Fortress Fights For Growth with Logan Acquisition

Fortress Investment Group (FIG), a major alternative-asset manager, had impeccable timing when the firm went public in February 2007, at the height of the credit bubble. Priced at $18.50, shares quickly zoomed to $37 on their first day of trading. Fortress raised roughly $635 million and had a market value of $7.4 billion.Of course, since then things have deteriorated substantially. The stock now trades at $4.20 and the market value is only $611 million. Then again, Fortress is unexceptional in its decline: The financial crisis has been brutal, even for the top operators.

And Fortress is not giving up: It actually sees opportunities, especially with acquisitions. So this week the firm acquired Logan Circle Partners, which is a part of Guggenheim Partners.

Another Move Toward Diversification

Over the years, Fortress has diversified its asset management business away from private equity. For example, the firm has $13.2 billion in hybrid funds and $4.5 billion in liquid hedge funds (according to its investor presentation).

But private equity, which accounts for $14.3 billion in Fortress's assets, is still a big part of its business. And that business is certainly facing difficulties. They include the specter of new regulations, higher taxes, pressure on fees and a lackluster IPO market.

At the same time, private-equity sponsors paid steep prices for buyouts when credit was cheap. In fact, Fortress is in the process of salvaging some of its portfolio companies, among them the foreclosure of Intrawest ULC, which operates the Whistler-Blackcomb resort. Fortress is also trying to work out the debt problems at Florida East Coast Industries.

Despite all this, Fortress has shown signs of improvement as the equities markets have rebounded. In the most recent quarter, Fortress generated $107 million in management fees and was even able to pull off the IPO of one of its portfolio companies, RailAmerica (RA).

The Deal

Launched in 2007, Logan Circle is a spin-off of Delaware Investments. The CEO, Jude Driscoll, is an experienced bond manager and employs various strategies, like short, long-duration, high-yield and so on. Logan has roughly $12 billion in assets, which will be a nice addition to Fortress' $32 billion. After all, it is tough to raise money right now. So why not buy assets? Besides, the diversification of Logan should help smooth out volatility in earnings.

But perhaps the most interesting detail of the transaction is the price tag: $21 million. And it includes a bonus structure that does not trigger until the end of 2011.

In other words, in the alternative-asset management world, it looks like there are opportunities, especially for those who are well-capitalized. Just look at the example of the Blackstone Group (BX), which recently purchased nine leveraged-loan and high-yield bond funds from Allied Capital (ALD).

It's a good bet we'll see many more such deals this year.
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