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Fortress Investment Group LLC (NYSE:FIG)

Q3 2011 Earnings Call

November 03, 2011 8:30 am ET

Executives

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

Daniel N. Bass - Chief Financial Officer

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

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

Gordon Runté -

Constantine Michael Dakolias - Managing Director, Member of the Management Committee, and Co-Chief Investment Officer

Analysts

Craig Siegenthaler - Crédit Suisse AG, Research Division

Steven M. Truong - Barclays Capital, Research Division

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

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

Alexander Blostein - Goldman Sachs Group Inc., Research Division

Operator

Good morning. My name is Lindsay, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Fortress Third Quarter Earnings Conference Call. [Operator Instructions] Mr. Runté, you may begin your conference.

Gordon Runté

Thank you, Lindsay. And good morning, everyone, and welcome to the Fortress Investment Group Third Quarter 2011 Earnings Conference Call. We'll begin our call today with opening remarks from Fortress Chief Executive Officer, Dan Mudd; and Chief Financial Officer, Dan Bass. After these remarks, we look forward to devoting most of our time to your questions. We have Fortress Co-Chairman, Wes Edens; President of Liquid Markets, Stu Bohart; Credit Co-CIO, Dean Dakolias; and other members of our executive team to join us for that portion of our call. Mike Novogratz and Pete Briger are traveling internationally today and so will not be able to join us. Before we begin, let me remind you that statements made today that are not historical facts may be forward-looking statements and 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 H. Mudd

Okay. Good morning, everybody, and thanks for joining us today. Third quarter was a pretty brutal environment from virtually every perspective. I think it's fair to say the challenges pretty much cut across sectors and markets and geographies. With that, our results, financial performance is only slightly below the second quarter, AUM was maintained, balance sheet strength. I think all of those things are a strong testament to where we are at Fortress. For the quarter we invested $1 billion. We raised $583 million, so we're investing. We're raising capital across our businesses, and we're seeing very attractive opportunities given what we do in a really tough environment. Let me go into that in a little bit more detail. Pretax DE was $43 million, $0.08 a share, compared to $46 million or $0.09 in the last quarter. AUM was roughly unchanged at $43.6 billion compared to $43.8 million at the end of the second quarter. The largest gain in AUM was attributed to our Credit PE business, where we invested close to $1 billion and still have approximately $3 billion in dry powder, which will be, of course, added to AUM when that's deployed.

Importantly, as in prior quarters, 80% of our AUM is in funds that have long-term lockup capital structures. The stickiness of that AUM, I think, contributes to the stability of the management fees that you saw this quarter, which were unchanged from the second quarter at about $131 million.

Incentive income, however, was down $14 million from -- down from $20 million in Q2. 80% -- about 85% of Liquid Markets main fund capital was below high watermarks at the end of the third quarter. Credit Hedge Funds remained well above the high watermarks so on a performance basis, they were flat from one strong quarter to another. We saw in contrast, other quarters relatively limited actual realizations in Credit PE but across the credit funds, the realization-based nature of incentive fees has resulted in significant embedded value with approximately $260 million in unrealized incentive fees at the end of the quarter.

Looking at the balance sheet for a second. Cash and investments, net of debt increased by about 3% to $1.1 billion, which translates into over $2 a share representing 60% of our stocks value at least at the close of trading yesterday.

Let me talk about each business briefly. Private Equity investment valuations declined by 6% during the quarter, really a reflection of lower share prices for public companies accounting for that decline. Our marks in the business compared favorably to the broad market indices with the S&P and MSCI World Indices down about 14% and 18%, respectively, year-to-date. On a year-to-date basis, valuations in our PE funds at the end of the quarter remained up about 6.5%, so a continued building story there.

In addition, core operating metrics at the portfolio companies, whether you look at occupancy rates from Holiday Retirement or you look at servicing book growth at Nationstar, we're up year-over-year. And all of those things added up to a positive aggregate cash flows across the portfolio companies. And I think we continue to see substantial valuation upside in many of the most significant private equity investments.

Liquid Markets, second business, we began the quarter with most capital below high watermarks. Through October, we were a bit further below those marks across our strategies. To update you, as of October 31, Macro, commodities and Asia Macro Funds were down, respectively: 9.4%, 6.6% and 1.4%, respectively. The hedge fund composite index was down about 6% in the third quarter. So it was a tough slog for lots of folks, but we remain mindful of the fact that these are absolute return strategies. So we're pursuing our core structural themes, and we remain optimistic about the prospects to deliver stronger investment performance going forward.

Third, Credit. In our Credit business, our Drawbridge Special Opportunities main funds were flat, slightly down for the quarter; but year-to-date, returns remained strong, up between 6.4 and over 9%. Virtually 100% of the capital, as I indicated, is above high watermarks. So the potential for incremental incentive fees remain strong there.

In Credit PE, in other words, in the Credit business but in the longer lockup structures we use there, our largest fund, FCO I, has a net annualized internal rate of return of just over 28% through September 30; and the funds, NAV surplus remained steady at nearly $1.6 billion. We continue to see a strong opportunity set there in Credit with a slight shift, I would say, toward more liquid assets, which are a little bit better price than we've seen recently as well as Europe, which we can talk about later.

We're still very constructive in Japan on the opportunity set that we see in distressed real estate and related assets. And our Japan Opportunities Fund is reflecting exceptional performance with a 27% increase in the funds NAV surplus during the third quarter. In this business, our approach is global. It's opportunistic. It's situation driven, so you can imagine that we are very, very busy.

For the fixed-income strategies at Logan Circle, the performance in our core plus strategy with over $5 billion of Logan's AUM was in the top third of its peer group year-to-date through September. Looking there at inception-to-date returns, 14 out of the 15 strategies have outperformed their relevant benchmarks. Those strategies were largely, I would say, risk neutral at the moment. We remain focused on the spread products that we know well there. And we're also seeing that the smaller client-focused managers like Logan are pretty well positioned to benefit as investors reassess their allocations to some of the mega players in the market.

I'll talk about capital raising for a minute. Over the past months, I've held investor conferences in Tokyo, Singapore and London. Wes is gearing up for our Private Equity LP Conference later this month. He's been in Asia along with Pete. Mike, as noted, is in Europe this week. So I would say, as a broad matter, we've met with a very wide range of large institutional investors and we're pleased with the level of interest that we see globally in Fortress really across our product set. In the third quarter, we had a total of $2.1 billion in new third-party commitments. That momentum continued through October with over $600 million in additional commitments. That brings our year-to-date total to approximately $2.7 billion raised. And we believe based on where we are now, we talked about this a little bit last quarter that we were seeing mostly flows given that the products we were out marketing were on the liquid side oriented toward the end of the year on the more lockup structures. We think we'll see a continued build in capital as we raise those lockup funds during the rest of the year.

Of the 145 institutional and private investors who have committed capital to Fortress this year, we're sustaining the 50-50 split between existing Fortress investors reinvesting with us and those that are new to our company. I think that's a healthy balance in terms of our approach and our results on the fundraising side. So we're getting existing incremental capital from investors and we're also starting new relationships, and we will work to grow those over time.

International penetration, as we've talked about before, remains a key focus of our fundraising efforts and I would say that year-to-date, we're really seeing progress there as roughly half of our commitments have come from outside the U.S., and we are going to continue to work on building this trend. We're building resources and enhancing marketing: Middle East, Australia, Asia, Europe and so forth.

Capital raising specifics, we're a little limited to what we can talk about in terms of specific funds, but I can tell you that we've had a very strong start for our third flagship Credit Opportunities Fund, FCO III with 2 closes already that have brought commitments to the fund and its related accounts to almost $800 million through October. So that's $800 million through October. The timing of the closes are difficult to predict, but I would say we're heading into the end of the year with strong momentum in all of the businesses and we remain pretty optimistic on the capital raising front.

I'll talk about the market and opportunities and then hand it over to Dan Bass. Raising capital is always an important part of what we do, but we believe there's a lot of significance around raising capital given the opportunity set we see across the businesses. We've invested over $2.4 billion of capital through September, and I think the pace of that should pick up substantially in the coming quarters. We think that the pace and the timing and the attenuation of the recovery will continue to shake out investment opportunities for the alternative businesses where we specialize.

I think people ask oftentimes about what the timing is going to be in terms of what inning are we in or when are we going to see the recovery, those kind of questions. And I think the real answer is that we don't know. We know what needs to happen, but it's very difficult to predict the timing other than to say we'll be attenuated probably in the 3- to 5-year time range. What are the 4 things that need to happen? We're 3 years into the great recession now and this crisis is already one of the more longer lived crisis in modern financial markets.

To get with -- as we look at it, you think about what we have to get through in order to get to a more stable foundation for longer growth are kind of 4 things. First of all, the deleveraging has to continue and accelerate. The bad assets that are out there really can't be wished away. We did an analysis of this and to date, among probably 10 or 12 institutions, about $3 trillion worth of asset dispositions have been announced, but not consummated. We think there's an additional $5 trillion to $10 trillion that will have to happen before we get to an appropriate level of deleveraging. Following the deleveraging, typically in these cycles, you see a large scale restructuring. That's got to be completed above this next large wave of maturing debt. In the next 3 to 5 years, over $5 trillion of corporate debt has to mature with nearly $3 trillion in commercial real estate loans maturing, over $1 trillion in LBO financing coming due. And there's a dearth of supply in terms of completing those refinancings. So I think in that void of high demand, spiking refinancings and the lack of supply, there will be terrific opportunities for us to get control of assets using the operationally sound companies that we've got out there operating.

Third thing, so you've got deleveraging, you've got restructuring, then I think you'll see a wave of changes in control. Whole companies or noncore businesses that belong to larger institutions will change hands in a very attractive environment. That's kind of the beginning of the unfolding of a classic opportunity for Private Equity or merchant banking. And then I think there's probably some regulatory rebalancing. We seem to move back and forth on a pendulum, and that will probably restore itself to some balance.

But with all of those steps and all of those big numbers, that's not a tomorrow or next year event. We think that's, as I indicated, probably a 3- or 5-year process before we see ourselves on a firm footing. That 3- to 5-year process, painful for some, we take no joy in that, but I would say that it will continue to shake out opportunities for Fortress specifically.

So to summarize really a hellish environment, we maintained AUM, we raised new capital, we built out our global capabilities, another few steps, delivered investment results and generally outpaced benchmarks and comparables and delivered positive financial results through the period. I think that continues to underscore the importance and the success of our business model; the importance of stable and patient investor capital; and the alignment of interest that we have between our ownership, our investors and our management.

Secondly, the embedded value in the company continues to grow. I think the facts have been generally underappreciated in the market. Our balance sheet, cash and investments, net of debt actually increased slightly in the quarter, in a quarter that was rife with value destruction across the market. So with over $1.1 billion in cash and investments, that translates into over $2 a share again, 60% of the share price.

Third, we firmly believe that our experience, most everybody around here has cut their teeth in the RTC, the savings and loan crisis, the Asia crisis, post-2008, our investment capabilities working our way through those processes, the capital that we have, the ability to execute against that idiosyncratic opportunities we see out there are unfolding for a historically attractive investment opportunity set, I think, will accrue to the benefit of our investors and our shareholders for a long time to come.

So thank you for that. Let me turn it over to Dan to go through the numbers.

Daniel N. Bass

Thanks, Dan. Good morning, everybody. Pretax DE for the quarter was $43 million or $0.08 per share. This brings our year-to-date DE to $192 million or $0.36 per share. Fund management DE was $51 million for the quarter and now stands at $200 million for 2011.

Let me begin with more detail on Dan's key points. First, AUM and management fees stability. In 2011, our management fees have been fairly consistent in each quarter. This is in a year in which we have returned nearly $2 billion of capital and paid out another $2 billion to investors who planned liquidations and redemptions.

Second, capital raising momentum. Capital raising has started to increase both in existing as well as new funds. Other third-party capital raised in the quarter, $580 million, was directly added to AUM and started paying us management fees. This is inclusive of $110 million raised of permanent capital in Newcastle. This is Newcastle's second such capital raise in 2011.

And third, performance fee generation. Our performance fees were modest this quarter compared to prior quarters. That said, year-to-date, our funds have still generated over $150 million of performance fees. With that backdrop, let me provide a little more detail on our segment results.

DE in the Private Equity business was $27 million for the quarter and $89 million for the year. DE was down from the second quarter and reflects lower management fees resulting from the fee basis changes that we discussed in our first quarter call. An important additional note on PE fund valuations. Our public investments in our funds have bounced back appreciating by around 11% in the month of October. Our Credit business had DE of $23 million bringing the year-to-date total to $109 million. In our Credit Hedge Funds, we recorded $50 million of incentive income on a year-to-date basis, which tracks close to the amount of incentive income recorded through the same 9-month period last year. Through the third quarter, virtually 100% of the capital in these funds remains above its respective high watermarks. This puts these funds in position to generate incentive income in the fourth quarter this year and thereafter.

In our Credit PE Funds, we realized $20 million of incentive income during the quarter, which is a smaller amount than we have recorded in recent quarters. However, we still have realized over $100 million of incentive income on a year-to-date basis in this segment.

Finally, AUM in our Credit PE Funds has grown 17% since the beginning of the year. This is a result of putting over $2 billion of capital work during the year while still returning nearly $1.5 billion capital to our investors. Though in this segment, we are growing our AUM, returning capital to investors and replenishing our dry powder.

DE for the liquid segment was $500 million for the quarter and stands at $14 million for the year. Included in this DE is only a minimal amount of recorded incentive income. While we do not anticipate significant incentive income from the liquid segment this year, all of the funds are within striking distance of their respective high watermarks.

As you know, performance dynamics in these funds can change quickly, so we remain confident that improved performance in the coming months, alongside planned growth including new funds, have the potential to generate incentive income in the upcoming quarters.

Before touching on the balance sheet, let me make a few points on margins and taxes. Our year-to-date operating margins stand at 37%. Given the markets and shortfall incentive income, I think it is noteworthy that our margins have held steady. This underscores the importance of our variable compensation structure. And as we approach year end, we believe that our DE effective tax rate will be closer to 5% than 10%.

Now onto our balance sheet. Our balance sheet and liquidity positions remain strong. Cash and investments almost $1.4 billion or up 12% from the beginning of the year. Debt is at an all-time low at $270 million. The net result of this is a leverage ratio of approximately 0.7x and $2 per share balance sheet value, which is up nearly 15% since year end. In closing, I'm confident with our franchise going forward for 3 reasons. One, our lockup AUM has provided us with continued management fee stability. The majority of this AUM is in funds that originated in 10-plus years structure, which gives us confidence that this trend will continue. Furthermore, we have ample dry powder that will add to AUM and generate additional management fees when it is called.

Two, we continue to execute a smart, proven and financially disciplined growth strategy. This includes geographic expansion, which in our case, primarily means shifting existing resources to targeted regions and new products. Doing this allows us to leverage our core capabilities without incurring significant additional expense.

And finally, the embedded value, whether on our balance sheet or in our funds, remains significant and a gauge of potential future earnings. Thank you, and let's go to Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Craig Siegenthaler with Crédit Suisse.

Craig Siegenthaler - Crédit Suisse AG, Research Division

First, just on the CSO III. Nice to see the $800 million of commitment you guys kind of referenced in the call there. But when you take a look at this business, the performance is very good, but the net flows that have been trending kind of light. And I'm just wondering if you can help us when the timing of these commitments will actually flow into AUM.

Daniel N. Bass

You're talking about the $3 billion in dry powder?

Craig Siegenthaler - Crédit Suisse AG, Research Division

No. On the Credit Hedge Funds business, I believe on the CSO III, you said there's $800 million in commitments in the pipeline?

Daniel N. Bass

Those are going to be just deployed. I mean, we're seeing opportunities, they're -- over the last funds, we have effectively invested that money over a 12- to 18-month period from the time it was raised. And so I mean, I think you look back to past on that.

Craig Siegenthaler - Crédit Suisse AG, Research Division

And then, well, actually just to look over the Credit Hedge Funds business then, how is the pipeline of kind of new potential wins and sales going in that business? Because that's I actually want to take a look at because the performance year-to-date is very good, and if you look at just kind of sales minus redemptions in AUM there, it's actually kind of fairly light. I'm wondering if you're seeing a pickup in activity there.

Daniel H. Mudd

Yes, let me -- Craig, it's Dan Mudd. Let me start and then as I noted, Dean Dakolias is here, the co-CIO of the business. So for the purposes of everybody on the call, it's important to remember that our Credit business is divided into 2 structures. So there's credit -- there are credit investments that we do on a PE format, which is typically an 8- to 10-year fund lockup capital structure and there is a credit hedge fund, which we call Drawbridge Special Opportunities Fund, which was the original fund in this business. So there are 2 parts to the business. The broad investment philosophy, special situations, distressed, restructuring through the debt side remains the same on each businesses, but the liquidity profile on the hedge fund side is higher than it is on the private equity side and therefore, tying back to Dan's question, the timing of realizations tends to be a little bit chunkier in the Credit Private Equity than it is in the Credit Hedge Fund. As I indicated, the fact that we've got both of those businesses on a global basis means that we can allocate to whichever investment opportunity set is the most attractive. A year ago, I would say it was much more attractive in the special situations, distressed, longer lockup, idiosyncratic space. Right now, there's a little bit more of the move toward more attractiveness on the liquid side. So I'll stop there and let Dean add a point or 2 in terms of the pipeline you're seeing and the set of opportunities.

Constantine Michael Dakolias

Sure, I think the pipeline is very strong in terms of what we're seeing. As Dan alluded to, I think it's shifted a little bit into more liquid opportunities than in liquid space as some of the trauma in Europe is playing itself out. So it's definitely more balanced today between the 2 and more focused on the liquid side than the illiquid side.

Craig Siegenthaler - Crédit Suisse AG, Research Division

Got it. And then may be just to turn it over to Private Equity for my final question. Can you give us an update on how maybe early success or even failures in the sector funds that you guys may be looking to raise just given what the markets have done in the third quarter? And then also I believe you're looking to IPO several businesses within that platform. We don't hear you calling names, but has that all been really kind of pushed back here until the markets normalized even after kind of a very strong October here?

Wesley Robert Edens

Craig, it's Wes. Well, in October, we've had a good month in the public sector. So as Dan said, our marks were down about 6% for the quarter. We recovered about 1/3 of that in the month just on the public side alone. And the underlying performance of our biggest exposures has had really, really good years from a cash flow generating standpoint. And that is, obviously, a big factor when we consider IPO-ing these companies. I think that our expectation now is that we've got 2 or 3 of the larger companies that we'd expect to be in the marketplace some time in the first half of next year. And I can't really be more specific than that, but there's -- as it stands, we've had a lot of success in senior housing business. We've got a lot of success in our servicing business. The last financial services investments we've made look like they're going to big winners. So there should be some good opportunities to raise capital and actually grow those businesses further. In terms of market opportunities and sector funds, we do see some -- there's some big opportunities in a couple of sectors. So on the transportation side, we've had our first closing of our transportation specific fund. We think that, that fund -- given the size of the sector, there's $1 trillion in the transportation asset business worldwide, we're a very, very large investor in many different elements there, whether it's railroads, or ships, or airplanes, containers, et cetera. So we think that our experience set and the opportunities there really match up well, and we're optimistic about what that fund could turn into.

Domestically on the financial services side, in particular, there's a couple of things we're kicking around that we think are also really interesting. And then lastly, I spent a fair amount of time this year, we opened an office in Shanghai, moved a couple of our long-term employees here that are Chinese over there and then established the presence there, have signed up an MOU to be partners with a large Chinese firm to pursue specifically some senior housing opportunities that we think are really, really substantial over there. And I think we'll be organizing sector capital around that in the first half of next year as well. So there's a lot of activity and the specifics. And then the overall fund profile, as Dan said, we expect to be in the market in the relatively near term in terms of just the new kind of general funds. So it's been a lot of work to get through this over the last couple of years, but the results have been great. And I think if we have the liquidity that we expect to get from our kind of largest investments in the next 6 to 9 months, we think it will be in a great position for. So...

Craig Siegenthaler - Crédit Suisse AG, Research Division

And then Wes, maybe a follow-up for you or maybe just Dan Bass. But just for us in the analyst community, can you remind us if there's a first closing? How we should think about the timing of that AUM in terms of showing up in your Private Equity AUM? Because if you look at your inflows this quarter, I believe it wasn't there. There's just the $44 million increase in invested capital. So when will that -- the timing of that actually show up in your assets under management?

Wesley Robert Edens

Sadly the answer is that it depends on the nature of the fund. Some of the -- we raised capital in the permanent vehicles like the Newcastle or this Worldwide Transportation Asset Fund. It shows up immediately. If it's committed capital and some of the sector stuff, that may look more like our Credit Private Equity Funds, which basically will show up when the capital is deployed. So it does depend a little bit -- that we've -- we think we'll see some meaningful inflows in the asset management side in the next quarter or 2.

Operator

Your next question comes from the line of Alex Blostein with Goldman Sachs.

Alexander Blostein - Goldman Sachs Group Inc., Research Division

A couple of questions. So on the liquid business just to start, I mean, it seems like the volatility in your returns has been relatively high even if we compare it to some of the peers. And I guess given stronger markets in October, I guess I was a little bit surprised that those funds haven't done a little bit better. So can you talk a little bit about the risks of maybe a pickup in redemptions? And I know you said there was something like $500 million or $600 million that you expect to get redeemed. I just want to make sure that, that's the number that's outside of that $355 million that you did see this quarter. And then when you're thinking about the liquid bucket as a whole, what percentage of that is annual redemption so given performance this year, how should we think about the sustainability of those assets?

Daniel H. Mudd

Let me start and go through or break it down and the as I noted, Stu Bohart, the President of that business is here. He'll give you a little bit more detail. The redemption requests that we've received in the third quarter across all the liquid funds are about $600 million. We've got $5 billion to $6 billion of AUM in that business. The number that you saw in the press release, the $335 million reflects the actual paid out during the course of the quarter. And also I would also remind you that we've had continued inflows through the quarter in that business. So we're constantly the process of raising capital and also responding to investors who will redeem either for performance reasons or because they need the liquidity because of issues elsewhere in their portfolio. So we've had those conversations with investors. I would -- the important thing to me in this business is that you're very clear with investors in terms of how you're positioned and what your outlook is. That enables them to look at your style in the macro sector, in the part of that portfolio and compare it off to others, I think we were pretty clear about it. So the conversations with investors, I would describe as those that I've had as recently as last week, have been very constructive. In terms of the positioning and where we are and where we see things going forward, let's do pick up from there.

Stuart H. Bohart

Three points for you. One on the volatility of either performance or the returns. We run these as absolute return funds. So I don't think you can take a lot from market direction whether this fund should be up or down. We can be long or short in these funds and have a very good track record of getting that right. Second, I'd point out that relative to benchmarks, we're fine. I'm not sure that we should focus too much on benchmarks or clients expect us to deliver positive performance. But this is shaping up to be a tough year but not a disastrous year. And relative to our peers, I think we're fine and that feeds into an environment where there are precious few opportunities in the markets. So if you look at fixed income, generally, the returns are quite low. If you look at equities, they're obviously highly volatile. It's a very proalternative environment. We have to capitalize on that. As for expected redemptions, and we don't guess at these things, you have the numbers in your sheet here. Maybe I should be more worried. I'm not particularly worried. I think we have a terrific team here. They're engaged with clients. They seem interested. We've had a rough 6 months. That's it, a rough 6 months. And 2009 was terrific, 2010 was terrific. We started off the year very well. We've had a what I would expect is our kind of normal bad 6 months. And we feel pretty good about our ability to come back strong. So am I worried? I'm not particularly worried. Maybe I should be, but I'm not. And as we march into year end, it all depend on performance and the broader environment, but we feel like we're well-positioned.

Alexander Blostein - Goldman Sachs Group Inc., Research Division

Okay. And then it sounds like you guys have a lot of opportunities to raise capital across different buckets of the company today. And you've given out a couple of numbers. Is it possible, Dan, to maybe just kind of summarize it, something that I'd like to refer to as kind of shadow AUM? So like $3 billion of capital that you talked about that's not in your AUM that could be, the $800 million commitment that you guys have on the credit side. Anything you have on the private equity side. So is there a way to break it down for us and say, "Okay, so far, we raise x, that's not in the run rate yet." We don't know at what point of time it's going to come into the run rate just because obviously the pace of capital deployment varies. But I think the aggregate amount would just be helpful to understand.

Daniel H. Mudd

Yes, I don't think that I can break it down or summarize it in a way that's significantly different than what we've already said in terms of where we are from a capital and a commitment standpoint. I would say a couple of things. One is that for the first probably 7 or 7.5 months of the year, we were not really in the market with private equity style lockup structure, so we were sort of in a mode of continually open funds on the Liquid Hedge Funds side or on the Logan side. The funds that Wes talked about, as well as the third Credit Opportunities Fund, didn't start to have closes until the third quarter and the fourth quarter. Because of the nature of those on the Liquid fund, the money tends to come in, in dribs and drabs. On Private Equity style close, they tend to come in, in big chunks around the times of the closings. So we've had a couple of those closings during the last third of the year. So you've started to see an uptick in AUM there. In addition, given the structure of the funds, you're typically -- in a Private Equity Fund, you're typically able to recycle the capital twice, invested or returned, call it back, reinvested and that goes into the dry powder calculation in terms what we think about in the Credit business. Last thing I would say, and then if Dan has anything to add, last thing I would say is last year, when we were able to look at each other in the eye and feel pretty comfortable that we knew where we were going to come out at the end of the year given the timing of the closes and so forth, around November, late November, kind of around the Thanksgiving period, I kind of gave an update to that. We haven't been through that process yet to give you a dependable number, but it will be my intention to go through and do that. It's just a little bit premature right now given the open nature of the funds that we've got in the market.

Daniel N. Bass

Yes, the only thing I would add is we mentioned the $3 billion in credit. We have $3.2 billion of uncalled capital around the house including that as of September 30; plus we've raised another $800 million post the quarter end as well; and further, although it's not dated directly, we have approximately $2 billion of capital to portfolio companies to deploy as well. So that's really the way we can characterize it.

Alexander Blostein - Goldman Sachs Group Inc., Research Division

Understood. That's helpful. And Dan, the last one for me. Just if you think about the performance on the liquid side of the house, is there any risk to performance fee reversals, clawbacks or anything else? I think I know the answer is probably no, but I just want to make sure that there's no kind of impact on incentive fees going forward if you are just to kind of end the year today given your performance numbers. And then just a follow-up on tax rate, 5% guidance for the year, can you just tell us what it was for the quarter as well?

Daniel N. Bass

The incentive fee reversals at the year end and today, no. There was -- so that's -- on the tax rate, we look at our tax rate on a full year basis and so we don't really isolate the quarter to date move, but it's been pretty consistent between 5% and 10% for the year. It's just coming on -- as we get to year end, close to the 5%. So that's really what I would say.

Operator

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

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

I'm going to maybe -- want to go back to talking about some of the Credit businesses and some of the capital raise. And I know you've talked about this at length and I know -- frankly, I just want to make sure I have it right because there are so many cross currents I'm not sure I've got all the numbers correctly. So the $800 million that you got in the first 2 closings for FCO III, is that included in the $3 billion of uncalled commitments in that business, in the Credit PE business?

Daniel N. Bass

Some, yes. Some, no. Some was raised prior to September. Some was raised after.

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

Okay. Then I guess, following up to an earlier question, the performance in the Private Hedge Fund business has been pretty good year-to-date yet. Now it does seem like capital formation in that business has been fairly modest considering just the general demand you see out there for credit products. Are you seeing -- are you more proactively marketing the Credit PE business, or trying to drive assets to that, or is there some other reason that...

Daniel H. Mudd

I would say Robert, it's Dan. I mean I would say as a broad characterization given the special situations nature of the business, given what we've experienced over the history of the business in terms of the timing and realizations, generally on the balance, we'd rather raise the money in a private equity structure than in a hedge fund structure. That said, the hedge fund structure that we have is a modified structure, so we're not subject to sudden and immediate redemption requests and payouts that those investments can pay out as they mature over time if we get redemption request and therefore, you see in some of the disclosures the discussion around the redemption account in that business, and that's just an account that pays out over time as the assets are harvested. So I guess I would say, unless Dean wants to add something, that the general trend has been to raise more money in the Private Equity style funds and we don't always have a Drawbridge Special Opportunities open to investors or to new investors. It's open, to my recollection, once or twice during the course of the past 1.5 years or 2 years. So I'll stop there.

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

And I assume the Opportunity Fund open right now? I believe you had opened it earlier in the year I guess.

Daniel H. Mudd

We have the offshore fund, which is unclose again. So we took in someone in offshore fund and then reclosed it.

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

Okay. And then may be going into Liquid business just maybe a follow-up also on an earlier question. Of the $335 million of redemptions in the quarter I'm assuming that part of that represents some of the $600 million in requests for redemptions you received in the quarter?

Daniel H. Mudd

Yes.

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

Okay. And then if you could just may be remind us between the end of the quarter and year end, the structure of the funds. Is it every -- is it monthly redemption notices? Is it quarterly, kind of when is the next kind of notice period you expect? Is it January 1, kind of the next opportunity? I'm trying to get a sense for what we may or may not expect post quarter end.

Daniel H. Mudd

Here's a quick rundown. One quarter of the segment is annual. Three quarters of it is predominantly quarterly redemption. The month of November, middle to the end of the month is where -- is our next significant redemption date.

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

Okay. great. And just may be going back to the Credit businesses, just generally curious, Dan, you mentioned about right now seeing somewhat incrementally more opportunities and maybe more liquid strategies. How do you kind of divvy up the investment opportunities between the Credit PE and the Credit Hedge Fund when it's kind of towards a, I'll call it a relatively more liquid strategy? Is that -- does the Credit PE Funds have this ability to kind of coinvest with the hedge funds and -- or is...

Daniel H. Mudd

Yes, I don't want to -- there's always kind of a fine line between when you sort of get into proprietary or strategic investment philosophies. But the way that I tend to think about the business, right, is that the Credit business including both the hedge fund side and the Private Equity side operate as one business. They have global origination. They have global underwriting and they have a fairly small investment committee. That investment committee is, therefore, able to look at the opportunity set around the world, around sectors, around various liquidity structures and around various asset liability structures that are most appropriate for the best risk return in a given opportunity. It is not atypical that on some opportunities and investment could be allocated across multiple funds including across the hedge fund side and the Private Equity side, and that's subject to a full set of disclosure committee, conflicts committee, compliance committee and other things that we use to look at that and discussion with investors. It's also not impossible that in a few of those investments, they might also proffer a coinvestment opportunity for some of the LPs in the funds. So highly opportunistic, pretty flexible, highly transparent, really just oriented around the best risk return investment for a given transaction.

Daniel N. Bass

Yes, as Dan said, they both -- we've managed them really from the top and so we're looking at kind of similar mandates across both platforms whether it's the hedge fund or Private Equity Funds and really it comes down to investment horizon, liquidity, what financing is available in each vehicle, what transactions or what other assets are in those vehicles and what this new transaction may look like. So independent decisions based upon the transactions and the portfolios that may exist at that time.

Operator

Your next question comes the line of Dan Fannon with Jefferies & Company.

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

On the Credit Hedge Funds side, I just want to confirm the redemption periods for that as well and the $800 million that's referenced in the press release. Is that what you guys know as of today and if we -- the window is now closed if people wanted to redeem?

Daniel N. Bass

Correct. It's an annual redemption period. That reflects the complete cycle for this past year. And that happened at the end of the third quarter.

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

Okay. And then the $800 million change or the management fee. I think you also referenced it's going to appear to step down in the fourth quarter, is that correct?

Daniel N. Bass

Can you repeat the question? Sorry.

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

You highlighted in the press release there's an $8 million increase in the management fees that you had through the first 3 quarters to this quarter from the Credit Hedge Funds and that appears to be going away if you're thinking about 4Q?

Daniel N. Bass

Yes, we have one advisory contract that we had terminated. We were paid a termination fee in the quarter.

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

Okay. And then I guess maybe, Stu, a question for you in terms of kind of the buildout of the liquid platform and talk about potentially strategies that you either have kind of layered into that as of late or potentially looking to add as you think about building out that side of the business?

Stuart H. Bohart

Sure. So we -- you may have seen, we've recently hired a team in Singapore to run a series of volatility funds. We are sorting out how to bring that out but those will be unique funds, stand-alone funds and we will build a business around that team based in Singapore, that's business for 2012. Although we would hope to be doing something with them on a stand-alone basis earlier in 2012. And we continue to look for other teams and think about other internal opportunities or spinouts and unique strategies that we have here that include long/short sector, liquid credits, as I mentioned, volatility, global strategies, I mean there's a wide range of things we look at. As of now, we have just one team in them. We're seeing very good opportunities with other teams that are attracted to the stability of Fortress and the client connectivity here. So we're good about our ability to build liquid markets going into next year.

Operator

Next question comes from the line of Roger Freeman with Barclays Capital.

Steven M. Truong - Barclays Capital, Research Division

It's Steven Truong here for Roger. I wanted to get an update around fees and as you travel across the globe and raise funds, are you seeing any fee pressures around fundraising?

Daniel H. Mudd

Thanks for the question. Look I've been doing this for something like 26 years and there is no financial services business on the planet that doesn't have fee pressure and so you're in a constant discussion to provide value, to keep your cost down and to sustain your margins at a reasonable level. My observation would be that broadly speaking, most of the pressure, if you think about the pressure potentially being applied sort of in 3 ways: One, your fee; two, your incentive fee; and three, the structure of when you get paid, when you cover a hurdle rate or a prep. My observation would be that right now, most of the pressure is on base fees. We advertise typically at 2%, and we average typically about 1.5%. So that's a reasonable increment that tells you where we feel that pressure. There have been case -- and Dan Bass and I look at the businesses very much and we want to pay the bills, pay the people, turn on the lights, pay the rent off of the base fees and then really earn our money through performance. So we managed very carefully the fixed costs against the fixed fees coming out of that 80% lockup base that I've talked about. So with that, we have in mind that there are levels of fixed costs at which we have to run an investment strategy or business and we'll walk away from it if we can't cover ourselves. Obviously, investors that have larger amounts of capital to deploy have more leverage than those that have a smaller amount. Those that have larger amounts of capital to deploy have a better ability and a more constructive basis to have a conversation with us about a separate account or a different investment strategy. That's just business. And I'm sure if we talk about it long enough, we could figure out an analogy or pretty much everybody that's in the financial services business. So I guess, I would step back and broadly say it's a tough fundraising environment. I think for the guys that are out delivering adequate performance at a megaphone level, it's probably pretty tough. And I think this will be a pretty tough environment for 3 people to go out by themselves and try to raise a first time fund. So where we are at Fortress is we've got a lot of expertise in several areas and depth there and a set of constructive conversations with investors. We're continuing to raise capital there, and we're, I think, being very prudent in terms of how we think about those 3 components of where we earn our money.

Steven M. Truong - Barclays Capital, Research Division

Okay. That's a great answer. And that's a good lead in to my follow-up question for Dan Bass around the margin, you mentioned that year-to-date, it's running at 37%. How do we think about it here going to the fourth quarter and against your longer-term target of 40% to 45% I think? Obviously, the year is impacted by lighter incentive fees relative to prior, but just want to get your thoughts on that.

Daniel N. Bass

You answered your own question, but it's a good question. Yes, it is driven primarily by the shortfall in incentive income coupled with the continued buildout, finishing the buildout of some of our Liquid Markets strategies and platforms. So we look at it as really tied to the incentive income and we still target the 40% as a target. So we'll try to keep you guys on time. That's the end of our hour. So in summary quickly, tough environment, we're on offense, capital raising trends, positive and building, a lot of embedded value in the company. And I think given what we do, again, we don't take any joy in the state of the world as citizens but as investors, we love it. Our strengths continue to align with a messy landscape. And every sign is that, that will continue through the investment horizon and the funds that we're offering. So thank you very much for your interest and attention, and we'll look forward to continuing to talk to everybody in the weeks and quarters ahead.

Operator

This concludes today's conference call. You may now disconnect.

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