hot on the heels of the fortress s-1, rumor has another high profile hedge fund ready to tap the public markets, this time incredibly in the form of investment grade debt.
any copies of the offering memo floating around out there? do float one my way..
fortress filed an s-1 on wednesday for what is being hailed as the first hedge fund IPO, a groundbreaking event worthy of frenzied discussion. the idea conveniently overlooks the bloodbath at the formerly NYSE listed but now defunct BKF, instigated by icahn and the idiots at steel partners.
the ny times published a piece on the fortress IPO, as did breakingviews. neither seem to have actually read or understood the filing…
the nyt, for example, thinks fortress runs on a 10% net margin:
For the first half of this year, Fortress, which has 500 employees, earned $88 million on revenue of $877.5 million. Fees from its funds totaled $185.8 million.
and breakingviews guesses futilely at the fee mix:
Assume that 70% of Fortress’s net income comes from performance fees and only 30% from management fees and that implies a blended multiple of about 13 times 2007 earnings.
given the relative dearth of effort by those that usually think for me, i took a quick and dirty stab at the s-1. some thoughts, subject to mistake and revision:
the corporate structure is hopelessly convoluted, so the financials are misleading - some of the managed PE funds are actually consolidated. hence the naive reading has revenue way overstated. though it sounds a little low, ‘05 revenues are likely on the order of $510mm, composed of:
comp takes out $235mm and g&a another $30mm for a net of $245mm, and an average payout ratio to staffers of about 48% of revenues. note that the filing assumes at one point a 38% payout on PE revenues; perhaps traders are more loved? (as it should be.) with a blended headcount of 330, average comp comes to $745k - just slightly better than goldman.
for the first half of ‘06, adjusted revenues come to $351mm, based on:
subtract comp of $170mm and $18mm in g&a for a net of $163mm, which annualizes, sans growth, to net income of $326mm.
onto the balance sheet. on the asset side, fortress holds:
add in $670mm of debt (to fund distributions to the partners) and the implied EV of the business comes to $6.87b, or an amazing 21x ‘06 earnings and 9.8x revs.
no surprise, then, that fortress is going public. the partners took out cash of $160mm in ‘05, $310mm in the first half, and will take out another $400mm before the IPO. that will leave fortress with a $485mm hole in members’ equity (deficit), to be filled by IPO proceeds.
without an IPO their normalized take would have been more like $400mm this year. between piddling $400mm annual payouts and 90% of $7.5b upfront, what is the discerning trader to do but accept the free money?