Fortress Investment Group LLC Q1 2010 Earnings Call Transcript

May. 7.10 | About: Fortress Investment (FIG)

Fortress Investment Group LLC (NYSE:FIG)

Q1 2010 Earnings Call

May 06, 2010 10:00 am ET

Executives

Wesley Edens - Founding Principal, Co-Chairman and Chairman of Management Committee

Peter Briger - Co-Chairman, President, Principal and Member of Management Committee

Daniel Mudd - Chief Executive Officer, Director and Chairman of Nominating, Corporate Governance & Conflicts Committee

Lilly Donohue - Managing Director

Daniel Bass - Chief Financial Officer

Analysts

Craig Siegenthaler - Crédit Suisse First Boston, Inc.

Marc Irizarry - Goldman Sachs Group Inc.

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

Daniel Fannon - Jefferies & Company, Inc.

Roger Smith - Macquarie Research

Roger Freeman - Barclays Capital

Operator

Good morning, my name is Brooke, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fortress' First Quarter Earnings Conference Call. [Operator Instructions] Ms. Lilly Donohue, you may begin your conference.

Lilly Donohue

Thank you, Brooke. Good morning, everyone. I want to welcome all of you today May 6, 2010, to our first quarter earnings call. Joining me today is Dan Mudd, our CEO; Dan Bass, our Chief Financial Officer; and we also have with us Wes Edens, and Pete Briger.

I'd like to point out that statements today, which are not historical facts may be forward-looking statements. Our actual results may differ materially from the estimates or expectations in any forward looking statement. These statements represent Fortress' beliefs regarding events by their nature are uncertain and outside of our control. I would encourage you to review the forward-looking statement disclaimer in our quarterly earnings release, including the recommendation to review the risk factors, which are contained in our annual and quarterly reports that are filed with the SEC, which is also available on our newly redesigned website at www.fortress.com.

Our new website is the product of an ongoing effort here at Fortress to look at our disclosures, improve communication and transparency and to simply tell the Fortress story. We really appreciate the feedback from the analyst community as well as our shareholders and hope you will find it helpful. With that, I'd like to turn over the call to Dan Mudd. Dan?

Daniel Mudd

Thanks, Lilly, good morning, everybody, and thanks for joining us today. The first quarter continued a trend of steady improvement. Pretax DE was $96 million, which was up significantly from the $9 million we made in the first quarter of '09, and up from the $1 million in the fourth quarter. The primary drivers there are positive performance in the managed funds, realizations in our credit business that generated significant incentive income and improvement on our balance sheet investments.

We're pleased by the positive momentum and the performance and the opportunities, but we also recognize that we have more to do. And above all else, we continue to stay focused on delivering top-tier performance to our fund investors, who are the foundation of our business. This morning, I'm going to spend a few minutes on the markets, review the key financial metrics, summarize activities in the individual business units and then Dan Bass will go through the financial results in detail, then we'll spend the bulk of time on your questions.

So as to the market in the first quarter of 2010, the economy continued to heal. Equity markets advanced and they sold off slightly in January and early February. The S&P 500 posted a first quarter return of over 5%, which brought the 12 months trailing to about 50%. Similarly, the international equity markets also posted gains on the fixed income side. High yield bonds continue to be the best performing sector, where new issuances totaled approximately $70 billion, as investor demand remained high.

The market's performance reflect the stronger earnings, some stabilization in the labor and the housing markets continuing benign inflation and some degree improvement in consumer confidence. We agree that these markets are improving, but we expect as we've talked about in the last couple of calls, continued surprises and bumps along the way whether Greece, or whether Iceland or whether other things like that.

But we are encouraged in all that by the way that the markets are shaping up and aligning with the foundational strengths of what Fortress does as a company. I say that because the directionality with dispersion, some inconsistency between markets creates a terrific climate for our global macro business. Restructuring and deleveraging produces opportunities for our credit business to find and profit from special situations. And the eventual reordering of company strategies in capital structures should produce a classic private equity market.

In addition, we're finding that as investors look to allocate capital in a low interest rate environment, loan-only credit is also an attractive portfolio allocation. And that sets up well for our newest business Logan Circle Partners. So in short, having survived the past two years, we've come out stronger with businesses that are well-positioned to capitalize on, I think what we all see, as truly historic opportunities.

Let's go through the three levers that build value at Fortress performance, capital formation and business development. First on the performance side, assets under management, which refers to the amount on which we earn management fees is now at $41.6 billion, which reflects the numbers for the Logan Circle acquisition at about $11.4 billion of AUM.

As I mentioned earlier, pretax distributable earnings was $96 million for the first quarter, up from $9 million in the first quarter of '09. That quarterly Pretax DE result was quite strong, principally driven by incentive income in our credit business of about $85 million gross for the quarter.

Fund performance continued to improve across all the businesses, as of first quarter end. The global macro funds were at their respective high watermarks and thus eligible to earn performance fees. In addition, the credit hedge fund continued to close the gap, and today the credit hedge funds are a little over 1% away from reaching their high watermarks. That number was about 8% on our last call. And PE funds were up a couple of percent on a mark-to-market basis.

A few more words on each of the three businesses in the macro hedge funds we're largely back to the high watermarks and we're continuing to see inflows into this liquid strategy. The Drawbridge Global Macro funds were up 3.7% net. And Fortress Macro Funds were up 3% net in the first quarter. In the month of April, the Drawbridge Macro fund was down a little bit about 80 basis points, which brought year-to-date April to positive 2.8% and Fortress macro was down 63 basis point net, which brought year-to-date to a positive 2.4%.

Our macro view continues to reflect our conviction that G4 rates are going to remain low and increase slowly. And through the quarter, we found relative strength in our rate and exchange positions in that business.

Moving on to our Credit business which for everybody to follow, we have renamed from the segment we used to refer as Hybrid. Just for simplicity and clarity, we're going to refer to Pete Briger's businesses as our Credit business. Those funds continue to perform well and are raising new capital. The credit focused hedge fund Drawbridge Special Opportunities had a good quarter and was up a little under 7% net. As I mentioned, the Drawbridge Special Opportunities Fund are on average approximately 1% from the high watermark. In the credit private equity business, this quarter we realized $85 million of gross incentive income, a little bit of detail there.

We invested about $1.6 billion of equity in residential mortgage assets at what turned out to be a very good time in the market late '07 and '09, early '09 to invest. As the markets -- late '08 and early '09. So as the markets improved and spreads tightened, the funds sold the assets which generated about $500 million of profit, which was the substantial driver of incentive income in the first quarter. Now that sale resulted in us returning approximately $1.3 billion of capital to our fund investors. That's attributable to the decline in AUM for the quarter. And I would note that virtually all of that $1.3 billion is recallable. And once reinvested, that comes back into AUM.

In summary, we continue to see a strong flow of potential transactions in the credit space and strong interest from investors in the strategy. Private Equity -- our Private Equity business saw continued progress in the quarter. We completed the refinance of Intrawest, which was a successful result in navigating another big challenge. Today following a well executed effort from the PE team, approximately 90% of our portfolio company debt, maturities have been pushed out to 2012 or beyond and the weighted average maturity of that debt exceeds five years now. And we also registered for the IPO of SeaCube our container company as the PE team continues to access windows in the capital markets to realize investment returns.

Second driver, capital formation, for the funds that focus on emerging opportunities and more liquid strategies. We've been successful in attracting new capital. We raised $890 million of new capital in the first quarter. And are now over $1 billion year-to-date. So as you break that out in the course of the quarter, about 70% has gone into liquid markets and about 30% into credit funds.

And then third, with respect to business development, we talked about this a bit in the prior quarter. We closed the acquisition of Logan Circle, which expands Fortress's capabilities into loan-only asset management. We added $11.4 billion of assets in that transaction. To comment, we will remain at our core and alternatives manager and the bulk of our earnings will come from alternatives but that said, business is like Logan which are focused, selective and fit well with our core strengths. I think overtime, it will help diversify our income streams, increase the breadth of conversations that we have with investors and put us in a stronger and stronger position to be a solution provider of choice to those investors.

The Logan integration has been executed according to plan. So we're pleased with how smoothly that's all gone. So to summarize and then I'll turn it over to Dan, we're almost back to high watermarks across the global macro and credit hedge funds. We continue to raise new capital. And looking ahead, we think the business is well-positioned. Deal flow continues to be good. We're excited about Logan's Circle. We've come along way in the course of Q1 and we're happy with the quarter. Let me stop there and turn it over to Dan.

Daniel Bass

Thanks, Dan. Good morning, everybody. The first quarter was marked by many significant events that produced very solid financial results. Some of those are as follows. We had a significant realization events in two of our credit private equity funds, generating $85 million of incentive income. We had positive performance in our hedge funds, bringing greater amounts of those funds capital near or at their high watermarks, thereby increasing our potential for future incentive income. We also raised $1 billion of new capital through April of this year. And also as Dan just mentioned, we closed Logan Circle in April, expanding our platform, which brings our pro forma AUM to about $41.6 billion.

Keeping those points in mind, let's review our results in more detail. The DE for the quarter was $96 million, up from $1 million in the fourth quarter of last year and $9 million from the first quarter of 2009. The Pretax DE per dividend paying share was $0.19 during the quarter. Second, on our GAAP net loss, the GAAP loss attributable to Class A Shareholders was $84 million or $0.58 per diluted share. And this was an improvement compared to a loss of $67 million in the first quarter last year but at $0.71 diluted share in the first quarter of 2009.

Let's look at DE in more detail. Fund management DE was $92 million for the quarter compared with $44 million in the first quarter of last year. This quarterly results was comprised of $207 million of segment revenues and a DE operating margin of 44%, which was well within our targeted operating margin range of 40% to 50%. Segment management fees were $108 million, up $8 million from the fourth quarter last year and the segment incentive fees were $99 million for the quarter, mostly driven from profit realizations in two of our credit private equity funds that generated the $85 million and they are related to the sale of the residential mortgage portfolios that Dan just described.

In addition, we booked $6 million of incentive income in the quarter, largely derived from our hedge fund businesses, which was the result of a larger subset of our investors being at or above their high watermarks. Having said that, let me spend some time discussing the hedge fund performance in high watermarks in more detail.

As noted in our press release, performance measure in our hedge funds are up for the quarter in a majority for our funds. In particular, Fortress Macro Fund was up over 3% for the quarter and the Special Opportunities Fund was up almost 7% for the quarter. The global macro fund, 67% of this fee-paying capital with a NAV of $1.4 billion exceeded it's high water market at March 31 and another 28% that capital is within 2% of reaching its high watermark. So a total of 95% of its capital or $2 billion in our macro funds either exceeds or within 2% of its high watermark.

Furthermore, the strong performance in special opportunities brought that fund close to its high watermark. We actually crossed the high watermark in April in the offshore funded onshore fund is approximately 1% from its high watermark as of the end of April. Should these trends continue, we anticipate earning incentive income in this fund sometime in the middle of this year.

Assets under management. We ended the quarter at $30.2 billion, which was down 4% from year end. However as Dan mentioned, $1.3 billion of that results from the return of capital in our credit funds. In addition, we raised $1 billion of capital, of which $890 million was raised in the first quarter primarily in our Liquid Hedge Funds segment. Of that, $740 million was directly added to AUM and the other $150 million of capital raised in the quarter is included in our $2.9 billion of uncalled equity capital or dry powder, which becomes AUM when called in the future.

In addition, $800 million was paid out in the first quarter related to the planned liquidation of our macro SPV and the private equity style payouts from our credit hedge funds. Through the first quarter, we have now distributed a total of $1.9 billion of capital to our global macro SPV investors. These distributions represent 1.2x the $1.6 billion of assets originally placed in the SPV. Assuming liquidation at the NAV of the remaining $300 million of capital on the SPV, we will return the multiple -- approximately 1.4x the original amounts placed in the SPV.

In our Principal Finance segment, which houses our balance sheet investments, the quarterly DE was a gain of $4 million. This gain was made up of approximately $8 million of income from our balance sheet investments and $4 million of interest expense. Now let's turn to our balance sheet.

Our asset values were stable during the quarter and we paid down another $28 million of our bank loan bringing our total debt outstanding to $370 million. This brings our credit agreement leverage ratio to 1.29x, well below the 3.5x financial covenant and we believe this reflects a healthy and low leverage sustainable capital structure.

On taxes, as it relates to taxes, our effective tax rate last year was approximately 27%. Let me remind you that our effective tax rate is sensitive to the relative mix of our earnings between management fees and incentive fees and the entities in which they are earned. Accordingly, as we see more incentive fees in some of our businesses, our overall effective tax rate is expected to come down. As we sit here today, we expect that our 2010 effective tax rate for DE purposes on a full-year basis will be a percentage in the mid-teens.

As Dan stated earlier, in April, we completed the Logan Circle acquisition, approximately $11.4 billion of assets were added to our AUM. As we previously mentioned, we do not expect Logan Circle to have a significant earnings impact in the short run. However, over the long term, we expect it to be a solid contributor to the Fortress bottom line.

If I may, just to respond to some of the questions that we saw this morning regarding dilutive share count. Our share count has increased year-on-year due to the issuance of 46 million shares in May last year and delivery of shares relating to equity rewards in the first quarter this year. As it relates to dilutive share counts for earnings per share purposes, the FOG [Fortress Operating Group] Unit Class B shares are only included in the diluted earnings per share count when they are diluted on an if-converted basis. This occurs when the effective tax rate for GAAP purposes projected for the full year in that calculation exceeds our effective tax rate for the period in question. This effect is generally not significant to diluted EPS as both share count and income/loss are increased.

In closing, I want to reiterate a few key highlights. Our stable long-term locked-up AUM will continue to provide us with stable fees. And a strong hedge fund performance will enable incentive income to be a greater proportion of our revenue going forward. And our ability to raise and invest capital will contribute to our firm's current and future earnings stability and potential. Thank you for your time and now we'll turn it over to Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Dan Fannon with Jefferies.

Daniel Fannon - Jefferies & Company, Inc.

Can you guys talk a little bit about fund raising and kind of where you guys did today with actually perspective funds that you're out raising. And then the money that you did get in the door this quarter, can you talk about -- is that coming from existing customers, new customers and kind of geographically where you're seeing the greatest interest?

Daniel Mudd

Let me start and then the other guys can jump in. I can't talk as I think you know by regulation about specific funds, but I'll give you some broad characterization. About a third of the way or so through the year, we're a little bit over $1 billion of new capital raised. And we think that, that's tracking pretty well. In my experience from having made a few trips around both the U.S., the Middle East, as well as Asia, there's pretty good momentum that's building because I think in the beginning of the cycle, there was a lot of reticence on the part of investors attenuated due diligence process for new investors. As the world kind of continued to heal, and investors began to get a little bit more comfortable, the liquid strategies came into focus first and it was relatively more straightforward to raise capital in those strategies. But as the year has wound along, we've seen interest as I said earlier in Pete's funds in the credit private equity space. I think that the majority of the capital we've raised has been from existing investors. But there are large, particularly geographical segments, the Middle East and greater China where we have not had as much historical presence that we've been concentrating on and we're starting to see a lot of interest and pretty good movement there. In Japan, where Nomura is our key partner. They've been extremely helpful, in terms of boosting our presence in the range of discussions we've had there as well. Net-net, about 70% of new capital has been in liquid strategies and about 30% in the longer-term locked-up world.

Daniel Fannon - Jefferies & Company, Inc.

And then in terms of any different fees associated with the new dollars coming in the door than what we've seen historically from you guys?

Daniel Mudd

I think that's certainly what you've read in the market is true that there's probably more pressure on base fees than there is on incentive type fees. I think we've been pretty successful in the conversations in terms of keeping a balance there. The structure of the Logan business is different obviously than the Alternatives business in terms of fee structure. But even there, I think those are holding in okay.

Daniel Bass

I think that's a fair representation, more pressure on the base fees than there is on the benefits.

Daniel Fannon - Jefferies & Company, Inc.

Just within the private equity portfolio, can you talk about any specifics with regards to companies that are seeing strength. You did mention your registration for SeaCube, I believe, for an IPO. Is there any other, as you think about the next 12 months where you're potentially looking to monetize or access the markets with other companies or a range of companies that you could talk about?

Daniel Mudd

Yes, let me -- Wes is here, so let me toss it to him.

Wesley Edens

The punchline is that we saw positive revenue growth across virtually every company that we have. If there were surprises in the first quarter to the most part there are surprises across the board in terms of upside. We've got big concentrations of our portfolio in transportation, which had a very, very strong quarter. We have a half a dozen different companies ranging across railroads and ships and airplanes and containers et cetera. You saw the registration for the container business, which has done extremely well in the difficult period in the last couple of years. It's a very resilient business and we think there's a ton of growth in it. So that company is in registration right now. You'll be hearing more about that as that progresses. I think that there is absolutely the possibility and probably the likelihood that there will be other capital raising events you'll see out of the Transportation businesses that are meaningful. We think that the -- in addition to the portfolio as being stable and the companies being well-financed, we think there's tremendous growth opportunities there in lots of different sectors. So that is a big focus for us and it should be an interesting year, to say the least. Another big concentration for us, we're the largest owner, investor in senior housing in the United States and a couple of different companies. The first quarter also was a very good quarter. The public company Brookdale has reported and so that is out there we have another large private company that also had a very good quarter. So those are probably the two biggest areas. There's a lot of other kind of miscellaneous anecdotes about the different companies but I'd say that the bottom line is that I'm quite optimistic that the year is going to be a good one and a third of the way through it has exceeded our expectations. So it should be a very good second half of the year.

Operator

Your next question comes from Roger Freeman with Barclays Capital.

Roger Freeman - Barclays Capital

Actually maybe just to pick up on private equity there, Wes. A couple of things, one, what about Nationstar? I mean that one seems to have quite a bit of momentum. They raised some capital right recently and it has more business wins. Would that be a potential candidate as well?

Wesley Edens

Definitely a potential candidate, yes. We are in a high-yield transaction for Nationstar in March and with that, I think there's really us and one other public company that are two kind of really well-capitalized and viable servicing companies in the U.S. that are actively looking at opportunities. The list of new business opportunities there is substantial and the environment for the servicing company is I think is a pretty unsteady one right now. And I say that because for the first time in the past 25 years or so since I've been around it, with the lack of production of new originations what it means is that virtually every servicing company is in some form of decline and their financials are going to look worse six months or 12 months or two years from now than they look today. It wouldn't have funds itself to is a very high likelihood that there's a lot of consolidation activity. And we've seen elements of that already. That was really the impetus for us to go out and raise $250 million of capital so we got a balance sheet, which is extremely well funded, with a lot of cash on it. And I think this is going to be a very productive year. We've got a couple of different things that are in the hopper one of which I think is a signing we won last week that will be made public here shortly. So I do think that in terms of windfall opportunities, the Servicing business, Booked and Residential on the Commercial business but we don't have good preference today. Our businesses that we think have got a lot of interesting times in front of them.

Daniel Mudd

The idea to what Wes said, two points: One is that the Nationstar's story is a real demonstration of the capabilities of private equity to kind of take the company and reposition it into the sector it needs to be and to take advantage of the situation. And be, on the folks that I talked to in the mortgage industry, there's been a real breakout in terms of the capabilities and the performance of servicers in what's a pretty stressful marketplace and Nationstar measures up extremely well from kind of an operational efficiency through point success rate standpoint,which is a good story.

Roger Freeman - Barclays Capital

Just sort of more broadly on private equity, where roughly would you say the portfolio in aggregate is valued now relative to the cost. I think a couple of quarters ago it was around break even but there've been some markups now.

Wesley Edens

It is. I think the net of it at the end of the first quarter we were up a couple of percent for the quarter. Last year the private equity funds were up 21.6% I think is the number, in aggregate for the year. Obviously 2008 was a rotten year for us and just about everybody else, I guess. But last year up 21.6% I think. Aspirationally we hope to have a similar year this year. Obviously we've got some wood to chop but there is every indication, as I said, with the fundamentals improving across the board, I'm pretty optimistic there's going to be some good growth opportunities here. So we're plus or minus, it depends on the fund, obviously. If you aggregate them, you are plus or minus around cost, net-net. There are differences in terms of some of the older funds doing better and some of the newer funds being lower. And that's now broken out so you could take a look at it, but...

Roger Freeman - Barclays Capital

And lastly, on private equity. The firepower that you've got relative to sort of the opportunities that you're looking at. I mean are you looking more at trying to maximize value of the existing portfolio or are you looking to deploy much new capital and do you have enough without having to raise more and could you raise more if you wanted to?

Wesley Edens

It's definitely both, Roger. Now we have -- as you add up all the portfolio companies, there's a couple of billion dollars in capital to go invest in these different businesses and that's something that we are looking to add to. So I think, you will see some capital formation in the high-yield equity deals et cetera, that are really oriented towards providing capital for the company, all at what we do with Nationstar. We've got a number of companies in the rating agencies right now, so I think, we're going to be active in the markets here in the coming months and quarters. You will see that. In terms of the other capital, we have capital and fund buys still turned to us. Our investment pipeline is actually longer now, than it has been in two and a half years, so I think, that there's the very real potential to do some interesting things. And my guess, is that in the ordinary course, we would invest like capital up largely over the course of this year, and then it could be a marketplace first part of next year. But there is a lot of investment activity to come, both inside the company as well as in the fund.

Roger Freeman - Barclays Capital

On the credit opportunities fund, the realization this quarter, can you characterize this? I think, last quarter, Pete, you were saying it's more of sort of liquid assets, and I don't know, if it's sort of a continuation of that or maybe some on the more liquid? And then on the capital raising side of that, I mean, as I kind of do the math or on the numbers you're talking about, it looks like $150 million is probably that second fund you're raising. It seems like that one is smaller than the prior one by a fair amount, I don't know if it's a fair characterization. Does that mean that there's a sort of less interest in those opportunities now?

Peter Briger

I would say that the realization that we've had to date in our credit funds, both private equity and hedge fund structure have been a function of us selling liquid securities. And the investments that we've been making over the last eight months have really been more illiquid and those are still investments that are in the fund and doing very well. In terms of capital raising with the Credit business, I've been happy with the capital that we've raised broadly speaking, but I can't speak to individual funds. But I think that the performance in both the hedge fund format for the special opportunities fund and our private equity credit funds have been excellent. And so, I am quite optimistic about our prospects over the next year or two to increase the size of our funds under management.

Operator

Your next question comes from Craig Siegenthaler with Crédit Suisse.

Craig Siegenthaler - Crédit Suisse First Boston, Inc.

Just on the ability to kind of grow the business organically here, you're starting to see some stronger activity in the liquid hedge funds and the Credit business, but it's tough for us to see the high-level distribution here. I'm just wanting to take a step back, where do you expect AUM to base at if you're thinking that marks are flat from here on out? Do you think, we're kind of near bottom, we can start to grow here? Maybe just provide some commentary on that front.

Daniel Mudd

I would say, you're right directionally that we're seeing a building of momentum in the liquid strategy, in the credit strategy. And I said in earlier remarks, we think out of a macroeconomic level, before you get into what's been called things like the new normal, there's going to have to be an enormous amount of corporate restructuring, changes of control and so forth that probably plays pretty well to our Private Equity business. So I think, what you're seeing is kind of a string of lights getting turned on, that go to some capital raising, some performance improvement, building on the performance improvement. You get into some promote. With the promote and the performance, you see an easier time for investors to sign up, whether for a new fund or for a liquid strategy, and that builds on itself. I don't think, we're either guiding or projecting what the breakout of AUM is going to be across the strategies and across the funds. The way I think about it, the thing we're trying to do is to kind of keep separated in the minds of the market, the strategies that we're in. There's no confusion between sort of classic private equity credit, private equity and the liquid hedge funds strategy. And there's some products that we're looking at around those and then we've got the addition of Logan Circle. So kind of all of those lights are turning on. I'm pretty agnostic to where the capital comes in. More importantly, though I think, as I kind of look at the distribution of capital that we've raised across the globe, we've been pretty muscular over the years in North America and kind of stronger than you might think, above bases really in Europe, but not as much penetration in the Middle East and parts of Asia, particularly greater China. And so we've been having those conversations. It takes a while to kind of build up the momentum, the conversations, get to know our CIOs and get through the process of due diligence. But I think you'd see some momentum there as well. That's probably as close, as fine as I would want to break out how we're thinking about AUM growth over the course of the year.

Craig Siegenthaler - Crédit Suisse First Boston, Inc.

Here's just a follow-up on that point. In the credit private equity funds, there was a very large distribution this quarter. Do you view that as unusually high? Or is that something you do expect to reoccur over the next few quarters?

Daniel Mudd

Pete can talk too. I mean, I think, it's kind of impossible to say when you're going to have large realizations and returns of capital. So we tend not to predict that. It tends to be by nature, a pretty opportunistic business, so it can happen sometimes. That kind of depends upon the market, the markets that we have access to, the ability to fund, what our view is on a going-forward basis. But I think Pete also said to you a second ago that a little bit of the environment has changed from one where it was more attractive and prudent from a risk-return standpoint to be in more liquid securities to being in somewhat more illiquid investments.

Operator

Your next question comes from Mark Irizarry with Goldman Sachs.

Marc Irizarry - Goldman Sachs Group Inc.

Just in the credit private equity funds, you returned $1.3 billion in capital and I think, you said $500 million or so in profit. What's the remaining mark on the capital on that fund?

Daniel Bass

It's North of invested capital. It's roughly about 1.2x.

Marc Irizarry - Goldman Sachs Group Inc.

Can you maybe just talk about the investment outlook there for potentially recalling that capital versus further realizations there, just sort of what the landscape for investing looks like these days? Is it more of a time to harvest or to put money to work?

Peter Briger

I would say that generally, our feelings have been that the public markets for credit have overrun what we think of as value on a general basis. And there's been a significant pronounced lag in terms of the valuations of private illiquid credit opportunities. And so, we see the environment very much a good environment to invest in illiquid situations. That being said, there's still a lot of risk in the world that we see, not only coming out of Europe and potentially, China. But also, what I think has been almost forgotten in the marketplace is the actual amount of leverage that exists in credit today that has not been restructured, balance sheets that haven't been restructured, particularly in the middle market and small market. And the financial institutions that hold the majority of that credit, whether they be part of the regulated financial system or the shadow banking system, for the most part, have not been de-leveraged. And so, while there are positive indications all across the U.S. from an economic perspective, the big elephant in the room, if you will, is the fact that we are still in a situation of real capital inadequacy in our financial institutions, and we are going to need a tremendous amount of deleveraging to take place before we get to capital adequacy. And we're going to see a fair amount of restructuring of financial institutions, not only in the U.S., but throughout the world. When I say fair, I mean, very substantial. And so for us, the big opportunity is the financial liquidation that will occur, as a result of those over-leveraged balance sheets. And so while the markets today in public securities offer few opportunities for us, the pipeline for private illiquid opportunities is good. And I think, we'll get better as the supply overhang comes on to the market. One of the things that Galileo has made very clear to us over the years is that even though there are external influences that can, in some short period of time, affect how gravity works in the long term, it works. And so we would expect just like you had in 1988 with the RTC, a lag in terms of financial assets coming on to the marketplace of between two and three years, some lag in this current aftermath of the crisis before real financial assets liquidation start to occur both in the U.S. and around the world.

Marc Irizarry - Goldman Sachs Group Inc.

Wes, can you comment on private equity capital formation. Just broadly when you talk to LPs is there a change in the way LPs thinking about private equity as an asset class and what you do Fortress in private equity sort of fit into what maybe the future for capital formation looks like?

Wesley Edens

We're not active in the market raising the fund now. right. So I don't know if I can speak to the specifics of your question directly. I think, I made some observations, that I think the likelihood going forward is that funds in many cases will be smaller or more targeted funds. That's probably an obvious observation from where they were in 2005 and '06. We do see a lot of interest at people that want to get exposure in specific areas, things like financial services, transportation or other kinds of things, real estate outside the U.S. There's very specific inquiry around things, and I think that, that, to a certain extent, match what's been happening in Hedge Fund business too, which you've seen a lot more in terms of the formation of capital in separate accounts and things that are being more targeted or more specific and people feel more control about them. So as the world has this process of healing in the last year, the amount of inquiry about capital formation has increased very substantially. But it's not to say that it's going to be back to where it was, I don't believe. But there will be a new credit on [ph] that I think, will be a very successful one as well.

Marc Irizarry - Goldman Sachs Group Inc.

Just for Dan Mudd, can you just comment on flows at Logan Circle? And also, maybe first, a question for Dan Bass, but the -- when sort of should we expect that to be accretive?

Daniel Mudd

I think as I said, it's gone according to plan so far. So I think that Logan, we like the business, we like the plugs [ph], we like the strategies. They have a particularly strong set of relationships in the consultant community, which is an important distribution channel there and one that we can benefit from. The range of strategies that they offer go from high yield, all the way through to cash. And with the burgeoning interest that we've seen in the marketplace in terms of high yield, that's been a strong story. I would say there are a few investors or advisors who, out of an abundance of caution, kind of hold investments for some period of time when there's been a change of control. So we're in the process right now of talking various of those investors through. The approach, which is simply that Logan kind of stands alone as a fourth or fifth business, depending on how you look at it. So it's not a distraction from our principles and their day-to-day investment duties. Logan's leadership and strategies and diligence and management team remain the same. And they keep that sort of same niche-oriented, and even though it's in traditional asset management pretty high output for that sector of the market. All of those things remain the same. I think, that's comforting to investors. So now with the -- there are pretty small amount, actually smaller than we might have thought, amount of redemptions at the close. So on a going-forward basis, the thing that we're really focused on is plugging Logan into our capital formation efforts, so that there is a broader range of conversation. There are some consultants that they can introduce us to but there are also myriad investors in the U.S. and overseas for that matter, that we're starting those conversations with, that didn't have access to before. So I would say, redemption's pretty well managed. Integration quite smooth. And now going forward, I think, what we saw is what we've got.

Marc Irizarry - Goldman Sachs Group Inc.

And how about the expected accretion on the deal?

Daniel Bass

Right now in the current period, there's not anticipated to be a significant accretion. But I think, over the next couple of years, we would expect it to be a significant portion of our earnings.

Operator

Your next question comes from Robert Lee with KBW.

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

Could we get maybe an update on the status of the balance sheet? I know you mentioned the previous $370 million of debt efforts have payed down, but can you just kind of remind us what the amortization is on that for the balance of the year and current cash levels? And also I'm assuming, with the purchase of Logan, maybe it drew down on the line of credit, it's kind of the first question.

Daniel Bass

$28 million remaining this year, $42 million next year, getting to $300 million. We did not draw down anything on the revolver to purchase Logan. Cash levels generally fluctuate between $150 million and $200 million, about $160 million right now.

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

As the business heals and you start to get to some high watermark and most of the high watermarks that we saw on the liquid and a lot of the credit products, and now your debt level is down, what are the signs or things or signposts you're looking for to think about restoring some part of the distribution going forward?

Daniel Mudd

Exactly the things that you just mentioned. So we have the conversation on a quarterly basis, both at a senior management level and a discussion and a recommendation to the Board. So the signposts are continuing to turn on a significant and sustainable flow of incentive income. I'm feeling comfortable, and with the amortizations that Dan just described, we're feeling increasingly comfortable with the debt and making sure that, that's also in a sustainable status that supports the growth and the cash needs of the business. And then I think, just broadly speaking, the prospects. So I think, it's another area where you're seeing us continue to march in that direction, not there yet, but continuing to march.

Operator

Your next question comes from Roger Smith with Macquarie.

Roger Smith - Macquarie Research

Let me just start with fee rates. I know, you talked about it being somewhat pressured, going forward. But can you give us a little bit more specifics like with the capital raised in the quarter, did that have lower fee rates? And when you're talking about the Private Equity business, is there potential for retroactive changes to the fee rates in that business?

Daniel Bass

During the quarter, as we mentioned, most of it was in the liquid funds. Our liquid main funds are generally two and 20 there is no real fee pressure on the main funds there. I don't think that there's any risk of retroactive fee rate changes in our Private Equity business.

Roger Smith - Macquarie Research

When we just do talk about the dividend or the distribution, is there a way to balance new deal activity, sort of in the broadening the Asset Management business with the dividend? Can you do both of those at the same time?

Daniel Mudd

Yes, I think we can. I would not be enthusiastic about an expensive, kind of high-multiple deal in that space. So I think, that -- we talked about this a couple of calls ago and then executed the last time around on Logan Circle. There continue to be these firms, good track record, good team, positioned well on the good part of the loan-only or traditional market. But they're not going to remain in the organization structure, the financial structure where they are. That could be a regional bank, that could be an AIG, that could be somebody along those lines. It's in the middle of some changes to their business model. And in that, you find opportunities to provide a little bit of liquidity upfront, and then in earn out, depending on what's the performance of the business is on a going-forward basis. And I think, that's really much more the way that we're likely to proceed in that space. So I would not imagine that we would do something that will have a significant enough cash-siphoning effect, that it would be a deciding factor in terms of the dividend.

Roger Smith - Macquarie Research

And then just if we do see a distribution on dividend come back here, has there been discussions around what that might look like rather than having a steady payout in the past? Could we see that fluctuate on a go-forward basis and maybe be targeted more towards the performance fee earning here?

Daniel Mudd

The discussion is certainly on the table, but it would be premature to give you an answer. Until we give you a full and comprehensive answer in terms of the decision there. And as I said, we're not there yet.

Roger Smith - Macquarie Research

Just on the recallable AUM in the Credit business, I guess, is it default $1.3 billion recallable? Is there more than that available to be called today?

Daniel Mudd

It's $2.9 billion, including predominantly all of the $1.3 billion, is included in the $2.9 million.

Operator

Your next question comes from Roger Freeman with Barclays Capital.

Roger Freeman - Barclays Capital

Back on the Fixed Income business, how do you look to build scale around? And I mean, Dan, as you're saying, whatever, couple of years, this could be a material part of the company's net income. But if you just kind of do the math right on the AUM and the 18 basis points, look like you got ahead of research staff there right? It feels like it has to come through AUM growth rather than anything else? So how do you grow it?

Daniel Mudd

So let me start and then Dan can add what he wants to add. So remembering the history of Logan Circle was that the guys came out of Delaware Asset Management, where they were managing well over $100 billion. So in our view, from the due diligence, both the intellectual scale and the system scale and the sort of superstructure of the funds that they manage, is highly scalable. And so you're absolutely right. The challenge there and the focus, the effort there is to organically build the assets under management. Along the way, there likely will be bolt-ons, that would put us, that would be structured similar to what I just talked about in response to the other Roger's question, that would probably be better situated within kind of the Logan Circle family than as another sleeve or silo at Fortress. But still, that kind of mantra about it is independent strategy, niche focus, team with a track record, but plugged into both the capital-raising infrastructure at Fortress, as well as kind of some of the overhead stuff, because the overhead things that we do here from a systems standpoint, or financial standpoint or legal standpoint, human resources, can all be spread broadly to support people-intensive businesses and producers. So you're right, that's exactly the formula and I'm pretty agnostic as to whether you're able to grow that through organic capital raising per se, versus roll ups of similar firms that add something, in terms of product or distribution.

Roger Freeman - Barclays Capital

Has that deal actually brought external inquiries in subsequently?

Daniel Mudd

What does that mean?

Roger Freeman - Barclays Capital

Are there asset managers coming to you, that they're saying they're actually in the market buying?

Daniel Mudd

Yes, I think the knock-on advantage of doing something, which kind of expands your capabilities and expands those levels of conversations. We're continuing to stay focused, but pretty picky.

Roger Freeman - Barclays Capital

And I had a question in liquids, just around the macro funds. Dan Mudd, you said in the beginning that this should be a good environment, given sort of pick-up in volatility. It does seem like macro funds had a tough time in March and I guess, April look's somewhat negative. Where does -- or were your comments just kind of related to the sort of the here and now around the opportunities that looking...

Daniel Mudd

Well, I mean, it's a couple of things. You're right in the sense that the first couple of months of the year were kind of strong, above par, and in the past couple of months have been a little bit weaker. But I think, in terms of a classic macro-environment, where you sort of establish a directional view of the world, I think the directional view of the world is pretty well-known right now, in terms of what governments are going to do, in terms of what central banks are going to do, in terms of the adjustment pressures on exchange rates, whether you're talking about the won or dollar, yen. There are clear sort of sub-cycles in the commodity world, as you see de-stocking, restocking, manufacturing orders pick up. And with the flow of information that we see, the ability over time to invest in those macro trends and make a buck along the way, remains pretty attractive. Now when you sort of get the spikes that we've had, that go outside the range, whether something in Europe or an exogenous shock to oil or something like that, you have to be pretty flexible and fluid and balanced in order to capitalize there. And that's exactly we're doing next. In fact, while Mike Novogratz has got a hall pass from doing this call, as things bounce around in those markets, I think, you guys would rather have him upstairs in front of his screen than chatting with us.

Roger Freeman - Barclays Capital

I guess, one other area, the commodities fund, I mean, is there anything around positioning out that we should note of the decline, on the quarter? It seems to be at odds with, at least like our commodity and this is up percent on the quarter and WTI was up 6%?

Daniel Bass

I think, that you may get a little bit of discrepancy with respect to a broad index. But in, terms of the strategy and the risk profile that we run in the commodities fund, they're actually tracking what's closer to what expectations would be. So I don't think, there's anything particular there other than that you're getting month-to-month noise and movement. And I think, over time, directionally, that strategy is going to work pretty well. And it has, if you kind of do a trailing 12, as opposed to a slice of the past two months or the past four months.

Roger Freeman - Barclays Capital

Wes, on Intrawest, I don't know how much you can talk about how material, in terms of pays. I guess, more importantly, the investors in the [indiscernible] fund on that, how do they feel about the outcome, because you had taken, I think, an $11 million reserve last quarter for management fees? And secondly, sort of sufficient to address any those concerns?

Wesley Edens

Yes, I feel very good about the outcome. It was not so different than you and I talked about at the end of the year. You obviously, have a lot of press related to it and a lot of -- I know that just given what the asset was and during the Olympics and everything else, but the outcome was a very reasonable one. We ended up -- at first restructuring, extending their debt and then at the last minute, a third party actually came in and just separately financed the transaction. That's probably a good outcome for all involved as well. And the market terms are reasonable. I think, that the business actually has a pretty clear path toward success in front of it, and we feel great about it. This is never a case of us, maybe that the asset didn't have -- a couple of them didn't have a lot of value. It was just a matter of having debt maturity at a particularly difficult time. And with that out of the way, that's knock on wood, kind of the end of all that. And everything else is focused on other things that are building in terms of our companies and our valuations as opposed to defensive play over the last couple of years in that stuff.

Roger Freeman - Barclays Capital

It was interesting that the weekly threats of property sales ended with the closing ceremonies.

Wesley Edens

That's exactly right.

Daniel Mudd

Thank you, all. We're going to wind up. Dan has one in-course correction to make before we finish.

Daniel Bass

I just want to modify my comment regarding the remaining assets in the credit fund. The remaining investments after the distribution on the $1.3 billion are valued in excess of 2x their cost bases. I made a comment at point, 1.2x, but it's actually 2x our cost base.

Daniel Bass

Another good piece of news to end on. So thanks for the questions. Reiteration, so continuation of the positive momentum goes on in the first quarter. Strong performance moving back up to high watermarks, good deal flow and good integration in terms of Logan Circle. So thank you all. We look forward to seeing you.

Operator

Thank you. This concludes the conference. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!