Credit thrives at Fortress, despite ‘uninteresting’ market

Fortress’s credit funds have continued to perform well, even though Peter Briger says the investment environment continues to be muted.  

Fortress Investment Group reported high performance and asset growth in its credit segment in the third quarter, though new opportunities continue to be relatively muted in the current market, said Peter Briger, the firm’s head of credit.

The returns Fortress has been making in credit are due to older investments and Briger said he did not expect to be deploying capital to many “interesting” opportunities soon. 

The Fortress Credit Opportunities I, II and III funds posted net IRRs of 24.7 percent, 16.8 percent and 10.8 percent, respectively, from their inceptions through 30 September.  

Fortress Japan Opportunities Fund (FJOF) I and II, which invest in Japanese real estate debt, returned 32.3 and 23.5, respectively, since their inceptions through the third quarter.  

The firm also announced that it closed FJOF III at its $1.1 billion hard-cap post quarter-end. The Drawbridge Special Opportunities Fund, the firm’s flagship credit hedge fund, returned 4.9 percent net for the nine months ending 30 September. 

Having acquired Mount Kellett, a credit hedge fund manager, this year, the firm also added $3 billion in assets under management to its credit segment, which totals $17 billion and is Fortress’ largest business after Logan Circle, a traditional fixed-income manager that handles $33 billion. 

Speaking on Fortress’ earnings call, Briger said the firm has had success in harvesting capital in its private equity credit funds, although “the credit environment continues to be uninteresting”.  

“In the beginning of this year, we thought there were really very little opportunities in the credit markets and pricing was awful,” he said.  

Even though pricing has improved slightly, Briger said the environment was still muted and that competitors’ early bets on energy credit had not paid off.  

“People who got into energy credit early have gotten hurt. For the most part, we stayed away from that and are really still biding our time. I don’t see a huge opportunity on the horizon. Everything that we are doing from a new investment perspective is really idiosyncratic,” Briger said. 

He added that he expects the firm’s funds to do well in the next year in terms of realisations. “But caution that we are not placing those realisations with new investments that we think are spectacular. So the credit business continues to tread water. We have done reasonably well on a relative basis … but we are really realising yesterday's investments,” Briger said. 

The credit business generated pre-tax distributable earnings of $51 million in the third quarter, up from $36 million in the same period a year ago. The 46 percent rise was driven by higher management fees and investment income.

Fortress executives also said they regret shutting down the macro hedge fund business, but that it will have a positive impact on overall performance, as it was an underperforming line. The hedge funds had $1.8 billion under management, 2 percent of Fortress’ total $74.3 billion.

“From an economic perspective, we are removing an underperforming business from our P&L. This business was actually dilutive to earnings in the first nine months of this year, losing around $8 million,” said chief financial officer Dan Bass.  

“As a practical matter, this AUM was far from any potential to generate incentive income and prospects for P&L contributions in the coming year were uncertain.” 

The firm also reported that it raised $9 billion in alternative capital through the third quarter, which is more than any full year since 2007. Fortress’ $74.3 billion in assets is a 13 percent rise year-on-year and a 3 percent increase from the second quarter. The New York-headquartered firm estimated it had about $8.7 billion in dry powder reserves.