Dan Mudd - CEO
Dan Bass - CFO
Wes Edens - Co-Founder, Principal and Co-Chairman
Pete Briger - Principal and Co-Chairman
Stu Bohart - President of Liquid Markets and Senior Managing Director of Strategy
Robert Lee - KBW
Dan Fannon - Jefferies
Roger Freeman - Barclays
Chris Kotowski - Oppenheimer & Company
Fortress Investment Group LLC (FIG) Q3 2010 Earnings Call November 5, 2010 8:30 AM ET
At this time, I would like to welcome everyone to the Fortress third quarter earnings call. (Operator instructions)
Thank you. Ms. Donohue, you may begin the conference.
Thanks, Amanda, and good morning, everyone. I'd like to welcome you all today November 5 to our third 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, Pete Briger and Stu Bohart.
I'd also 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 the company's beliefs regarding events that by their nature are uncertain and outside of the company's control.
I'd also encourage you to review our forward-looking statement disclaimer in our quarterly earnings release as well as the recommendation to review the risk factors that are contained in our annual and quarterly reports that are filed with the SEC.
Now I'd like to turn the call over to Dan Mudd.
Thanks, Lilly. Good morning, everybody. Thanks for joining us. I think it was a very solid quarter. We made a lot of progress really across Fortress. Financial results were strong and improved. The capital raising momentum continued from the second quarter. And the businesses, the deal flow and the pipelines continued to build.
As you may have noted, we announced steps to build out our global organization with the opening of an Asian hub in Singapore. And I think overall and probably most importantly, the businesses continued to capitalize on investment opportunities that are really aligned with the greatest strengths at Fortress.
Performance was strong across the vast majority of the funds, and the performance carried through into October. As one common indication, nearly 100% of AUM for the main credit and macro hedge funds ended October above their high watermarks.
I think the backdrop of the third quarter was really the continuation of a muted, choppy, messy recovery. Uncertainty in the market continued to drive risk aversion that stifled growth, particularly I think in the developed world. The big challenges that are facing both public and private decision makers, while we work through what's really going to be not just the next several quarters, but probably the next several years in terms of developing clarity on how policy and how regulator prescriptions and how investment themes are going to work their way out.
It seems to us unlikely that this pattern of kind of moribund growth is going to achieve sufficient velocity to get up to escape velocity and into a more robust recovery anytime next year.
If you think about what are the upsides in all the investment themes, the upside is at some level things don't get any worse in the continuation of where things are. The downside, particularly with reflection on the QE2 program that was just announced, consumers and CEOs remain unconvinced, and we backslide or double-dip or trip backwards.
But I think in most of the medium term and most likely scenarios, what works well for us here is the continuation of the themes that have worked well over the past many quarters. The great liquidation continues and the investment strengths here at Fortress produce value for the firm and for the clients.
I think that in that, the third quarter really represents a more typical quarter for what we'll see going forward, which is a franchise well positioned to capitalize on these opportunities and to take advantage of them as the kind of new normal economy takes shape.
So today, I'll give you an overview and some perspective on our financial performance, talk about the key elements that drove that. Dan Bass will go into more details on the results. Wes, Pete are here. Novogratz and Levinson are upstairs. As you know, payrolls just came out. They're focused on that. And we welcome Stu to the call.
Pre-tax distributable earnings for the quarter were $78 million, an increase of about 40% over the prior year. On a year-to-date basis, we recorded pre-tax DE of $247 million through the third quarter. That $247 million through Q3 roughly doubles what we did in the first nine months of 2009.
The two key drivers are straightforward and I think pretty obvious. One, management fees have continued to benefit the growth in AUM. And two, there is kind of the second cylinder of the business; incentive fees are beginning to reflect the strength in the performance of the funds. Incentive income of $75 million in the quarter equaled the total incentive income that we earned in '09.
Let me talk about investment performance for a second. That's a key lever for changing the earnings dynamics in the business. We had strong, absolute and relative performance in our macro funds. Those funds were invested consistent with the theme of low rates and low growth in the U.S. I think we enforced this week positive rate in commodity trends in China and the emerging markets, and a U.S. consumer that's still very much undecided is now on the sidelines.
Third quarter returns, 3.3% in the Fortress Macro fund, pushed their AUM above high watermarks. As of September 30, 96% of main macro fund investments were above high watermarks. That compared to our last call in July, where through the first half of the year we were at about 36%. So 96% over high water was 36%.
Performance strength continued in October. We closed the month in October subsequent to the quarter end, nearly 100% of those investments above high water. As you know a component of the macro business is our Fortress Commodities Fund. We were down 1.7% for the quarter and 31.1% through September 30, but terrific performance by that team in October, up over 3%, pushed about 90% of the commodities fund above high watermarks as of October 31.
Moving to credit, strong performance that we talked about last quarter continued this quarter. The process that Pete has described as the great de-leveraging, the great liquidation and the great litigation are continuing to kick-off terrific special situation investment opportunities. And most of these that we see require the kind of diligence and operational depth and ability to manage complexity that's really a long suit in this business.
As you know, while the predominance of the funds are in private equity type structures, there are also hedge fund structures in our credit business. For those hedge funds, the Drawbridge special opportunity, main onshore and offshore funds were up over 6.7% and 8.4% respectively in the quarter. They were up 18.5% and 20.6% on the year through September 30, and a 100% of the main fund investments were above high watermarks at September 30.
In the credit private equity funds, net asset value surplus has increased to $1.9 billion as of September 30, up approximately 16% over Q2.
Some progress made in the quarter, just to mention a few: In September, we completed the acquisition of the European mortgage assets of residential capital GMAC subsidiary. The related servicing platforms, combined with the other Fortress-owned services that we really own globally around the world gives us a very deep and unique insight into the resi space throughout Europe and in other markets as well.
That we think will enable us to maximize the value of those assets and the funds.
Three, private equity; as you know, our private equity business has aggressively worked to term financing out, take costs out, access to capital markets with two IPOs just in the past week or so. Equally importantly, I think for the market we now have control investment opportunities that are starting to merge, and we are positioned to invest.
In August, we announced the pending acquisition of an 80% interest in American General Finance. American General is a leading player, and one of the few surviving players in a roughly $3 trillion consumer finance market, where many of the largest competitors have either shut down or downsized, but the number of borrowers has roughly doubled over the course of the past four years. So I think we see pretty attractive supply and demand dynamics there.
In September, private equity, together with the credit business completed the acquisition of CW Financial Services, CW Capital. As a reminder, that business has a robust servicing origination investment advisory platform and is the nation's second-largest specialty servicer of CMBS, which puts us there in the front and center of a market that's actually bigger than the consumer market at $3.4 trillion.
Estimated fair market value of fund investments improved by 3.4% over the second quarter, which contributed to a 5.4% year-to-date increase through September 30, and that momentum has continued as well in October.
Just for a bit of background and context on that trend, fair market value hit the low point in the first quarter of '09, and valuations have increased approximately 41% since that time.
Finally, Logan Circle Partners, our long-only fixed income business, has achieved solid investment returns through the three quarters of 2010 that brings their long term track record across multiple products, categories and environments pretty much into the top tier. Eight of the firm's 13 product composites rank in the top quartile versus their peers for the one year rolling period, and eight of the firm's product composites are ranked in the top quartile for the five-year period.
Opportunities remain to invest and to build up that platform as we've discussed in the past, but we remain pretty conservative and selective there.
From the standpoint of capital raising and AUM growth, the third quarter was very solid. It was driven by the closing of two private equity style credit funds and continued momentum in liquid markets and Logan. Year-to-date capital raise was approximately $3.7 billion at September 30.
In October and the first days of November we raised an additional $900 million of capital that brings the year-to-date new capital to over $4.6 billion. So we're pleased with that and like the momentum there.
A key driver of the third quarter in the year-to-date capital raise was the closing of the second credit opportunities funds in July. That fund and the related managed accounts closed at $2.6 billion and that number compares to the target of about $2 billion, even that we set for that initially. So again, showing good interest in the credit products.
Importantly, I think we continue to raise capital across both investor types, in terms of pension endowments, sovereign wealth and so forth, increasingly across geographies with a historical strength in North America and Europe. We're seeing increasing relationships discussions and investments in the Middle East Asia, and Japan of course has been a very strong story this year.
Year-to-date through the third quarter over 35% of the funds raised came from international investor. So I think more to come there. Capital raising momentum contributed to 6% increase in AUM in the third quarter. That increase is the largest organic gain in AUM in a single quarter since back in '07.
Couple of strategic items that I want to note. First, we completed a new credit agreement that lowers our total debt obligation to $280 million. Again, to give you some context there, the $280 million today was $412 million a year ago, and was then coming down from a peak of $800 million back in the first and second quarters of 2008.
As before, to comment on the dividend, we've lowered our total debt obligation. That's a step in the process, delivering sustainable incentive income which we're starting to see now. As well as looking at the overall market trends and conditions, are the key inputs that the board will continue to consider in determining dividend actions.
Second on the strategic front with the opening of the key hub for both business development and investments in Singapore, we continue to execute against our plan for disciplined, measured, global expansion of the platform. Beginning in early 2011, Adam Levinson, who is the Co-CIO of our flagship macro funds will lead our Asia specific macro trading activities from Singapore, with an eye toward Asia specific funds in the future.
And we've already got significant risk on, significant investments in and significant client relationships around Asia, so having out him there in the market will put us in, I think, a very strong position to continue to operate and build that poll. There are several reasons I think just as a way of background in terms of the Asia focused here.
First and foremost is that there is a compelling current as well as emerging set of opportunities to invest in Asia. And we think that the firms that have significant experience in the region and are on the ground with robust local operations will be best position. On this front there is a track record there, we built a deeply experienced team of professionals in Tokyo. And in June we closed our Japan opportunities fund hit its cap of $800 million of the ground in the year, that's just a terrific story for building out a business.
The distressed opportunities that we see for investing in Japan, not really abet on overall direction and macro fundamentals in Japan, but simply the fact that the pricing, the structure of the market and our ability to invest is very strong. We think some of those will emerge in the rest of Asia as time goes by.
Second, we're confident that the needs of Asia's largest and most sophisticated investors are aligned with the investment capabilities we've built. I just returned several weeks ago from investor conferences that we put on in Singapore and Tokyo, and having met with a number of investors both East and West. My conclusion was that our name is solid and there's a good appetite for investment opportunities, really across all of our businesses.
And third, I think across the senior leadership for the business both, people that have been here since the start as well as teams we've added along the way have terrific on the ground experience in the region including through the last cycle for (inaudible) leveraging in Asia, and that experience is obviously important in terms of think about investing going forward.
So for the business in summary, hedge funds above high watermarks on top of terrific performance, credit strategies are in a sweet spot; the macro view and hedge fund has been validated, after what was really kind of a long hot beginning for the summer. Private equity is investing in companies that have survived the meltdown and now see strong upside.
Long-only has got solid performance, our DE is up, our debt is down, and I think the company is well positioned to invest.
So with that let me hand it over to Dan Bass for little more detail on the financial performance.
You've seen the details of our financial results. But let me direct you to three main points. First, concerning DE, with pretax DE at $78 million for the quarter, year-to-date pretax DE is $247 million, an increase of $122 million over the previous year. Behind that substantial increase, management fees were up 7% year-over-year and we generated material incentive fees of $224 million on a year-to-date basis.
Second, in regard to margins, the third quarter result reflected $191 million of segment revenues and DE operating margin of 37%. This brings our year-to-date margin through September to 41% within our historical range of 40% to 50%. The slight decrease is due to year-to-date variable compensation true-ups.
Finally, on incentive income, it is important to note that of the $75 million of incentive income for the quarter, fully $60 million comes from the breaking through of our high watermarks. What this means is, that moving forward we will generally accrue $0.20 of revenue for every incremental dollar earned in these funds. Interestingly, this quarter was the first time since 2007 that incentive income exceeded management fees from our liquid and credit hedge funds.
Moving onto the quarterly results from our business segments, our private equity business contributed $35 million of DE for the quarter, an increase of $5 million over the second quarter. Included in this result, we recognize $5 million of incentive income from further distributions from our Fund I.
Our liquid hedge fund business contributed $16 million of DE for the quarter, up $15 million from the second quarter. As mentioned previously, strong performance in our Fortress macro fund allowed us to break through our high water marks and accrue $20 million of incentive income during the quarter.
And also on our credit business, it contributed $25 million of DE for the quarter. There are two main reasons why this is down in the second quarter. First, the prior quarter results included significant realization driven incentives from our credit private equity funds which is a very good thing. And second, the prior quarter also included the one time $10 million benefit from the release of the management fee reserve taken in our value recovery funds.
Importantly, as Dan mentioned, performance in our special opportunities funds again remained strong in the quarter and allowed us to accrue $40 million of incentive income in our credit hedge fund segment.
So all in all, a solid quarter across all of our business segments. And as the tax is based on our current earnings profile, our affected DE tax rate on a full year basis is still expected to be a percentage in the mid-teens.
Now, let me turn to our balance sheet. At the end of the third quarter, adjusted for capital movements, our investment asset values were up 4% compared to the end of the second quarter. This change is primarily due to improved valuation in our private equity funds, as Dan outlined in his talk, and strong performance in our hedge funds.
And as it relates to our debt refinancing, post the additional pay down of debt in early October, our debt-to-EBITDA leverage ratio was less than one times on a pro forma basis. That is an extremely healthy and low leverage ratio that reflects our continuing focus on lowering our overall debt.
Now, let me shift to fund performance and AUM, two key drivers of our financial results. Since Dan already gave you plenty of detail on fund performance, I'm going to focus my talk on AUM.
As mentioned, AUM ended the quarter at $44 billion, up 6% from the second quarter. It's also important to note that in addition to the $44 billion, we had a total of $3.2 billion of dry powder at the end of the third quarter. As you know, dry powder becomes AUM in the future when it is called.
Looking at the changes in our AUM during the quarter, inflows from new capital, and increases in invested capital totaled $1.8 billion. We also saw a benefit of $1.2 billion from the performance of our funds. Additionally, on the outflow side, it's important to note that this is the last quarter that the global macro SPV will have a negative impact on AUM.
Finally, looking at the composition of our AUM at the end of the quarter, with $32 billion of alternative AUM and $12 billion of traditional AUM, which comes from our Logan Circle business, significantly, 81% or $26 billion of the alternative AUM is long-term locked up capital that provides a stable, steady source of management fees.
So altogether, a very positive story on the AUM front. In summary, as I think about the quarter, and how it fits with our business strategy, I want to leave you with these three takeaways; number one, our financial performance was strong and reflects a fundamental positive shift in our earnings profile. Number 2, the momentum in AUM growth has continued and long-term lockups should provide a stable source of management fees. And finally, breaking through our high watermarks gives us a good starting point for generating incentive income in the future.
Thank you and let's go to Q&A.
(Operator Instructions) Your first question is from Robert Lee with KBW.
Robert Lee - KBW
Could we get an update on where you stand versus cost in invested capital? I know you've had a pretty good rebound in fair values there. But how far are you from being able to start to earn some carry over time? And then also the dry powder and P/E, I know you are seeing more opportunities. But if memory serves me, the dry powder in that business was fairly modest. So are you thinking about another fund or is it going to be mainly the capital raising around specific investments? Can you just maybe give us some color on that?
Lee, first question with respect to promotable income from the private equity funds, there actually are a number of the funds that are promotable now. And both currently and in the near future, we think you're going to continue to see private equity promoters have generated from liquidation. So you can't predict exactly the timing or the nature of those, but there are many, many funds. So it's not as simple as just one of the hedge funds to give a rough figure about the relative position of the fund to its high watermark.
The overall momentum behind the funds is extremely strong. We've had a very, very good year on both the management side as well as the investment side. So I am very optimistic about the prospects of those funds both currently and in the future. So that's a bit more of a general response than maybe you'd ask for, but that's the best stance.
With respect to the dry powder in the funds, you think of it a couple of ways. The most recent funds, Fund V, is very close to being fully invested. And in the ordinary course, we expect it to be back in the markets in the very near term, raising capital. And I have bunch of thoughts about that, but our counsel has refrained us to talk about prospective fund raising on calls like this. So that is certainly on the calendar and something we're looking forward to being on the road shortly.
With respect to cash to invest, we actually have a fair amount of dry powder, whether it's between the different investment funds and the companies themselves and their balance sheets we have, billions of dollars of capital to be deployed. And actually the companies are active. And if you go down the line company by company, whether it's railroad companies, the gaming companies or the senior housing businesses or the motor servicing business, which has been a huge winner for us, there is a lot of capital inside those businesses, and they're actually very, very active investing in the markets.
Robert Lee - KBW
Maybe just kind of a modeling question for Dan. You have the expansion into Singapore and other new business initiatives. Just anything we should be thinking about from an expense perspective? We're going to start seeing some ramping expense as part of it in the run rate ready. And to an extent now that you are getting backed by high watermarks and the business is more stable, are you seeing extra compensation pressures to retain staff as kind of market feel?
You said Dan. So Dan Mudd will start and then Dan Bass continues from there. So I think we're being very prudential about trying to keep our expense line in a leveled place. One of the outputs of that is you can see how consistent margins have been over a period of time. Throughout the period, we've continued to make investments in themes and projects along the way, and this is a continuation of that. As you manage any company in the four quarters, when you are adding costs, you also look at areas that you can take out costs, things that you don't need to do anymore.
The second dynamic there I think is that one of the things that we will want to manage very carefully is, just to pick the Singapore example, to have Adam make the transition and to be focused on continuing to manage his existing book, a lot of which already sits in Asia. And he's got a team that's over there now, matching that out with the opportunity to get on the ground and raise a fund there, which is effectively the way to break even on the local costs and the move. So we're managing both of those processes and are glad we've got Stu Bohart here to help support that whole effort.
Secondly, I think as you know, last year was a year in which there was a bit of a dirt of points in some of the funds, and so we had the added advantage of the public company, being able to use a little bit of restricted stock in order to keep people focused. Probably we'll do some of that again this year. But again, we'll do it in the overall context of keeping the margins and the expense lines on a trend of continuing health.
I don't have much more to add. Some of the Singapore and other initiatives, some of that's repositioning some resources that are already here in New York out to Asia. So I wouldn't suspect major swings in the margins, just to reiterate Dan's point from that perspective.
Your next question is from Dan Fannon with Jefferies.
Dan Fannon - Jefferies
Could you guys give a breakdown of $3.2 billion in dry powder as to where that's housed within the different strategies?
It's in the press release. About $3 billion of that is in the credit private equity business. But when we talk about the $3 billion, that is just the amount that's going to be added to AUM to fee paying capital. The actual amount that we have to spend, whether it's facilities or in the portfolio companies, is north of $6 billion or $7 billion when you add it all up.
So the $3 billion and the $3.2 billion is just that, which would be equity capital which we charge management fees on. And then we add it to AUM.
Dan Fannon - Jefferies
The $267 million in net client flow, is that related to Logan or another different entity?
Yes, we report Logan in the AUM table on a net client flow basis. And the capital raise number does not include Logan. It's reported on a net basis, consistent with the traditional industry.
Dan Fannon - Jefferies
On the management fee side, within the liquid strategy, management fees declined sequentially very modestly, $1 million quarter-over-quarter, but asset levels were up. So just wondering if there is anything going on with fees within that equity here within that segment?
No, I don't think there is any analysis. It's all inventorial. The fee rate changed just (inaudible). No trends there.
Dan Fannon - Jefferies
I guess more broadly speaking, the rates that are coming in are similar to what you had historically?
Yes, I think they're holding in pretty similarly. Obviously, I think what you read about in the press, there is generally more comfort on incentive and promote than there is on base fees. We feel that we have those discussions, but I think when we go through the diligence process and negotiating process, given some of the performance numbers that we're talking about, particularly around the credit business, that tends to be the other side of that conversation.
Your next question is from Roger Freeman with Barclays.
Roger Freeman - Barclays
I guess first question, the operating expenses seem to take up a decent amount particularly in credit. I'm just wondering if there is a reason for step-up in costs. Are there legal expenses or anything, given some of those, like (Peter Cooper) or anything like that that's driving costs up?
Most if not all of the uptick in operating expenses, Roger, is related to compensation. Just increases on the top-line, revenues have also caused us to increase compensation. When we make late-in-the-year compensation adjustments, we true them up on a year-to-date basis.
So in the quarter, we have three quarters of that uptick in compensation when we adjust them. That's pretty much the drivers in that business.
And that moves directly in line with changes in performance. So those two things are correlated. And again, to the earlier question about expenses, are managed to the overall level of (inaudible).
Roger Freeman - Barclays
But just to be clear there, so that would include incentive like bonus compensation outside of profit sharing?
Roger Freeman - Barclays
And when you think about that true-up, I guess I'm wondering to some extent, now that you've kind of gotten above high watermarks and in general are in a much better position, is there sort of more of a catch-up, in that folks have been maybe under-compensated to some degree and you're starting to catch them up?
Catch-up is really an accounting term that we had in the quarter. From an overall perspective, we have consistently managed our margin within a band, and we saw some outsized performance on the top-line, and that just caused some of this true-up on the bottom line.
Roger, the other thing I would say, just to be more specific about that is, we have a certain amount of high level folks who are partners in the funds. And then we have a medium level of folks who are not partners in the funds. And when those guys do a terrific job, both on the realization side, but also on the investing side, they can be eligible for greater bonuses.
And so that's what you're seeing right now is, we are in a very good part of the investment cycle for what we do. And so there's been lots of activity, and so those guys are going to get rewarded for that activity.
Roger Freeman - Barclays
Sure. And actually Pete, the incentive income there was quite a step-up. Can you just talk a little bit as to what drove this? Obviously, spreads continue to come in whether they kind of have all year. I mean is this more in mortgages or what was it?
There's sort of two phenomenon, there's sort of the returns in normalcy after sort of financial markets dislocation, which was very helpful to our credit businesses. But now we're in sort of the area of this cycle which suits us, perhaps the best which is what I would call financial services garbage collection. And so there've been quite a few realizations in that area as well.
So from my perspective, I don't think that there is any one thing, certainly last year there was big contributions from our mortgage positions in specific, but ore broadly across better spectrum now. I think we're just a more diversified business that's contributing to those profits.
Roger Freeman - Barclays
But lastly, has CW Financial brought any mortgage purchase opportunities in for you yet in the credit fund?
I think from our perspective, the way we would think about CW is it's an investment that was made both in the private equity area and credit area. And I think with respect to giving out specific information about a private company, we'd rather not.
Your next question is from Chris Kotowski with Oppenheimer & Company.
Chris Kotowski - Oppenheimer & Company
Question for Pete. And I guess you've talked about the great deleveraging, the great liquidation and the great litigation. And I'm just curious where can you flush out those opportunities a bit, and where and how do think about putting money to work and if you think about those three categories.
Yes. Well I could go on about this for hours, but I'm just going to make this sort of quick. If you look to the two biggest financial asset liquidations over the last 100 years, basically the SNL bailout, and the RTC liquidation and the Asia crisis, soup to nuts, the SNL bailout in terms of asset sales is roughly $250 billion in book value. When I say book value, I mean outstanding principal balance and appraised values. So the market value of that liquidation process was probably half of that.
If you look at the Asia crisis, maybe slightly bigger, $300 billion to $325 billion in book value, again, outstanding principal balance and appraised value of asset sold. Maybe the market value was similar, $0.50 on the dollar. So if you want to be as (expansive) as possible, you would characterize those two big financial asset liquidations as roughly $600 billion of asset sales where the market value might have been half of that.
If you look at what is for sale right now out of regulated and non-regulated financial institutions around the world, just actually what's publicly for sale. We get to a number that's probably three times as large as that. Just with what's currently available for sale and what's coming in the future seems to be a big supply demand in balance. So a lot of the transactions that we've done over the last 18 months have been publicly announced. And you can look at those announcements to see what we've been up to. But our pipeline in with respect to what I would call financial services garbage collection is as big as it has been in my career.
Chris Kotowski - Oppenheimer & Company
And then in terms of the great litigation, I'm curious, obviously there have been some stepped up efforts by Pimco and BlackRock and the New York Fed. But how does a company like Fortress participate in that trade. I mean, just given that sort of the financial service giants have billion dollar litigation expenses on a regular basis and your entire expense basis, $70 million, $80 million a quarter. How does a firm like Fortress succeed in that?
Well, when you put together a lot of different things, and I'll try to piece it apart. When you're talking about Pimco and BlackRock, I think what you're talking about primarily is all of the press that's been out in the markets over mortgage modifications about foreclosure moratoria about sort of government interference in the enforcement process. And maybe you're talking about the (put) bank liability to the major banks.
And that's certainly a product of the great litigation, it's not currently one that we're all focused on, because mortgage prices have sort of gone up to a level, where we think that they're basically uninteresting from an opportunity perspective. So we'd leave that to the long-only managers like Pimco and BlackRock, really not interesting.
I think when we are talking about the great liquidation, we're talking about the general complexity that exists in capital structures that were issued in the easy money environment, so the extreme layering of corporate leverage capital structures and structured finance capital structures. And so when we think about the great liquidation it really has to do with the opportunities that exist in terms of creditor-to-creditor liquidation.
So we're involved in lots and lots of distressed businesses all over the world. And since you have capital structures where you can buy securities in very defined radiated layers, there's going to be lot's of questions about who gets what in an enforcement process, in a restructuring process. So if you look at capital structures at the time of Jesus Christ, you had people who were out there with equity and you had moneylenders. And if you look at 2006 and 2007, you could have capital structures with 50 or 60 different types of security all owned by different constituencies, some who are low capitalized, some who are poorly capitalized and some who are in fact insolvent, some who had money to make protective advances et cetera.
And so what we find so exciting in the current market is that even very small assets have complicated capital structures. In fact, if you were to use one word to describe the current mess that we're in or the current cycle that we're in from all other sort of negative credit cycles, I think the word that you would use to express the difference between this one and other ones is really complexity.
And so complexity creates risk premium and risk premium is a significant factor that drives our business. I would also say that our emphasis or area of emphasis today has gone from the public credit markets to the private markets. There is lots of money available in today's world to go out and buy liquid securities that get marked by brokerage and dealer community and traded and traded on an active basis if you think about it from the biggest easy money environment in the world to the greatest liquidity crisis of all of our lives.
And so today people remember that and so there is lots of money out there that wants liquid homes meaning that people can get their money anytime they needed and there is not a lot of money out there to pursue illiquid credit opportunities when you're not as certain as to when you're going to get your money back.
So focus is really in the areas where you can earn a significant liquidity premium, a significant risk premium. And from an investing standpoint, we certainly like situations which create risk premiums. Sometimes governmental interference actually creates opportunities for us.
Chris Kotowski - Oppenheimer & Company
Just geographically, would you say, U.S., Europe, Asia, which is the richest?
I would say all of the above with special emphasis here in Fortress on Asia because many of the senior management team here have lived and invested in Asia and certainly Adam Levinson is moving out to Singapore.
My own personal focus on Asia, our business that is growing in Japan, Australia, Hong Kong. But I would say, that no opportunities in the world is greater than the United States right now for what we do.
We've reached the end of the allotted time for questions. I'll turn the call back over to Dan for any further remark.
Thanks everybody for tuning in. I think if you look at the fundamentals of the business, raising money and investing it well is the key that turns on three cylinders around here, base fees, incentive income and balance sheet realization and one of them is definitely turned on. The second is starting to turn on significantly and that produces for us a solid quarter.
I think everything we see in the macro environments says that an attenuation of the existing market conditions is going to continue. If 2008 was broken and 2009 was rebalancing, 2010 leaves an awful lot of work left to do in terms of regulation and stability under the market and a long-term directionality, a layout of the players on the field. That is all good for us.
So I look forward to talking to you and telling you the continuation of the story. Thanks everybody.
This concludes today's conference call. You may now disconnect your line.
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