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Fortress Investment Group LLC (NYSE:FIG)

Q2 2012 Earnings Call

August 02, 2012 10:00 am ET

Executives

Gordon Runté

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

Daniel N. Bass - Chief Financial Officer

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

Wesley Robert Edens - Principal, Co-Chairman of the Board, 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

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

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

Operator

Good morning. My name is Christie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fortress Second Quarter Earnings Conference Call. [Operator Instructions]

It is now my pleasure to hand the program over to Mr. Gordon Runté. Please go ahead.

Gordon Runté

Okay. Thank you, Christie. Good morning, everyone, and welcome to the Fortress Investment Group's Second Quarter 2012 Earnings Conference Call. We will begin our call today with opening remarks from Fortress interim CEO, Randy Nardone; and Chief Financial Officer, Dan Bass. After these remarks, we'll save most of our time this morning for your questions.

Joining us for that portion of the call, we have today with us, co-chairman and head of Private Equity, Wes Edens; co-Chairman and Head of Credit, Pete Briger; Fortress Principal [indiscernible]; and President of Liquid Markets; Stu Bohart, 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. Fortress had a solid second quarter, and we're seeing good progress in every business, which points to substantial earnings upside. Capital formation was very strong in the first half of 2012. AUM is now up 9% over the past year, and a record amount of dry powder will add to AUM when invested. Investment performance has been strong within each of our businesses, and embedded value on our balance sheet and within our funds continues to grow.

Let me review some of the key items from the quarter, in addition to some significant recent developments. The Board approved a dividend payout of $0.05 a share for the second quarter. We generated pretax distributable earnings of $50 million or $0.09 a share. Dan will provide more detail in a few minutes, but let me highlight a few points.

Our distributable earnings benefit from a stable, predictable stream of management fees. In the second quarter, we had management fees of $115 million, roughly flat to Q1. Importantly, there are a number of potential catalysts for higher management fees in the near and midterm. First, we have $7.4 billion in dry powder that will begin generating management fees when invested. Second, we're still in the market raising capital in each of our businesses. I'll give more detail on these initiatives in a minute.

The second component of DE, incentive income, was $47 million in the second quarter, down slightly from Q1. A number of items point to meaningful potential upside of these numbers going forward. One, our credit funds have seen gross undistributed incentive income grow to over $400 million. This points to the potential for meaningful increases in our incentive income realization in future periods.

Two, macro performance has been strong in 2012, a growing proportion of fund NAV has moved above high watermarks. We gave up some gains in July. But if we can replicate first half performance in the second half of the year, almost all macro NAV would be above the high watermarks. Additionally, virtually all of our Asia Macro Fund NAV is above high watermarks.

Three, in Private Equity, we've seen continued investment valuation gain across our main funds, 5% in the second quarter and over 10% for the year. And a big portion of one of our largest investments, the senior living business holiday retirement, is in a separate fund that is right at its preferred threshold. To be clear, sustained outperformance at our most recent funds will be required to reach preferred thresholds, but with years left before maturity, there is still potential for carrying in these funds.

Obviously, new money coming into our funds is a key driver of potential for higher management fees and incentive income over time. So let me give an overview on our capital raising initiatives. At the time of our last call, our third credit opportunities fund had reached $3.7 billion, already our largest fund raised since 2007. That fund closed at over $4.3 billion, nearly doubling the size of its predecessor fund. A new dedicated set of real estate funds is approaching $300 million in third-party commitments through July. And our second Japan real estate credit fund is tracking to over $1 billion.

In Private Equity, capital raising is centered on sectors where we can leverage decades of experience. We continue to raise capital in the transportation and infrastructure space, and perhaps most significantly, in terms of the scale of near-term opportunity, we're raising capital for investments in the mortgage servicing space. Wes is here and can elaborate, but let me give you a few highlights.

Total market size for the U.S. residential housing market is over $17 trillion, and with about $10.2 trillion of outstanding mortgage debt. It's one of the largest debt markets in the world. About 90% of the corresponding mortgage servicing market is owned by the big banks. Because of looming increases in capital requirements, the mark-to-market impact of MSR values on earnings and continual headline risks, these institutions have incentives to lower their exposure to mortgage servicing rights or MSRs.

As a result, we expected a meaningful part of the MSRs outstanding could move from large banks to non-bank servicers in the coming years. We believe this is a terrific investment opportunity where attractive returns can be made in the U.S. residential housing market without making a directional bet on home prices or the price of recovery -- the pace of recovery.

In our portfolio company, Nationstar, we have one of the sector's most highly regarded servicers. Nationstar has been the largest beneficiary to date of the shift of servicing to non-banks. On our last call, I mentioned that we are pursuing this opportunity largely through a co-investment structure. Our publicly traded REIT, Newcastle, has raised $645 million of capital since 2011, with $265 million already invested in MSRs alongside Nationstar.

Given the size of the opportunity and the level of demand among the LPs, we've also launched the dedicated MSR fund. We expect this fund will close within the next few weeks, with commitments of at least $500 million.

In Liquid Markets, we expect that fund raising dynamics will benefit from the strength of performance in both our main macro and Asia Macro strategies. We've also seen great interest in the context Asia strategy that we launched in May with over $50 million in commitments to date and a robust pipeline.

Lastly, the capital raising trajectory at Logan's Circle remains strong in the second quarter. Net inflows of nearly $1.7 billion pushed AUM to over $18 billion. With the current pace of flows and a strong pipeline, we look forward to Logan moving to profitability in the near term and becoming a contributor to DE over time.

I've addressed the main drivers of value at Fortress, management fees and incentive income and the capital formation efforts that can move each higher going forward. The third pillar of value at Fortress is our balance sheet, which has grown in value as we've invested alongside our LPs. In the second quarter, net cash and investments on our balance sheet stood at $1.1 billion or $2.12 a share. The successful close of the RailAmerica sale, which we announced last week, could add approximately $180 million to net cash on our balance sheet.

Dan will walk you through the mechanics of that in a few minutes, but that's about $0.30 a share. So if nothing else happens, the value of our net cash and investments could be approaching $2.50 a share for the fourth quarter. Net of that value, our stock price at yesterday's close reflects a multiple of just over 3x consensus earnings.

Looking at capital formation, investment opportunities and potential upside for DE, I'm excited about the prospects for each of our businesses. In credit, outstanding investment performance continues and commitments to successor funds have followed, reflecting the achievements of our credit team, Fortress was named credit focused fund of the year by institutional investor for the second consecutive year. We've built a credit team with few peers in terms of global sourcing, underwriting and asset management capabilities. In short, this is a business designed for today's environment, with over $7 billion to invest, I believe Fortress is well positioned to capitalize on the great deleveraging that continues to unfold.

In Private Equity, we are capitalizing on the opportunities resulting from a transformation of the mortgage servicing space. We've seen continued gains in investment values across our funds. And the RailAmerica sale I mentioned a moment ago will result in an investment return of 2.2x. It's pretty good for investment made at the height of the market in 2007.

In Liquid Markets, 2012 has been a story of strong investment performance that has truly differentiated our Macro and Asia Macro Funds from their peers. Continued performance strength that meaningfully alter the earnings dynamic of this business was significant incentive income upside.

And in Logan Circle, steady and meaningful gains in AUM have followed from strong investment performance. Logan's infrastructure is highly scalable, and the investment team has years of experience managing a much larger capital base. I'm optimistic about the potential to meaningfully grow this business over time.

So overall, I feel good about our progress at the halfway mark of 2012. I'm excited about the prospects for investments and for the growth across all of our businesses. I believe that our value proposition is compelling today with substantial upside, and I'm confident that the successful execution, business by business and investment by investment, should allow Fortress to deliver value to our shareholders over time.

Thanks. And now, let me hand it off to Dan.

Daniel N. Bass

Thanks, Randy. Good morning, everyone. I will open with the financials, and then provide more detail around the key items Randy highlighted, investment performance, fund-raising and embedded value.

With that in mind, let's start with the financials. Pretax DE was $50 million or $0.09 per share in the second quarter, bringing year-to-date pretax DE to $107 million or $0.20 per share. Fund management DE, our fee earnings measure, was $53 million in the quarter, down slightly from the first quarter, bringing year-to-date fund management DE to $109 million.

AUM finished the quarter an all-time high of $47.8 billion. This is up 3% from the first quarter and 9% since the end of the year. The quarterly growth is a result of raising approximately $270 million of equity in Newcastle, which was directly added to AUM, investing nearly $400 million of our dry powder, largely in our credit PE style funds and recording net inflows of around $1.7 billion in Logan Circle. All of this, while distributing over $1 billion of capital back to our LPs and paying out $600 million of hedge fund redemptions.

Moving to investment performance. Throughout 2012, our funds have performed exceptionally well across all of our businesses. Let me give you a few examples of this. In our credit hedge funds, our DBSO funds generated 7.6% net returns year-to-date through June, with a 3.3% net return in the second quarter. This allowed us to record $56 million of incentive income in our Credit Hedge Fund segment during the first half of the year. This fund now has generated positive returns in 13 out of the last 14 quarters, as well as annualized returns of nearly 11% since its inception 10 years ago.

In our Credit PE Funds, strong annualized returns since inception such as a 27% life-to-date IRR in our first Credit Opportunities Funds have continued to build potential future earnings. In our Liquid Hedge Funds, our Fortress Macro Fund is up 8% net through June, marking significant progress against high watermarks since the beginning of the year. These returns bring over 90% of the macro fund capital within 3% of their respective high watermarks. And total macro fund capital's around $3 billion, of which, approximately $900 million or 30% already exceed their high watermarks. Our Fortress Macro Fund was up almost 7% net, the Fortress Asia Macro Fund was almost 7% net through June, and nearly all of its capital exceeds its respective high watermarks.

And in our traditional PE funds, the value of our fund investments appreciated by 5.4% or over $700 million during the second quarter. This brings fund investment appreciation to approximately 11% for the first half of the year. The quarterly appreciation was largely driven by our public company investments, which were collectively up 20% in the second quarter following a 10% appreciation in the first quarter. The main driver of this appreciation was Nationstar, which, alone, was up 50% in the second quarter. So as you can see, collectively, our funds have performed very well in 2012.

Shifting to our capital raising efforts, a few points here. We raised another $1.1 billion in the second quarter, marking it the third consecutive quarter in which we've raised over $1 billion of capital. An now, through the first half of the year, we have raised a total of $4 billion of capital, not including the $1.7 billion net flows into Logan Circle. More importantly, the majority of these commitments have not yet been included in our AUM. They are, however, included in our $7.4 billion of dry powder, which is up $1 billion for the end of the first quarter and up over $3 billion since the end of last year. Notably, most of this dry powder is in funds with 7- to 10-year locked-up capital structures. So when the capital is called and invested, the financial benefits will accrue over many years.

Finally, let me give you more detail on embedded value, which comes in 2 forms at Fortress, undistributed incentive income and our balance sheet. As it relates to undistributed incentive income, at the end of the second quarter, our gross undistributed incentive income exceeded $0.5 billion, at $507 million. This is up from $413 million at the end of the first quarter and $315 million at the end of last year. And of the $507 million, only $62 million has been included in our distributable earnings to date. And as it relates to our balance sheet, our investments were valued at over $1 billion -- $1.1 billion, a 4% increase from the end of the first quarter. Debt is down another 25% from the first quarter to $189 million.

And finally, as Randy mentioned, the planned sale of RailAmerica would have a significant balance sheet impact on closing. If the transaction closes at current terms in the fourth quarter, as expected, Fortress would see a total net cash flow of approximately $180 million, or approximately $0.34 per share. This would double the current cash balance on our balance sheet.

This projected cash flow is result of collecting previously deferred management fees and expense advances in certain of our Private Equity funds. In addition, like our LPs, we are also an investor in our funds and will receive a portion of the proceeds from the sale as well. A quick point on taxes. For full year 2012, we still expect our DE effective tax rate to be between 4% and 10%.

So in closing, a few final thoughts. Outstanding fund performance has continued to position us well to attract additional capital, as demonstrated by us raising $4 billion so far in 2012. Our performance has been solid, and it also points to ample opportunity for our upside across all of our businesses. Deployment of dry powder will have a very positive impact on our management fees. And on the incentive side, sizeable realizations from our Private Equity style funds or liquid incentive income would meaningfully move the earnings bar.

And as I've said for a few quarters now, the embedded value in our funds continues to grow. It is, in our view, still very much underappreciated and undervalued in the market.

With that, now let us take your questions.

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

Just a question for Pete. I'm wondering if you can help us think about how quickly you expect to deploy the $7.2 billion of uncalled capital that sits in your credit business? And really especially, after kind of cautious commentary in the first quarter call and then accurately not seeing a lot of activity in the -- during the second quarter.

Peter Lionel Briger

Well, I think I feel similarly to the first quarter, our general view is that risk is mispriced in Europe and in Asia against us, meaning that we think actual risk is higher than perceived risk in terms of prices in the public credit markets. And so the public securities' markets, credit in Europe and Asia don't seem interesting to us. And the prices that we would make private credit investments in those 2 jurisdictions are low enough that generally, financial institutions cannot sell at market clearing prices without too serious capital diminution to make it sensible. In the U.S., we think credit risk is priced fairly, which, for our alternative funds means that we have to be very careful because we charge significant fees, and we're working on an absolute return basis. And so when risk is priced fairly, we make generally idiosyncratic investments rather than thematic investments. And so the pace of investing in credit has slowed, reflecting what we feel about the market. We like to be investors when risk premiums are high and when perceived risk is higher than its actual risk. And so there's a lot of government intervention going on in the credit markets all over the world. There are a lot of distortions in the credit market and there's a lot of actual risk. We're seeing a science experiment play out in Europe. We're in an accident-prone environment. And the market is not taking well to our type of transitional capital. And so, generally, in those periods, we're paid to wait, keep cash in our pockets. And as the markets turn over to reflect real market pricing of risk or maybe more favorable pricing than the risk merits, we'll become active investors. And I can't tell you when that's going to happen, but we do have a fairly long commitment period, generally 3 years, from the closing of these funds to invest that capital. And since we're in a competitive environment against our competitors, trying to have better returns than our competitors and also having good absolute returns, we're waiting at this point. So I can't give you more information other than we'll know it when we see it, and we'll be aggressive investors in those times.

Craig Siegenthaler - Crédit Suisse AG, Research Division

And then, Pete, if you think valuations for riskier assets are generally high in Europe, I'm wondering why -- maybe there hasn't been more loan sales coming from your business, which would've generated positive performance fees over the last few quarters? And here, there's been some level of performance fees, but not as high as you get if you were actively selling credit in Europe.

Peter Lionel Briger

Well, that's a good question. Most of the risk that we have in our funds is U.S. risk. In fact, about 85% of the market value of our credit funds reside in North America, about 7% in Europe, 6% in Asia, a little bit of the remainder in Australia and other places. So your question is, is if we think that, that risk is mispriced, why aren't we selling? We generally have illiquid credit, and so we don't have the ability to sell when we want in a moment's notice. We have to work through transactions. So in times like these, when we do make investments in markets that we think are risk -- are priced against us, we're generally making idiosyncratic private investments where the assumptions that we're building in to our exits on those investments are very draconian. We're assuming that values for the underlying assets that back the debt are going to go down significantly over the period of time that we hold those assets, and that we're still going to be able to have a margin for error and a really good outcome. So we tend to invest less in these types of markets and only go after specific transactions where the individual dynamics of the transaction makes sense. Is that fair?

Craig Siegenthaler - Crédit Suisse AG, Research Division

That's fair.

Operator

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

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

Maybe, Wes, if you can give us some perspective on Private Equity, on sort of the staging of -- and life-cycle of some of the investments that you have in there? And also just an update on fund raising and sort of the pace of closings that we should think about as we move forward?

Wesley Robert Edens

Okay. Great. Well, as both Dan and Randy said the year thus far has been a very positive one from a valuation standpoint, and we've had very, very solid operating performance across the portfolio. Some of our bigger investments have been our better performers, but due to the 3 kind of big food groups of transportation, financial services, senior housing have all had a fair bit of success across the board. The big news from the liquidation standpoint is the RailAmerica sale, which is expected to close sometime in the fourth quarter. That company, context wise, the management of the company has doubled the EBITDA in the last couple of years, so it's been terrific. Operating performance has been resulting in great financial performance. And we think it's a real win-win in terms of the sale and merger of that company. A lot of the activity for the first part of the year and certainly what's been on public new has been the financial services space. Again, most of these guys have talked a lot about Nationstar. That's a big investment for us. It has done great financially, and I think it's still, at this stage, is very, very early in the opportunity cycle that we see. And [indiscernible] Randy laid it out well, the residential space in the U.S. is a gigantic one. I think, from kind of every twist and turn, we think that things have either bottomed or are doing modestly better. And I think that the opportunities that have yet to play out in the recovery is very, very much still to come. There's still a lot of activity in the MSR space. That's a product that, I think, that we had a big hand in kind of pioneering as an investment product a year ago. We've made a bunch of investments, both in Nationstar and then our public company in Newcastle. We have committed to others where the stock and [indiscernible] in the transaction. We'll see how that plays out in the fall. Away from that, we think that there's just going to be a ton of activity, but I think that there are legitimately 4 or 5 material groups of opportunities that exist in the sector that both have great opportunities. And I think that the key to them is have the operating apparatus and infrastructure to access that, and I think that between the servicer and the REIT and all of the collective capabilities around the firm both in PE and in credit we've got, all the tools to be the people on top of the pile when it all ends up getting done. So we certainly did not distinguish ourselves right, certainly did not distinguish myself from a performance standpoint as the market went straight down on the resi side, but we're pretty focused on being at the top of the heap when it goes the other way, as it is right now. So capital formation follows performance. And between the list of vehicles and then this new MSR fund that Randy talks about, I think the total capital formation out of my group will be something just south of $1.5 billion, we think, since we started this all, a number of months ago, and we'll have this fund to report on, I think, in the near term, I think the next couple of weeks is likely when that gets in to business. And I think there's a long ways to go. So in terms of other kinds of things, we've, again, as these guys mentioned, we've got a number of the bigger investments that have moved up into the kind of flight path of things that could be liquidated. And I'm optimistic that we're going to have a very, very good second half of the year. So hard to predict anything specific about that, but that's the general kind view at, Marc.

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

And then just on Logan Circle, looks like getting pretty close to being a contributor on the fund management DE basis, the flows maybe were a little bit slower sequentially. When we look ahead, any indication on the pipeline of flows there that we should expect on a go-forward basis?

Unknown Executive

This is Rob. I think flow-wise the pipeline is good. We're going to continue to -- we hope that the current pace is a little bit beyond our control there, but I think it's that current a couple of factors all kicking in, about 25% of the capital that's come in year-to-date has been from entirely new clients of the firm. About 75% has been from either existing traditional clients of Logan or existing clients of alternative businesses, and we're getting some traction in terms of cross-selling. So I think we keep mining that, that route and we can have some decent success with the latter half of the year.

Operator

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

Roger A. Freeman - Barclays Capital, Research Division

Just a quick one on RailAmerica. Is -- I'm trying to remember how that was structured. Are there any side-car funds? I'm trying to figure how much distributable -- what kind of distribution will ultimately come off of that in spite of I think being in the, I guess, in the '06 fund?

Unknown Executive

The RailAmerica shares is 24 million shares in Fund IV and 6 million shares in the co-investment fund. So $27.5 times those share prices. Dan mentioned that top of the waterfall there is repayment of vig of some deferred management fees and the rest is distributable to the LPs.

Roger A. Freeman - Barclays Capital, Research Division

Great. And then on Logan Circle, obviously, another strong quarter of flows. I mean -- can you talk to the client base? Is this a concentrated institutional flow or maybe sort of sectors within institutional space? Or is there anything particularly driving this or is it pretty broad-based?

Unknown Executive

This is Rob again. It's really broad-based. If we take a step back a second, the company really become part of Fortress about 2 years ago. It's a very institutional client base. That's really what Logan is at this stage. I think most of the consultant-driven processes that you see on the traditional side, time to get -- put on a yellow light while we see what happens. Now that there's been some stability for the past year or so, it's clearly a key part of the business, I think. That plus the performance of the other teams themselves for which the foundation of it are really starting to click over. So it's really -- something has been in the pipeline and guys have been working hard for the past 1.5 years and we're starting to get some good traction. Just to give you an idea, I think of the new inflows -- I'd say the majority of it is just direct -- traditional pension funds or insurance companies. A fair chunk of it is sub-advisory through mutual funds sub-advisory, and then probably 20% or so is to the consultant channel. So really, you're kind of typical institutional type product. At this point, there's really no direct retail stuff at all at Logan.

Roger A. Freeman - Barclays Capital, Research Division

Okay. Does the one, the not funded pipeline have a similar trajectory to some sort of combination of what was on the first and second quarters?

Unknown Executive

I can't really short a specific AUM pipeline there. I think the company is overall on target. The way we look at it, more importantly, is what its contribution to DE our distributable earnings, and swinging from a subtraction to a neutral and now to a positive contribution. So I think that's [indiscernible] we work for it. Clearly, the average margin on Logan's, their fees are, on average, about 15 basis points if we tally it all up. It works quite a bit differently by nature than the alternative businesses.

Roger A. Freeman - Barclays Capital, Research Division

Yes, okay. And we're right around the break-even level on AUM now?

Unknown Executive

Yes.

Roger A. Freeman - Barclays Capital, Research Division

And then Pete, coming back to the credit opportunities and hearing what you said in a earlier question. I mean, if Europe risk is mispriced and you've got a not great situation over there and fairly priced, what has to -- what actually happens to kind of get asset prices to fall to deep enough level they kind of become attractive? I mean it's hard -- it's getting hard to figure out what gets a lot worse than the current reality in the markets just around pricing because money is going to fixed income because there's no return anywhere else. I'm just trying to figure out what kind of creates a really attractive pipeline for you other than kind of continuing to pursue the idiosyncratic opportunities?

Peter Lionel Briger

Sure. Generally, right now, we've got a very fluid situation with a lot of uncertainty. And so in periods of uncertainty, people don't like to make decisions, and that has a real impact on what is happening in Europe. Europe is not a static situation. It's a fluid situation, and there's dramatic credit contraction that's going on right now in Europe. That being said, ECB European Union is providing a tremendous amount of credit to banking institutions, to buyers of sovereign bonds, et cetera. So there's a tremendous amount of government intervention that's going on. Financial institutions all over Europe are able to take their asset-backed securities and pledge them and get cash. And therefore, asset-backed securities prices are distorted. And so what happens in a situation like this is time goes on. And gravity takes effect, and a market clearing process begins at some point. And then, you've got an accident-prone environment -- I think, credit has been a good business since the collapse of the financial system. But credit investing has typically been only an okay business and investing in credit as many financial institutions have realized over a long period of time is only marginally profitable if you invest through the cycle. So we're trying to be mindful of the fact that you have a cap upside in a huge portion of the credit world, unless you're in sort of buying companies though the debt, if you will. Your upside is cap. And so when actual risk is higher than perceived risk, you really want to be out of the market. So what needs to happen is the market needs to realize the actual level of risk and price for the actual level of risk and the government's got to stay out of the way. So it is conceivable that we are in this period of chronic problem solving and government intervention for some period of time, and we don't invest capital in significant amounts in our credit business because we can't make the types of returns that our investors are looking for and are paying us to make because these are not mutual funds. These are not relative value credit businesses. So I wish I had a better answer for you, a more precise answer for you, but I just can't give you one.

Roger A. Freeman - Barclays Capital, Research Division

No, makes sense. I mean, basically, the government crutch has to go away, central bank support, which they pretty much don't do until they have no choice. The last question is Fund V, I misspoke before, I said Fund VI, how much is that have to go up at this point to get to the preferred threshold?

Peter Lionel Briger

I don't have the precise number. Basically, the market value of it is basically at investment capital plus or minus.

Roger A. Freeman - Barclays Capital, Research Division

Okay. So it's just the accumulated hurdle.

Wesley Robert Edens

Yes. Especially the last hand full of things we made in that fund I think we got a lot of bright prospects for even through the second half of this year. So it is recovered to a good place and it's got a long ways to go.

Operator

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

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

Maybe you could help us get a better handle on how we should think about a cash distribution. I mean understanding that the trajectory of the business is as positive capital raising performance, hopefully realizations continue. But I think what is maybe a little bit more opaque to me, at least, and maybe investors out there is have -- when you reported DE, actually translate into the ultimate distribution for the full year and a true-up. Understanding that there's some taxes, there's payments under the TRA, there's some holdback just to run your business and maybe some other tax payments. So any guidance you can give us that if you're reporting $0.09, $0.10 a quarter on pretax DE, no. If you did that for each quarter for the full year, what are we going -- what should we be expecting for a cash distribution? It's the -- the $0.20 base plus another $0.05, $0.10, $0.15, just trying to get some way that we can actually put our arms around that to get it to cash that we will actually receive.

Randal Alan Nardone

This is Randy. Well, it's not the end of the year yet, and obviously, distributions are subject to board determination. There's certainly be a lively debate internally about what to do, taking into account liquidity and our debt and our share price and other investment opportunities and buying back shares are all things that we'll consider when the time comes.

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

Yes, but there's no -- I mean, I know some of your peers have -- using more kind of a preset formula in the sense of 80-ish odd percent of distributable earnings, a number like that, but it's -- I guess it's a little more wait and see, I guess.

Randal Alan Nardone

Wait and see, and we're certainly not going to approach it on a formulaic basis.

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

Okay. Question for the credit PE business for Pete, I'm just curious, if you look at incentive income, is there any way to get a hand on how, what portion of that is actually just being driven by kind of a natural cash flow off the portfolio from interest payments and whatnot is there? Kind of a certain level that even without realizations, you generate $5 million or $10 million or $15 million or whatever the number is a quarter in incentives?

Peter Lionel Briger

No.

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

I'm sorry, no? Okay. And then maybe on the liquids business. I mean performance has clearly improved. I mean, can you give us any color on kind of where you stand in terms of hedge fund redemption notices and kind of trend there or anything?

Peter Lionel Briger

The notices, which will be disclosed in our 10-Q, the trend is down across all of our businesses. In the credit business, the DBSO fund doesn't really have its notice period until the end of the third quarter. So there's really nothing significant there. And then the liquid business there, down significantly.

Operator

Your next question comes from the line of Jason Stewart with Compass Point.

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

On the fundraising side, can you give us any color about how investor requirements or diligence has changed across the hedge fund and Private Equity products?

Peter Lionel Briger

This is Pete. I don't think that it's changed a lot particularly. I think that the work that people do is similar to the work that they did pre-2008. I think that, that -- maybe there's a bigger focus on infrastructure. Obviously, a lot of smaller firms got washed away, so -- governance, et cetera. But I would say that it's -- overall, pretty much the same.

Unknown Executive

[indiscernible] on the liquid side, there's a little more focus on separately managed accounts and we're very well positioned to accommodate that with our infrastructure. Our business in macro, Asia Macro, is highly liquid, a lot of desires for transparency on that. But it's not a significant change in due diligence process. It's more of a change in how the money comes in. And as I've said for the separate managed accounts, we're well positioned to thrive it in that environment.

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

That makes sense. I guess I just would have expected given where we are in the cycle in the sustained stretch in Europe that you might see fund to funds gravitate to firms like yours where there's more infrastructure et cetera. The easy money for smaller credit funds might have already been made, people are becoming a little bit more picky about who they put money with, but it seems like maybe it's not the case.

Randal Alan Nardone

I'm not sure that's the case, I'd like to say that's the case, but we've seen huge amount of money raised to go into credit investing, people always seem to be fighting the last warrants and returns have been good in credit, you would expect -- you would hope for the opposite. But it hasn't really been the case. I think the credit funds are getting funded to a greater degree than they have before. There is some, as I said, emphasis on infrastructure. And certainly, if people are going to be investing in private credit investing, there's so many firms that went out of business in 2008, 2009. I think people are worried more about do people have the real infrastructure that they need, but absolute dollars, let's say, that people want yield and they feel less confident about the equity markets.

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

That's helpful. And then you commented a little bit -- pretty broadly about Asia. I was wondering more specifically, if you had any thoughts about what opportunities might emerge in real estate, specifically in China. And how you're thinking about any trends more of country specific or asset specific that you could talk about?

Peter Lionel Briger

Well, we are interested in China from a real estate investment perspective, but we are very cautious about the risk that exist in the real estate environment in China. And so we would like to be bigger investors in Chinese real estate, but we're keeping our cash in our pockets right now. But we're getting organized about China. We've got a very significant business, an excellent business in Japan and a significant business in Australia today. And I think China is more of a future project for us.

Randal Alan Nardone

Although on the senior housing business, we've set up a China operation last year, and they've had a great run of things. We've got a great partner in China. We've got a great partner in China. We've got our first property, which is under construction, which is a significant step ahead. I think we'll have an open meeting of that project by the end of the year. China's got the largest old population in the world, and I think we're the biggest investor in senior housing here in the U.S., so we've got a great platform. We moved over a bunch of folks, and it will be very interesting to see how this all plays out. So first property is in Shanghai. hopefully we will have something to update on that business. We're funding it right now with our partners, both on balance sheet, and I think that as we see the economics and the dynamics that market figure out themselves and make it a little bit more clear what the opportunities that looks like then I think we'll organize capital in relation to that. So it's interesting.

Operator

[Operator Instructions] Your next question comes from the line of Dan Fannon with Jefferies.

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

I guess a comment, or a question around the credit side as well. In the press release, you mentioned a couple of large managed accounts that help with the fundraising. I guess it seems as if that's somewhat of a trend across our businesses with managed accounts. And are those roughly on similar terms? Is the kind of the rest of your AUM with regards to redemptions and fees?

Randal Alan Nardone

Yes.

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

Okay. And then as you think about -- I guess, I apologize if you already said this, but with regards to the liquid business, have you guys -- did you talk about July in terms of how those funds have fared versus high watermarks?

Unknown Executive

In July, the Fortress Macro Fund was down to about 2%. The Fortress Asia Macro Fund was up, not quite 2%, 1.5% or so, so a mixed bag there. But nothing that changes where we are, in over the course of the year, having terrific performance, terrific -- absolutely terrific relative to our peers, and I would also point out that we are open and most of our competitors are not. So we feel very good about our position moving forward, based on that status. Both performance and the fact that we're out marketing and seeing a lot of clients who are interested in the space.

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

And the point being that others aren't open for new AUM?

Unknown Executive

Many of our biggest competitors are not. In fact, yesterday, you saw one of our big competitors send money back out the door. So we're a little bit smaller and we're open for business and we're performing well. It's a good market dynamic for us.

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

Okay. And then just a clarification on the redemptions. In the quarter, I guess, how much was resulted from the closure of the commodity fund?

Daniel N. Bass

$400 million. $400 million of the $600 million was a result of the closure.

Operator

That does conclude our question-and-answer session for today. I am pleased to hand the microphone back over to Mr. Randy Nardone.

Randal Alan Nardone

Thanks. Great. Thanks, everyone for joining us today. We had a good quarter for Fortress, saw a continued progress, robust activity and strong investment performance across everyone of our businesses. Embedded value on our balance sheet and in our funds continue to build, and now represents over half our current share price.

We continue to attract more capital from more investors around the world, and we believe that investment opportunities remain aligned with our strengths, which bodes well for performance going forward. We're pleased with the points of strength, progress and momentum that were evident in the first half of 2012, and we believe the substantial potential earnings upside is well within reach. Thank you.

Operator

This does conclude today's conference call. You may now disconnect.

Unknown Executive

Thank you.

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