On Friday, February 9, 2007, Fortress Investment Group became a publicly traded company.News that Fortress Investment Group have now gone public might have left a number of people scratching their heads, perhaps summoning up such comments as “Eh?”, or “Why?”, or “What does it all mean?” or “Does it matter?” Well, that’s what I said anyway, so maybe I can answer my own questions.
How can Fortress go public and yet a wholly owned subsidiary (Intrawest) remain private? To begin with, only Class A shares were sold to the public – some 34.3 million at $18.50 each, raising $634 million. The company’s five principal partners retain 77.7% of the company’s combined voting power through control of Class B shares. With 13.7% owned by Japanese Nomura Holdings, only 8.6% of shares are in the public domain. Buying Fortress shares does not mean a shareholder would have a stake in the investments owned by Fortress. They would own a piece of the holding company which makes money collecting management fees on the assets of investors and also performance fees related to the returns it generates on investor’s money. In other words, if you think by buying shares in Fortress Investment Group gives you a stake in the operation of Winter Park Resort, you’d be wrong. Investors can only profit (or lose) from the stream of investment advisory fees and incentive compensation rather than from the underlying investments that the fund buys with client money.
So why would a private equity investment and hedge fund that enjoys fairly limited regulation by the federal government, wish to go public and thereby potentially open itself up to increased regulation and rigorous disclosure? The answer(s) can be found in the company’s filing with the Securities & Exchange Commission on February 2, 2007 as required under an IPO (Initial Public Offering). I have the 326 page document if someone can’t get to sleep at night:
• People: Fortress describes itself as “an intellectual capital business”. The management of alternative assets is a highly specialized undertaking that demands talent, skill and experience. In a highly competitive market for investment professional talent, publicly traded equity provides Fortress with a valuable additional compensation tool which will help them recruit and retain some top investment managers and traders. I guess I need to send them my résumé then.
• Permanence: Hedge funds that face concerns over succession once the founders and principals of a fund move on can allay those fears by creating a more permanent institution in going public and solidifying its institutional presence as an “investor”.
• Capital: Aside from raising a bucket load of money through the IPO, Fortress now has access to capital from the public which can be used to grow its businesses and create new investment products.
• Currency: Fortress can use its stock to finance future strategic acquisitions.
3. What does it all mean?
I definitely see the logic in wanting to attract and keep the very best investment talent. Ultimately this in the best interests of the entities under Fortress’s control, including Intrawest. I mentioned in an earlier article that these guys are smart. Perhaps it’s an indication that by mentioning in the prospectus the need to recruit and keep talent, this had been a problem in the past. Just a guess.
Having a ticker symbol on the New York Stock Exchange (FIG if you are interested) certainly implies a permanent institution, and perhaps in the eyes of the original founders, establishes a sustainable legacy – aside from making them billionaires! Good for them – which is what I think I said when the founder of Intrawest cashed out in the sale of Intrawest to Fortress to the tune of $126 million. Peanuts compared to this deal!
In its regulatory filing, Fortress said it will use some of the money from its IPO to branch into alternate investment strategies, including infrastructure and real estate funds, structured debt, and specialized funds focused on specific industries and regions. Fortress is already extremely diversified, so this would be a continuation of sound investment strategy. It also augurs well for Winter Park Resort and the ongoing real estate program.
4. Does it matter?
At the end of the day I personally don’t think it does, unless you really want to dabble in FIG shares which will give you access to a type of investment vehicle hitherto beyond the reach of most people. However, just because you can trade in hedge fund shares for the first time doesn’t necessarily mean they are a good investment. There is also an argument that the structure of Fortress has changed, with a slight divergence from the entrepreneurial spirit that made this hedge fund so successful to begin with.
It is suggested within financial circles that shares in Fortress are (at the time of writing) vastly overvalued – but how can one properly analyze this company anyway and make a determination of share value? Trying to calculate a true price-to-earnings ratio is futile because the company’s financial disclosures only recognize income based on realized incentive profits. In addition, with the founders holding 77.7% of the voting rights, and only 8.6% being traded publicly, there is no pressure for them to disclose their strategies for the future.
So, as far as Winter Park Resort is concerned – aside from the indirect implications for more talented personnel overseeing Intrawest and having access to more capital – for you and me it doesn’t really matter, and that’s all that counts, right?