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:
- $170mm in reported mgmt fees (or 1.5% on c. $11b)
- $240mm in reported incentive fees
- $40mm in gains on direct investment in managed funds
- $60mm in fees on PE gains subject to clawback (and hence not recognized as revenue)
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:
- $145mm in reported mgmt fees (or 1.5% on c. $19b)
- $80mm in incentive fees (returns must have sucked)
- $16mm in earnings on direct investments
- $110mm in PE fees subject to clawback
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:
- $340mm in direct investments in their own funds, from providing seed capital for new ones
- $70mm in options on their own funds, no doubt a trick picked up from the BDC scam that is NCT
- $890mm in unrealized performance fees (net of 38% to comp) on $7.1b of unrealized gains on listed portfolio cos
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?