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The founders also cashed out. One of the more brazen aspects of the deal was that $250 million of the IPO proceeds was set aside to pay off a term loan facility that had been used to make a onetime capital distribution to the principals the previous year. In total, the five took $1.66 billion out of the firm before the IPO through dividend payments and private stock sales, including a 15 percent stake sold to Japanese bank Nomura right before the offering.

The deal caused a stir — and some hand-wringing in the industry. Writing about the Fortress IPO in the 2009 edition of Pioneering Portfolio Management, Yale University endowment chief David Swensen criticized the firm’s principals for the conflicts of interest inherent in their deal, and joked that a section on “greed” was absent from Fortress’s SEC offering document.

At the time of the IPO, Fortress had $17.3 billion in private equity funds, $9.4 billion in hedge funds, and $3 billion in real estate. The large asset base was achieved in part by using loan proceeds to invest in the funds, leveraging assets in a way many funds do not. Many of the funds’ investments were not publicly traded, making their valuation so suspect that some investors shied away from them. In fact, in its IPO prospectus Fortress acknowledged that the value of 29 percent of its assets was based on “internal models with unobservable market parameters.” Even many of its hedge funds, specifically the credit funds run by Briger, were relatively illiquid.

To say 2007 was the top for Fortress is an understatement. Shares started falling almost immediately out of the gate and by January 2009 had sunk to $1.00, a decline of 97 percent from the peak. With the financial world in collapse, Blackstone and Och-Ziff also suffered huge declines: Blackstone ended 2008 at $6.26, down 80 percent, and Och-Ziff fell to $5.19, an 84 percent drop. Since then Blackstone has performed the best, but it’s still up only 3 percent from its 2007 launch. Och-Ziff has fared the worst, down 90 percent from its October 2007 debut.

At Fortress troubles first surfaced in the macro funds run by Novogratz, a man known for his glitzy lifestyle, complete with a Tribeca duplex once owned by Robert De Niro and a flamboyant wardrobe featuring diamond-studded belts and cowboy boots. Of all of Fortress’s products, Novogratz’s were the most liquid, yet he had a two-year lock-up on investors’ money. Before the crash many hedge funds had adopted this feature, which at the time allowed them to avoid registering with the SEC. But because his funds were run out of a publicly traded firm, Novogratz had no such rationale, and there was no issue with liquidity.

The losses of 2008 threw that bit of arrogance into stark relief. Although Fortress had put up the gates to keep investors locked in when its funds suffered double-­digit losses, it was forced to open them eventually, and some $4.6 billion was redeemed between 2012 and 2014 in the firm’s liquid hedge funds. By 2015, when the macro fund fell 18 percent — leaving it with an annualized return of 2.8 percent — Fortress was forced to shut it down, with only $1.6 billion left. By the end of 2016, the firm’s hedge fund assets were about half of what they were at the time of the IPO, and Novogratz was gone.

The shutdown of Fortress’s macro funds was a big loss. The hedge funds had charged investors as much as 3 percent in management fees and between 20 and 25 percent in incentive fees. But last year Fortress earned only $1 million in incentive fees and $14 million in management fees on its liquid hedge funds, down from $16 million and $138 million, respectively, in 2014. Total incentive income for the Fortress macro funds was less than $100,000 and $3.8 million for 2015 and 2014, respectively; management fees sank to $34.7 million in 2015 from $63.3 million in 2014.

Private equity, run by Edens, was originally considered Fortress’s crown jewel. Between 1998 and 2006 those funds netted 39.7 percent on an internal rate of return basis, according to the IPO prospectus, but such returns have disappeared. “Essentially, we view that business in runoff,” says Keefe Bruyette’s Dai. “It’s more or less a shrinking asset pool.”

One major problem, the analyst notes, is that the portfolios’ returns haven’t been high enough to push them over their hurdle rates so that Fortress can start charging incentive fees. Last year the firm said most of its private equity vehicles had hurdle rates of 8 percent. “We don’t have any intention to lower the hurdle rates,” Briger said on the third-quarter conference call, responding to questions from analysts. “I think in terms of private equity credit, if you’re really not going for substantially higher than 8 percent gross, our view would be why are you actually going out and investing in those types of investments, just given the illiquidity risk?”

In 2016, Fortress received no incentive income from its main private equity funds, compared with $2.9 million in 2014. Management fees also fell — to $93.8 million from $136 million — as funds matured and no new ones took their place. The firm’s third private equity fund, launched in September 2004, reaped management fees of $9.9 million and $13.8 million for 2015 and 2014, respectively. But there have been no incentive fees for years: Returns were a respective 5.8 percent, 6.9 percent, and 4.8 percent in 2012, 2013, and 2014. Last year the fund’s annualized return was 2.0 percent, and a fourth fund was in the red on an annualized basis.

The immediate future doesn’t look much better, according to Briger. “Our investing pace today in terms of [private equity] investments has slowed significantly,” he said on the conference call. “We have a bunch of dry powder, and I would say we need a better environment to be investing in the types of things that produce the types of returns, the types of PE incentive, than we are seeing now.”

Fortress’s credit funds, run by Briger, have been the best performers in recent years. Last year the Drawbridge Special Opportunities hedge fund gained 9.7 percent, annualizing at 10.7 percent, and its offshore equivalent gained 5.9 percent for an annualized 9.5 percent. Briger’s private equity credit funds also have been strong performers, with double-digit annualized returns.

But their future is unclear right now, and this has led Fortress to return capital to investors. “We are in a period of time where the opportunity set is low,” Briger said in November, adding that Fortress had given back 20 percent of the capital in the offshore credit fund. “We would look to do that in our credit hedge funds to the extent that we were building up more cash than the opportunity set, in our judgment, necessitated over some medium-term period.” Part of the problem, he said, was the lack of big investment themes in credit. “There’s nothing that is thematically interesting,” he told analysts. “Everything that we’re doing is idiosyncratic, based upon the specific circumstances of a transaction or an investment, and it is unlikely that that’s going to change in the real short term.”

The inside joke about hedge funds is that by bulking up assets they can make enough money from management fees so that profiting from their investment acumen — that is, earning incentive fees — becomes practically irrelevant. Asset gathering is the name of the game. But eventually that quits working. Investors pull capital, and it becomes harder to raise it.

Asset growth at Fortress was flat in the years after it went public, so in 2010 the firm grew by buying a fixed-income asset management firm, Logan Circle Partners, which now accounts for almost half of its assets under management — $33 billion of $69.6 billion. But managing fixed income throws off little in fees, analysts point out: Logan Circle has barely been breaking even.

The bottom line for Fortress is that its revenue and income have continued to shrink even as markets have come back. Total revenue was $1.2 billion last year, down 4 percent, or $50.1 million, from 2015. Since 2014 net income has fallen 25 percent, to $181 million. Pretax distributive earnings, which analysts look at, fell 19 percent between 2014 and 2016, to $362 million. They peaked at $551 million in 2007. In 2005, before it went public, Fortress grew profits at an annualized rate of more than 100 percent. That year it booked net income of $193 million on less than $30 billion in assets and $1 billion in revenue.

To many observers the Fortress saga proves that publicly traded alternatives firms aren’t a good idea. One problem, attorney Kaplan says, is the conflicting demands of running a hedge fund and operating a public company: “When you’re running a hedge fund, you’re trying to maximize value and return for investors in the fund, but if you’re a public shareholder, your interest is fees being as big as possible. Instead of running a fund strictly for the benefit of investors, now you’ve got shareholders to be responsible to.” Fortress doesn’t seem to have done well by either.

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