Wednesday, February 15, 2017
Japan to Buy Florida East Coast Railway? (Bloomberg)
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Fortress Exits Decade in Public Spotlight With SoftBank Deal
by Devin Banerjee and Melissa Mittelman
February 14, 2017 9:14:02 PM EST February 15, 2017 11:47:02 AM EST
Firm was first private equity, hedge fund manager to go public
Slumping stock, hedge fund losses dogged Fortress since crisis
Why Softbank Buying Fortress Investment Is a Big Deal
Why Softbank Buying Fortress Investment Is a Big Deal
The first private equity firm to go public has become the first to be bought.
Ten years after Fortress Investment Group LLC listed on the New York Stock Exchange, Japan’s SoftBank Group Corp. has agreed to buy the alternative-asset manager for $3.3 billion, according to a statement Tuesday. The sale caps a decade of public scrutiny for the New-York based firm as it weathered a sliding stock price and volatile performance.
“The fact that SoftBank is paying a significant premium over the recent trading prices of the firm suggests that there is value well above what the public markets are willing to pay for at this moment,” JMP Securities LLC analyst Devin Ryan said in a phone interview Wednesday. “They’re getting a lot of value for the price that they’re paying.”
Fortress’s February 2007 listing heralded an era of IPOs for alternative-asset investment firms. Blackstone Group LP followed four months later, and hedge-fund manager Och-Ziff Capital Management Group LLC went public later that year. KKR & Co., Apollo Global Management LLC, Oaktree Capital Group LLC, Carlyle Group LP and Ares Management LP came next.
Fortress, along with Blackstone and Och-Ziff, suffered steep declines in share price as the financial crisis hit their holdings. Fortress, which sold stock in the IPO at $18.50 apiece and traded at all-time high of $37 weeks later, plummeted to as low as 77 cents a share in December 2008.
The stock closed Tuesday at $6.21, 66 percent below its IPO price. Shares surged 29 percent to $7.98 as of 11:39 a.m. in New York Wednesday.
“Ten years and a week ago we were the first alternative manager to go public,” co-Chairmen Pete Briger and Wes Edens and Chief Executive Officer Randy Nardone wrote in an e-mail to employees Tuesday evening. “Now we are embarking on a new path -- although similar to our original mission in many respects, we now embrace the opportunities and challenges of a worldwide market by joining forces with SoftBank.”
Fortress was founded in 1998 by BlackRock Inc. partner Edens and UBS Group AG executives Nardone and Bob Kauffman. As they raised money for private equity deals and invested the capital, assets under management grew to $3.9 billion in five years from starting capital of $400 million. As they expanded into credit and hedge fund strategies, assets swelled to $32.6 billion by 2007.
Operating as a public company seemed uninteresting for the firm’s leaders, who often phoned in to public earnings presentations from different places around the world and spoke off the cuff rather than from prepared, written remarks. By contrast, top executives at peers such as Blackstone, Carlyle and KKR spend weeks preparing for each earnings report and conference call with analysts and investors.
On one such call, in October 2014, Fortress’s executives were asked by JMP’s Ryan whether they would ever consider going private.
“When the opportunity presents itself, we’ll definitely think about that,” CEO Nardone responded. “It’s obviously something that, at these valuations, it does seem like a pretty good value. It is something we think about as we think about many things going forward.”
Major performance trouble started in 2014, when results in Fortress’s macro hedge fund business began to falter. Led by Mike Novogratz, the macro strategy once managed $8.1 billion before wrong-way trades led to a spate of client withdrawals, which hampered performance even further. The business met its demise in 2015, when Fortress shuttered his funds and Novogratz, a former U.S. Army helicopter pilot and former partner at Goldman Sachs Group Inc., left.
“Fortress has struggled more than many of its peers with growth and public investor acceptance,” Keefe Bruyette & Woods Inc. analysts Rob Lee and Ann Dai wrote in a note to clients Tuesday. “We don’t think there is much read-across to other publicly traded alternative managers, in part given their generally larger market caps, and to the extent this seems like a unique transaction with a unique acquirer.”
As of Sept. 30, Fortress managed $70.1 billion across its private equity holdings, credit assets, real estate, hedge funds and fixed-income investments. Among its large holdings are Florida East Coast Railway, which it bought for $3.5 billion in in 2007, consumer lender OneMain Holdings Inc. and mortgage servicer Nationstar Mortgage Holdings Inc.
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Edens, Nardone and Briger -- a former Goldman Sachs partner who joined Fortress in 2002 and rose to be co-chairman -- have agreed to continue leading the business under SoftBank, the companies said Tuesday. The executives agreed to invest half of their proceeds from the sale into Fortress-managed funds, as well as SoftBank’s shares and other vehicles. In a letter to clients Tuesday, they added that they intend to maintain 90 percent of their current level of investment in Fortress products for four years.
“Rather than a ‘cash out’ for us, this in a real sense is a ‘cash in,’” they wrote in the e-mail to employees. “We have never been more excited about the prospects for our business and with this transaction will once again be left to pursue our investment businesses as a private enterprise.”
Edens, Nardone and Briger will reap a combined $1.39 billion from the sale to SoftBank, marking the second big windfall for the partners. Edens, Briger and three other principals extracted $1.7 billion in dividends and private stock sales from Fortress before it went public.
Fortress will operate independently and remain headquartered in New York, SoftBank said. The Japanese company, led by founder Masayoshi Son, said it’s committed to maintaining Fortress’s management, business model, brand, employees, processes and culture.
SoftBank already had ties to Fortress before the deal. Rajeev Misra, SoftBank’s head of strategic finance, left Fortress in 2014 after less than a year. He leads SoftBank’s $100 billion technology-focused private equity effort known as the Vision Fund.