions are down and investment demand is up. We raised $1.4 billion in the first half of the year plus nearly $470 million in July.

In Asia Macro, we reached our fundraising goal for 2013 and had $1.7 billion in AUM as of July 1.

We continue to be excited about Logan Circle. With strong composite performance, our core fixed-income strategy should continue to do well on the fundraising front. We also believe growth can accelerate as the firm continues to evolve into a broader platform. That evolution began with the launch of the growth equities business in the second quarter, at the end of the second quarter. This business is now raising capital in 4 strategies, and just 30 or so days into marketing, we have a robust pipeline and high expectations. So we expect continued AUM growth at Fortress over time.

Finally, our balance sheet, which currently includes nearly $3 a share in net cash and investments. More than half of that is in older vintage PE Funds, so we expect a bunching of realizations over the next few years. And we think there's upside in many of our largest investments.

Since we can run our business with a smaller balance sheet, we intend to return a significant portion of net proceeds of balance sheet realizations to our shareholders. As we said in the past, this could come in the form of year-end, top-up distributions or through opportunistic repurchases of outstanding shares.

So quick summation. It was a terrific quarter for Fortress. Our results have begun to show the earnings power of our business model and the financial performance that can result when all of our businesses are doing well. From investment performance to capital formation to new business initiatives to embedded value, the leading indicators of future performance are strong. We feel very good about prospects for the remainder of the year and we see a great deal of upside potential from where we stand today.

Before I hand it off to Dan, I want to say that I'm excited to serve as CEO and I'm very proud of the achievements of the great Fortress team. Dan?

Daniel N. Bass

Thanks, Randy. Good morning, everyone. Our second quarter earnings are at historic levels. The catalyst to reach these results have been visible and trending upward for a few quarters now. Let me share a few facts to support these statements.

Total revenues have exceeded $1 billion over the last 4 quarters. This results in pre-tax DE of nearly $420 million over that same time period. In the last 18 months, we have raised over $11 billion of capital, which has contributed to double-digit AUM growth. And we now have almost $18 billion of assets above high watermarks and eligible-generated incentive income. This is compared to $12 billion, or up 50%, from the same time last year. With that said, let me focus more on the financial results.

Year-to-date, our pre-tax DE was $248 million, a year-to-date increase of 132%. Management fees are up 13% and incentive income is up over 200%. Increased realizations in our Credit PE Funds and record quarters in both our Credit and Liquid Hedge Funds drove the substantial year-to-year increase in incentive income. Our operating margin was 44% in the quarter and is now 42% for the year. This is compared to 33% last year. The main driver here is liquid incentive income. As I stated before, a material amount of incentive income in that business can significantly improve our operating margin as it has done this year.

Now let me review each of the businesses. First, in Private Equity. Year-to-date DE was $62 million, including $30 million in the second quarter. This is an 11% increase on a year-to-year basis. During the quarter, we completed the liquidation of our first main private equity fund generating $5 million of incentive income. Over its life, Fund I has had a net annualized IRR of 26% and generated over $340 million of incentive income. Public valuations were up 7% in the first 6 months of the year and continue to trend well in July also. In particular, Nationstar was up 24%, or $600 million, in the month of July alone. In addition to the $1.1 billion MSR fund raised in July, we also had permanent equity raises at both New Castle and Eurocastle in the quarter. These equity raises totaled $330 million and added to our AUM during the quarter.

In our credit funds, DE was $53 million in the quarter bringing year-to-date DE to $94 million. This is an increase of over 80% from the same period last year. In the second quarter, we recognized $101 million of incentive income, $37 million in our credit PE Funds and a record high $64 million in our Credit Hedge Funds. Quarterly returns of over 5% in DBSO drove the record hedge fund results. And even with significant realizations in the quarter, unrealized incentive income in our credit funds continue to grow to over $660 million. These represents growth of nearly $240 million, or over 50%, from the same time last year.

In our liquid funds, pre-tax DE was $64 million, the second-highest quarter of DE recorded in the segment since we went public. By comparison, we recorded $3 million of DE in the second quarter last year. Again, this underscores the point: Liquid incentive income can change our earnings dynamics materially. Net quarterly returns of over 9% in both our Macro Fund and our Asia Macro Fund generated this historic level of incentive income. In fact, the $92 million of incentive income in the second quarter was $24 million more than we recorded in the entire year last year. We raised $1.4 billion in the first 6 months this year in Liquid, and subsequent to quarter end, we raised almost $0.5 billion in July and another $300 million today. Altogether, that's $2.2 billion of new capital raised this year in our Liquid business. This pushes AUM in the segment to over $7 billion with around $5 billion of that capital currently above its high watermarks.

And finally, Logan Circle. During the quarter, we ceded the new growth equities business and along with it 4 new investment strategies. This new business will leverage the existing platform already in place and is expected to generate higher fee rates than our core fixed income business. We expect average fee rates of approximately 60 basis points in this new business.

A few points on the balance sheet. Balance sheet value, as represented by net cash and investments, stands at over $1.4 billion, or $2.88 per share. This represents annual growth of nearly $1 per share. Additionally, as part of the GAGFAH share sale in July, we recognized a realized gain of $6 million for DE purposes in the third quarter. Also just the other day, we paid down our remaining $89 million of debt. This payment once again leaves us free of debt and will save at least $2 million of interest income.

Finally on taxes. We still expect our full year DE tax rates to remain in the 6% to 10% range. This lower rate is a function of significant equity-based compensation deductions that will be reduced starting next year. Consequently, we could see our tax rate increasing next year. Our rate could increase our percentage in the upper teens or low 20s. Obviously, the actual rate will be highly dependent on the mix of our earnings.

A few closing comments on our strong first half of the year. Our earnings reflect the potential that we've been highlighting for many quarters. We have now had 4 sequential quarters of EPS growth including 50% growth this quarter. Compared to last year, we had double-digit AUM growth and triple digit earnings growth. And with nearly $3 of value of cash and investments and 0 debt, our balance sheet has never been in a better position. More importantly, we have significant long-term growth catalysts in all of our businesses. These catalysts include: multiple vehicles currently raising capital in our private equity business; substantial dry powder for making new investments in both our credit and traditional private equity businesses; the potential for significant incentive income from our legacy PE Funds; continued asset flows into our hedge funds; a top-tier new business at Logan Circle; as well as a growing surplus of embedded earnings in the form of incentive income in all of our businesses. All of which point to significant potential for earnings growth.

Thank you. We will now take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question is from Craig Siegenthaler with Crédit Suisse.

Craig Siegenthaler - Crédit Suisse AG, Research Division

So first question here, just thinking about capital deployment, your annualized after-tax earnings now are well over $500 million, cash and investments of $1.5 billion, with 0 in debt after the GAGFAH sale and also the debt paydown this year in July. I'm wondering how we should think about, not just this year but longer-term, the $120 million of dividend that you're allocating, how much could that step up, and also, should we think about maybe buybacks at some point?

Randal Alan Nardone

Well, as we've -- it's Randy. As we've said before, we will take all of our earnings into account when we decide what to do dividend wise. It will be a board matter. It will be actively debated between that and -- with management and board. We've talked about the possibility of a top-up dividend at the end of the year, or certainly looking at any opportunistic repurchases of stock.

Craig Siegenthaler - Crédit Suisse AG, Research Division

And then when you think about retaining earnings for things like growing investments, seed capital, what are demands on that side of the business especially with the new Logan Circle growth equities business, maybe using some of your capital there to seed funds in other parts of your business?

Randal Alan Nardone

As I said in my opening remarks, we have a big balance sheet and I think we don't need that big a balance sheet to operate our business. And so I would think on a net basis, you'd expect the balance sheet to shrink over time.

Craig Siegenthaler - Crédit Suisse AG, Research Division

Got it. And then just on the $5.9 billion credit private equity dry powder. I'm wondering, how should we think about the potential inflows over time from this business? Maybe just give us an update on -- maybe if Pete's online, he can give us an update in terms of his thoughts on the business and when we get to see some of those inflows?

Peter Lionel Briger

Well, when you say inflows, are you talking about realizations from current investments that we have, or you're talking about utilization of dry powder?

Craig Siegenthaler - Crédit Suisse AG, Research Division

Yes. So the $5.9 billion of uncalled capital to dry powder, how quickly could you start pulling that into your funds and start managing that and deploying that?

Peter Lionel Briger

Well, I think with respect to the Credit PE Funds, the environment is more difficult to make investments. Perceived risk is low in terms of the credit business around the world, there's lots of government intervention, and that sets up a bad metric for credit PE-type returns. So actual risk is in a bad place relative to perceived risk. In our Drawbridge funds, we think we can deploy capital, raise capital and deploy capital, because our opportunistic lending business is in a good place at this point. Financial institutions are leveraging and there are a whole host of opportunities for us to make loans in places that bigger financial institutions don't want to be. So I would say, by and large, this is not a great credit investing environment. It's gotten slightly better than the last couple of quarters. There's been more uncertainty that's been set in the market. But I would not say that this is a robust environment for making new opportunistic credit investments. I would say the last great remaining place with potential is Europe, which is why I'm here. But even here, I think the metric of perceived risk to actual risk is not a good one for us. So I think this is a better time for selling our existing investments than making new investments, although we have significant amounts of dry powder and investor interests if the markets do change more in our favor.

Operator

Your next question is from Marc Irizarry with Goldman Sachs.

Danielle Matsumoto - Goldman Sachs Group Inc., Research Division

This is Danielle Matsumoto for Marc Irizarry today. Maybe to start off with a bigger picture question, just could you just walk through, in the PE business and the Castles and just the business overall, how rising interest rates impacts the ability to deploy capital as well as realize your investments?

Wesley Robert Edens

This is Wes. The -- well, it's different for different businesses. For the most part, our strategy of our private equity businesses has been to try to lock in as much long-term secured finance if we can across the different businesses, and then as we generate growth across the portfolio, it drops straight to the bottom line. Across the overall portfolio, the year-over-year operating results in the private equity businesses have been extraordinary. I think the portfolio in it's entirety was up 33.6% second quarter of 2012 and second quarter of 2013. So from an operating standpoint, that's a tremendous result. And it was really pretty much across-the-board. The financial services sector were the stars. The -- all the U.S. companies, so Springleaf, Nationstar, CW, they all had a terrific year, we think they have -- we think a lot of room to continue to grow. The transportation businesses here in the U.S., in particular, also had a very good period and the senior living businesses had, again, very, very steady growth. So you add that all up, you get some terrific results. Those results have translated into good financial results as well. I think Randy mentioned this in his remarks, but our -- private equity portfolio last year up 25.4%, $3.3 billion in total gains. Through the end of July, they're up 10.2% for the year, another $1.6 billion, so I'm just marking through the month after the quarter. So kind half of the performance of last year, roughly through half of the year. And again, we think the prospects are bright, we've got a handful of things that are slated for public capitalization. I think you'll see some activity in the second half of the year that will be immaterial. And really then just echoing kind of Pete's issues. The more challenging aspect of our business is finding interesting and low-priced things to do. Certainly the businesses themselves have found a lot of follow-on investments. But the new investments side we've been searching far afield, we've got a couple of things that I think are very promising, but it's a difficult environment to find really attractive things when the markets are as robust as they are.

Danielle Matsumoto - Goldman Sachs Group Inc., Research Division

Okay, great. And then going back to the Castles, there have been a lot of changes in that business and it has really evolved over the past couple of quarters. So could you just give an update on the outlook for incentive income, how should we be thinking about that there, and potential for any equity raises in the next couple of quarters?

Randal Alan Nardone

Yes, through the first half of the year, we've raised over $1 billion in permanent capital across all of those different vehicles, so well over $1 billion. And we think that there's going to be additional opportunities to raise and deploy capital in the second half of the year. You'll see some incentive income in the third quarter for sure, looks like right now, and I think that the prospects again are very good. We spun our residential business out of New Castle. It's a new company, it's called New Residential. It's a $1.6 billion equity cap company. That company's got very substantial investments in both the consumer space, and those investments look they are going to be terrific. We're going to report results next week, so we'll talk about that in more detail. Also they've got a very large investment portfolio of mortgage servicing rights. And I guess, back to your first question, the one investment that we've got that has got the most upside by far from rising interest rates would be our mortgage servicing rights and the kind of adjacent businesses in our servicing business. So we've got big exposure to what we think are very inversely correlated positions relative to rising rates. And you'll see again, the results from that next week. But I think that that's something has got a long way to go as well.

Operator

Your next question is from Bulent Ozcan from RBC.

Bulent S. Ozcan - RBC Capital Markets, LLC, Research Division

I just had a question on the growth equity business. In terms of the fundraising and the goals that you have, what was the goal here? What are you trying to achieve in terms of asset mix? What is the goal in terms of flows? Could you give us a bit more detail in that respect?

Randal Alan Nardone

This is Randy. We have high expectations for that business. The team in the past has run I think $30 billion of equities and so our aspirations are in the tens of billions of dollars. They just literally started the end of Q2. So there's not likely to see a result instantly. But a good pipeline of interest and we look forward to reporting good results from that sector.

Bulent S. Ozcan - RBC Capital Markets, LLC, Research Division

Would the business have broken even this quarter if it wasn't for the startup costs, could you give an indication on that?

Daniel N. Bass

The fixed income business is covering it's operating costs, so, yes, the reason for the loss this quarter is because of the startup costs, yes. And the income is growing, so the run rate is high.

Bulent S. Ozcan - RBC Capital Markets, LLC, Research Division

And then in terms of capital management decision to buy back shares, I mean, the decision to pay off the debt. It seems to me, and I was expecting the payoff to be a slower process but you guys decided to pay off the debt right away. What was the motivation to do this that quickly? And a related question is of course, in capital management, given where your stock is trading right now, what is the interest in buybacks versus paying higher dividends?

Daniel N. Bass

I'll answer the capital management question and then I'll hand it off to Randy. This is Dan. It was a simple capital management. The debt was due in 6 months, had a 5% interest and interest in cash is 0. So it's purely a cost savings on that.

Randal Alan Nardone

And we have plenty of liquidity otherwise [ph], so it's simply saving interest expense. On the decision of whether to pay a dividend or to buy shares, it's obviously going to be dependent on the circumstances and what the price might be and how we're thinking about book value and our prospects going forward. So last year, when we bought back shares, it seemed like an extraordinary opportunity at that price and so we thought that was the right thing for shareholders.

Operator

Your next question is from Roger Freeman with Barclays.

Roger A. Freeman - Barclays Capital, Research Division

Just, Pete, if you're still there, just wanted to get your thoughts on rising rates and the impact on your credit businesses. You said things look slightly better and -- from investing perspective just wondering, given your focus on some investment-grade lending, distressed [ph] credits that aren't quite as impacted by rate rises we're seeing here, what -- how does this impact? And do you think that we're going to see still significant increases near-term or raising maybe overshot?

Peter Lionel Briger

Well Roger, we certainly don't view ourselves as good -- in my business certainly here in my business as good prognosticators of rates. That being said, we have been short in our business these last couple of quarters and have profited by it significantly in our special opportunity business. In terms of the effect in our business, it really is a question of how quick and how much. I think that the amount of increase that we've seen in interest rates hasn't really impacted our portfolio either in special opportunities or in PE Credit materially. Special opportunities have a huge floating-rate component. We're not looking to take interest rate risk there. We've got a fairly senior portfolio, a very secured portfolio. So interest rate moves in that don't have a significant impact on returns, although we do have a lot of interest rates seers [ph], which are helping us out right now. And to the extent that the short end comes up a bit, it will have a negative impact. All of the things being equal, again, I don't think too big of a concern. What we look forward in our business are situations where risk premiums go up and they go up quickly. So if that were to happen, I think that would be a medium-term benefit to our business. But I don't perceive the environment as wondering [ph] if that's going to happen quickly in a significant amount. But we could certainly be wrong. So what I would say is if there is a big move in interest rates. It could have some slight negative impact on our business, but it's enough to really shake things up. It will have the medium-term much more positive impact in our business. Does that answer your question?

Roger A. Freeman - Barclays Capital, Research Division

Yes, it does. And so what makes you slightly more positive around the investing environment than when you said that comment earlier?

Peter Lionel Briger

Well I'm not particularly positive on the investing environment for Credit, and I'm not exactly sure what makes it really interesting other than some unexpected significant exogenous shock. So we're not predicting that things are going to be a lot more interesting in the next 6 months for our business. The credit markets are healing. Our best shot for things to get better on the investment side is certainly in Europe where the economy continues at worse outside of Germany. But again, we really do better in an environment where risk premiums are high and actual risk is lower, and I don't see that in the foreseeable future.

Roger A. Freeman - Barclays Capital, Research Division

Okay. Is that the Italian distressed fund? Is that a private equity fund or is that a liquid, like a lending fund or...

Peter Lionel Briger

That's a Credit PE product. Those are long-term investments. The debtor-creditor enforcement laws in Italy are some of the worst. And from a creditor's perspective, it takes the longest to get the cash out, so it's a definitely long-term credit PE investment. And there's a lot going on in Italy that we want to be prepared for. I spent the day as part of the last 2 weeks in Italy looking at our potential investment, et cetera. And I'm hopeful that, again, the Bank of Italy and the financial situation there needs to get a little bit more scary for to be interesting for us.

Roger A. Freeman - Barclays Capital, Research Division

Okay. Maybe, Randy, just on Logan Circle, the -- I mean, you might have said this earlier, were flows positive there in June and are they in July?

Randal Alan Nardone

They're positive in June and I believe -- I don't have the number -- sorry, is it positive in July?

Daniel N. Bass

Yes, they're positive in July, too.

Roger A. Freeman - Barclays Capital, Research Division

Okay. And at that growth equity business, are you -- you're out raising third-party capital or you need to seed a track record for some time before you do?

Randal Alan Nardone

We're not raising capital now.

Roger A. Freeman - Barclays Capital, Research Division

Okay. Last question. I think, Dan, if you look at the table that goes through the businesses, calculating return on private equity, is it the reason that you come out with a negative number is the FX impact in the income and loss and foreign exchange line?

Daniel N. Bass

This is based on the capital that we charged management fees, not the overall valuation of the firm. So this is -- this has -- certain investments, we can't -- even though the growth is above our invested capital, this is only the change in those that are still below.

Roger A. Freeman - Barclays Capital, Research Division

That was in the table?

Daniel N. Bass

Yes.

Operator

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

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

First question I have maybe for Pete. I'm just kind of curious, I mean, it's -- you said it's probably, at least in the Credit PE business, maybe a better environment for realizations that investing. And then incentives are clearly up sharply year-over-year, but is it reasonable to think that we could see further acceleration in incentive generation as you maybe try to step up the pace of the realization?

Peter Lionel Briger

As I mentioned on our last call, the biggest objective that we have is to do the right thing with our investments. Right now, we're better sellers than buyers, and so it is possible that our realizations get more front loaded. And we look at the environment and we look at each investments on investment-buying, investment bases and say, "What's the best time and what is our ability to realize on these investments?" And so we are trying to sell things where it's possible to sell them, where there still is a base in terms of investments. So that is a possibility. But again, the markets are volatile and you've seen a big jump in interest rates. And so from our perspective, it's definitely something that we're focused on, it's definitely something that we'd like to do, but we're only going to do it when it make sense.

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

Okay, great. And maybe going back to capital raising. Clearly you had a strong first half and including, I guess, in early July. From -- I guess, from here forward, you've got the MSR Fund closed -- I may be mistaken, I guess, maybe the Asia Macro reached its limit. So how should we think of, aside from maybe potential Castle secondary capital formation from here, how are you thinking about the second half of the year, still at a good level but maybe not matching what you've seen in the first half just as strategies kind of hit their limits and closed? And then maybe a follow-up to that, does the MSR II fund started earning fees in Q3 or is that more as the capital's drawn down and deployed?

Randal Alan Nardone

It's Randy. As we mentioned at the opening, we're actively raising capital in -- for 2 funds. One is in infrastructure fund, the other is the Italian nonperforming loan fund. The Castles, as Wes mentioned, are public companies. They are positioned to raise capital as opportunities come up, and obviously, we're deeply involved in looking at opportunities there. Your MSR question is, we charge fees as money is invested.

Daniel N. Bass

In addition, Asia is at its capital. We are raising capital in the main Macro Fund.

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

Okay, great. And then one last question going back to kind of the capital deployment and really the distribution. I mean, is there any guide post you could give us in terms of how you're thinking about if we take the pre-tax PE, you've got $0.50, $0.51 so far this year, that we should be thinking that a reasonable range, what portion of that could be returned, whether it's distribution and/or share repurchase for the year? It would be like 80% or 50% or 60%? I mean, it's -- obviously, most of your peers have some kind of general guidelines, which is helpful. So I don't know if you have anything like that you can kind of help us, guide us towards what we can maybe expect at least from a total cash return perspective?

Randal Alan Nardone

Well, we don't have in mind, at this point, a fixed percentage. As I think we said earlier, end of the year, we will discuss what the right amount is and we don't think that committing to a specific percentage really makes sense. Last year, I think when you take into account the repurchase, we actually distributed more than 100% of DE.

Operator

Your next question comes from Chris Kotowski with Oppenheimer.

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

Question for Pete. The $5.9 billion in dry powder that you have. How long -- can you give us an idea how long that is committed for and how do you manage -- and if we assume that this environment where it is not a good environment for investing, let's assume it goes on for another 2 or 3 years, at what point do you run into end-of-life -- end-the-fund life kind of issues where you might think that an investment idea takes 4, 5 years to mature but the money is only committed for another 2 or 3 years at that point?

Peter Lionel Briger

Well, the specific commitment period on the funds that we have vary. But the majority of the funds have commitment periods, they're open for another 1.5 to 2 years. So I think the bigger point is that we're not worried about our ability to raise money if the environment changes in our favor. And one could raise a lot more money today in our opportunistic alternative credit businesses if we chose. Even in the current environment, our investors want to give us money which we've turned down. And we've done a good job through these last investment cycle as stewards of investors' capital. And so I can -- if when we went out and talked to our investors and explained the environment and why it was interesting, we could raise as much capital as we needed. So that's not a worry of mine at the current time.

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

Okay. So -- but then, let's say, 18 months from now an opportunity presents itself, you put $1 billion to work or what have you, that money then is committed for a multiple year period of time from there once it's invested?

Peter Lionel Briger

Yes. I mean, we have another at least 7 years on that money. And to the extent that the investments that we are making were longer durations than that, we'd go out and ask our investors for the extension at the time that we made the investments. We didn't have ourselves in a position where we had asset liability management there, if that's the question you're asking.

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

Yes. Okay. And then just in general, can you kind of compare and contrast the kind of situations that you invest in DBSO versus private equity? Why is it still a decent time to invest in DBSO, not in private equity?

Peter Lionel Briger

Yes, there's a longer answer to that. That a lot of what we do in special opportunity is short-term investing. It's onshore. It's U.S. trader business. It creates taxes that are paid by U.S. onshore investors. And so the lending businesses, the opportunistic lending business is a good business, the duration of that capital doesn't need to be long. And the recyclability of those funds are important to making those a good business even in the current environment. But don't get me wrong, I'm not saying that it's fantastic investment environment for special opportunities and a terrible investment environment for Credit PE. I'm saying that the current credit environment is still lousy, but we're finding reasonable investments to make in special opportunities.

Operator

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

Daniel Thomas Fannon - Jefferies LLC, Research Division

Just a quick one for me in terms of the July inflows, particularly, I guess, in the liquid stuff, should we see that flowing into management fees as we think about the third quarter?

Randal Alan Nardone

Yes.

Daniel Thomas Fannon - Jefferies LLC, Research Division

And the 1 point, that's $470 million? And then the 1 6, that stuff, it will flow in overtime across the other strategies?

Daniel N. Bass

Yes, that will mostly flow in as the capital is deployed.

Operator

There are no further questions in queue. I would now like to turn the conference over -- back over to Randy Nardone.

Randal Alan Nardone

Thanks, everybody, for your questions and for your interest in Fortress. We had a great quarter, a great first half for our investors, for our company and for our shareholders, and we believe we're set up well for a strong full year. Thanks again, and we look forward to updating you in the next few months.

Operator

Thank you for your participation in today's call. This concludes today's conference. You may now disconnect.

Randal Alan Nardone

Thank you.

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