fortress 4q & year end earnings call transcript

8/2/2019 Fortress 4Q & Year End Earnings Call Transcript

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FinalTranscriptFortressInvestmentGroup

Fourth Quarter and Year End 2011 Earnings

Conference Call

February 28, 2012 / 8:30am EST

Speakers:Randy Nardone - Interim Chief Executive Officer, Co-FounderDan Bass Chief Financial OfficerStu Bohart President of Liquid MarketsDean Dakolias - Co-Chief Investment Officer of Credit FundsWes Edens Co-Chairman, Co-FounderGordon Runte Head of Investor Relations and Corporate Communications

Analysts:Craig Siegenthaler Credit SuisseMarc Irizarry Goldman SachsRoger Freeman Barclays CapitalRobert Lee KBWCampbell Anthony Macquarie


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Final TranscriptFortress Investment Group: Fourth Quarter and Year End 2011 Earnings Call


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.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator

Instructions)

I would like to now turn the call over to Mr. Gordon Runte. You may begin, sir.

Gordon Runte

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

will 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 would like to provide a quick introduction. Randy was part of Fortress before the

Company had a name. He is a day one principal and member of our Board since its inception. Randy previously served as Chief Operating Officer of

Fortress and he has 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.

Randy Nardone

Thanks, Gordon, and thanks, everyone, for joining us today. Fortress delivered solid performance and made important strategic progress against a

challenging backdrop in 2011. We have entered 2012 well-positioned across our businesses and we remain confident that the investment landscape

presents outstanding opportunities for select diversified managers l ike Fortress.

Let me start by anticipating an obvious question and giving you some context on my new role. As Gordon noted, my ties to Fortress could not run any

deeper. I am 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 of 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 will 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 of companies. Dean and Wes

will provide some color on this later in the call.


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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. In Liquid Markets a disappointing year for our flagship macro funds, but we have had a strong start

to 2012, and Asia Macro has reported a very solid first 11 months that has 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 a 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 Principals' Agreement. The new five-year agreement provides for compensation on a completely forward-looking performance-driven

basis with no compensation guarantees.

Last, we continued 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 per share. That is 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 three 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 in 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.

Dan Bass

Thanks, Randy. Let me start my remarks with three 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

numbers.

Pre-tax 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 our incentive income. In our Credit Hedge Funds we have produced 11% net returns for the year in our

DBSO funds, generating $78 million of incentive income. This left 100% of the capital in these funds above their respective high-water marks.

In our Liquid Funds nearly all the capital ended 2011 below respective high-water marks. 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-water marks. And our Fortress Macro Fund was upnearly 4% in January leaving over 80% of its capital within 6% of its high-water marks.

In our traditional PE Funds the value of our investments continued their upward trajectory. They appreciated by over 9% during the year following a 17%

appreciation in 2010. This brings the appreciation of these fund investments to approximately 67% since the low point in 2009.

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.


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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 have

previously stated, our full-year capital raise was backend 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 have invested since 2008.

Our pace of investing has been, on average, over $1 billion over the last three 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 Liquids business.

As we stated before, the new Principals' 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 have previously noted, our equity-based compensation deduction is significant and will continue to

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 the 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 remains strong, particularly in our credit business. And, finally, as we begin the year I am pleased

with the further strengthening of our alignment with shareholders. New and essential for this alignment is the Principals' Agreement and dividend. These

new elements join our continuing alignment of control of expenses and optimization of our capital structure.

Now let me turn it over to Stu.

Stu Bohart

Thanks, Dan, and good morning, everyone. As was mentioned, the Liquid Markets business had mixed performance in 2011 but it wasn't without its bright

spots. We successfully launched a new fund, the Fortress Asia Macro Fund.


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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 have 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 two 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, Arab Spring, US 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 will 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 macro investors. Combined with better growth numbers out

of the US, this has led to a widespread risk-on rally in global equities and credit.

Correlations and implied volatili ty 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 of a slowdown that could lead to new concerns about Spain and Portugal. And let's not forget Iran,

Syria, and the importance of energy prices and Mideast 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 US elections and fiscal tightening that the US 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 will need to be 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 to 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 are above high water in

Asia, and as Dan noted in his comments, we are within striking distance in our other funds. We have 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 earn incentive fees, but our success is tied to recent

performance. Our clients are willing to pay our fees, but they demand the performance, liquidity, and, of course, the right to change their mind.

Our mixed performance in 2011 led to the reported outflows but our strong start to the year and keen investor interest in 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 diverse Liquid Markets business. Dean?

Dean Dakolias

Thanks, Stu. Good morning. I think Dan went over fund performance for 2011 so I would only add that while we are pleased to have delivered strong

returns 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

2012 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 imbalance 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 five years. Interventions globally can't support liquidity, allowing for the deferment of decisions, but in the end institutions will still be

forced to sanitize their balance sheets and divest non-core assets and businesses.

The only question really is timing. We are patient investors with the right structures in place to pursue both near- and long-term opportunities. I thinktoday most of the focus is on Europe and I will touch on that a little bit.

I think I will lead with the punch line also that LTRO is unambiguously good for both Europe overall in the short term and for the execution of our own

investments in liquid assets in Europe. I think without the action from the ECB, a likely outcome at the end 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 inaction.


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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 medium 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.

Exacerbating the situation is an environment of governmental fiscal austerity, higher taxes and cuts in the economic zone where the government share of

GDP generally is much higher than in places like the US. So our best guess is that unemployment likely remains high and that growth will continue to 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 has apparently had on both equity and credit markets

globally, I think really making the liquid form of what we invest in generally uninteresting, it did not decrease overall European bank leverage from 28

times tangible assets to equity to 15 where US bank holding companies sit. It did not remove the 6% of total loans that are in non-accrual status on

European banks' balance sheets. For context, it 's roughly 2.5% for US banks.

Nor did it increase reserves from $0.59 for every Euro of non-accruals to the 120 cents per dollar where US 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 three-year

window as forever and avoid taking hard steps to restructure and reduce. They can fiddle; we can wait.

I think the US, while it has really dealt with its banking issues more aggressively earlier in the cycle, still suffers many of the same fundamental issues as

Europe, high unemployment, underemployment, little prospect for real personal income growth, fiscal tightening at all levels of 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 this laundry list of issues weighing on financial markets around the world we are 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 opportunity set for our credit businesses in the years ahead. Wes?

Wes Edens

Thanks, Dean. If you could take the first two months of the year and multiply it times six it would be quite a year. In the private equity world we have a

portfolio of investments that are concentrated in really three sectors -- financial services, and then transportation and health care, healthcare-related realestate in particular.

The financial services space is one that is dominated by investments in the service sector. So we have got an investment in a company called Nationstar

that is the largest non-bank servicer here in the US. We have an investment that we share with the credit funds in a company called CW that is the second-

largest special servicer of commercial real estate loans, troubled loans, here in the US. And then we own 80% of a company we bought from AIG called

Springleaf, it's a consumer finance business.

Notable of all of these investments is that they really are in the business of being the pick and shovel providers of dealing with the messes that exist. One

of the things I think is notable, although you read in the papers once a day, twice a day, 100 times a day about all the European debt crisis, the residential

mortgage market in the US is a couple trillion dollars larger than all that debt added up together. For all that, there has been a lot of money made and lost

over the last five years and you have had this great depression in housing, I feel, we feel, that the future cleanup of this is quite possibly the greatest

opportunity of any of our investment lifelines.

[* Text deleted at request of company.]

Transportation we have got concentrated investments in railroads and containers and airplanes. Railroads have had a spectacular run. We do have a public

company there that you can keep track of. We also, own the Florida East Coast Railroad that has had a very good run on things.

Containers, airplanes, those are really very good proxies for worldwide trade and movement of both goods and people on the airplane business. Lots of

interesting things going on there. We capitalized a fund de novo to focus on transportation assets; we called it Worldwide Transportation and

Infrastructure. We've 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.


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I think that collectively, when you add up all of our transportation-related investments, we probably have among the largest of any investment manager in

the world, if not the largest. So that is a space where the folks that have done that, my partners Joe Adams and Ken Nicholson, Jon Atkenson have done a

terrific job at managing those investments during all the downturn and there has been a lot of good things going on there.

Lastly, 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 will have some interesting things to talk about there.

So pretty much across the board we have 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 is not a lot of visibility we can give into things as they are unfolding, so all that I can really relay is that we are

pretty optimistic about it.

We'll see how the year turns out obviously because there is a lot of different things that can always go wrong, but for the first two months it has been a

spectacular start to it all. Second half of the year I think could lead to some really interesting capital formation events as well. So again without kind of

forecasting that we think that there is a lot of good things going on there.

So that is all. I will turn it back over. Randy?

Randy Nardone

Let's go to Q&A

QUESTIONANDANSWER

Operator

(Operator Instructions) Craig Siegenthaler, Credit Suisse.

Craig Siegenthaler - Credit Suisse

Good morning. First, maybe to just start where Wes left off on private equity and maybe just go into performance fees.

After a very kind of low year of performance fees in 2011, and I think you would 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-water marks? Also, when you think about -- you can't say a lot I

know, but Nationstar and the railroad company, etc.? Maybe give us a little better color there.

Wes Edens

Well, it's a fund-by-fund analysis that is probably best done kind of walking you through them individually, Craig. But I think some of the early funds are

above their high-water mark and so the income is promotable. Some of the more recent ones still have a little bit of wood to chop, but as a group they are

all above cost at this point.

[* Text deleted at request of company.]

The railroad company, I don't know if we disclose our basis in it. Obviously its trading value is well above what our basis is in that company. I think the

street consensus for fourth-quarter earnings was $0.21. I think the Company did $0.33 or $0.34.

We refinanced last week. Its primary debt, which three years ago was high-yield debt we put in place. It was about a $500 million issue roughly that was

10% all-in cost of debt. That debt was refinanced last week at 4 1/8%.

So the business has roughly doubled its EBITDA over that period. They have done some spectacular operating results but also the financing markets in the

private equity space right now are as good as they have been at any point since the crisis, at least in our sector, so I feel really good about that.


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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 and the incentive fees in the last couple of years has been miserable as a product of the tough times that we had to deal with. I think the

miserable times are behind us and there is a lot of room to be optimistic about what is going to happen. But of course it's just a function of when we

actually transact, what we do, etc., so you have to kind of wait and see.


Got it. Just a follow-up question on the $2.2 billion of committed capital. Maybe given the composition Pete is best to answer this or maybe Dan Bass, but

I am wondering how should we think about the likely timing of these flows because risk assets have rallied a lot. Does that mean they are 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?

Dan Bass

Just to be clear, the number was $3.9 billion of dry powder. And, Dean, you can answer the (multiple speakers).

Dean Dakolias

Sure. I think in terms undrawn -- the timing of drawing down it's difficult to predict. Obviously 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 opportunity set going forward and the deleveraging

that will occur even with the rally and risk assets over the past few months.


Okay, great. Guys, thanks for taking my questions.

Operator

Marc Irizarry, Goldman Sachs.

Marc Irizarry - Goldman Sachs

Great, thanks. 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 raising 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 your strategies, maybe even away from credit?

Randy Nardone

We like our diversified model and we continue to try to diversify and expand on the diversification. I think that prospects for fundraising in our three

major businesses look pretty good.


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Great. Then maybe, Stu, can you just elaborate a little bit on some of the efforts that you have undertaken in terms of building out the infrastructure? How

much sort of expense is built into the cost structure today relative to the amount of assets you can raise? And if you can give us any more color on sort of

what the forward outlook is for fundraising for you guys that would be helpful.

Stu Bohart

Sure. One of the things I am more involved 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 at the environment generally where rates are low and risk and equities, if it has come down it's still a

concern of what can happen in long-only equities, but like the capital raising environment is very strong.

It's 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 are in a good position across all of the businesses. Wes mentioned some of the new funds that are coming out of private equity.

In Liquid Markets we are also focused on developing new funds, planting the seeds that we -- I don't want to share details on new funds because we gointo marketing around it, but we currently expect to launch at least two new funds. Asia Macro is getting a lot of attention. It has performed well; has a

very strong team out of Singapore.

The Macro Fund has interest as well, although it's highly dependent on what the preceding six months looks like. So as we enter the year and we are

performing well we are getting more and more interest in that.

You asked a question around infrastructure costs. They are baked in; I don't expect a remarkably higher expense level. My point is we are focused on it.

We are 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 is to launch new funds, increase AUM and us moving steadily towards a goal of more

diversification across the business.

Randy Nardone

We don't set public fundraising goals, but the momentum we built at the end of 2011 and going into this year is pretty strong. I think we are in the market

right now with seven or eight funds in all of our businesses, so we are very optimistic about 2012.


Okay. Then I know it is sti ll preliminary, but any color on performance in February versus high-water marks?

Dan Bass

The month is not done, so we are not prepared to report on that.


Okay. Then, Dan, just one more quick one for you. Can you just -- the $1.1 bill ion in investments, can you just give us a breakout of what the composition

of those balance sheet investments are?


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Dan Bass

Yes, it is about $600 million plus -- $600 million to $650 million in the main private equity business predominantly, and then the balance, $400 million

plus, is [half Liquid, half Credit] (corrected by company after the call).


Great. Thanks.

Operator

Roger Freeman, Barclays Capital.

Roger Freeman - Barclays Capital

Good morning, hi. You mentioned SMAs and $300 million coming in from the pension fund. Maybe you can talk about the competitive environment for

SMAs and what you're seeing out there. Thank you.

Stu Bohart

It is 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 are all moving towards SMAs primarily as 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 are in a very good position to provide it, and I think you will see a lot of the

institutional flows head that direction over the coming years.


Okay, thanks. And in terms of the seven to eight funds that are in the market right now, can you talk about appetite for those funds more specifically?

Perhaps what you are seeing across existing LPs and new LPs and across geographies? Thank you.

Stu Bohart

Little tough for me to guess at things. I would tell you that we have a lot of capabilities here and a lot of funds. We focus our efforts on where there is

client demand and that is how we come up with the shorter list of seven or eight 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 our investor pool.

So as we have said, we are out there, we are optimistic about it, but it's hard for me to guess exactly what comes out of that cap raise effort. But if you look

at our strength and you look at the general appetite for products that are risk controlled and have the capability of producing double-digit returns, you get

some sense of the broader opportunity.

Dean Dakolias

Sorry, I was just going to add that I think there is really good appetite across the (inaudible) types of investors for our funds, both repeat and new.


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Okay, thank you.

perator

Robert Lee, KBW.

Robert Lee - KBW

Thanks. Good morning, guys. Couple questions; first, just to clarify, Dan, the $3.9 billion of dry powder. If I read the release right is it about $3.7 billion

of that mainly in the credit PE business that is not currently earning fees?

Dan Bass

Correct, correct. In addition we have over ($1.6 billion) (corrected by company after the call) at our private equity portfolio companies that has dry powder

as well.

Robert Lee - KBW

All right, great. You mentioned in the press release as of December 31 in the Liquids business there was about a $1 billion of redemption notices.

Knowing that sometimes people can -- if they give you notice they don't have to execute on it, but is there any possible to update us on the status of that. If

you have seen most of that kind of flow out so far and what is kind of the next window that we should be thinking about from potential redemption

notices?

Stu Bohart

What we reported is what we have realized. We haven't yet reported Q1; we will 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. It's very dependent, as you said, on kind of last-minute decisions when the

people want to come in or go out.

It is an ebb and flow, it's the nature of the business, but as I had mentioned, we feel pretty good about how we started the year.

Robert Lee - KBW

Okay. Maybe following up to the Liquids business, you mentioned you are hopeful that you will have two new strategies out there this year. Without

going into specifics, I am just curious, the management of those products are those brand-new products to the firm in the sense that you are going out, you

are hiring new teams to run them or are you using kind of existing personnel and kind of spinning off strategies?

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?


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Stu Bohart

Sure, it's a combination of both -- of new teams that are attracted to the capabilities of Fortress and capital formation and client service and the

infrastructure, as well as spinouts or supplemental funds based on current skill sets internally. So Asia Macro is an example of a spinout. I think we have

one, perhaps two, of those down the road but we will see.

Then on new teams, we do get the opportunity to look at 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 of the new teams does not have a significant expense impact.

They come knowing that they will be partners in the funds, meaning they will share incentive fees and that we will grow a business together. And as we do

that they begin to get compensated.

Robert Lee - KBW

Great. I just have one last question, and thanks for indulging me. Just curious, you have multiple businesses, you have seven or eight 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 -- or are your marketing people kind of marketing the whole platform? Just trying to get asense on how you kind of organize that way.

Stu Bohart

So we have a mix that works well here that is a combination of product specialists, 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 those on into the product areas for a more focused sales process. Client service,

the teams sit together on one floor; we meet regularly. There is 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 specialists that are down in the business units.

Robert Lee - KBW

Thanks and I know I said that was my last one; I did have one last one. You mentioned 50% of your, I guess your LPs or commitments this year came

from non-US investors. Could you give us a sense of the proportion of commitments you are getting from just brand-new investors to the Fortress

platform?

Dan Bass

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

Robert Lee - KBW

Great. Thanks for your patience and taking my questions.

Operator

Campbell Anthony, Macquarie.


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Campbell Anthony - Macquarie Research

Just had a question on the -- there is $700 million that came out of the liquid funds this quarter in redemptions and another $1 billion next quarter in 1Q

2012. Of that $1.7 billion is it mostly in macro or is some of that coming out of commodities? What is the breakdown there?

Stu Bohart

You have the numbers here. It's macro and commodities --

Dan Bass

I would say two-thirds macro, one-third commodities.

Stu Bohart

Macro is the bigger fund so predominantly macro.

Dan Bass

Yes, it's two-thirds macro, one-third commodities.


Okay, thanks a lot. What did you say the tax rate was in 2011?

Dan Bass

4.[3]% (corrected by company after the call).


4.[3]% (corrected by company after the call). Great, thank you very much.

Operator

(Operator Instructions)

Gordon Runte

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


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Randy Nardone

Thanks, Gordon. 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 on our balance sheet. Second, investorinterest in our strategies is strong and we are in the market with new or next-generation funds in each of our businesses. We are 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 experience 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.

DISCLAIMER

Certain statements in this transcript may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of1995, including statements regarding Fortresss sources of management fees, incentive income and investment income (loss), estimated fund performance,the amount and source of expected capital commitments and amount of redemptions. These statements are not historical facts, but instead represent onlythe Companys beliefs regarding future events, many of which, by their nature, are inherently uncertain and outside of the Companys control. It ispossible that the sources and amounts of management fees, incentive income and investment income, the amount and source of expected capitalcommitments for any new fund or redemption amounts may differ, possibly materially, from these forward-looking statements, and any such differencescould cause the Companys actual results to differ materially from the results expressed or implied by these forward-looking statements. For a discussionof some of the risks and important factors that could affect such forward-looking statements, see the sections entitled Risk Factors and ManagementsDiscussion and Analysis of Financial Condition and Results of Operations in the Companys Annual Report on Form 10-K, which is, or will be, availableon the Companys website (www.fortress.com). In addition, new risks and uncertainties emerge from time to time, and it is not possible for the Companyto predict or assess the impact of every factor that may cause its actual results to differ from those contained in any forward-looking statements.Accordingly, you should not place undue reliance on any forward-looking statements contained in this transcript. The Company can give no assurance thatthe expectations of any forward-looking statement will be obtained. Such forward-looking statements speak only as of the date on which they were made.The Company expressly disclaims any obligation to release publicly any updates or revisions to any forward-looking statements contained herein to reflectany change in the Companys expectations with regard thereto or any change in events, conditions or circumstances on which any statement is based.

THE INFORMATION CONTAINED IN THIS TRANSCRIPTS IS A TEXTUAL REPRESENTATION OF THE COMPANY'S CONFERENCE CALL

AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS,

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fortress 4q & year end earnings call transcript

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