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Executives

Gordon Runté -

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

Daniel N. Bass - Chief Financial Officer

Peter Lionel Briger - Co-Chairman, President, Director, Member of Management/Organization Development Committee, and Principal

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

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

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

Jason Stewart - Compass Point Research & Trading, LLC, Research Division

Roger A. Freeman - Barclays Capital, Research Division

Christoph M. Kotowski - Oppenheimer & Co. Inc., Research Division

Fortress Investment Group LLC (FIG) Q1 2012 Earnings Call May 3, 2012 8:30 AM ET

Operator

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

Gordon Runté

Thank you, Brooke. Good morning, everyone, and welcome to the Fortress Investment Group First Quarter 2012 Earnings Conference Call. We will begin our call today with opening remarks from Fortress Interim Chief Executive Officer, Randy Nardone; and Chief Financial Officer, Dan Bass. After these remarks, we'll save most of our time this morning for your questions. And joining us for that portion of our call, we have Co-Chairman and Head of Private Equity, Wes Edens; Co-Chairman and Head of Credit, Pete Briger; Principal and Co-CIO of Fortress Macro Funds, Mike Novogratz; and Co-CIO of Credit, Dean Dakolias; along with other members of our management team.

Before we begin, let me remind you that statements made today that are not historical facts may be forward-looking statements. And these 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. Let me pick up where I left off from our last earnings call just 2 months ago. I described positive momentum on a number of fronts: capital formation, investment performance and the growing embedded value on our balance sheet and in our funds. I indicated that this momentum was carrying into 2012, and that's exactly what we saw during the first quarter. Reflecting confidence in our prospects going forward, the board approved a dividend payout of $0.05 a share for the first quarter. As a reminder, we intend to pay a base dividend in each quarter.

Beginning this year, we intend to supplement the fourth quarter dividend with a top-up dividend based on full year performance. Our base quarterly dividend represents a dividend yield of over 5%.

Let me recap some of the other key items from the first quarter and provide color on what we anticipate for the rest of the year. We generated pretax distributable earnings of $57 million or $0.11 a share in the first quarter. Dan will provide more detail in a few minutes, but let me highlight a few points.

First, our business was designed to provide a stable, predictable stream of management fees with the majority of AUM in long-term investment structures. This was the case in the first quarter with management fees of $118 million, roughly flat to Q4. Our $6.4 billion in dry powder, plus the commitments to be raised in funds still in the market, together with the permanent capital that can be raised through new capital, all point to potential to grow this base of earnings.

Second, our business generates variable incentive fees based on performance and realizations. Incentive income of $52 million was up slightly from Q4. We made progress during the quarter towards generating potential future incentive income with improved performance in Macro and continued valuation gains in Private Equity. Credit remains positioned to be a meaningful contributor to the incentive line with all main fund NAV above the high watermarks or preferred thresholds. In the end, our incentive income is less predictable than management fees, but as we've seen in past periods, it can be a meaningful contributor to DE.

The big news of the quarter, though, is capital formation. We had $2.9 billion in new capital commitments in the first quarter, our largest single quarter capital raised since 2008. That doesn't include $2.3 billion in net inflows at Logan Circle. These commitments came from approximately 150 investors, and we've continued to see 2 important trends in our LP base.

First, the base of expanding and becoming more diverse. Over 30% of our first quarter commitments came from new investors, and over 30% came from international investors. Second, we continue to deepen relationships with existing investors who accounted for the major portion of commitments. Approximately half of our AUM today is from LPs invested in 2 or more of our businesses.

The largest driver of the new commitments was our next-generation Credit Opportunities Fund, FCO III. The fund raised over $3.7 billion through the end of the quarter. That compares to $2.3 billion for FCO II, which was raised in 2009.

Also in Credit, our second Japan Opportunities Fund and our first dedicated global real estate fund accounted for nearly $1 billion of commitments through March. These funds highlight a dynamic I addressed on our last call, a growing LP preference for more focused strategies. At Fortress, we've had the benefit of being able to launch focused strategies based on expertise incubated within our main investment platforms.

On the Private Equity side, the second closing of our Transportation and Infrastructure Fund points to that same dynamic playing out. And in the space where we see tremendous opportunities, our publicly traded REIT Newcastle continues to raise capital to invest in mortgage servicing rights with $325 million raised over the past 12 months.

Lastly, in Logan Circle, strong net inflows led to over $2.5 billion in asset growth in the first quarter, bringing AUM for this business to over $16 billion. We're seeing terrific interest in Logan from a broad base of prospects with many investors seeking alternatives to some of the giants in the space. Although not yet on the block, we look forward to Logan becoming a meaningful contributor to our earnings going forward.

As we've said in the past, our ability to grow, to raise capital, to attract new investors and to expand into new products and offerings is largely a function of investment performance. Dan will get into the detail, but I want to provide a high-level overview of investment performance and business dynamics.

In Credit, we continue to have strong performance. As we've said in the past, this is a business that, in many ways, was designed for the type of complex global opportunities we expect to see in the coming years.

In Liquid Markets, the Macro Fund rebounded sharply in the first quarter. After a challenging April, we still estimate the fund is up over 3.5% on the year, which pushes a high proportion -- higher proportion of NAV closer to high watermarks than at year end. Asia Macro also had a strong first quarter and a challenging April, but this fund is up an estimated 2.8% through April and over its high watermarks. Our commodities fund was a down quarter after a tough 2011, was the outlier. We expect redemptions here, but the fund is not material to our overall business results.

More broadly in Liquid Markets, we'll continue to focus on a disciplined evolution towards a multi-fund platform with a Macro Fund at its core. Strategic additions like our convex strategies team and a development of complementary strategies coming out of our Macro platform will remain points of focus.

In Private Equity, trend of investment valuation gains continued in the first quarter, a storyline that's marked 10 out of the last 12 quarters. We also had solid operating performance in our portfolio companies with standout performance in our main sectors: financial services, senior living and transportation and infrastructure. Continued strong operating performance and growth could lead to meaningful further valuation gains for some of our largest portfolio investments.

In terms of liquidity events, Nationstar had its IPO in March, raising $250 million. It's a highly selective environment today, but we believe the capital markets will be accessible for select companies with strong prospects for growth like Nationstar.

And in Logan Circle, we've seen strong performance carry into 2012 across the vast majority of its strategies. As I mentioned earlier, performance strength has led to success in attracting new investors, and we see a lot of runway still ahead.

Before handing off to Dan, let me reiterate key points from the quarter. We raised more capital than in any quarter since 2008, and we're still in the market in all of our businesses. Investment performance in our main funds was strong, which has positive implications for future incentive income. We continue to expand our investor base with significant traction in international markets. And we continue to build embedded value in our funds and on our balance sheet. Today, our balance sheet investments, plus cash and net of debt, account for over $2 a share. That's more than 55% of our share price today. We feel good about progress made in the quarter, the momentum we're carrying forward and our prospects for the remainder of 2012.

With that, let's hand off to Dan.

Daniel N. Bass

Thanks, Randy. Good morning, everyone. The first quarter can be summed up by 3 main points. Traction in raising capital continued at a strong pace, where we raised over $2.9 billion. Embedded incentive income in our PE-style funds has continued to grow, and fund performance was again solid across all of our businesses.

With that in mind, let's discuss the quarter in more detail. Pretax DE was $57 million or $0.11 per share. This is up from pretax DE of $50 million in the fourth quarter of last year. Fund management DE was $56 million, up from $53 million in the fourth quarter of last year as well. Management fee stability also continued as we generated $118 million or $0.22 per share in the first quarter. However, DE includes only a moderate level of incentive income from our funds. We recorded $52 million or $0.10 per share in the quarter, well below our potential.

Let me shift the fund performance, the main driver of incentive income. In our Credit Funds, our DBSO funds returned over 4% net in the quarter. This helped generate $30 million of incentive income in this segment as 100% of the DBSO main fund capital exceeds its high watermarks. A continuation of outstanding returns built the undistributed incentive income across our Credit Funds to a record level of $350 million. Again as a reminder, none of this embedded incentive income has been recorded either in our DE nor is represented in the value of our balance sheet.

In our Liquid Hedge Funds, our Fortress Macro Fund was up over 6% net, and our Fortress Asia Macro Fund was up almost 6% net in the quarter. This brought over 88% of the main fund capital in these funds within 4% of respective high watermarks at the end of the quarter. However, as Randy mentioned, April has proven to be more challenging with both funds giving back an estimated 2% to 3% during the month.

And finally, in our traditional PE Funds business, the value of our fund investments appreciated by 4.7% or over $600 million during the quarter, largely driven by the marks on our public company investments. Our investments in RailAmerica and GAGFAH were up 44% and 66%, respectively. The Geico appreciation also allowed us to reverse a $4 -- $4 million clawback reserve previously taken from our Fund II incentive income.

Moving to capital raised. I want to discuss the financial impact of the $2.9 billion of capital that we raised this quarter. The majority of the capital raised is not currently in AUM, so it has not started paying us management fees. However, it is included in our $6.4 billion of dry powder, which will become AUM and generate management fees when they are called. This ample dry powder gives us clarity around the future of our stable base of management fees, which is the main financial component of our business. It also enhances our ability to plan for and capitalize on future investment opportunities.

One last point on capital formation. Subsequent to the end of the quarter, we raised $115 million of permanent equity in Newcastle, which was added directly to AUM in the second quarter. This brings total equity raised since the beginning of last year to $325 million in Newcastle.

Now looking closer at AUM. AUM finished the quarter at an all-time high of $46.4 billion. This is up $2.7 billion or 6% from year end. This is after distributing $400 million of capital back to our investors in PE-style structures and $1 billion of redemptions in our Liquid business.

Finally, on AUM, as you might have seen, we have broken out Logan Circle as a segment in our financials. Net client flows into Logan Circle were $2.3 billion during the quarter, bringing AUM to over $16 billion. And in April, AUM has now surpassed $17 billion.

A couple of comments on margins and taxes. Operating margin for the first quarter was 33%. Included in this margin is the compensation for the new principals agreement. This quarter, we recorded $4 million of expense related to this agreement. In addition, $3 million of 3-year vesting equity was accrued as we reached the 10% cash cap in our Credit business. On taxes, for full year 2012, we expect our DE effective tax rate to be between 4% and 10% versus our 4% rate in 2011. And as a reminder, our tax rate will remain low through the end of next year as we have significant equity-based compensation deductions through the end of next year.

Quickly on our balance sheet. Our investments were valued at nearly $1.1 billion, a slight increase from year end. And our debt is now under $200 million after scheduled paydowns, which were made in the middle of April. Lastly, our balance sheet still has over $2 per share of book value from our net cash and investments.

In closing, a few final thoughts. Our current assets in locked-up structures, combined with our $6.4 billion of dry powder, give me great confidence in our ability to grow our AUM and generate substantial, stable cash flows. When the market is more conducive to realizations, we have a large amount of embedded earnings, both in our funds and through our balance sheet.

Finally, there are components of real value that are often overlooked or understated, including our balance sheet value and the value of our dividend. As I mentioned a minute ago, we have over $2 per share in book value, and our dividend yield is currently between 5% and 6%, not considering value from any possible year-end top-up.

Now let us take questions.

Question-and-Answer Session

Operator

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

Craig Siegenthaler - Crédit Suisse AG, Research Division

Just the $6.4 billion of dry powder, it's really a very strong improvement quarter-over-quarter. I'm wondering, what are the prospects for additional growth here? And I know this is sort of a function of how quickly Pete deploys this, but under normal and average conditions, maybe a second question is, how fast does Credit Private Equity dry powder get deployed historically?

Randal Alan Nardone

Pete?

Peter Lionel Briger

Well, that question is very much a function of how market opportunities present themselves. Our business is very opportunistic. We've just sort of come out of a period of intense financial dislocation. And the U.S. certainly seems to be recovering, and Europe seems to be flooded with liquidity. So I'd say at the present moment, we're uncertain as to how quickly that capital will get deployed. We think the bigger picture of financial services, deleveraging is going to continue for some period of time, some extended period of time, and so our opportunity set is pretty large. But in the current environment, the credit markets don't seem that interesting to us, broadly speaking. So I'm sorry, I don't have a better answer for you.

Craig Siegenthaler - Crédit Suisse AG, Research Division

Okay. And then a follow up here on Logan Circle. Over $2 billion of flows here, really strong, annualized organic growth, 70%. I'm pretty sure you guys aren't going to repeat this, or at least for a long period of time. What is the more normal run rate of flows here from Logan Circle in active long-only fixed income?

Randal Alan Nardone

This Randy. I'm not sure that this is not repeatable. I think we're seeing some momentum here with Logan. Their performance is terrific, and we're in the process of basically getting organized. We've been getting organized since we bought this thing. I think we're starting to connect and hit on some cylinders here. The opportunity set in global fixed income is obviously gigantic, so we're pretty optimistic about the business.

Craig Siegenthaler - Crédit Suisse AG, Research Division

Okay. And if I could have just one follow-up. Randy, maybe you can provide us some commentary on the update for the CEO search.

Randal Alan Nardone

We are kind of clicking along just fine. I don't feel a lot of pressure about replacing me right now, other than at home, so things are clicking along fine.

Operator

Your next question comes from Marc Irizarry with Goldman Sachs.

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

I'm assuming just on Logan Circle, strong flows. The $1 billion increase figure was $17 billion. Is that a combination of both flows and markets? And so what's driving the flows there? And then secondly, the pretax fee, the fund management fee in that segment, when do you think Logan Circle -- when should we start to reach the inflection point in terms of the contribution to overall DE?

Daniel N. Bass

So the flows were mostly capital inflows from investors. There was some performance, but it was mostly capital inflows. The breakeven point where it covers their direct and allocated expenses is in the $19 billion to $20 billion range.

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

Okay. And then just in terms of performance in April, can you give us maybe just some perspective on how Credit -- and what's happening with the Credit Funds in April?

Randal Alan Nardone

Pete?

Peter Lionel Briger

Well, I think that we're doing pretty well. We haven't -- we have a 30-day lag to the exact compilation of our NAVs just due to the illiquid nature of some of the positions. But I think that April was a good month for us.

Operator

Your next question comes from Robert Lee with KBW.

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

First question I have was around the distribution. And I know it's impossible to know what's going to be at year end, but how should we be thinking about -- or were you thinking about proportionally? I mean, if you had $0.11 of pretax DE, distributed $0.05, I mean, just for the sake of argument, should we be thinking -- if we're trying to estimate what a year-end distribution could look like proportionally, if you generated, let's say, $0.60 of pretax DE, would we expect you'll -- your thoughts are you will distribute half of that, or 75%, I mean, kind of -- any way you've kind of put a range around that?

Randal Alan Nardone

It really depends on what happens for the year. I mean, we want visibility on -- as we said, we'll pay a base management fee that's primarily based on management -- base dividend based on management fees. The fourth quarter will look at where we are for the year and incentive income. And obviously, the declaration of the dividend and sizing of the dividend is up to the board.

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

Okay. And maybe switching gears to the Liquids business and the Credit Hedge Fund business. Could you update us on whatever type of redemption notices you may have? I know you obviously had tightened ones in the first quarter in the Liquids business, but where do things stand right now? And what should we be expecting?

Daniel N. Bass

Yes. For the second quarter, we have around a little over $300 million that is anticipated coming out across all of our Liquids businesses. And we don't -- and our -- and just for clarification's sake, our Credit Hedge Fund business has an annual notice that happens at the end of the third quarter, so there's no notices there.

Operator

Your next question comes from Dan Fannon with Jefferies.

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

I guess just in terms of the dollars that are being raised, even, I guess, both in Credit and even -- it looks like you've got some money in Liquid, at least you flagged in the press release, is there any change in terms of the fee rates that are either of dollars that are coming in versus the ones that are leaving?

Randal Alan Nardone

No.

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

Okay. And then what fund actually drove the incentive income if we look at the Liquid side of the business, at $6 million?

Daniel N. Bass

It's mostly from the Fortress Macro Fund, some of the capital raised from -- in the last year, the last part of last year.

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

Okay. And then it seems like from a credit perspective, that the -- your earlier comments that the outlook for investment isn't at least all that attractive at this point. Are there areas, I mean, that you could talk about that you're looking at, I guess, within Credit and then also in PE or in other areas that you think are interesting in the current environment for capital deployment?

Peter Lionel Briger

Well, big picture, we do think the environment for investing in credit will be interesting. There is still a tremendous amount of financial services deleveraging that needs to take place all over the world. But in particular, the U.S. and Europe, we have active discussions going on about investments in both those jurisdictions, but there's a significant price gap as to where we want to invest, broadly speaking again, and where transactions are being offered. And that's largely a function of all of the government liquidity that's been infused into the marketplace, both in Europe and in the U.S. And so sort of the risk premium that we like to see when we're making investments, broadly speaking, has been taken out of the market while governments are working hard to sort of effectively take on a bunch of private sector debt. And so we think there'll be great opportunities over the next 2 to 3 years. I just think that from our perspective right now, the amount of asset sales has slowed just due to the intense government liquidity provisions that were made in the first quarter of this year. And we have seen in places like Spain and Italy, in particular, with sovereign yields rising, risk premium coming back into the marketplace. So it's a little early to tell, but we're actively involved in our European business and looking at investments and actively involved in our U.S. business and looking at investments. But again, we want more risk premium if we're going to invest in opportunistic situations. Does that answer your question?

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

Yes, it does.

Operator

Your next question comes from Roger Freeman with Barclays. [Operator Instructions]

Your next question will come from Jason Stewart with Compass Point.

Jason Stewart - Compass Point Research & Trading, LLC, Research Division

My question relates specifically to a portfolio company and a managed company, Newcastle and Nationstar, and your philosophy around making either credit private equity investments or any really investment that those 2 companies would be involved in. You might not want to comment about a specific transaction but just philosophically how you approach that topic.

Daniel N. Bass

Sure. We have been active and are continuing to be very active in looking at mortgage servicing opportunities in particular. Nationstar, 4 years ago, was a single-digit billion dollar servicer. Today, pro forma, it's -- with the stuff that we've committed to, it'll be closer to $200 billion servicer. So we've had a tremendous amount of growth in that business, and it's been very, very productive. And I think that, that company is public, and its earnings will be out next week and will speak for itself, but we're very excited about that's been happening with that business. The business model that we think is the right one to pursue is a capital-light business model that allows us to grow the business without simply putting all the assets directly on the balance sheet. And so the architecture we've created for that space is to basically have Nationstar be the servicer for the assets and invest in a portion of the mortgage servicing rights and then have third-party investors, in particular, in this case, Newcastle, be a co-investor, kind of shoulder to shoulder with them when they make new investments.. And we've made a number of investments in the first quarter. Most notably, we bought the estate of mortgage servicing rights from Aurora Bank, which is the old Lehman Brothers bankruptcy estate. That was a purchase in total of a couple billion dollars, so it was a large transaction. We're working on a similar transaction that's considerably larger in size as we speak. And then there's a very, very long pipeline of stuff that we think is out there. If you look at the disclosure that exists for Newcastle, you can see, because we update the stuff on a monthly basis as to what the performance of those mortgage servicing rights have been. And then the performance has really been tremendous. They've been kind of unleveraged returns in the low to mid-20s in a very, very kind of front-ended cash flow investments. So we don't leverage these investments. The cash comes back relatively quickly. And I really think, really following along with what Pete's comments were earlier, that the financial services space in the U.S., I think, is the best opportunity set in the world. I know there's been a lot that's been said about the potential for investment in Europe. And I'm sure there'll be a lot of great investments to come out of there. But the -- yes, their liquidity provisions, the LTROs and whatnot that are being provided, I think, take a lot of the selling pressure off, at least in the short term. In the U.S., the regulatory drumbeat continues. And there's just -- I think there's going to be a flight of businesses and assets out of regulated financial institutions into nonregulated. We see that certainly in the mortgage servicing rights. We see that certainly in the consumer finance space. So I think there's just a ton to do. So but the direct and very short answer to your question now is philosophically, we looked at how -- some kind of a marriage between the capital on balance sheet at Nationstar and then other third-party investors, be it Newcastle or others. So...

Operator

Your next question comes from Roger Freeman with Barclays.

Roger A. Freeman - Barclays Capital, Research Division

Just on the Credit opportunities, I wanted to ask before, Pete, is your view that ultimately, the governments won't be able to provide enough underlying liquidity to support the natural course of deleveraging that will occur? Or that it will go through fits and starts, and you'll just move to where the opportunities are opportunistically?

Peter Lionel Briger

Well, I think that the provision of liquidity, particularly in Europe, helps the banking sector because they have a natural arbitrage. They can buy sovereign debt with a 0 risk weight, and they've got the cash to do it by pledging almost anything on their balance sheet. And so that, in and of itself, will help, to a small extent, the banks repair their capital ratios. But a lot of the financial institutions in Europe, in particular, are going to need more than that. And so there are going to be quite a number of institutions that go insolvent and have to get dealt with. And so that will create lots of opportunities for us as institutions rationalize their size, their expense base, and a number go out of business. And so the governments will be, I think, having enough potential fundraising power to heal a lot of what's going on in Europe and the U.S., but there's still going to be a great number of assets that fall out as opportunities for us. And what we don't want to do is really be in there competing with hundreds of billions of dollars of liquidity provisions when those sort of announcements are made and there's this sort of a euphoric in the marketplace. So we do think that there will be periods of time where people really do recognize the problems in the banking sector. And we also do think that there are certain geopolitical events that could occur like a Middle Eastern war, which will have some impact on commerce and growth.

Roger A. Freeman - Barclays Capital, Research Division

Okay. Just looking at the capital raising, the $2.9 billion, $2.4 billion is the Credit Private Equity, the III. Is the other $500 million the Transportation closing?

Daniel N. Bass

No. It's a couple of other funds. It's the Japan Opportunities Fund. It's a Real Estate Fund in credit, and it is -- there is some additional capital in Worldwide TAI in the Transportation Fund. But it's made up of -- across those 3 funds.

Roger A. Freeman - Barclays Capital, Research Division

Okay. Just maybe on Private Equity, Wes. What are your expectations beyond this fund? And obviously, the Asia fund you're working on. Around further, more -- maybe more general purpose? Or do you anticipate specialized funds for the time being?

Wesley Robert Edens

We've got -- we have a handful of different initiatives on specialized capital, some that will be, I think, reported in the very near term. So around things like the mortgage servicing stuff we talked about or senior housing or transportation is a bunch of very specific initiatives. And I think if the performance in the funds continues and the liquidity comes from some of the things we're working on now, I think we will be the back in the markets sooner rather than later with a more general fund. But that's a second half of the year event, I think, at this point. But the first -- if you take the first 3 months of the year and multiply it times 4, I think it would be the best year probably overall we've ever had in Private Equity. So it's off to a pretty good start. So we'll just see how it all plays out.

Roger A. Freeman - Barclays Capital, Research Division

Yes, absolutely. Okay. And just lastly, on the international LP growth, how much of the capital raised in or committed in the first quarter by dollar amount came from outside the U.S., and actually, also from new customers? I'm actually asking 2 questions, new -- outside the U.S. and new customers.

Randal Alan Nardone

It's about 30% outside the U.S., and pretty much the same number, about 1/3 of the investors are new to Fortress.

Roger A. Freeman - Barclays Capital, Research Division

By dollar amount, too?

Randal Alan Nardone

Yes, that's right.

Roger A. Freeman - Barclays Capital, Research Division

And you have -- what are your selling efforts overseas? You obviously are getting a quick big pickup. And what's driving that? Is there a focus on more folks fund-raising over there?

Randal Alan Nardone

We definitely have focused fund-raising going on in the Middle East and Asia and Europe.

Operator

Your next question comes from Chris Kotowski with Oppenheimer & Company.

Christoph M. Kotowski - Oppenheimer & Co. Inc., Research Division

I'd like to hear Wes expand a bit on his thoughts that the U.S. financial services are the most interesting opportunity stack in Private Equity. And I guess I'm curious, a, are we -- is it primarily mortgage and consumer finance? Or would you broaden that out to brokerage and depositories? And then secondly, are the companies that you've got out there now, are those the vehicles in which to pursue that opportunity stack? Or is this the kind of thing you didn't think of doing in a dedicated fund?

Wesley Robert Edens

Well, I think that the -- if you start with the depository institutions, I think that the good news is the banks are better capitalized today than they've been in many, many years. The bad news is I think it's increasingly going to be hard for them to make money. And if you look at -- I haven't gone through the results on Wells this morning, but I think, really, the bright spot, I suspect, in the banking system, to those that are really making a lot of money, probably have a lot to do with the mortgage market. The mortgage businesses -- in the first quarter of the year, have to be their most profitable ever, I would suspect, however, you measure, I think. With people pulling back from the marketplace, again as a function of a lot of regulatory oversight, put-back liabilities, there's always the trailing flat-tail liabilities that have really pushed the banks out of those businesses and are very focused on just core deposit-taking consumer-focused activities. And even in that, I think they're very focused on prime customers. So a lot of the marginal ways that they've made money historically in the past decade or 2, I think, are greatly reduced. The direct knock-on of that is that those companies in the non-bank financial space that can step in to provide margin liquidity in those areas, I think, have got tremendous opportunities. The mortgage servicing stuff is the most prominent. It is the most visible of our public ones. And for all that we've gone from $6 billion or $8 billion in servicing to $200 billion in servicing, I think in the context of the opportunity set in the marketplace, it's still fairly early on in that opportunity, honestly. So that's a big one. The consumer finance business is a $2.5 trillion market. Probably 35% or 40% of it is non-prime. Non-prime is a dirty word for much of the banking system, and I think you're going to see a lot of growth in the consumer side. So obviously, we bought the consumer finance business from American General that we've renamed Springleaf that we have seen a lot of good activity on the consumer side, and we think that there's a lot of great opportunities there. With respect to whether the opportunities will be pursued directly through those companies or others, I think it will certainly be a combination of both. I think that where it makes sense for us to capitalize with companies publicly and access public capital, we'll do so. It is a very opportunistic business model to pursue in financial services. I mean, really, you need to buy what's for sale, when it’s for sale and hopefully under good terms, and that's a hard thing to predict or cause to happen. But I'm really -- as I said, I'm very optimistic about what's going to happen. And the U.S. is a big geography. There's a lot of assets, and I think that there's going to be some terrific opportunities in the next couple of years. So...

Operator

Your next question comes from Marc Irizarry with Goldman Sachs.

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

Wes, just sticking with Private Equity for a second, it sounds like you're pretty encouraged by some investment opportunities. Could you talk a little bit about the harvesting activity from the portfolios as you look ahead, particularly on the private portfolio side of the equation, where are, sort of, things? How -- it looks like operating performance, obviously, valuations are improving. But what do you think the outlook is for harvesting?

Wesley Robert Edens

We think it's -- that the outlook is pretty positive. We've got -- in the first quarter, we had terrific operating performance. We're up about 5% across the funds. We're up another couple of percent in the month of April. So the overall performance has been terrific in a couple of very large notable cases. It brings us to a place where we really are evaluating kind of what to do with the investments. So some of these companies are quite large, and so it's a little complicated to figure out exactly what the right path is. But we're definitely very focused on it in a handful of cases, Mark. So it's hard to predict and even harder to talk about, obviously. So I can't give you real specific guidance, but all you have to do is look at some of the bigger companies, and I think you'll can see what the performance has been. One thing I would say is that all of the significant capital events that we had planned for the first quarter not only got done but got done at or in many cases as well in excess of kind of what our expectations were. For example, in RailAmerica, which is a terrific company, and we did a high-yield deal about 2.5 years ago, a $0.5 billion deal. Cost of debt was about 10%. We refinanced that deal in the first quarter at just over 4%. So same company, 2 years forward go from 10% to 4 1/8% is a reflection of kind of what's going on overall. And we did -- We had a whole host of things happen. We did another mortgage securitization in Springleaf and ended up being considerably better than where it was last year. We did a big refinancing up in Canada for a senior housing business. Of course, we did the IPO for Nationstar. So we've had a very, very busy quarter on the capital side that really does, I think, position a lot of those companies well for potential liquidity events at some point in the future. So more to come when we have actually done that. So..

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

Okay. And then, Dan Bass, if you could just dimension a little bit the clawback provisions, I guess, for Private Equity, how -- or in aggregate, I guess, for across the portfolios, what do you need to see? I guess it's somewhat idiosyncratic based on funds, but how should we think about the reversals of clawbacks before you start to get maybe bigger DE from realization activity in Private Equity?

Daniel N. Bass

I mean, from a clawback reserve, we have about $64 million of balance sheet reserve right now. And that's really across 3 of our funds. I'd say about $10 million of that is with respect to Fund II, the fund that I talked about, the $4 million reversal. So that's probably the one that's closest to potential reversal. But again, we have over $350 million of embedded incentive across our funds. And all of our credit funds are above their high watermark. And so from that perspective, that's where you'll see the incentive income in the very near term.

Operator

[Operator Instructions] At this time, there are no further questions. I'll turn it back to the presenters for closing remarks.

Randal Alan Nardone

Great. Thanks, everyone, for joining us today. We've got a good quarter, including some points of notable strengths that bode well for future results. More investors committed more capital to more funds than in any quarter since 2008. The performance is broadly positive, which is, of course, our overriding focus. We feel good about our prospects to deliver for our investors and our FIG shareholders going further into 2012. Thanks again for your interest in Fortress, and we look forward to updating you again in a few months.

Operator

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

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