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Fortress Investment Group LLC (NYSE:FIG)

Q4 2011 Earnings Call

February 28, 2012 8:30 am ET

Executives

Gordon Runté -

Randal Alan Nardone - Co-Founder, Principal, Director, and Interim Chief Executive Officer

Daniel N. Bass - Chief Financial Officer

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

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

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

Analysts

Craig Siegenthaler - Crédit Suisse AG, Research Division

Marc S. Irizarry - Goldman Sachs Group Inc., Research Division

Roger A. Freeman - Barclays Capital, Research Division

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

Campbell Anthony - Macquarie Research

Operator

Good morning. My name is Andrea, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fortress Year-End Earnings Call. [Operator Instructions] I would like to now turn the call over to Mr. Gordon Runté. You may begin, sir.

Gordon Runté

Okay. Thank you, Andrea. Good morning, everyone, and welcome to the Fortress Investment Group Fourth Quarter and Full Year 2011 Earnings Conference Call. We will begin today's call with opening remarks from Fortress interim Chief Executive Officer, Randy Nardone; and Chief Financial Officer, Dan Bass. We'll then move to business updates from Stu Bohart, President of Liquid Markets and Head of Strategy; Dean Dakolias, Co-CIO of our Credit business; and Wes Edens, Fortress Co-Founder, Co-chairman and Head of Private Equity. After these remarks, we look forward to taking your questions.

As you know, Randy was appointed interim CEO in late December. So I'd like to provide a quick introduction. Randy was part of Fortress before the company had a name. He's a day one principal and member of our board since its inception. Randy previously served as Chief Operating Officer of Fortress and he's been a member of the operating committee, our main decision-making body, since it was formed.

Before handing off to Randy, 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 Randy.

Randal Alan Nardone

Thanks, Gordon, and thanks, everyone, for joining us today. Fortress delivered solid performance and made important strategic progress against the challenging backdrop in 2011. We entered 2012 well positioned across our businesses and we remained confident that the investment landscape presents outstanding opportunities for select diversified managers like Fortress. Let me start by anticipating an obvious question and giving you some context on my new role.

As Gordon noted, my ties at Fortress could not run any deeper. I'm one of the Fortress Co-Founders, and I take my new responsibilities very seriously. I don't anticipate any major changes in our course or strategy. The transition has had and will have no impact on the investment teams or processes at Fortress. Pete, Wes and Mike remain laser focused on investments. We continue to benefit from the guidance of our board and the leadership of the principals.

At the corporate level, we have a very high-quality people and systems. Most of my new direct reports were my old direct reports. So this has facilitated a seamless transition with no let up in the progress of our company. We'll keep you updated on any developments here. Let's do a quick recap of 2011 and share some thoughts on 2012.

First, business activity has been strong. Across our funds, we invested $3.5 billion of capital in 2011, and quite a bit more if we count our portfolio companies in the Private Equity business. We continue to see great opportunities for each of our businesses. Capital formation across our funds was substantial.

Full year third-party commitments were $4.2 billion. That includes well over $1 billion in our next-generation credit private equity funds and $200 million of permanent capital in Newcastle. Deal flow is strong. We have a solid pipeline in credit and a significant uptick in activity around our private equity portfolio companies. Dean and Wes will provide some color on this later in the call.

For the year, credit continued to deliver top-tier performance. Private Equity continued a trend of significant valuation gains. We also made great progress to generate some liquidity events for our LPs in 2012. For Liquid Markets, a disappointing year for our flagship Macro Funds, but we've had a strong start to 2012. And Asia Macro has reported a very solid first 11 months that's carried into this year.

Second, we continue to position Fortress for the long term and made a great deal of strategic progress on this front. We continue the disciplined expansion of our global capabilities and reach. Over half of the capital we raised in 2011 was from investors outside of North America. On the investment side, we saw compelling opportunities and put more capital to work in Asia, Europe and Australia. We also continued to diversify and expand our product offerings. Our Asia Macro Fund is a perfect example of how we can leverage expertise incubated within our flagship funds. And we plan to show you more on this front in 2012.

We renewed our principles agreement. The new 5-year agreement provides for compensation on a completely forward-looking, performance-driven basis with no compensation guarantees. And last, we continue to build on the strength of our balance sheet. Debt is at an all-time low, book value has increased to $1.1 billion and we currently have cash and investments, net of debt, of about $2.15 a share. That's more than half of our current share price.

Based on our progress and confidence in our prospects going forward, the board approved a dividend payout of $0.05 a share for the fourth quarter. We intend to pay a base dividend for the first 3 quarters of each year based on our net management fees. In the fourth quarter, we intend to pay a top up dividend based on full year performance, including incentive income.

More than anything else, I think 2011 demonstrated the benefit of a diversified business model with scale and expertise across a range of investment types. In a challenging year, we delivered positive financial results while building significant embedded value on our funds and on our balance sheet.

When Wes, Rob and I first met with Pete and Mike over 10 years ago, our objective was to build a business model for all seasons. Leveraging that model and continuing to strengthen the model remains a key focus today. In 2012 and in the coming years, we see compelling opportunities in each of our businesses. We believe this will position Fortress to deliver strong returns for our investors. And by doing so, we can create value for our shareholders. Thanks. Let me turn this over to Dan for a review of our financial results.

Daniel N. Bass

Thanks, Randy. Let me start my remarks with 3 points. First, our pace of both raising and deploying capital picked up in the second half of the year, and that momentum has carried into 2012. Incentive income potential remains robust, particularly in our credit business. And finally, our balance sheet position continues to strengthen. With that, let's get into the into the numbers.

Pretax DE for the fourth quarter was $50 million or $0.09 per share. Full year pretax DE was $242 million or $0.46 per share. Management fees were up 8% for the year, following an 11% increase in 2010. However, DE was down for the year largely due to lower incentive income across our business.

Now let me turn to fund performance which drives on incentive income. In our credit hedge funds, we produced 11% net returns for the year in our DBSO funds, generating $78 million of incentive income. This left 100% of capital in these funds above their respective high watermarks.

In our liquid funds, nearly all of the capital ended 2011 below respective high watermarks. However, performance is off to a very good start in 2012. In January, our Asia Macro Fund was up over 2%, which leaves all the capital in this fund above its high watermarks. And our Fortress Macro Fund was up nearly 4% in January leaving over 80% of its capital within 6% of its high watermarks.

In our traditional PE funds, the value of investments continued their upward trajectory. They appreciated by over 9% during the year, following a 17% appreciation in 2010. This brings appreciation of these fund investments to approximately 67% since the low point in 2009.

And finally, in our credit PE funds, we earned $118 million of incentive income during the year. And more importantly, we still have over $290 million of mark-to-market undistributed incentive income embedded across our credit funds.

As I said in the beginning, capital raising picked up momentum throughout the year. Let me touch on a few key highlights. For 2011, we raised a total of $4.2 billion of capital. This includes raising capital in each of our segments for the first time since 2007. As we previously stated, our full year capital raise was back-end loaded with $1.8 billion of capital raise coming in the fourth quarter. Of the $4.2 billion capital raise, over $1.3 billion is from our third set of Credit Opportunities Funds. This raise includes a $300 million separate managed account from a large international pension fund. Just to note, our second set of Credit Opportunities Funds closed with $2.5 billion in total commitments back in 2010.

Additionally in December, we launched our second Japan real estate fund raising over $550 million in LP commitments. Furthermore, during the year, we also raised $1.6 billion across our hedge funds, which was directly added to AUM when it was raised.

As for AUM in total, we finished the year at $43.7 billion, which was down 2% from the beginning of the year, but up slightly during the quarter. Some key components on AUM are as follows: We invested $3.5 billion of capital for the year, the highest amount of capital that we've invested since 2008. Our pace of investing has been, on average, over $1 billion over the last 3 quarters. At the same time, we distributed a total of $3.5 billion of capital back to our investors in our PE style structures. We also paid out $1.9 billion of redemptions, mostly in our Liquid business. However, the $1.6 billion of hedge fund capital we raised, helped to largely offset these outflows. Finally, the last point on AUM, we had $3.9 billion of dry powder at the end of the year.

Shifting to our margin and taxes. Our operating margin for the year was 36%. The main drivers for this margin level are higher nonrecurring expenses, modest investment in new businesses and only a nominal amount of incentive income from our Liquid business. As we stated before, the new principal agreement could have a potential impact to our operating margins in 2012. However, this impact is capped at 10% of fund management DE in each business.

In addition, the impact is contingent upon positive performance and raising new funds. This means that it is in the best interest of our shareholders for us to hit our cap in each business, each year. Our DE effective tax rate was 4.3% for the year. As I've previously noted, our equity-based compensation deduction is significant, and we'll continue keep our DE tax rate low through the end of next year.

Again, as I said at the beginning, our balance sheet continues to be an area of core strength. At the end of year, our investments were valued at nearly $1.1 billion, a 7% increase during 2011. Cash stands at over $330 million, up over $120 million from the end of last year. Total debt continues to decline. After all scheduled paydowns, debt will be below $200 million by the end of the second quarter of this year. This is a 75% reduction from the peak level of debt back in 2008. All in all, we have over $2 per share of balance sheet value, which is up 20% since last year. This embedded value in Fortress is often overlooked.

In closing, let me end where I began. Our capital raising and pace of investing has gained significant momentum. This gives me great confidence that we can attract capital and grow our AUM in 2012. Near-term performance fee generation potential still remain strong, particularly in our Credit business.

And finally, as we begin the year, I'm pleased with the further strengthening of our alignment with shareholders. New and essential for this alignment is the principles agreement and dividend. These new elements join our continuing alignment of controlled expenses and optimization of our capital structure. Now let me turn it over to Stu.

Stuart H. Bohart

Thanks, Dan, and good morning, everyone. As was mentioned, the Liquid Markets business had mix performance in 2011, but it wasn't without its bright spots. We successfully launched a new fund, the Fortress Asia Macro Fund. We hired a new fund management team in Singapore with expertise in global volatility strategies. And we reinvigorated the business plan for the Fortress Partners Fund, our endowment-style vehicle that helps pension endowment funds invest in alternative strategies. And we've made progress in further developing our Liquid Markets IT and infrastructure to accommodate our growth plans.

Our focus for 2012 remains on evolving the business in a manner that diversifies revenue, diminishes key-man risk, and lays the foundation for a bigger and broader business that reaches more clients with a wider range of funds. While we can't discuss specific details, it is our current plan to expand the Liquid Markets lineup by at least 2 new funds this year.

A few comments on the environment as we move further into 2012. Last year, we saw a market focused on Chinese hard landing, the Arab Spring, U.S. growth and insolvency in Europe. To varying degrees, all those concerns are still out there, but 2012 begins with all eyes on Europe. The long-term refinancing operation, LTRO, and you'll hear a little bit more about that from Dean, and the apparent resolution of the Greece crisis have reduced risk premiums across the board and created a trending environment conducive to a macro investors. Combined with better growth numbers out of the U.S., this has led to widespread risk on rally in global equities and credit.

Correlations and apply volatility levels have broken down in our space. And among hedge funds, generally, the opportunities have been good. But we don't expect the improved environment to be without choppiness, perhaps significant choppiness and skillful tactical trading, historically, a Fortress strength, will be very important. The bite of European austerity may well be the start a slowdown that could lead to new concerns about Spain and Portugal. And let's not forget Iran, Syria and the importance of energy crisis and Middle East stability, as global economies try to find sustainable growth. The market is not without significant potential terror risk, and that is before we stop to ponder the upcoming U.S. elections and fiscal tightening that the U.S. needs to get its own house in order.

So we have an environment in which we feel relatively good about our ability to pound out returns, but we know we'll need to the fleet-footed. And we have an investor base that is very hungry for a risk return profile that can't be found in traditional approaches in equity and fixed income. If we perform well, our Liquid Markets business is well positioned for growth, both in existing funds and in new products.

We're above high water in Asia, and as Dan noted in his comments, we're within striking distance in our other funds. We've recently seen new interest in separately managed accounts and have the infrastructure to further grow this business. And we have a business that is modestly profitable in management fees and very profitable when we are in incentive fees.

But our success is tied to recent performance. Our clients are willing to pay our fees but they demand a performance, liquidity and, of course, the right to change their mind. Our mix performance in 2011 led to the reported outflows, but our strong start to the year and key investor interest and alternatives and the unique strength of Fortress, will hopefully provide an offset as 2012 unfolds. We feel good about our prospects for both performance and capital raising, and are focused on the opportunities ahead and our longer-term objective of a larger, more diversed Liquid Markets business. Dean?

Constantine Michael Dakolias

Thanks, Stu. Good morning. I think Dan went over our fund performance for '11, so I'd only add that while we're pleased to have delivered strong return for our investors, we don't spend much time looking backward. Let me focus on some of the issues and opportunities we see going further into '12 and over the next several years. The short take is that we believe there will be tremendous investment opportunities in credit over the coming years.

We continue to see the greatest supply demand and balance that has ever existed for financial asset liquidations. With $3 trillion dispositions to date, we expect to see as much as $5 trillion more over the next 5 years. Interventions globally can support liquidity, allowing for the deferment decisions. But in the end, institutions will still be forced to sanitize their balance sheet and divest non-core assets and businesses. The only question, really, is timing. And we are patient investors with the right structures in place to pursue both near- and long-term opportunities.

I think, today, most of the focus is on Europe, and I'll touch on that a little bit. I think I'll leave with a punch line also that LTRO is an ambiguously good for both Europe overall in the short term and for the execution of our own investments in the liquid assets in Europe. I think without the action from the ECB, the likely outcome event of last year would have been a severe liquidity crisis that could have precipitated failures of major financial institutions. In this context, we would characterize the creation of LTRO as the best worst choice that could have been made given the profound risk associated with inactions.

The announcement of LTRO and the wide adoption of it by European financial institutions has really relieved liquidity pressures faced by many European banks in the median term. However, because we see very little of the LTRO capital filtering its way back into the real economies, of Europe, debt capital for the real economy will be severely constrained for a number of years, exacerbate situation with an environment of governmental fiscal austerity, higher taxes and cuts in the economic zone with the government share of GDP, generally, as much higher than in places like the U.S. So our best guess is unemployment likely remains high, and that growth will continue be quite lackluster for a number of years.

What does this mean for our Credit business. I think despite the very positive impact that LTRO apparently had on both equity and credit market globally, I think really making the liquid form of what we invest in generally uninteresting. It did not decrease overall European bank leverage from 28x tangible assets to equity to 15, where U.S. bank holding companies sit. It did not remove the 6% of total loans that are nonaccrual status on European banks balance sheets for contacts that's roughly 2.5% for U.S. banks. Nor did it increase reserves from $0.59 for every euro of nonaccruals to the $0.120 per dollar, where U.S. bank holding companies are reserved. Kick the can is no longer a childhood game.

We should benefit as LTRO has been supportive in addressing the stability of European banks, allowing the focus more on controlled balance sheet reductions. The access to cheap funding allows them to earn more profits of increased reserves necessary to sell non-core assets. Some banks will view the 3-year window is forever and avoid taking hard steps to restructure and reduce. They can fiddle, we can wait. I think the U.S., while it has really dealt with its banking issues more aggressively earlier in the cycle, still suffers many of the fundamental issues as Europe, high unemployment, underemployment, little prospect for real personal income growth, fiscal tightening at all levels of the government, inconsistent availability of credit for many middle-sized companies and a political environment that does not appear to be conducive to compromise.

Additionally, uncertainty over how and when regulations are applied to financial institutions continues to hamper the flow of credit. I think with these laundry list of issues, weighing on financial markets around the world, we're confident there will be ample opportunities for investments where the main money flows won't go. With truly global capabilities, extensive sourcing channels, a team of over 350 professionals dedicated to credit and the ability to take on structural and operational complexity, we see a very attractive opportunities for our credit business in the years ahead. Wes?

Wesley Robert Edens

Great. Thanks, Dean. Well, if you could take the first 2 months of the year and multiply times 6, it would be quite a year. In the private equity world, we have a portfolio of investments that are concentrated in really 3 sectors, financial services and then transportation and healthcare, healthcare-related real estate in particular. Financial services space is one that is dominated by investments in the service sector. So we've got an investment in a company called Nationstar, that's the largest non-bank servicer here in the U.S. We have an investment that we share with the credit funds in a company called CW. That is the, I think, the second-largest special servicer of commercial real estate loans, travel loans right here in the U.S. And then, we own 80% of a company we bought from AIG called the Springleaf with the consumer finance business.

And notable of all these investments is that they are -- they really are in the business to be in the pick-and-shovel providers of dealing with the messes that exists. One of the things I think is notable, although you read in the papers once a day, twice a day, 100x a day about the European debt crisis, the residential mortgage market in the U.S. is a couple trillion dollars larger than all that debt added up together. And all that there has been, a lot of money made and lost over the last 5 years, and you have this Great Depression housing. I feel, we feel, that the future cleanup of this is quite possibly the greatest opportunity of any of our investment lifelines. So it's something we're very focused on.

Our residential company is in registration right now with the SEC, and so the lawyers don't allow us to say anything about it. All I would say is that I'm extremely optimistic that this company can become the category killer to clean up the mortgage mess. And when it is appropriate and possible for us to talk about it, I will talk about it in some depth. We're extremely positive on the sector and what that company has achieved. We think that there are other very comparable things to do in the other 2 big companies we got in the space between CW and Springleaf. So that part of it, we feel great about.

Transportation, we've got concentrated investments in railroads and containers and airplane. Railroads have had a spectacular run. We deal with public company there that you can keep track. We also own a Florida East Coast railroad that's had a very good run on things. The containers, airplanes, those are really very good proxies for worldwide trade and movement of both goods and people in the airplane business. Lots of interesting things going on there.

We capitalized the fund, de novo to focus on transportation assets, we called it Worldwide Transportation & Infrastructure. Have got 100-plus million dollars of capital that can be converted to permanent capital there, that we think is the foothold of what can be a very, very large business for us. I think that collectively, when you add up all our transportation-related investments, we'll probably have among the largest of any investment manager in the world, if not the largest. So that's a space where the folks that have done that, my partner Joe Adams and Ken Nicholson, John Atkinson have done a terrific job in managing those investments during all the downturn, and there's a lot of good things going on there.

Last, with the healthcare-related space, both domestically and then -- we started a business last summer in China that we are very, very optimistic about. The demographic footprint of China is one that lends itself very well to senior housing. Hopefully, we'll have some interesting things to talk about there. So pretty much across the board, we've had positive results. The nature of my part of the business, our part of the business, is that we can only talk about things that really have happened. There's not a lot of visibility we can give into things as they are unfolding.

So all that I can really relay is that we're pretty optimistic about it. You can see how the year turns out obviously because there's a lot of different things that you can always go wrong. But for the first 2 months, it's been a spectacular start to it all. Second half of the year, I think it lead to some really interesting capital formation events as well. So again, without kind of forestaging that, we think that there's a lot of things going on there. So that's all. And I turn it back over to Randy?

Randal Alan Nardone

Let's go to Q&A.

Question-and-Answer Session

Operator

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

Craig Siegenthaler - Crédit Suisse AG, Research Division

It's Craig Siegenthaler from Credit Suisse. First, maybe to just start where Wes left off on private equity and maybe just going to performance fees. After a very kind of low-year performance fees in 2011, and I think you'd argue probably 2009, 2010 were lower years in the cycle of things, kind of where do we stand in 2012 when you think about where certain funds are versus high watermarks? And also when you think about -- you can't say a lot I know, but Nationstar and the railroad company, et cetera. Maybe give us a little better color there.

Wesley Robert Edens

Well, it's a fund-by-fund analysis, it's probably best done if I kind of walk you through them individually, Craig. But I think, some of the early funds are above their high watermark. And so the income is promotable, so the more reason one's to have a little bit of wood to chop. But as a group, they're all above cost at this point. The Nationstar, I think our investment in that is at about $800 million in invested capital. You can get access to kind of the research and see where that deal is expected to price. But obviously, we think that the valuation for today is actually going to be a very attractive one. I'm optimistic about the offering. We're not selling any of our shares and I think that the growth prospects for that business in particular are really tremendous. It's had -- I mean the stated numbers, I think we're a $29 million EBITDA company 4 years ago. I think the first quarter run rate is expected be about $225 million. That gives you some measure of how well that company has done. And I think when you add up all the opportunities in the sector, it is very much early in the overall opportunity. So we'll see where that is. The railroad company, I don't know if we disclosed our basis in it, obviously, its trading value is well above what our base is. That company -- I think that the Street consensus for fourth quarter earnings was $0.21, and I think the company did $0.33 or $0.34. We refinanced last week, it's primary debt, which 3 years ago is the high-yield debt we put in place. So it's about $500 million issue of roughly -- that was a 10% all-in cost of debt. That debt was refinanced last week at 4 1/8%. The business has roughly doubled its EBITDA within that period. They've done some spectacular operating results. But also, the financing markets and private equity space right now are as good as they've been at any point since the crisis, at least in kind of -- in our sectors. So I really feel good about that. So with respect to fees, which is near and dear to all of our hearts, it's episodic. So it's really a function of what we do and when we do it. The fee generation, the incentive fees in the last couple of years has been miserable as the products have kind of a tough times we had to deal with. I think the miserable times are behind us, and there's a lot of room to be optimistic about what's going to happen. But of course, it's just a function of when we actually transact, what we do, et cetera. So you have to kind of wait and see.

Craig Siegenthaler - Crédit Suisse AG, Research Division

Got it. And just a follow-up question on the $2.2 billion of committed capital, and maybe given the composition Pete's best to answer this, so maybe Dan Bass. But I'm wondering, how shall we think about the likely timing these flows because risk assets have rallied a lot. Does that mean they're less likely to happen over the near term, because I believe these are kind of opportunistic in terms of when you pull some of that committed capital?

Daniel N. Bass

Just to be clear, the number was $3.9 billion of dry powder and Dean, you can answer the...

Constantine Michael Dakolias

Sure. I think the terms of undrawn timing of drawing down the segments, it's difficult to predict. Obviously, I believe, as I said before, that there will be ample opportunities over the coming years. So it's difficult, as I said, to predict the timing. But believe in the opportunities of that going forward and the deleveraging that will occur even with the rally in risk assets over the past few months.

Operator

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

Marc S. Irizarry - Goldman Sachs Group Inc., Research Division

Maybe this is a question for, I guess, to jump all to Randy for you potentially. When you look at the business, you guys have raised some money in private equity, but it looks like lots of the capital raise is happening in the world of credit where you guys have some core skills, if you will. When you look forward at the business, what do you think the sort of mix between the different segments is going to be and how important is it for you guys to continue along the path of diversifying strategies, maybe even away from credit?

Randal Alan Nardone

Well, we like our diversified model and we continue to try to diversify and expand on the diversification. I think that prospects for fund raising in our 3 major businesses look pretty good.

Marc S. Irizarry - Goldman Sachs Group Inc., Research Division

Great. And then maybe Stu, can you just elaborate a little bit on some of the efforts that you've undertaken in terms of building out the infrastructure? How much sort of expenses, sort of built into the cost structure today relative to the amount of assets you can raise? And if you give us any more color on sort of what the forward outlook is for fundraising for you guys that would be helpful?

Stuart H. Bohart

Sure. So one of the things I'm more involved in now over the last few months is capital raising across the board. And we have core strengths in a lot of areas here. It's true that our big opportunity at the moment is the credit business where we have a remarkable team in the right place at the right time and significant investor demand. But if you look across the environment generally where rates are low and risk and equities is -- if it's come down, it's still a concern of what can happen on long-only equities. I feel like the capital raising environment is very strong and it is hard for an institutional investor to go out with any confidence and assemble portfolios that could make 7% or 8% without a very large allocation to alternatives. So we're in a good position across all the businesses. Wes mentioned some of the new funds that are coming out of private equity. And in Liquid Markets, we're also focused on developing new funds, planning the seeds that we -- I don't want to share details on new funds because we go into marketing around it, but we currently expect to launch at least 2 new funds. Asia Macro is getting a lot of attention. It's performed well, has a very strong team out of Singapore. The Macro Fund has interests as well although, it's highly dependent on what the preceding 6 months looks like. So as we enter the year and we're performing well, we're getting more and more interest in that. Yes, the question around infrastructure cost, I mean they're baked in, I don't expect a remarkably higher expense level on that. My point is we're focused on it. We're using current resources to make sure we have the platform to support a multi-fund hedge fund business. And I don't think you should worry about expenses rising dramatically. What you should be looking for to launch new funds, increase AUM and us moving steadily down towards a goal of more diversification across the business.

Randal Alan Nardone

Yes. We don't set public fundraising goals, but the momentum we built to the end of '11 and going into this year is pretty strong. I think we're in the market right now with 7 or 8 funds in all of our businesses. So we're very optimistic about 2012.

Marc S. Irizarry - Goldman Sachs Group Inc., Research Division

Okay. And then any -- I know it's still preliminary, but any color on performance in February versus high watermarks?

Daniel N. Bass

The month is not done. So we're not prepared to report on that.

Marc S. Irizarry - Goldman Sachs Group Inc., Research Division

Okay. And then Dan, just one more quick one for you. Can you just -- the $1.1 billion in investments, can you just give us a breakout of what the composition of those balance sheet investments are?

Daniel N. Bass

Yes. It's about 600 plus, 600 to 650 in the main private equity business, predominantly. And then the balance, 4 plus, 100 million is 2/3 Liquid, 1/3 Credit.

Operator

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

Roger A. Freeman - Barclays Capital, Research Division

You mentioned SMAs and $300 million coming in from the pension fund. Can you talk about the competitive environment for SMAs and what you're seeing out there?

Stuart H. Bohart

It's Stu Bohart. As I mentioned, the interest in alternatives is growing, and the large pools of capital have a preference towards SMAs. Some of them don't have the infrastructure to deal with the transparency it creates for them. But they're all moving towards SMAs. Primarily it's a risk control mechanism and it requires infrastructure. Infrastructure that we have and that we use currently with our SMA clients. We expect the trend to continue. Some clients will come into the co-mingle, but when they want an SMA, we're in a very good position to provide it. And I think you'll see a lot of the institutional flows head that direction over the coming years.

Roger A. Freeman - Barclays Capital, Research Division

Okay. And in terms of the 7 to 8 funds that are in the market right now, can you talk about appetite for those funds more specifically, perhaps what you're seeing across existing LPs and new LPs and across geographies?

Randal Alan Nardone

Yes. A little tough for me to guess at things, but I'll tell you that we have a lot of capabilities here and a lot of funds, and we focus our efforts on where there is client demand. That's how we come up with the shorter list of 7, 8 -- 7 or 8 funds. We wouldn't be out engaging on those if we didn't think we had a good opportunity to raise capital, and they didn't fit a need for investor pool. So as we've said, we're out there, we're optimistic about it, but it's hard for me to guess exactly what comes out of that capital raise effort. But if you look at our strengths and you look at the general appetite for products that are risk controlled and have the capability of producing double-digit returns, you'll get some sense of the broader opportunity.

Randal Alan Nardone

Sorry, I'm just going to add that I think there's a really good appetite across geographies and types of investors for our funds both repeat and new.

Operator

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

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

A couple of questions. First, just to clarify, Dan, the $3.9 billion of dry powder. If I read the release right, is it about 3.7 of that mainly in the credit PE business that's not currently earning fees?

Daniel N. Bass

Correct. And in addition, we have over $1.5 billion at our Private Equity portfolio companies that has dry powder as well.

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

All right. Great. And you mentioned in the press release as of December 31, in the Liquids business, there was about $1 billion of redemption notices. And knowing that sometimes, people can have -- to give you a notice, they don't have to execute on it. But maybe is it possible to update us on the status of that, if you've seen most of that kind of flow out so far and what's kind of the next window that we should be thinking about from a potential redemption notices?

Stuart H. Bohart

What we reported is what we've realized. We haven't yet reported Q1. We'll do that when Q1 is over. We have subscriptions and redemptions in all the funds, but I can't give you an update until we get through the end of March. And it's very dependent, as you said, on kind of last-minute decisions where do people want to come in or go out. It is an ebb and flow. It's the nature of the business. As I have mentioned, we feel pretty good about how we started the year.

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

Okay. And maybe following up to the Liquids business. You mentioned, you're hopeful that you have 2 new strategies out there this year. Without going into specifics, I'm just curious the management of those products, are those brand-new products of the firm in the sense that you're going out, you're hiring new teams to run them? Or are using a kind of the existing personnel and kind of spinning off strategies and to the extent, you kind of go out and maybe hire new teams to run new strategies? Can you maybe talk about how you think about their compensation structure?

Daniel N. Bass

Sure. It's a combination of both, of new teams that are attracted to the capabilities of Fortress and capital formation and client servers and the infrastructure, as well as spinouts or the supplemental funds based on current skill sets internally. So Asia Macro is an example of a spinout. And I think we have 1, perhaps 2 of those down the road but we'll see. And then on new teams, we do get the opportunity to look a lot of teams and think about new funds and talk to our investors about where their appetite is. The compensation structures on those are related to the success of the fund. So the hiring in the new teams does not have a significant expense impact. They come knowing that they'll be partners in the funds, meaning they'll share incentive fees and that we will grow business together. And as we do that, they begin to get compensated.

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

Right. Great. I just have one last question. Maybe just curious, I mean you have multiple businesses, you have 7 or 8 products in the market. Could you talk a little bit about how your distribution is organized? Is it organized by kind of PE, Liquids, Credit or do you have -- are your marketing people kind of marketing the whole platform? Just trying to get a sense on how you kind of organize that way.

Daniel N. Bass

So we have a mix that works well here, that's a combination of product specialist, which are focused sales people around each one of the businesses, which includes Credit, Private Equity, Liquid Markets and our traditional business at Logan. We also have generalists and consultant coverage that represent Fortress broadly in prospecting and managing relationships. So we identify new clients and develop those relationships and then pass these on into the product areas for a more focused sales process and client service. The teams sit together on one floor. We meet regularly. There's a lot of dialogue and sharing of information across the fund sets, as well as the clients. But it's a combination of generalists and then specialist that are down in the business units.

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

Thanks. And I know I said that was my last one, but I have one last one. You mentioned 50% of your, I guess, your LPs or commitments this year came from non-U.S. investors. Could you give us a sense of the proportion of commitments you're getting from these brand-new investors to the Fortress platform?

Randal Alan Nardone

Yes. It's approximately 50% new and 50% re-ups from existing.

Operator

Your next question comes from the line of Campbell Anthony with Macquarie.

Campbell Anthony - Macquarie Research

I just have a question on the -- your $700 million that came out of liquid fund this quarter and a redemption, and another $1 billion next quarter or in 1Q '12. So of that $1.7 billion, is it mostly in macro or some of that commodities? What's the breakdown there?

Stuart H. Bohart

The numbers here, it's macro and commodities.

Daniel N. Bass

I said 2/3 macro, 1/3 commodities.

Stuart H. Bohart

Right. Macro is the bigger fund. So predominantly, macro.

Daniel N. Bass

Yes. 2/3 macro, 1/3 commodities.

Campbell Anthony - Macquarie Research

Okay. And then -- sorry, what did you say tax rate was in 2011?

Daniel N. Bass

4.2%

Operator

[Operator Instructions]

Gordon Runté

Okay. Andrea, it seems we've run out of questions. Let's move back to Randy Nardone for some closing remarks.

Randal Alan Nardone

Thanks, Gordon. Okay. Thanks, everybody for joining us this morning. Let me close with a few key points. First, in a challenging year, we delivered solid financial performance and continued to build value in our funds and our balance sheet. Second, investor interest on our strategies are strong and we're in a market for new or next-generation funds in each of our businesses. We're well positioned to attract new capital from an increasingly global client base, and that client base is turning more and more often to the alternative space.

Third, our businesses have experienced through cycles and our capabilities are well aligned with the investment landscape we see in 2012 and beyond. We see outstanding opportunities to invest and generate strong returns for our investors in each of our businesses. We look forward to the year ahead and to keeping you updated on our progress along the way. Thanks again. And thanks for your interest in Fortress.

Operator

Thank you, ladies and gentlemen. This concludes today's conference call. You may now disconnect.

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