Last December business executives from around the globe made
their way to Manhattans Trump Tower to meet with
president-elect Donald Trump. But few made as big of a
splash as Masayoshi Son, head of SoftBank Group
Corp., who had Trump crowing on Twitter about the Japanese
moguls pledge to invest $50 billion in the U.S. and
create 50,000 American jobs.
Hes one of the great men of industry, so I just
want to thank you very much, Trump said of Son, who took
over as SoftBanks CEO last year following poor
performance by his predecessor. One might have predicted that
Sons first U.S. investments during the Trump era would be
in the kinds of high-flying tech companies, like Alibaba Group
Holding, that SoftBank has become famous for staking. Instead,
on February 14, SoftBank agreed to pay $3.3 billion to buy
Fortress Investment Group, the struggling
alternative-investment firm that went public to great
fanfare ten years ago but whose shares have since lost 74
percent of their market value.
Despite the slide in the firms stock, Fortresss
principals have made out well, pulling billions out of the
company thanks in part to the latest deal with
The founders got a big payday when they took it
public, and now theyre getting a second good
payday, says Myron Kaplan, a founding partner of law firm
Kaplan, Wolff & Cohen, who counsels hedge fund firms
like Elliott Management Corp. on organizational structure and
succession planning. Kaplan says Fortress has been
terrible for public investors.
Fortress was the first U.S. alternatives firm to go public,
in 2007, starting a trend that burned red-hot, then quickly
flamed out, proving over the past ten years that these deals
have been a disaster for public shareholders, which include big
mutual funds catering to both retail and institutional
investors. Among Fortresss shareholders: Allianz Asset
Management, Fidelity Investments, Wellington Management Co.,
and even the State Teachers Retirement System of Ohio.
And there is another ominous takeaway. Unlike most of its
hedge fund and private equity peers, Fortress makes its numbers
public, and they shine a harsh light on the
alternative-investment business over the past decade.
Fortresss assets have more than doubled since 2005, but
the firms net income was lower in 2016 than it was in
Fortress hasnt performed great, says Ann
Dai, an analyst at Keefe, Bruyette & Woods who says the
complexity of the firms business model also
has made investors wary. Complicated tax issues, a plethora of
esoteric investment strategies, and a dual share-class
structure that gives the principals disproportionate voting
power arent for the faint-hearted. Although almost half
of its $69.6 billion in assets under management are in the
staid, low-fee world of fixed income, Fortresss private
equity funds invest in senior-living centers and
railroads, and its hedge funds buy distressed real estate
credit. Meanwhile, its best-known macro hedge funds have
flopped, its vaunted private equity funds havent
surpassed their hurdle rates in years, and even its highly
regarded credit funds seem to have hit a wall.
Fortress co-founder and co-chairman Wes Edens may have inadvertently summed up
his firms value last fall, on a third-quarter conference
call, when he talked about the environment for Fortresss
private equity business: I think its a time to be
cautious. There are lots of things for sale, and there are few
things that are really worth buying.
That isnt stopping SoftBank. Though
primarily an Internet and telecommunications company, it
recently said it planned to parlay its hefty cash hoard into a
$100 billion investment fund. Fortresss $3.3 billion deal
with SoftBank was driven by Rajeev Misra, a former Deutsche
Bank derivatives expert who is now in charge of investment
strategy for the Japanese firm. A few years ago Misra worked
briefly at Fortress, where he developed a relationship with
Edens and Peter Briger Jr., who cochair the board of directors.
(Briger also has ties to Japan, where he previously worked for
Goldman Sachs Group.)
SoftBanks purchase of Fortress may be part of a grand
strategic vision that has yet to be articulated. But Fortress
had long been looking to sell, analysts say. Indeed, just
months after going public, the firm reportedly hoped to secure
a tie-up with Bear Stearns Cos., before the latter imploded
into the arms of JPMorgan Chase & Co. The sale to SoftBank
wasnt easy to pull off, either.
The consummation of the deal was in serious doubt as
late as February 12, 2017, according to a complaint by
the Securities and Exchange Commission regarding suspected
insider trading in Fortress shares at two brokerages in
Singapore and London (Maybank Kim Eng Securities and R.J.
OBrien) ahead of the announcement.
Both Fortress execs and Son are appropriately ecstatic about
the deal. SoftBank is an extraordinary company that has
thrived under the visionary leadership of Masayoshi
Son, Briger and Edens said in a public statement.
We anticipate substantial benefits for our investors and
business as a whole, and we have never been more optimistic
about our prospects going forward.
Son said in the same statement, Fortresss
excellent track record speaks for itself, and we look forward
to benefiting from its leadership, broad-based expertise and
world-class investment platform. Neither Fortress nor
SoftBank responded to requests for comment beyond those public
SoftBank is paying a huge premium for Fortress, having
agreed on $8.08 per share when the stock was trading at $5.83,
with a book value of $4 per share. That has led some analysts
to applaud the deal. Fortress wasnt getting credit
in the public markets, says JMP Securities analyst Devin
Ryan. This transaction gives them a bigger partner to
grow their business at a faster rate.
A source close to Fortress says, The sale seems to
reflect the principals belief in the business model and
investment platform, but probably a profound skepticism that an
alternative manager will ever be ascribed a premium valuation
in the public markets.
It has left some hedge fund veterans scratching their heads.
Culturally, it is such a disconnect, says Bruce
Ruehl, a former executive at hedge fund consulting firm Aksia.
Fortress has virtually no footprint in the high-tech world, and
the Japanese record in asset management isnt strong. Yet
the pressure on alternative-investment firms to sell will
continue, Ruehl reckons, given that they are under siege.
Theres tons of fee pressure on any products sold
into the institutional space, he explains.
Ive seen a lot of cycles, but this one is
different. You better be doing it well and have some kind of
hook that really differentiates you.
Fortress is arguably not in the top tier of
alternative-investment firms, but even the star managers
have hit hard times. Last year investors yanked more than $70
billion from hedge funds, according to Hedge Fund Research, as
the industry underperformed the broader markets for the seventh
year running. A few big names, like Perry Capital, shut their
doors, and regulatory woes hit firms as diverse as Omega
Advisors, which faces insider trading charges, and Och-Ziff Capital Management Group, whose
African subsidiary pleaded guilty to bribing foreign government
officials. Even industry legends like Paul Tudor Jones are
slicing their firms fees, and the pressure shows no signs
More firms will shrink, disappear, or if theyre
lucky, like Fortress be gobbled up. The Japanese
arent the only foreigners who are circling. A subsidiary
of Chinas HNA Capital, an aviation and shipping
conglomerate, was part of a consortium that agreed to buy out
Anthony Scaramuccis stake in $12 billion fund of funds
SkyBridge Capital so he could work for the White House. It was
an opportune time for Scaramucci to sell, as SkyBridge had lost
money for the past two years.
Fortresss woes exploded into public
view in 2015, when Michael Novogratz, one of the firms
principals and an industry luminary who had joined from Goldman
Sachs, retired after shutting down his Drawbridge Macro fund
following wrongheaded bets on everything from Brazil to China.
The Novogratz departure made headlines, but in fact the
problems at Fortress had been brewing almost from the time it
The year Fortress tapped the public markets, 2007, was an
auspicious time for hedge funds, which had just burst into the
public consciousness: Institutional investors like pension
funds had started piling into them after losing money in the
stock market crash earlier in the decade. Multibillion-dollar
fund launches were not uncommon, banks were trying to gain a
toehold by taking stakes in top funds, and a mystique of riches
surrounded the highfliers. Although the Fortress IPO was priced
at $18.50, it was oversubscribed, leading to a market debut at
$35 per share. Both Blackstone Group and Och-Ziff Capital
followed suit, debuting later that year at $31 and $32 per
Fortress had quickly grown assets during the hedge fund
heyday, amassing $29.7 billion by the time of its IPO. The
firms initial valuation of $7.5 billion was 37 times its
2005 pretax income, an indication that investors thought
theyd found the next great growth stock. Instead, it was
a market top indicator. Fortress principals Edens, Robert
Kauffman, and Randal Nardone (all from UBS), and ex-Goldman
stars Briger and Novogratz became billionaires on paper, owning
more than 77 percent of the stock.