It used to be that the only way you could invest in hedge funds or private equity was if you were a multi-millionaire or a large institution. There was also the added risk of whether the manager was having an up or down year, as well as the risk of how successful the investments were.
In reality, the best investment was being the manager or the partner running the funds. The large management fees they charged ensured they always made money, regardless of their funds' performance.
Well, now there's a way to invest alongside -- and profit from -- these managers. Over the past few years, several of these large managers have gone public -- and that's giving individual investors the opportunity to own shares in the management company that collects these large fees.
One of the best investments in this space is Fortress Investment Group (NYSE: FIG). Founded in 1998, this business development company (BDC) manages over $62 billion in assets that are diversified across four segments. Fortress has some of the smartest guys on Wall Street working for the company, including co-founders Wesley Edens and Mike Novogratz.
Fortress' segment with the most assets under management is its traditional asset manager, Logan Circle Partners, with over $26 billion. Logan Circle manages fixed-income and global equity investments. In the first quarter, all 16 of Logan Circle's fixed-income strategies outperformed their respective benchmarks. Fortress' $7.7 billion liquid-markets unit also invests in equities and fixed-income instruments, as well as in currencies and commodities
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Fortress' second-largest segment is private equity. Fortress manages $11.8 billion in buyout funds and another $3.5 billion in publicly traded companies that invest in real estate and media assets. The buyout funds have an investment term of 10 years and the mortgage funds have a term of five years. The buyout funds look for cash flow-generating companies in North America and Western Europe.
The third segment is Fortress' credit business, which manages $13 billion between private equity and hedge funds. The private equity side looks for distressed and undervalued assets. These assets could be real estate, natural resources or intellectual property. The hedge fund part of the business looks for opportunistic lending situations and invests in distressed loans, assets and corporate securities.
Fortress has $6.6 billion of uncalled capital, or what's referred to in the industry as "dry powder." This gives Fortress the resources to explore new investment strategies that could allow the firm offer additional products to its existing client base and capture new business.
One area that the firm is actively looking to expand is its liquid markets business. Fortress just added the global investment team from Centaurus Capital, forming Fortress-Centaurus Global Strategy. The focus will be on long-short and event-driven equity strategies.
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Fortress also has an affiliated manager platform, which it will look to invest in new investment managers and provide a fee-for-services model. Startup managers would then have access to Fortress' technology, infrastructure and client relationships.
In the first quarter, assets under management rose 12% from last year. Fortress ended the quarter with net cash and investments of $2.97 per dividend-paying share.
Shares also look to be quite undervalued. Fortress is trading at only 7.2 times next year's expected earnings and has a price/earnings-to-growth (PEG) ratio of only 0.17. The company also pays out 68% of its earnings and has a dividend yield of 4.8%. Fortress is also a share buyback machine and repurchased over 60 million shares in the first quarter, or 12% of its dividend-paying shares outstanding.
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Risks to Consider: Any downturn in the global economy could have a significant impact on its funds and its investment returns. This would lead to a loss of management fees, which would have a significant impact on the bottom line.
Action to take --> Buy shares of Fortress Investment Group with a price target of $9, for upside of 30%. This would put shares back trading at their 52-week highs. It would also put Fortress trading at 3 times book value, which is still well below the asset management industry average of 3.7 times.