UPDATE 3-Fortress profit climbs on strong fund returns

Wed Feb 27, 2013 12:08pm EST

By Katya Wachtel

Feb 27 (Reuters) - U.S. alternative asset manager Fortress Investment Group LLC said on Wednesday that quarterly profit more than doubled as many of its funds recorded gains that helped boost fee income, beating estimates.

New York-based Fortress, one of a handful of publicly traded managers of hedge, credit, and private equity funds, said pretax distributable earnings rose 114 percent to $107 million, or 20 cents per share, in the fourth quarter from $50 million, or 9 cents per share, a year earlier.

Analysts at Barclays had estimated earnings of 14 cents per share, in line with the Wall Street consensus.

For the full year, pretax distributable earnings rose 15 percent to $278 million from $242 million a year earlier.

Fortress said pretax distributable income is the best way to measure performance because it excludes large quarterly compensation costs stemming from the equity interest of top executives who took the company public in 2007.

Quarterly net income attributable to Class A shareholders was $102 million versus a net loss of $91 million a year earlier.

The firm also set a fourth-quarter dividend of 6 cents per share, a 20 percent increase.

Fortress staged a turnaround in 2012 after the previous year, when its hedge funds battled to make profits in volatile markets and its chief executive, Daniel Mudd, resigned. In 2012, the company's macro-focused and credit hedge funds produced strong returns, and its private equity and credit private equity portfolios also gained, which boosted earnings.

Fourth-quarter earnings "were the highest we have recorded in two years," said Randal Nardone, the interim CEO.

He added that strong fund performance contributed to "robust capital raising," with new and existing investors committing $6.7 billion in 2012.

Incentive income, or fees that hedge fund managers earn when their funds perform well, shot up about 148 percent to $114 million in the quarter, from $46 million a year earlier.

The firm's main credit portfolio, the Drawbridge Special Opportunities Fund, rose 18 percent for the year. The flagship Macro fund ended 2012 up almost 18 percent, and the Asia Macro fund rose more than 21 percent for the year.

All of the funds grew in the quarter. Hedge funds, on average, returned about 6 percent in 2012.

In addition to higher incentive income, Fortress said net income was helped by a reduction in costs associated with an agreement signed by top executives that expired at the end of 2011.

Assets under management increased 4 percent from the third quarter to $53.4 billion.

Management fees totaled $131 million, helping to boost profits in the quarter, and was up more than 8 percent from $121 million in the year-earlier period.

"The quarter was a solid beat on better performance and the dividend increase is encouraging," wrote Barclays equity analyst Roger Freeman in a research note. "Performance fees seem to be gaining momentum, fundraising is pacing well."

Fortress shares rose 0.6 percent to $6.26.

CREDIT ENVIRONMENT 'LOUSY'

On a conference call, Fortress executives were optimistic about the fundraising and performance outlook for 2013, especially in the private equity and hedge fund portfolios.

However, credit head Peter Briger said "the current environment for opportunistic credit investing is lousy."

"Thematically I don't think there's a great credit environment anywhere in the world," he said, noting that even though Fortress is still putting money to work in the credit markets, the investments are "idiosyncratic in nature."

He added that though there was a "ton of capital raised to invest in European credit opportunities, I don't think that any serious credit investor is interested in the credit opportunity in Europe right now."

"The opportunity is big, but to date, potential."

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