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Fortress Investment Group LLC (NYSE:FIG)

Q1 2011 Earnings Call

May 05, 2011 8:30 am ET

Executives

Stuart Bohart - President of Liquid Markets, Senior Managing Director of Strategy, Member of Management Committee and Member of Operating Committee

Wesley Edens - Co-Founder, Co-Chairman, Principal and Member of Management Committee

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

Gordon Runté -

Daniel Bass - Chief Financial Officer

Daniel Mudd - Chief Executive Officer, Director and Member of Management Committee

Analysts

Gerald O'Hara - Jefferies & Company, Inc.

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

Marc Irizarry - Goldman Sachs Group Inc.

Roger Smith - Macquarie Research

Roger Freeman - Barclays Capital

Operator

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

Gordon Runté

Thank you, Laurie. Good morning, everyone, and welcome to our first quarter 2011 earnings conference call. We will begin our call with opening remarks from Fortress Chief Executive Officer, Dan Mudd; and Chief Financial Officer, Dan Bass. After these remarks, we'll save most of our time today for your questions. And we have Fortress Co-chairman, Wes Edens and Peter Briger; Principal Mike Novogratz; Senior Managing Director, Stu Bohart; and other members of our executive team to join us for that portion of the call.

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

With that, let me hand off to Dan Mudd. Dan?

Daniel Mudd

Okay. Thanks, Gordon, and thanks everybody for joining us today. I think the progress and the performance in the first quarter put us on a solid start for 2011 and positioned us for another strong year. Pretax DE for the first quarter was $103 million or $0.20 a share. That was the strongest first quarter at Fortress since 2007 and the second consecutive quarter with pretax earnings over $100 million.

As in the last few quarters, management fees were strong and stable, again reflecting the benefit of having nearly 80% of our AUM in longer-term lockup structures. And in this quarter, incentive income was substantial, representing about 50% of revenues. The results, I think, continue to reflect the very attractive earnings dynamics of a diversified asset manager delivering strong returns for its LPs. Incentive income follows directly from that strong performance, which we delivered across the franchise even in a market that was unsettled by events that ranged from unpredictable to unthinkable.

So let me start with that environment. Global uncertainty prevails. Year-on-year, oil and gold are up over 30% after a moment where lip service was devoted to deflation, there are now solid expectations of a global inflationary cycle. Central banks in India, Southeast Asia and Europe have commenced formal tightening, and China continues policy tightening.

The U.S. now effectively on credit watch, continues to maintain 10-year rates below 4% with a fiscal deficit at $1.6 trillion, which is 11% of GDP, slow relative growth, all of those things putting dead weight on the dollar.

Corporate profits are running at an annualized $1.6 trillion, a level that we last saw in the second quarter of 2007. The difference between 2007 and 2011, same level of corporate profits, is that we're doing that with 7 million fewer U.S. workers. Those jobs seem unlikely to come back in the near term, keeping a strain on municipalities, the U.S. housing market and the consumer sector.

Commercial property, trophies aside, remains under occupied and difficult to finance. And an immense overhang of regulatory uncertainty continues to weigh on the financial sectors. Important elements of Dodd-Frank, housing policy and trade policy all remain unresolved.

So for us, this all adds up to a fragile, hair-triggered environment. Accordingly, events, tsunamis, revolutions, oil well blow outs, sovereign crises on the downside. And on the upside, victories in the war on terror, positive economic numbers and political progress, all have a magnified albeit transient impact on the markets.

Amidst all of this, we have equity markets trading at post 2008 highs and volatility at the lows. In our view, this environment calls for the kind of tactical, opportunistic, high-intensity investment approach that is Fortress' specialty.

Let me go through the businesses. First, in Liquid markets, our macro fund produced net returns of 1.9% in the quarter while many other funds in the space struggled. Our new Fortress Asia Macro Fund generated net returns of 3.5% in March alone, its first month of existence and a month in which a lot of similar funds were stopped out.

Fortress Commodities Fund delivered 3% for the quarter. Although we've given back a little bit in April and the start of May, Fortress Macro remains in positive territory year-to-date. Asia Macro is still up over 3% and Commodities, over 2.6%.

In our Credit Hedge Funds, our main DBSO funds continued to perform very well, generating net returns ranging from 5% to 6% for the quarter. This follows exceptional full year returns in 2010 ranging from 25% to 30%. In Credit Private Equity, the inception to date return in our flagship Opportunities Fund was 32% net, 42% gross. And at the end of the first quarter, net asset value surpluses across the Credit PE Funds increased to $2.7 billion, which was up 16% from the end of the year in December. So we're pleased with all that, that our credit funds have been recognized for their strong performance. Fortress Japan Opportunities Fund was named Fundraise of the Year by Private Equity Real Estate, and Fortress was recently nominated for Credit-Focused Firm of the Year by Institutional Investor.

In Private Equity, the trend of substantial increases in fund investment valuations continued for another quarter. Our main PE Fund investments appreciated by over 10% in the first quarter, which was about $1.2 billion. Since the low point evaluations in Q1 '09, our PE investments have appreciated by $5.5 billion or up 71%.

To further illustrate the trend, valuations in the most recent vintage fund, Fund V, increased by over $400 million or 15% in the first quarter alone. This, I think, reflects the significant upside potential in some of the investments that Wes highlighted on our last call. Since the '09 trough, Fund V investments have increased in value by $1.4 billion. And then finally, in Logan Circle, every one of our 13 strategies is now beating its relevant benchmark year-to-date.

These results, in our view, put a strong point on Fortress' positioning as a performance-driven investor. Yes, we will market. Yes, we will grow assets. Yes, we will add strategies. But in our view, all of those activities follow from performance, finding and investing in opportunities that make money for our investors.

So let me talk for a moment about the specific opportunities we see in the core businesses. First in Financial Services. The great deleveraging continues. And we estimate that to date, less than 10% of the financial assets that need to be marked and sold have actually moved. On one hand, the tough complicated special situations present a great opportunity for our Credit business to buy and manage assets following on from entry level prices that remain very attractive. Real estate is now entering a supply-demand imbalance in terms of distressed refinancings and restructuring. And I believe that our purchase of CW Financial will be a boon to our efforts there. On the other hand, larger divestitures, like the sale of AIG's Consumer Finance business, represent opportunities for Fortress PE to acquire operating businesses.

Second, let me talk about transportation and senior living. We already operate large global businesses in our Private Equity portfolio in these sectors, RailAmerica, SeaCube and Aircastle are well-known transportation companies that we run. Holiday and Brookdale are leaders in the senior living space. So in a kind of parallel way, global demographics favor shipping and logistics just as regional demographics in Asia favor senior living. And we're actively pursuing opportunities in both sectors.

Third point, the directionality, the volatility, the dispersion in the capital markets continues and presents significant opportunities across our Liquid funds. Our broad hypothesis, U.S. softness, China emerging markets growth and a low-rate environment transitioning to anti-inflationary policies is playing out in creating opportunities in our core fixed income FX and commodities positions.

A slightly less attractive cycle is underway in fixed income and long only fixed income, but that said, the institutional cash on the sidelines has to go somewhere and Logan Circle's short duration strategies have seen strong inflows with total assets of 30% on the quarter. Overall, Logan had its most successful quarter of net flows since the acquisition a year ago with net inflows totaling $550 million.

So summary. The opportunity we see today, which spans all of the businesses, I think, bodes well for putting money to work and therefore, for raising new capital. So let me talk about that for a moment.

For the first quarter, we raised about over $500 million in new capital. The pace of that capital raising built in April. And through May 1, total new third-party capital had grown to approximately $1.2 billion. Due to the timing of new funds coming to the market, particularly in the longer lockup structures, we expect 2011 to be somewhat back loaded in terms of capital raising.

Last year, to remind you, we finished investing our fifth Private Equity fund, we raised 2 new Credit PE funds and we reopened DBSO for new investors. We then turned, at the end of last year and the beginning of this year, to deploying that capital. So accordingly, in the first quarter, we did not have any new PE style funds -- any significant new PE funds available for subscription.

That caused a shift during the first quarter from what we saw last year where we raised about 2/3 of the money in longer lockup structures and 1/3 in liquid strategies. The first quarter was reversed, 2/3 in liquid strategies, and 1/3 in PE. That should balance out as the year rolls on. The main point, I think, about capital raising is that today, for the first time since 2008, we're in the market, raising capital in every single one of our businesses.

To give a little texture to that, I think investor interest is there. The dialogues with existing and prospective LPs are very constructive. And as we progress through the normal cycle of capital raising and new products and structures, we'll continue to build on the momentum that started in 2010.

Let me give you an update on some of the initiatives that are underway and some of the things that we've talked to you in conversations with investors over the course of the quarter. We expect that the capital raising and the progress of the business at a strategic level will benefit from our focus on disciplined expansion, leveraging the existing capabilities that we have to build critical mass in new products and new geographies. Today, international investors represent about 25% of the capital we manage, and I think that points to both progress and potential.

A particular focus of our efforts continues to be growth in Asia. Let me update what we're doing in the region. First, in terms of the terrible calamity in Japan, I'm gratified to report that all the members of our Japan credit team are well. The team has done a great job of managing through the hardship and the uncertainty to carry out their duties to our clients.

On the investment front, the events in Japan have not had a material impact on investment properties in our funds portfolio, which are primarily located in Tokyo. Our team has told me that of the 900 properties we have, the total damage estimate is about $500,000.

In Singapore, our office is now fully staffed. The operations and capital-raising functions are up and running, and we have a solid start in the Fortress Asia Macro Fund. Asia aside, we continue to focus capital raising in the Middle East, specifically the Gulf region, as well as our traditional core base in North America and Europe.

A couple of updates that I know you're interested in. As I mentioned on the last call, we've been working to finalize an appropriate employment agreement and compensation structure for our principals that will extend from the expiration of their current agreement, which goes through February 2012. We've made great progress, and we're on track to announce the final structure under which our principals would “reup” their terms of employment. And we will announce that during our second quarter conference call in August when we will disclose all of the relevant specifics. All on track there.

With respect to the dividend, no change to announce today. That topic remains on the board agenda, and we are remaining mindful of the balance between investing in our funds and the opportunities I've described: building new businesses, reducing our debts and the importance of establishing a current yield. That said, we are evaluating the various methodologies in the market, level dividends, variable dividends and perhaps, the most relevant to the pattern of earnings in an alternative manager, 3 quarters of a relatively low fixed dividend, topped off in the fourth quarter to reflect annual incentive income.

I want to reemphasize that we understand the importance of the topic, and also to reiterate that the principals, the employees in the board who have 70% of the common stock among them, share this interest and focus. Management has not made a recommendation to the board at this point. So I would say, overall, all of our various initiatives are tracking well.

To sum up, before I hand it over to Dan Bass, a strong quarter from a financial and strategic perspective that sets us up well for the rest of the year. We remain well positioned to capitalize on extremely attractive investment opportunities across our businesses and to generate returns that will build loyalty among existing LPs and attract new allocators to Fortress. And we're continuing to make steady, disciplined progress in bringing Fortress' capabilities to more and more diverse investors globally. So with that, thanks for listening.

And let me hand it off to Dan Bass to go through some of the earnings numbers.

Daniel Bass

Thanks, Dan. Good morning, everyone. First, let me apologize in advance for the scratchy voice, but I've been battling a small case of laryngitis over the last couple of days. Dan talked about the financial headlines in the quarter.

Let me now drill down on comments on our business segment performance, margins and tax rate, AUM and our balance sheet. As stated earlier, pretax DE was $103 million for the quarter or approximately $0.20 per share. Management fees were up slightly quarter-over-quarter and incentive income generation remains robust. The operating results were once again strong across all of our segments, reflecting our versatile and our dynamic business model.

Now let's take a look at the results from a segment perspective. Our Private Equity business contributed $27 million of DE in the quarter on $48 million of revenue. Management fees were essentially flat quarter-over-quarter. And as Dan mentioned earlier, the fund investment values depreciated by over 10% in the quarter.

Our Liquid Hedge Fund business contributed $13 million of DE in the quarter on revenues of $44 million. Performance in these funds helped us generate $22 million of incentive income in the quarter.

Our Credit business contributed $58 million for the quarter on revenues of $147 million. This is a very positive result. Let me put this result in perspective. Our Credit business had an outstanding year in 2010, yet the DE recorded this quarter is higher than any single quarter last year. Some of the drivers of this result include the following: we had strong performance of around 5% in our Special Opportunities Funds, which helped us recognize $38 million in incentive income in our Credit Hedge Funds; and second, we earned $57 million of gross incentive income in our Credit Private Equity Funds. This is now the fifth consecutive quarter that we’ve had meaningful distribution in this group of funds.

Also in our 10-Q that'll be filed later today, you will note that we currently have approximately $270 million of gross mark-to-market undistributed incentive income in the Credit Private Equity Funds. Just to point out on this, these numbers are not included in any of our current or prior period earnings.

Finally, our Principal Finance segment, that's the segment that houses our balance sheet investments, generated a net gain of $8 million for the quarter. Further, as of March 31, we had over $300 million of embedded gains in that segment that could be realized if we liquidated those assets at their current value. So as you can see, all in all, all of our segments made a significant contribution to our earnings in the quarter

Now let me take a moment to make a few comments about our operating efficiency and tax rate. Our operating margin in the first quarter was 39%. The main reason for the lower margin is a charge of $5 million recorded in the quarter. The charge represents the write-off of a potentially uncollectible receivable. Excluding this charge, our margins would have been around 41%, which is consistent with our historic average.

Let me conclude this section with a positive note around our tax rate. As we sit here today, we expect that our full year effective tax rate for 2011 distributable earnings will be between 5% and 10%, down from our 16% rate in 2010. The main driver is an increased deduction related to the equity-based compensation. The magnitude of this deduction will keep our tax rate lower than it would otherwise be through the end of 2013.

Now a few comments on AUM. AUM ended the quarter at $43.1 billion, which is down approximately 3% from year end. Let me take a second to explain what's going on with AUM. During the first quarter, 3 of our Private Equity Funds reached the end of their investment periods. At that time, the management fee basis was reset from committed capital to the lower of invested capital or net asset value. This is not uncommon and the change in basis is twofold. The difference between capital committed and capital invested. And two, historical reductions in the NAV of certain investments, which in this case, generally occurred in 2008 and 2009.

So as a result, AUM was decreased by $2 billion due to the reset in this quarter. Further, this reset had no effect on management fees recorded -- or will be recorded in the first half of 2011. Excluding the reset of these funds, our AUM would have increased by $0.5 billion from the end of the year. Finally and lastly on AUM, at the end of the quarter, we had a total of $3.9 billion of dry powder across all of our funds, up from $3.5 billion at year end. This dry powder becomes AUM when it is called.

Now a few comments on our balance sheet and liquidity. The value of our investments continued to appreciate and ended the quarter at $1.1 billion, a net increase of approximately 8% from year end and 24% on a year-over-year basis. At quarter end, we had almost $220 million of cash, a debt balance of $275 million and a debt-to-EBITDA leverage ratio of 0.6x.

Finally, it's not important -- it's important not to overlook our GAAP book value, which is almost $1 billion. This is up just over 7% from the end of last year and up 53% from the end of the first quarter last year. So in closing, let me make the following 3 points. The embedded value that could be realized from both our funds and our balance sheet is ample and continues to grow. Strong performance and our ability to raise capital are crucial for continuing our earnings momentum. And finally, our balance sheet is strong, giving us the flexibility to grow our businesses and generate value for our shareholders.

Thank you, and let's go to Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Robert Lee of KBW.

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

I'm just curious, I know, Dan -- well, I guess both Dans, but you had touched on -- that you are thinking about the distribution and you guys also talked a little bit about the strengthening balance sheet. But can you maybe update us a little bit on your thought process. I look at the investments on the balance sheet, x the cash, you’re up to $1 billion now, your pretty substantial unrealized gains there. I don't know what flexibility you have to realize some of those, but how are you thinking about or is it a possibility you would think to -- if you could realize some of that, accelerate debt reduction, kind of increase the flexibility to restore a distribution. I mean, is that -- to maybe address how that fits into your thinking going forward?

Daniel Mudd

Let me -- let Dan Mudd start and then I'll turn it over to Dan Bass. I think at a high level financial strategy view, we're continuing to want to drive the net debt down to zero. And we look at all the opportunities to do that. We like the investments that we have on the balance sheet. Largely speaking, those are investments that travel alongside the investments that as a GP we've got with our LPs. So it's unlikely that we would transact in front of as opposed to parallel to our investors in any realization here. So I would think of those as pretty much traveling alongside each other. That said, there's a tremendous amount of value there. And as the various funds, particularly on the Private Equity side, move through realizations, that'll be part of the process there. But tactically, we're also looking at all the potential sources in order to continue to bring the debt down. It's an important thing to refinance the existing agreement we had. And that gives us a little bit over a year from now to make that whole process work. That obviously plays into the dividend as one of the factors. But I would point out that from a maximum of $800 million, our debt is now down at $275 million. It's down at a kind of run rate below our annual DE. So we've made a huge amount of progress there. But we're continuing to chip away at it. Dan, what do you want to add?

Daniel Bass

Yes, I just wanted to reiterate your point about the assets and recognition traveling alongside our LPs. And so as we see realizations in our Private Equity Funds, both Credit and traditional Private Equity, you'll see these gains be harvested.

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

All right. Great. And then I know, Dan Bass, you mentioned that there was a $5 million, I guess, kind of onetime item in expenses. But as you -- as we think about that expense base going forward and you have the Singapore office open, so I assume that fully in the run rate. But can you talk about other expansion initiatives that you have, if any, that may -- we could see some additional pressure on expenses? Or just maybe talk generally about what you're seeing some opportunities there.

Daniel Bass

Yes. I think the Singapore expenses are in the run rates. We are managing our expenses very closely. And we feel pretty good about the relationship of our expense base to our revenues. So we feel like we're pretty well aligned there.

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

Okay. You talked then about the first time since '08 capital raising in each business at this point. Could you maybe drill down a little bit more? And maybe give us some color in the different businesses kind of some of the key products you're capital raising for right now, particularly if it's a new type of fund as opposed to, say, an evergreen fund like in the liquids business? What are you thinking about the second half of the year?

Daniel Mudd

Yes. Although, let me do 2 things. One is I have to be a little bit careful not to be offering any products on the call here, but I'll give you a broad overview in terms of what we're focused on. And then, if Wes and Pete and Stu Bohart who's here from the Liquid Markets business want to add in a little color, that can be helpful. So you're absolutely right. The evergreen funds that are always open, starting with the Macro Fund and starting with Logan Circle, are continuing to raise and continuing to make progress there. So for the first quarter, as I said, about 2/3 of the capital that came in came in from those funds. I would say that we see, in Pete's business, the pace of investment in the existing Credit Opportunities Fund and the realizations to be pretty strong. So there's probably an opportunity to follow on there. In Private Equity, starting off with more sector-specific opportunities, those that I talked about in transportation and senior living and following thereon kind of a broader Private Equity Fund or the direction that we're thinking about right now. The other -- a couple of other points of color, and then I'll see if anybody else has got a comment there. Very encouraged that in the first quarter, we brought in over 100 new investors and of the new money that came in, reminding you that it was mostly in the Liquid business, about 48% of that was North American, so 52% of it came from overseas. And as you know, one of the big initiatives has been to build on our traditional base, which has been very strong in North America and Europe, to add to capital raising overseas. So it ties in a little bit to your earlier question with Dan Bass. We're not putting up flagpoles out in the rest of the world just for the sake of putting up flagpoles. We're putting up a business in Asia, both to invest money and to raise capital. And that's starting to bear fruit. Last year, the number was effectively 0. Asia money that came x Japan, this first quarter, was about 11%. So pretty positive on those fronts. In terms of new funds, let me see. Pete, Wes, if you guys want to add a few comments, too?

Wesley Edens

Sure. As Dan mentioned, we are looking at a couple of sector-specific funds. One in transportation, one in senior housing. We've been spending a lot of time in China and are opening a Fortress office there next month in June and expect to see some activity there in the second part of the year. The core Private Equity businesses, as reflected in the results, have had a really terrific run in the last year, year and a half and are continuing to have a good run. We have a lot of good things going. And the core areas of concentration, financial services, transportation, senior housing and health care-related stuff, all have had a lot of good momentum from the sectors themselves, and those businesses continue to do well. So we expect to be active in terms of the general fund raising in the second half of the year. So Pete?

Peter Briger

The other thing I should do is introduce Stu Bohart. We brought Stu Bohart in as President of our Liquid business. He's here. Mike's upstairs on top of the markets. Stu, you want to add some color for Liquid?

Stuart Bohart

Yes, for the Liquids business, we're very mindful of the opportunity for Fortress in the Liquid Hedge Funds. And we've begun planting the feeds and thinking about how we can grow this business from the current 3 funds and roughly $6 billion in AUM. Our immediate priority is to get the Asia Macro business to scale and the Macro business to capacity. We also have the Commodities Fund, which has performed well. You'll see over the course of this year and into next that we'll be working with outside investors to seed new funds, always mindful that we want to be careful that we don't disrupt Macro, that we remain sure on our strategy there. We do see the opportunity to bring in new teams, new funds, new investors that increase information flow, support the Macro business and allow us to diversify the overall business into something that looks more like a multi-fund complex with significantly higher AUM and earnings power.

Operator

The next question comes from line of Roger Freeman of Barclays Capital.

Roger Freeman - Barclays Capital

I guess just a follow-up on a couple of these questions. In Private Equity, maybe Wes, how much capacity do you think you have to do private equity deals in the meantime before you've raised new money? I know there's existing debt capacity in existing portfolio companies. Are you looking at opportunities to add around those? And then also with respect to fund raising, I think Dan might have already mentioned sort of a broader PE Fund, potentially, in addition to sector specific that sounds a bit new versus last quarter. I mean, you think you can raise a general Private Equity fund at this point?

Wesley Edens

Well, I guess the first question with respect to what is going on. We have a lot of capital in different businesses. I think the current count were somewhere between $2 billion and $3 billion in cash in the different portfolio companies. And there's a lot of activity on that front, Roger. We are pretty full out as a group right now on a number of initiatives on some of these companies. The Consumer Finance business, in particular, you're going to see a lot of activity. There should be a lot of debt and equity capital formation that you'll see, I think in the near term. On that side of the business, the senior housing likewise, there's a lot that's going on there. So we are quite busy in that regard and are active in the financial services space, in particular, on the servicing side of both residential and commercial. So the activity levels and the acquisitions that are going on there are kind of first derivative of investing in funds are very full out, and the results reflect that. We raised capital in the first quarter in Newcastle for the first time in a couple of years. That whole sector went through quite a cathartic period. We not only survived, but have managed to recover nicely. There's some great investment opportunities there since we raised capital, I guess, about over a month ago or so and we're reporting earnings in that company here tomorrow, actually. So you'll get a window into that. But there's been a lot of good stuff in there. And as I mentioned, I think that the general Private Equity fund raising will commence in the second half of the year. And I think I'm very optimistic about it. When you look at the valuations on -- as Dan said, the most recent Fund V from a low point in the middle of the crisis to today, it’s had a tremendous rebound. And I think is going to end up being a very, very good performer, top quartile performer. A vintage a wise [ph] for that fund when all is said and done. So very we're very optimistic about the prospects for that. And there's a lot of activity, obviously.

Roger Freeman - Barclays Capital

Okay. Just on the funds point -- well, I guess we'll see this in the Q later, but where are those now marked relative to the cost?

Wesley Edens

Yes, both of them are just real costs at this point. I think that's our goal. And I wrote to my annual letter to the fund investors, which is our goal is to have both those above costs in midpoint of the year. And it's not the midpoint of the year now, so you'll never know. But I'm pretty optimistic about that.

Roger Freeman - Barclays Capital

Got it. Okay. And then maybe for Pete, can you talk a little bit about the types of realizations you saw? You were able to get in the first quarter in Credit Private Equity. They're obviously strong. At the same time, I hear the comments that there's still a lot of liquid credit that needs to move and hasn't. So on the one hand, it seems like you're selling them. Maybe you can talk a little about that, who the buyers are. It seems like there's a little bit of opposing trends there in terms of what others aren't selling and at what you are?

Peter Briger

Well, I would say that the fixed income credit markets are on fire. And so broadly speaking, I think that in security form are easy to sell and don't have much upside. So if you look at the Credit business, broadly speaking, which is certainly as much of a vintage business in the investing world, right now the public credit markets are awash with capital. And we have made investments across a number of sectors where we either had public securities to sell or our positions became more liquid. And so we have made sales in our residential whole loan portfolio, in our residential securities portfolio and broadly across a number of different categories that we have invested in. To your point -- or to Dan's point, the investing that we've done more of over the last 12 to 18 months would be under the heading of what I would term financial services, garbage collection where we're taking on significantly more illiquid portfolios and making more illiquid investments. And the investment environment for financial services garbage collection is quite good right now. And you'd probably still, in a world where the disparity between the public credit markets and the illiquid portfolios that are on banks' balance sheets, on government balance sheets, et cetera, that disparity in terms of investment return is still probably close to an all-time high. Although, the returns in that sector have come down along with everything else in credits. So while the opportunity is certainly not as good as it was 12 or 18 months ago, there is still an opportunity for us to invest significant amounts of capital in that role. Did that answer the question?

Roger Freeman - Barclays Capital

Yes. Just to clarify, the realizations in the Credit Private Equity, if I might take away, it's actually more liquid securities going in it? Or maybe illiquid position that became more liquid?

Peter Briger

Well, yes.

Roger Freeman - Barclays Capital

Okay. All right. Just lastly, maybe for Dan Mudd. On Logan, obviously, you're seeing some good inflows there. What are you thinking about sort of longer-term prospects for that long-only fixed income? It's obviously a good business you own, but it's not large in the context of fixed income funds. Is this going to be a growth leg? Or is this just -- continue to be a nice little business that sort of runs alongside Fortress?

Daniel Mudd

No. I mean, we definitely would like to grow the business. There was a window of opportunities when we acquired Logan Circle that, as I said I think at the time, there were a number of firms that were not going to remain where they were, either because of different strategic interest by the holders or regional banks or what have you. That closed a little bit. And so I have not seen as compelling an opportunity to buy firms outright. So we've pushed a little bit harder on the organic growth side of that. Precedent to the organic growth was making sure we had the performance across the funds. Because it's really a business where if you're delivering the performance, you get the meetings and you get the mandates. And as I'd said, we're now there with high decile performance in all of their strategies. So that's them starting to turn the wheel on raising capital. I think that there may be opportunities going forward to take over the running of portfolios from others that are subscale and so forth. And then when the opportunity comes up to invest again in the sector when valuations look a little bit better, we're in a good position to do that. So we like the sector, we like the business, we like the progress. Obviously, the biggest wind blowing at us and all that right now is that there's been a bit of a rotation out of fixed income and into equities broadly. But that's something that we knew going in and you just have to deal with in terms of the broad cycle in the business. So I think you just got a record like 5 questions in, Roger. So we should go on.

Operator

Your next question comes from the line of Dan Fannon of Jefferies.

Gerald O'Hara - Jefferies & Company, Inc.

This is actually Jerry O'Hara stepping in for Dan today. Just a quick question on the $2 billion sort of reset or step-down in AUM on several of the Private Equity Funds. From a modeling perspective, is there any timing or guidance you could provide for future resets or step-downs on other funds?

Daniel Bass

The only fund that's presently in our stable of funds that is on committed capital at this point is the Japan Opportunities Fund. So just look at the origination date and the resets occur at the earlier of the raise of the subsequent fund or the expiration of the investment period.

Gerald O'Hara - Jefferies & Company, Inc.

Expiration of the investment period. Okay. Great. And then also sort of modeling related, the RCA distributions that are noted, I guess, on a chart on Page 4. Can you kind of talk a little bit as far as the timing until potential extinguishment or timing going forward? And is this sort of a quarterly run rate that we can kind of expect going forward from this quarter going forward?

Daniel Mudd

In times like this where you have more liquidity in the marketplace, the RCA distribution time periods probably go down. So what's left in those accounts is probably more illiquid. And if I had to sort of pick a time period, I would say an average life of between 3/4 of a year and maybe a year and 1/4. And those are very, very rough estimates, which could be wrong. And when I say average life, I don't mean average time to full extinguishment of the account. I mean the average life of the run off of the cash flows, if you follow me.

Operator

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

Marc Irizarry - Goldman Sachs Group Inc.

A question for Dan Mudd. Dan, can you give us some perspective on when you’d expect to have the dividend, the distribution policy set? Is that something you anticipate will happen sort of relatively soon? And then you mentioned wanting to get to a net cash position or thereabouts. How do you think about the embedded gains relative to that looking at that net cash position?

Daniel Mudd

Both answers are going to be pretty short. Can I give you any direction on the timing? No. If we were going to make direction on the timing, we would tell you what the timing would be. So what I've tried to do along the way, Marc, is make sure you’re apprised in terms of what we're thinking about, as factors, but also to remind you that ultimately this is a decision that the board would make. And as I said in the remarks, we have not -- management has not made a recommendation to the board on the topic at this point. The second question, as I said, those gains will travel alongside the existing LP realizations. I would think about that as happening more as a secondary benefit to the net cash position or the net debt. And that being one of the 5 or 6 factors that we're looking at in terms of being able to put in place. To us, a policy that's sustainable and that's continuous and that's predictable is the right way to do it. We've marched through some of the key factors that are important in terms of that sustainability. But I also gave you some character in terms of where we see the markets right now. And all the things we've talked about in terms of opportunity to continue to seed and build out funds are all things that we're considering in the process.

Marc Irizarry - Goldman Sachs Group Inc.

And then maybe you'll answer this right, but the accrual -- the $270 million in the accrual in the credit fee fund, the accrued incentives, how much of that is sort of -- is there a portion of that, that's more liquid? Or how should we think about the timing of the harvesting of those gains?

Daniel Mudd

Let me toss it to Pete.

Peter Briger

Well, I feel very good about the valuations associated with those gains. And as to the timing, I'm pretty unsure. So I would say from our perspective that the valuation methodology and that produced those gains, I think, is pretty right on. But the timing of realization is a question mark. I don't think it's a big question mark. What we do for the most part tends to be shorter duration than sort of true private equity when you're buying companies. But I would say that we're going to take our time and understand how we can maximize NPV on those portfolios. And so it's not really a consideration of ours as to sort of what quarter that happens; it's really a question of sort of making sure that we maximize net present value for our fund investors.

Daniel Bass

Right. And just one last point on the numbers there. We like the trajectory a lot. At year end, we had $250 million of embedded incentive. We harvested $57 million in the quarter, and now we have $270 million. So about a $78 million net change in the quarter in that embedded incentive there. So we like the trajectory there.

Operator

Our next question comes from the line of Roger Smith from Macquarie.

Roger Smith - Macquarie Research

I'm actually interested on the capital commitments that you would need to make on new fund raising activities. Has there been any kind of change there? I historically think of that like about a 2% number for you guys.

Daniel Mudd

Yes. I mean, I don't think that, that changes the numbers. The numbers vary between something like 1.5% and 3%. Historically, we've been at a higher level than that. But we'd like for the house to be somewhere in that range. One of the trends that I think is increasing a little bit in the new, new capital raising environment is that investors are pretty focused on ensuring that the principals or the CIOs or the PMs have their own personal skin in the game. In our case, that's over $1 billion of funds that the principals invested in, in Fortress funds. So it's quite significant. But that continues to be, I think, a focal point in the discussion. I'd like to see over a period of time the house have a pretty actuarial, 1% to 3% level of investment in new Fortress funds. Sometimes to get a fund started, we have to go up a little bit higher than that. And over time, there's probably an opportunity to reallocate and see something new. That's just part of business.

Roger Smith - Macquarie Research

Okay. And then on the Credit PE Funds, that $3.6 billion of, I guess, capital that's available right now. Is there a timeframe that is on that, that is shorter than the length of the funds?

Peter Briger

Are you asking what the investment period?

Roger Smith - Macquarie Research

Yes, that's exactly what I'm asking.

Peter Briger

The investment period for the Credit PE Fund is typically 3 years.

Roger Smith - Macquarie Research

Okay. And then you mentioned that fixed income markets are on fire right now. Does that mean it's harder to put money to work?

Peter Briger

Really, we raised the credit PE funds not to take advantage of the public credit markets. It was only when the financial dislocation occurred to such a great extent in 2008 and 2009 that it was a much better commercial proposition to be in securities than in what I would term financial services garbage collection. And so our orientation in those funds is towards illiquid investments. That's why we set them up as PE style funds. And so we were lucky enough to have participated in that financial dislocation from an investment perspective and to realize some great returns. But the emphasis of our business in Credit, it is in illiquid investments, and so I think that as I mentioned before, while the current market place for financial services garbage collection may not be a 10, in terms of a 1 out of 10 scale, it's pretty darn high, but it's lower than it was 12 or 18 months ago. And so I think for us on a relative basis, this is a great time. It may not be the best time certainly because the public markets have come back so strong. And I might say, from my perspective, unexpectedly strong or unjustifiably strong. But I would say that our pipeline is very strong right now. We have capital available to invest from our funds. And we also have significant interest from our investors to invest in new funds.

Daniel Mudd

Another way that I think I would add to what Pete said that is that in my observation, in his general line of business, there's a certain amount of conflation between the concept of distressed investing and the concept of special situations. What the markets on fire does is it enables you to refinance or to finance existing companies. But at the same time, to also create exits from the securities positions. There is still an entire, I say, "land of broken toys;" Pete says, "financial services garbage collection," that falls outside the spectrum of distressed investing or securities investing and falls into real special situations where you may have to go through a restructuring, you may have to go through a bankruptcy process, you may have to do a lot more operational dirty work than is typical for some of the folks in his business. Pete's filled out the team and the capability to be able to do those. And so there's an investment opportunity on one side. There's a harvesting opportunity on the other.

Peter Briger

Just to put a fine point on that. If you look at the markets right now, the credit markets, in particular, is controlled by long-only capital flows, which want to sort of make the additional return above government guaranteed fixed income. That's on the one hand, and as I said, unjustifiably low-return environment right now for that product. And on the other side of it, you look at the banking disasters that occurred around the world and you see literally hundreds and hundreds of what I would call corporate yard sales going on.

Gordon Runté

So I think Roger Freeman gets the last question.

Operator

Final question comes from Roger Freeman of Barclays Capital.

Roger Freeman - Barclays Capital

Just Pete, going right back to that discussion on sort of liquids versus the illiquid sort of garbage collection that you're doing more the investing around now. How much of the unrealized gains are still sort of in the liquids area? Because this is an area -- you've been beating sort of quarter-after-quarter on realizations because there've been these great opportunities to sell some of the securities. Are we close to the end of that? I'm just trying to figure out if there's going to be maybe a lull while that runs out, and you're building gains in the more illiquid stuff that's not going to come out for a while.

Peter Briger

I know that's important information to you. I don't have the answers at the top of my -- at my fingertips. But I would just say generally is while it's important to you, it's not important to me in terms of investing or realizing...

Roger Freeman - Barclays Capital

No, I understand. Okay.

Daniel Mudd

Okay. Thanks. Quick summary. Good start to the year, sets us up well. Great performance across the business. Still like the market environment an awful lot. It gives us a lot of compelling opportunities to put money to work. The global interest in our funds is strong. We like the results from what we've done to kind of expand our wings in terms of capital raising. And there are a lot of opportunities to build on the progress that we've made so far. So thanks. If there's follow-up, Gordon, the IR team, myself, everybody else here is available. We appreciate your time and interest. Thank you.

Operator

Thank you for participating in the Fortress First Quarter Earnings Conference Call. You may now disconnect.

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