The credit market is currently crowded, mispriced and uninteresting according to executives speaking Thursday (28 July) on Fortress Investment Group's second quarter earnings call.
“When we say 'uninteresting' that means that the return possibilities in the market, unless we are able to do something exceptionally idiosyncratic, are not that good. We have to take what the market gives us, or just not invest,” said Peter Briger (pictured), co-chairman and head of credit and real estate at Fortress. “For the most part, our decision has been not to invest in the lion's share of opportunities that come our way because the investment return possibilities, from a risk-adjusted perspective, are not that interesting,” he said. Briger's characterisation of the state of credit markets echoed comments made on previous earnings calls.
Chief executive Randal Nardone highlighted the performance of Fortress' credit unit amidst what he labelled as a strong quarter for the firm overall.
Fortress' private credit business, consisting of its credit private equity funds and credit hedge funds, delivered $73 million in pre-tax distributable income in the second quarter, with $47 million coming from the credit private equity funds and $26 million coming from credit hedge funds. This was an increase over the $68 million in the second quarter of last year that came as a result of higher incentive income and management fees, according to materials released in conjunction with the call.
Distributable earnings from credit in the first half of 2016 reached their highest level in the history of the firm, according to Nardone. The credit unit's assets under management stood at $18 billion at the end of the quarter.
Through the end of June, Fortress Credit Opportunities (FCO) I posted an inception to date net IRR of 23.7 percent, while FCO II achieved 16.2 percent and FCO III reported 9.8 percent. The firm's flagship credit hedge fund, the Drawbridge Special Opportunities Fund, reported net returns of 2.8 percent in the second quarter and annualised inception-to-date net returns of 10.7 percent as of 30 June. The Fortress Japan Opportunity Fund (FJOF) showed an inception-to-date net IRR of 33.3 percent, while its successor fund, FJOF II, reported a 28.3 percent inception-to-date net IRR.
Briger said that returns achieved by its credit funds, which focus on distressed investing, are not possible today and that Fortress' existing credit portfolio is likely to shrink absent a change in market conditions.
Overall, Fortress reported pre-tax distributable income of $101 million for the second quarter, an improvement over the $64 million reported last quarter but 26 percent below the $137 million in distributable earnings achieved in the second quarter of 2015.
The firm reported $7.3 billion in dry powder and a slight decline in total assets under management from $70.6 billion in the first quarter to $70.2 billion at the end of June. The decrease in AUM was attributed to the return of capital to Fortress investors and declines in the firm's affiliated managers and co-managed funds.