September 27, 2022

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Fortress Investment Group

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FILE PHOTO: Representatives of Fortress Investment Group applaud at the New York Stock Exchange while ringing the opening bell, in New York February 9, 2007. REUTERS/Chip East

Fortress Investment Group (FIG) is a large, publicly traded investment manager. Founded in 1998, FIG has evolved from a private equity firm into a diversified global investment manager. Its growth can be traced to the acquisition of Logan Circle Partners, a firm that manages $33 billion of the $69.6 billion of FIG’s assets. While the merger with Logan Circle Partners provided Fortress with an extra source of cash, investors should still be wary of Fortress’s strategy.

In January 2009, Fortress Investment Group’s stock prices began to fall. They had fallen 97 percent since the company’s 2007 peak. While this is not a good outcome for investors, the company’s affiliates have performed well over the past few years. Blackstone, for instance, has risen three percent since its 2007 launch. Och-Ziff, meanwhile, has recovered 90 percent from its October 2007 debut.

Another problem with Fortress Investment Group’s strategy is its dual-class structure. The group’s primary shareholders have disproportionate voting power, which raises tax issues for investors. Moreover, the investment firm employs esoteric investment strategies that don’t necessarily have a direct link to market performance. This makes it difficult to gauge the firm’s success, says Ann Dai, a financial analyst at Keefe, Bruyette & Woods.

The firm invests across various industries. It targets physical as well as financial assets. It believes that this strategy provides downside protection and stable cash flows. The firm’s current focus areas include senior living, transportation, media, telecommunications, and energy infrastructure. However, it has also sold some of its non-core holdings. Most recently, it has agreed to sell its stake in Arm Ltd. to Nvidia Corp. for $40 billion. This deal is likely to face regulatory opposition.

Although Fortress is not yet in the top tier of alternative-investment firms, its founders have reaped billions from the firm. The latest deal with SoftBank represents its second big payday in a row. Moreover, the firm’s record has also been bad for public investors. In 2015, a former Fortress Investment Group principal, Michael Novogratz, had to resign from the company due to insider trading charges. As a result, his company’s drawbridge Macro fund lost money on both China and Brazil.

While SoftBank has purchased Fortress, it is not certain if public ownership is the best option for the hedge fund industry. The company still needs to prove its performance before it can be relisted on the NYSE. SoftBank’s new owner must reinvest the sale proceeds in SoftBank funds. This could mean the end of Fortress as a public company. That’s bad for the future of hedge funds. So, what does this mean for investors?