Q2 FIG-2015.6.30-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2015
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-33294
Fortress Investment Group LLC
(Exact name of registrant as specified in its charter)
|
| | |
Delaware | | 20-5837959 |
(State or other jurisdiction of incorporation | | (I.R.S. Employer Identification No.) |
or organization) | | |
|
| | |
1345 Avenue of the Americas, New York, NY | | 10105 |
(Address of principal executive offices) | | (Zip Code) |
(212) 798-6100
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ý Yes No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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| | |
Large accelerated filer x | | Accelerated filer o |
| | |
Non-accelerated filer o | | Smaller reporting company o |
(Do not check if a smaller reporting company) | | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date.
Class A Shares: 215,673,299 outstanding as of July 24, 2015.
Class B Shares: 226,331,513 outstanding as of July 24, 2015.
FORTRESS INVESTMENT GROUP LLC
FORM 10-Q
INDEX
Set forth below is information about certain terms used in this Quarterly Report on Form 10-Q:
‘‘Management Fee Paying Assets Under Management,” or “AUM,” refers to the management fee paying assets we manage, including, as applicable, capital we have the right to call from our investors pursuant to their capital commitments to various funds. In addition, AUM includes management fee paying assets managed by autonomous businesses in which we retain a minority interest under our affiliated manager platform. Our AUM equals the sum of:
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(i) | the capital commitments or invested capital (or net asset value, "NAV," if lower) of our private equity funds, private permanent capital vehicle through May 2015 and credit PE funds, depending on which measure management fees are being calculated upon at a given point in time, which in connection with private equity funds raised after March 2006 includes the mark-to-market value of public securities held within the funds, |
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(ii) | the contributed capital or book equity of our publicly traded permanent capital vehicles, |
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(iii) | the NAV of our hedge funds, including the Value Recovery Funds which pay fees based on realizations; |
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(iv) | the NAV or fair value of our managed accounts, to the extent management fees are charged; and |
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(v) | AUM related to affiliated managers. |
For each of the above, the amounts exclude assets under management for which we charge either no or nominal fees, generally related to our investments in our funds as well as investments in our funds by our principals, directors and employees.
Our calculation of AUM may differ from the calculations of other asset managers and, as a result, this measure may not be comparable to similar measures presented by other asset managers. Our definition of AUM is not based on any definition of assets under management contained in our operating agreement or in any of our Fortress Fund management agreements. Finally, our calculation of AUM differs from the manner in which our affiliates registered with the United States Securities and Exchange Commission report “Regulatory Assets Under Management” on Form ADV and Form PF in various ways. Significantly, Regulatory Assets Under Management, unlike Management Fee Paying Assets Under Management, is not reduced by liabilities or indebtedness associated with assets under management and it includes assets under management and uncalled capital for which Fortress receives no compensation.
“Fortress,” “we,” “us,” “our,” the “company” and the “public company” refer, collectively, to Fortress Investment Group LLC and its subsidiaries, including the Fortress Operating Group (as defined below) and all of its subsidiaries.
“Fortress Funds” and “our funds” refers to the private investment funds, permanent capital vehicles and related managed accounts that we manage. The Fortress Macro Fund is our flagship liquid hedge fund and the Drawbridge Special Opportunities Fund is our flagship credit hedge fund.
“Fortress Operating Group” or “FOG” refers to the limited partnerships and their subsidiaries through which we conduct our business and hold our investments. The public company controls the Fortress Operating Group through wholly owned subsidiaries that serve as the general partner of each FOG entity.
Economic interests in each FOG entity are represented by Class A common units and Class B common units. Class A common units are (indirectly) owned by the public company, and Class B common units are owned by the principals (defined below) and, from time to time, a former senior employee who owned securities convertible into Class B common units.
The number of outstanding Class A common units equals the number of outstanding Class A shares of the public company. The number of outstanding Class B common units equals the number of outstanding Class B shares of the public company.
“Fortress Operating Group units” or “FOGUs” is the term we use to refer to the aggregate of one limited partner interest (either a Class A common unit or a Class B common unit, as applicable) in each FOG entity. One FOGU together with one Class B share is convertible into one Class A share. A surrendered Class B common unit automatically converts into a Class A common unit.
“principals” or “Principals” refers to Peter Briger, Wesley Edens, Randal Nardone and Michael Novogratz, collectively, as well as Robert Kauffman until his retirement in December 2012. The principals control the public company through their ownership of the public company’s Class B shares (together with, from time to time, a former senior employee who owned securities convertible into Class B shares). The Class B shares and the Class A shares are each entitled to one vote per share, and the number of Class B shares outstanding represents a majority of the aggregate number of Class B shares and Class A shares outstanding. The Class B shares do not represent an economic interest in the public company and therefore are not entitled to any dividends. The principals own their economic interest in the public company primarily through their direct ownership of FOGUs.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements under Part II, Item 1A, “Risk Factors,” Part I, Item 2, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” Part I, Item 3, “Quantitative and Qualitative Disclosures About Market Risk” and elsewhere in this Quarterly Report on Form 10-Q may contain forward-looking statements which reflect our current views with respect to, among other things, future events and financial performance. Readers can identify these forward-looking statements by the use of forward-looking words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of those words or other comparable words. Any forward-looking statements contained in this report are based upon the historical performance of us and our subsidiaries and on our current plans, estimates and expectations. The inclusion of this forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. Such forward-looking statements are subject to various risks and uncertainties and assumptions relating to our operations, financial results, financial condition, business prospects, growth strategy and liquidity. If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, our actual results may vary materially from those indicated in these statements. Accordingly, you should not place undue reliance on any forward-looking statements. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this report. We do not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.
SPECIAL NOTE REGARDING EXHIBITS
In reviewing the agreements included as exhibits to this Quarterly Report on Form 10‑Q, please remember they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about the company or the other parties to the agreements. The agreements contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the other parties to the applicable agreement and:
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• | should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate; |
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• | have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement; |
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• | may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and |
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• | were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments. |
Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. Additional information about the company may be found elsewhere in this Quarterly Report on Form 10‑Q and the company's other public filings, which are available without charge through the Securities and Exchange Commission's ("SEC") website at http://www.sec.gov.
The company acknowledges that, notwithstanding the inclusion of the foregoing cautionary statements, it is responsible for considering whether additional specific disclosures of material information regarding material contractual provisions are required to make the statements in this report not misleading.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
FORTRESS INVESTMENT GROUP LLC
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
|
| | | | | | | |
| June 30, 2015 (Unaudited) | | December 31, 2014 |
Assets | |
| | |
|
Cash and cash equivalents | $ | 233,912 |
| | $ | 391,089 |
|
Due from affiliates | 188,051 |
| | 326,575 |
|
Investments | 1,144,597 |
| | 1,121,545 |
|
Investments in options | 60,950 |
| | 71,844 |
|
Deferred tax asset, net | 415,915 |
| | 417,623 |
|
Other assets | 165,531 |
| | 173,708 |
|
Total Assets | $ | 2,208,956 |
| | $ | 2,502,384 |
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|
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|
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Liabilities and Equity | |
| | |
|
Accrued compensation and benefits | $ | 181,967 |
| | $ | 374,709 |
|
Due to affiliates | 372,660 |
| | 375,424 |
|
Deferred incentive income | 326,338 |
| | 304,526 |
|
Debt obligations payable | 75,000 |
| | 75,000 |
|
Other liabilities | 90,430 |
| | 88,053 |
|
Total Liabilities | 1,046,395 |
| | 1,217,712 |
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Commitments and Contingencies |
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|
|
| | | |
Redeemable Non-controlling Interests | 19 |
| | 1,717 |
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| | | |
Equity | |
| | |
|
Class A shares, no par value, 1,000,000,000 shares authorized, 215,673,299 | | | |
and 208,535,157 shares issued and outstanding at June 30, 2015 and December 31, 2014, respectively | — |
| | — |
|
Class B shares, no par value, 750,000,000 shares authorized, 226,331,513 | | | |
shares issued and outstanding at June 30, 2015 and December 31, 2014, respectively | — |
| | — |
|
Paid-in capital | 1,922,869 |
| | 1,996,137 |
|
Retained earnings (accumulated deficit) | (1,312,093 | ) | | (1,350,122 | ) |
Accumulated other comprehensive income (loss) | (2,409 | ) | | (2,416 | ) |
Total Fortress shareholders’ equity | 608,367 |
| | 643,599 |
|
Principals’ and others’ interests in equity of consolidated subsidiaries | 554,175 |
| | 639,356 |
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Total Equity | 1,162,542 |
| | 1,282,955 |
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Total Liabilities, Redeemable Non-controlling Interests and Equity | $ | 2,208,956 |
| | $ | 2,502,384 |
|
See notes to consolidated financial statements.
FORTRESS INVESTMENT GROUP LLC
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(dollars in thousands, except per share data)
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| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Revenues | |
| | |
| | | | |
Management fees: affiliates | $ | 150,936 |
| | $ | 136,045 |
| | $ | 278,643 |
| | $ | 265,755 |
|
Management fees: non-affiliates | 14,966 |
| | 17,716 |
| | 30,257 |
| | 35,338 |
|
Incentive income: affiliates | 82,158 |
| | 60,442 |
| | 106,381 |
| | 94,693 |
|
Incentive income: non-affiliates | 296 |
| | 44 |
| | 296 |
| | 687 |
|
Expense reimbursements: affiliates | 53,991 |
| | 51,662 |
| | 108,556 |
| | 102,848 |
|
Expense reimbursements: non-affiliates | 3,568 |
| | 2,614 |
| | 6,816 |
| | 5,062 |
|
Other revenues (affiliate portion disclosed in Note 6) | 2,573 |
| | 1,821 |
| | 4,228 |
| | 3,071 |
|
| 308,488 |
| | 270,344 |
| | 535,177 |
| | 507,454 |
|
| | | | | | | |
Expenses | |
| | |
| | | | |
Compensation and benefits | 199,108 |
| | 168,114 |
| | 377,996 |
| | 356,633 |
|
General, administrative and other | 45,185 |
| | 42,186 |
| | 88,166 |
| | 80,009 |
|
Depreciation and amortization | 12,768 |
| | 5,037 |
| | 18,099 |
| | 9,338 |
|
Interest expense | 1,039 |
| | 947 |
| | 1,878 |
| | 1,638 |
|
Transfer of interest in Graticule (see Note 1) | — |
| | — |
| | 101,000 |
| | — |
|
| 258,100 |
| | 216,284 |
| | 587,139 |
| | 447,618 |
|
| | | | | | | |
Other Income (Loss) | |
| | |
| | | | |
Gains (losses) (affiliate portion disclosed in Note 3) | (6,787 | ) | | 4,864 |
| | 24,774 |
| | (6,191 | ) |
Tax receivable agreement liability adjustment | (7,500 | ) | | — |
| | (7,500 | ) | | — |
|
Earnings (losses) from equity method investees | (36,321 | ) | | 22,448 |
| | 5,387 |
| | 42,822 |
|
Gain on transfer of Graticule (see Note 1) | — |
| | — |
| | 134,400 |
| | — |
|
| (50,608 | ) | | 27,312 |
| | 157,061 |
| | 36,631 |
|
| | | | | | | |
Income (Loss) Before Income Taxes | (220 | ) | | 81,372 |
| | 105,099 |
| | 96,467 |
|
Income tax benefit (expense) | 5,199 |
| | (7,916 | ) | | (13,200 | ) | | (13,910 | ) |
Net Income (Loss) | $ | 4,979 |
| | $ | 73,456 |
| | $ | 91,899 |
| | $ | 82,557 |
|
Allocation of Net Income (Loss): | | | | | | | |
Principals’ and Others’ Interests in Income (Loss) of Consolidated Subsidiaries | $ | 1,653 |
| | $ | 42,100 |
| | $ | 53,876 |
| | $ | 48,177 |
|
Redeemable Non-controlling Interests in Income (Loss) | 10 |
| | 157 |
| | (6 | ) | | 157 |
|
Net Income (Loss) Attributable to Class A Shareholders | 3,316 |
| | 31,199 |
| | 38,029 |
| | 34,223 |
|
| $ | 4,979 |
| | $ | 73,456 |
| | $ | 91,899 |
| | $ | 82,557 |
|
Dividends declared per Class A share | $ | 0.08 |
| | $ | 0.08 |
| | $ | 0.46 |
| | $ | 0.16 |
|
| | | |
| | | | |
Earnings (Loss) Per Class A share | |
| | | | | | |
Net income (loss) per Class A share, basic | $ | 0.01 |
| | $ | 0.15 |
| | $ | 0.16 |
| | $ | 0.16 |
|
Net income (loss) per Class A share, diluted | $ | 0.00 |
| | $ | 0.12 |
| | $ | 0.16 |
| | $ | 0.14 |
|
Weighted average number of Class A shares outstanding, basic | 216,183,181 |
| | 207,783,751 |
| | 215,985,577 |
| | 212,328,315 |
|
Weighted average number of Class A shares outstanding, diluted | 449,210,362 |
| | 444,566,847 |
| | 222,210,732 |
| | 459,673,136 |
|
See notes to consolidated financial statements.
FORTRESS INVESTMENT GROUP LLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(dollars in thousands)
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Comprehensive income (loss) (net of tax) | |
| | |
| | |
| | |
|
Net income (loss) | $ | 4,979 |
| | $ | 73,456 |
| | $ | 91,899 |
| | $ | 82,557 |
|
Foreign currency translation | 526 |
| | (570 | ) | | (372 | ) | | (1,602 | ) |
Total comprehensive income (loss) | $ | 5,505 |
| | $ | 72,886 |
| | $ | 91,527 |
| | $ | 80,955 |
|
Allocation of Comprehensive Income (Loss): | | | | | | | |
Comprehensive income (loss) attributable to principals’ and others’ interests | $ | 1,949 |
| | $ | 41,739 |
| | $ | 53,568 |
| | $ | 47,157 |
|
Comprehensive income (loss) attributable to redeemable non-controlling interests | 10 |
| | 157 |
| | (6 | ) | | 157 |
|
Comprehensive income (loss) attributable to Class A shareholders | 3,546 |
| | 30,990 |
| | 37,965 |
| | 33,641 |
|
| $ | 5,505 |
| | $ | 72,886 |
| | $ | 91,527 |
| | $ | 80,955 |
|
See notes to consolidated financial statements.
FORTRESS INVESTMENT GROUP LLC
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (Unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 2015
(dollars in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Class A Shares | | Class B Shares | | Paid-In Capital | | Retained Earnings (Accumulated Deficit) | | Accumulated Other Comprehensive Income (Loss) | | Total Fortress Shareholders’ Equity | | Principals’ and Others’ Interests in Equity of Consolidated Subsidiaries | | Total Equity |
Equity - December 31, 2014 | 208,535,157 |
| | 226,331,513 |
| | $ | 1,996,137 |
| | $ | (1,350,122 | ) | | $ | (2,416 | ) | | $ | 643,599 |
| | $ | 639,356 |
| | $ | 1,282,955 |
|
Contributions from principals’ and others’ interests in equity | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 36,165 |
| | 36,165 |
|
Distributions to principals’ and others’ interests in equity (net of tax) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (175,755 | ) | | (175,755 | ) |
Dividends declared | — |
| | — |
| | (96,501 | ) | | — |
| | — |
| | (96,501 | ) | | — |
| | (96,501 | ) |
Dividend equivalents accrued in connection with equity-based compensation (net of tax) | — |
| | — |
| | (2,335 | ) | | — |
| | — |
| | (2,335 | ) | | (4,184 | ) | | (6,519 | ) |
Net deferred tax effects resulting from acquisition and exchange of Fortress Operating Group units | — |
| | — |
| | 4,859 |
| | — |
| | — |
| | 4,859 |
| | 15 |
| | 4,874 |
|
Director restricted share grant | 71,208 |
| | — |
| | 271 |
| | — |
| | — |
| | 271 |
| | 289 |
| | 560 |
|
Capital increase related to equity-based compensation, net | 7,066,934 |
| | — |
| | 12,145 |
| | — |
| | — |
| | 12,145 |
| | 13,085 |
| | 25,230 |
|
Dilution impact of equity transactions (Note 6) | — |
| | — |
| | 8,293 |
| | — |
| | 71 |
| | 8,364 |
| | (8,364 | ) | | — |
|
Comprehensive income (loss) (net of tax) | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
Net income (loss) (excludes loss allocated to redeemable non-controlling interests) | — |
| | — |
| | — |
| | 38,029 |
| | — |
| | 38,029 |
| | 53,876 |
| | 91,905 |
|
Foreign currency translation | — |
| | — |
| | — |
| | — |
| | (64 | ) | | (64 | ) | | (308 | ) | | (372 | ) |
Total comprehensive income (loss) | |
| | |
| | |
| | |
| | |
| | 37,965 |
| | 53,568 |
| | 91,533 |
|
Equity - June 30, 2015 | 215,673,299 |
| | 226,331,513 |
| | $ | 1,922,869 |
| | $ | (1,312,093 | ) | | $ | (2,409 | ) | | $ | 608,367 |
| | $ | 554,175 |
| | $ | 1,162,542 |
|
See notes to consolidated financial statements.
FORTRESS INVESTMENT GROUP LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(dollars in thousands)
|
| | | | | | | |
| Six Months Ended June 30, |
| 2015 | | 2014 |
Cash Flows From Operating Activities | |
| | |
|
Net income (loss) | $ | 91,899 |
| | $ | 82,557 |
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities | | | |
Depreciation and amortization | 18,099 |
| | 9,338 |
|
Other amortization (included in interest expense) | 390 |
| | 390 |
|
(Earnings) losses from equity method investees | (5,387 | ) | | (42,822 | ) |
Distributions of earnings from equity method investees | 23,756 |
| | 51,204 |
|
(Gains) losses | (24,774 | ) | | 6,191 |
|
Deferred incentive income | (65,709 | ) | | (53,362 | ) |
Deferred tax (benefit) expense | 4,448 |
| | 12,756 |
|
Options received from affiliates | (25,158 | ) | | (1,604 | ) |
Tax receivable agreement liability adjustment | 7,500 |
| | — |
|
Equity-based compensation | 25,388 |
| | 18,334 |
|
Options in affiliates granted to employees | 5,681 |
| | 4,052 |
|
Other | 356 |
| | (764 | ) |
Transfer of interest in Graticule (see Note 1) | 101,000 |
| | — |
|
Gain on transfer of Graticule (see Note 1) | (134,400 | ) | | — |
|
Cash flows due to changes in | | | |
Due from affiliates | 18,392 |
| | 3,146 |
|
Other assets | (5,927 | ) | | 30,487 |
|
Accrued compensation and benefits | (157,551 | ) | | (187,033 | ) |
Due to affiliates | (17,007 | ) | | (30,248 | ) |
Deferred incentive income | 74,610 |
| | 59,128 |
|
Other liabilities | 2,810 |
| | 4,573 |
|
Purchase of investments by consolidated funds | (66,965 | ) | | (144,313 | ) |
Proceeds from sale of investments by consolidated funds | 53,494 |
| | 126,240 |
|
Receivables from brokers and counterparties | (211 | ) | | (41,302 | ) |
Due to brokers and counterparties | 2,727 |
| | 7,305 |
|
Net cash provided by (used in) operating activities | (72,539 | ) | | (85,747 | ) |
Cash Flows From Investing Activities | |
| | |
|
Contributions to equity method investees | (18,862 | ) | | (6,012 | ) |
Distributions of capital from equity method investees | 155,255 |
| | 321,085 |
|
Purchase of securities | (883 | ) | | (7,217 | ) |
Proceeds from sale of securities | 18,101 |
| | 74,922 |
|
Proceeds from exercise of options | 51,543 |
| | — |
|
Purchase of fixed assets | (11,075 | ) | | (4,176 | ) |
Purchase of software and technology-related assets | — |
| | (25,976 | ) |
Net cash provided by (used in) investing activities | 194,079 |
| | 352,626 |
|
Continued on next page.
FORTRESS INVESTMENT GROUP LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(dollars in thousands)
|
| | | | | | | |
| Six Months Ended June 30, |
| 2015 | | 2014 |
Cash Flows From Financing Activities | |
| | |
|
| | | |
Repayments of debt obligations | — |
| | (50,000 | ) |
Borrowings under debt obligations | — |
| | 125,000 |
|
Proceeds from public offering (Note 8) | — |
| | 186,551 |
|
Repurchase of Class B shares (Note 8) | — |
| | (186,551 | ) |
Payments to repurchase Class A shares (Note 8) | (9,676 | ) | | (363,410 | ) |
Dividends and dividend equivalents paid | (104,554 | ) | | (32,583 | ) |
Principals’ and others’ interests in equity of consolidated subsidiaries - contributions | 283 |
| | 3,670 |
|
Principals’ and others’ interests in equity of consolidated subsidiaries - distributions | (167,554 | ) | | (78,833 | ) |
Excess tax benefits from delivery of RSUs | 4,476 |
| | 2,931 |
|
Redeemable non-controlling interests - (distributions) contributions | (1,692 | ) | | 16,253 |
|
Net cash provided by (used in) financing activities | (278,717 | ) | | (376,972 | ) |
Net Increase (Decrease) in Cash and Cash Equivalents | (157,177 | ) | | (110,093 | ) |
Cash and Cash Equivalents, Beginning of Period | 391,089 |
| | 364,583 |
|
Cash and Cash Equivalents, End of Period | $ | 233,912 |
| | $ | 254,490 |
|
Supplemental Disclosure of Cash Flow Information | | | |
Cash paid during the period for interest | $ | 1,019 |
| | $ | 788 |
|
Cash paid during the period for income taxes | $ | 7,702 |
| | $ | 3,447 |
|
Supplemental Schedule of Non-cash Investing and Financing Activities | | | |
Employee compensation invested directly in subsidiaries | $ | 35,800 |
| | $ | 33,450 |
|
Investments of incentive receivable amounts into Fortress Funds | $ | 134,657 |
| | $ | 249,740 |
|
Dividends, dividend equivalents and Fortress Operating Group unit distributions declared but not yet paid | $ | 5,240 |
| | $ | 5,839 |
|
Retained equity interest related to Graticule transfer (Note 1) | $ | 33,400 |
| | $ | — |
|
Non-cash redeemable non-controlling interest - contributions | $ | — |
| | $ | 20,519 |
|
See notes to consolidated financial statements.
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2015
(dollars in tables in thousands, except share data)
1. ORGANIZATION AND BASIS OF PRESENTATION
Fortress Investment Group LLC (the “Registrant,” or, together with its subsidiaries, “Fortress”) is a leading, highly diversified global investment management firm whose predecessor was founded in 1998. Its primary business is to sponsor the formation of, and provide investment management services for various investment funds, permanent capital vehicles and managed accounts (collectively, the “Fortress Funds”). Fortress generally makes investments in these funds.
Fortress has three primary sources of income from the Fortress Funds: management fees, incentive income, and investment income on its investments in the funds. In addition, Fortress receives expense reimbursements pursuant to management agreements. The Fortress Funds fall into the following business segments in which Fortress operates:
a) General buyout and sector-specific funds focused on control-oriented investments in cash flow generating assets and asset-based businesses in North America and Western Europe; and
| |
b) | Entities which Fortress collectively refers to as "permanent capital vehicles" which includes (i) Newcastle Investment Corp. ("Newcastle"), New Residential Investment Corp. ("New Residential"), Eurocastle Investment Limited ("Eurocastle"), New Media Investment Group Inc. ("New Media"), New Senior Investment Group Inc. ("New Senior") and Fortress Transportation and Infrastructure Investors LLC ("FTAI"), which are publicly traded companies that are externally managed by Fortress pursuant to management agreements (collectively referred to as the "publicly traded permanent capital vehicles") and (ii) FHC Property Management LLC, (together with its subsidiaries, referred to as "Blue Harbor"), a senior living property management business. The publicly traded permanent capital vehicles invest in a wide variety of real estate related assets, including securities, loans, real estate properties and mortgage servicing related assets, media assets and transportation and infrastructure assets. All of the capital of Worldwide Transportation and Infrastructure Investors ("WWTAI"), a private fund managed by Fortress, was contributed to FTAI which completed its initial public offering ("IPO") in May 2015 (see Note 2). |
| |
2) | Liquid hedge funds that invest globally in fixed income, currency, equity and commodity markets, and related derivatives to capitalize on imbalances in the financial markets. In addition, this segment includes an endowment style fund, which invests in Fortress Funds, funds managed by external managers, and direct investments; a fund that primarily focuses on an international "event driven" investment strategy, particularly in Europe, Asia-Pacific and Latin America; and a fund that seeks to generate returns by executing a positively convex investment strategy. |
On January 5, 2015, Fortress Asia Macro Funds and related managed accounts became the first group of funds to join Fortress's affiliated manager platform ("Affiliated Managers") as they transitioned to an autonomous asset management business named Graticule Asset Management Asia, L.P. ("Graticule"). Fortress retained a perpetual minority interest in Graticule amounting to 30% of earnings during 2015 and declining to approximately 27% of earnings over time. Fortress also receives additional fees for providing infrastructure services (technology, back office, and related services) to Graticule. During the quarter ended June 30, 2015, Graticule notified Fortress of its intention to terminate the infrastructure services agreement effective at the end of May 2016. Fortress will continue to earn fees for providing services to Graticule through the effective date of the termination. Fortress recorded the results of this transaction at fair value. During the six months ended June 30, 2015, Fortress recorded a non-cash gain of $134.4 million, non-cash expense of $101.0 million related to the fair value of the controlling interest in Graticule transferred to a former senior employee for no consideration, and $33.4 million from its resulting retained interest as an equity method investment. Fortress utilized an income approach to value Graticule, its retained interest in Graticule and the controlling interest in Graticule which was transferred. This approach relies on a number of factors, including actual operating results, discount rates and economic projections.
In the second quarter of 2015, Fortress determined that certain software and technology-related assets which were used in its liquid hedge funds business had not met certain growth targets and performed an asset impairment test. As a result of this test, $7.5 million of assets were written off and included in Depreciation and Amortization.
| |
a) | Credit hedge funds, which make highly diversified investments in direct lending, corporate debt and securities, portfolios and orphaned assets, real estate and structured finance, on a global basis and throughout the capital structure, with a value orientation, as well as non-Fortress originated funds for which Fortress has been retained as manager as part of an advisory business; and |
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2015
(dollars in tables in thousands, except share data)
b) Credit private equity (“PE”) funds which are comprised of a family of “credit opportunities” funds focused on investing in distressed and undervalued assets, a family of ''long dated value'' funds focused on investing in undervalued assets with limited current cash flows and long investment horizons, a family of “real assets” funds focused on investing in tangible and intangible assets in the following principal categories (real estate, capital assets, natural resources and intellectual property), a family of Asia funds, including Japan real estate funds and an Asian investor based global opportunities fund, and a family of real estate opportunities funds, as well as certain sector-specific funds with narrower investment mandates tailored for the applicable sector.
| |
4) | Logan Circle Partners, L.P. (“Logan Circle”), which represents Fortress's traditional asset management business providing institutional clients actively managed investment solutions across a broad spectrum of fixed income strategies. Logan Circle's core fixed income products cover the breadth of the maturity and risk spectrums, including short, intermediate and long duration, core/core plus, investment grade credit, high yield and emerging market debt. |
For a reconciliation between the financial statements and the segment-based financial data that management uses for making operating decisions and assessing performance, see Note 10.
|
| | | | |
FINANCIAL STATEMENT GUIDE |
Selected Financial Statement Captions | | Note Reference | | Explanation |
| | | | |
Balance Sheet | | | | |
| | | | |
Due from Affiliates | | 6 | | Generally, management fees, expense reimbursements and incentive income due from Fortress Funds. |
| | | | |
Investments and Investments in Options | | 3 | | Primarily the carrying value of Fortress’s investments in the Fortress Funds. |
| | | | |
Deferred Tax Asset, net | | 5 | | Relates to potential future net tax benefits. |
| | | | |
Due to Affiliates | | 6 | | Generally, amounts due to the Principals related to their interests in Fortress Operating Group and the tax receivable agreement. |
| | | | |
Deferred Incentive Income | | 2 | | Incentive income already received from certain Fortress Funds based on past performance, which is subject to contingent repayment based on future performance. |
| | | | |
Debt Obligations Payable | | 4 | | The balance outstanding on the credit agreement. |
| | | | |
Principals' and Others' Interests in Equity of Consolidated Subsidiaries | | 6 | | The GAAP basis of the Principals' and a former senior employee's ownership interests in Fortress Operating Group as well as employees' ownership interests in certain subsidiaries. |
| | | | |
Statement of Operations | | | | |
| | | | |
Management Fees: Affiliates | | 2 | | Fees earned for managing Fortress Funds and other affiliates, generally determined based on the size of such funds. |
| | | | |
Management Fees: Non-Affiliates | | 2 | | Fees earned from managed accounts and the traditional fixed income asset management business, generally determined based on the amount managed. |
| | | | |
Incentive Income: Affiliates | | 2 | | Income earned from Fortress Funds, based on the performance of such funds. |
| | | | |
Incentive Income: Non- Affiliates | | 2 | | Income earned from managed accounts, based on the performance of such accounts. |
| | | | |
Compensation and Benefits | | 7 | | Includes equity-based, profit-sharing and other compensation to employees. |
| | | | |
Gains (Losses) | | 3 | | The result of asset dispositions or changes in the fair value of investments or other financial instruments which are marked to market (including the publicly traded permanent capital vehicles and publicly traded portfolio companies). |
Continued on next page.
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2015
(dollars in tables in thousands, except share data)
|
| | | | |
FINANCIAL STATEMENT GUIDE |
Selected Financial Statement Captions | | Note Reference | | Explanation |
Tax Receivable Agreement Liability Adjustment | | 5 | | Represents a change in the amount due to the Principals under the tax receivable agreement. |
| | | | |
Earnings (Losses) from Equity Method Investees | | 3 | | Fortress’s share of the net earnings (losses) of the Fortress Funds resulting from its investments in these funds. |
| | | | |
Income Tax Benefit (Expense) | | 5 | | The net tax result related to the current period. Certain of Fortress’s revenues are not subject to taxes because they do not flow through taxable entities. Furthermore, Fortress has significant permanent differences between its GAAP and tax basis earnings. |
| | | | |
Principals’ and Others’ Interests in (Income) Loss of Consolidated Subsidiaries | | 6 | | Primarily the Principals’ and employees’ share of Fortress’s earnings based on their ownership interests in subsidiaries, including Fortress Operating Group. |
| | | | |
Earnings Per Share | | 8 | | GAAP earnings per Class A share based on Fortress’s capital structure, which is comprised of outstanding and unvested equity interests, including interests which participate in Fortress’s earnings, at both the Fortress and subsidiary levels. |
| | | | |
Other | | | | |
| | | | |
Distributions | | 8 | | A summary of dividends and distributions, and the related outstanding shares and units, is provided. |
| | | | |
Distributable Earnings | | 10 | | A presentation of Fortress's financial performance by segment (fund type) is provided, on the basis of the operating performance measure used by Fortress’s management committee. |
Recent Accounting Pronouncements
In May 2014, the FASB issued a comprehensive new revenue recognition standard for contracts with customers that will supersede most current revenue recognition guidance, including industry-specific guidance. This standard contains principles that an entity will apply to determine the measurement of revenue and timing of when it is recognized. The entity will recognize revenue to reflect the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. In July 2015, the FASB voted to approve a one year deferral of the effective date of the new revenue recognition standard. The new standard is effective for Fortress beginning January 1, 2018. Early adoption is permitted but not before the original public entity effective date (that is, annual periods beginning after December 15, 2016). The standard permits the use of either the retrospective or cumulative effect transition method. Fortress is currently evaluating the impact on its consolidated financial statements upon the adoption of this new standard.
The FASB has recently issued or discussed a number of proposed standards on such topics as, leases, financial instruments and hedging. Some of the proposed changes are significant and could have a material impact on Fortress’s financial reporting. Fortress has not yet fully evaluated the potential impact of these proposals, but will make such an evaluation as the standards are finalized.
In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810) - Amendments to the Consolidation Analysis ("ASU 2015-02"). ASU 2015-02 eliminates the deferral of Statement of Financial Accounting Standards No. 167, Amendments to FASB Interpretation No. 46 (R) previously provided to investment companies and certain other entities pursuant to ASC 810-10-65-2. ASU 2015-02 also amends the evaluation of whether (1) fees paid to a decision maker or service provider represent a variable interest, (2) a limited partnership or similar entity has the characteristics of a variable interest entity ("VIE") and (3) a reporting entity is the primary beneficiary of a VIE. ASU 2015-02 eliminates certain conditions for evaluating whether a fee paid to a decision maker or a service provider represents a variable interest. Fees received by a decision maker or service provider are no longer considered variable interests and are now excluded from the evaluation of whether the reporting entity is the primary beneficiary of a VIE if the fees are both customary and commensurate with the level of effort required for the services provided and the decision maker or service provider does not hold other interests in the entity being evaluated that would absorb more than an insignificant amount of the expected losses or returns of the entity. If the reporting entity determines that it does not have a variable interest in an entity, no further consolidation analysis is performed as the reporting entity would not be required to consolidate the entity.
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2015
(dollars in tables in thousands, except share data)
The effective date of ASU 2015-02 is for fiscal years and interim periods within those fiscal years, beginning after December 15, 2015 for public companies and early adoption is permitted. Fortress has elected to early adopt ASU 2015-02 on a retrospective basis as permitted, for all periods presented. The consolidated financial statements and related footnote disclosures have been adjusted for the impact of the adoption. The adoption did not result in a cumulative effect adjustment to Fortress’s retained earnings (accumulated deficit). Fortress’s accounting policy, updated for the adoption of ASU 2015-02, is described below.
Basis of Accounting and Consolidation - The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The accompanying consolidated financial statements include the accounts of Fortress and its consolidated subsidiaries, which are comprised of VIEs in which it is the primary beneficiary as described below and voting interest entities (“VOEs”) in which it is determined to have a controlling financial interest under ASC 810, as amended by ASU 2015-02.
For legal entities evaluated for consolidation, Fortress must determine whether the interests that it holds and fees paid to it qualify as a variable interest in the entity. This includes an evaluation of fees paid to Fortress where Fortress acts as a decision maker or service provider to the entity being evaluated. Fees received by Fortress are not variable interests if (i) the fees are compensation for services provided and are commensurate with the level of effort required to provide those services, (ii) the service arrangement includes only terms, conditions, or amounts that are customarily present in arrangements for similar services negotiated at arm’s length and (iii) Fortress’s other economic interests in the VIE held directly and indirectly through its related parties, as well as economic interests held by related parties under common control, where applicable, would not absorb more than an insignificant amount of the entity’s losses or receive more than an insignificant amount of the entity’s benefits.
For those entities in which it has a variable interest, Fortress performs an analysis to first determine whether the entity is a VIE. This determination includes considering whether the entity’s equity investment at risk is sufficient, whether the voting rights of an investor are not proportional to its obligation to absorb the income or loss of the entity and substantially all of the entity's activities either involve or are conducted on behalf of that investor and its related parties and whether the entity’s at-risk equity holders have the characteristics of a controlling financial interest. A VIE must be consolidated by its primary beneficiary. Performance of such analysis requires the exercise of judgment.
The primary beneficiary of a VIE is generally defined as the party who has a controlling financial interest in the VIE. Fortress is generally deemed to have a controlling financial interest in a VIE if it has (i) the power to direct the activities of the VIE that most significantly affect the VIE’s economic performance and (ii) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. For purposes of evaluating (ii) above, fees paid to Fortress are excluded if the fees are compensation for services provided commensurate with the level of effort required to be performed and the arrangement includes only customary terms, conditions or amounts present in arrangements for similar services negotiated at arm’s length. Fortress also evaluates its economic interests in the VIE held directly by it and indirectly through its related parties, as well as economic interests held by related parties under common control, where applicable. The primary beneficiary evaluation is generally performed qualitatively on the basis of all facts and circumstances. However, quantitative information may also be considered in the analysis, as appropriate. These analyses require judgment. Changes in the economic interests (either by Fortress, related parties of Fortress or third parties) or amendments to the governing documents of the VIE could affect an entity's status as a VIE or the determination of the primary beneficiary. The primary beneficiary evaluation is updated continuously.
For VOEs, Fortress shall consolidate the entity if it has a controlling financial interest. Fortress has a controlling financial interest in a VOE if (i) for legal entities other than limited partnerships, Fortress owns a majority voting interest in the VOE or, for limited partnerships and similar entities, Fortress owns a majority of the entity’s kick-out rights through voting limited partnership interests and (ii) non-controlling shareholders or partners do not hold substantive participating rights and no other conditions exist that would indicate that Fortress does not control the entity.
For entities over which Fortress exercises significant influence but which do not meet the requirements for consolidation, Fortress uses the equity method of accounting whereby it records its share of the underlying income of these entities. These entities include the Fortress Funds. The evaluation of whether Fortress exerts control or significant influence over the financial and operational policies of an entity requires judgment based on the facts and circumstances surrounding each individual entity.
Virtually all of the Fortress Funds are, for GAAP purposes, investment companies. Investment companies record realized and unrealized gains (losses) resulting from changes in the fair value of their investments as a component of current income. Additionally, investment companies generally do not consolidate their majority-owned and controlled investments (the “Portfolio Companies”).
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2015
(dollars in tables in thousands, except share data)
Distributions by Fortress and its subsidiaries are recognized when declared.
Redeemable Non-controlling Interests represent ownership interests in consolidated subsidiaries which are redeemable and not owned by Fortress.
Principals’ and others’ interests in consolidated subsidiaries represent the ownership interests in certain consolidated subsidiaries held by entities or persons other than Fortress. This is primarily related to the Principals’ interests in Fortress Operating Group (Note 6). Non-Fortress interests also include employee interests in majority owned and controlled fund advisor and general partner entities.
Deconsolidation of New Media
Prior to the adoption of ASU 2015-02, Fortress consolidated New Media, a VIE. The financial results of New Media were included in Fortress’s consolidated financial statements in previous filings with the Securities and Exchange Commission, based on the then existing consolidation guidance. The adoption of ASU 2015-02 resulted in the deconsolidation of New Media as Fortress determined that under ASU 2015-02, it was not the primary beneficiary of New Media. The fee arrangement with New Media is both commensurate with the level of effort required for the services provided and include only customary terms and Fortress does not hold other interests in New Media that would absorb more than an insignificant amount of New Media's losses or benefits. Therefore, Fortress no longer considers this fee arrangement to be a variable interest. Under ASU 2015-02, Fortress and its related parties under common control as a group, where applicable, do not have the obligation to absorb losses or the right to receive benefits from New Media that could potentially be significant to New Media. Also see Note 3 for the related disclosures for certain unconsolidated variable interest entities.
The accompanying consolidated financial statements and related footnotes of Fortress have been prepared in accordance with accounting principles generally accepted in the United States for interim financial reporting and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared under GAAP have been condensed or omitted. In the opinion of management, all adjustments considered necessary for a fair presentation of Fortress’s financial position, results of operations and cash flows have been included and are of a normal and recurring nature. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These financial statements should be read in conjunction with Fortress’s consolidated financial statements for the year ended December 31, 2014 and footnotes thereto included in Fortress’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 26, 2015, as revised in Fortress's Current Report on Form 8-K filed with the Securities and Exchange Commission on May 7, 2015. Capitalized terms used herein, and not otherwise defined, are defined in Fortress’s consolidated financial statements for the year ended December 31, 2014.
All significant intercompany accounts and transactions have been eliminated.
Certain prior period amounts have been reclassified to conform to the current period's presentation.
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2015
(dollars in tables in thousands, except share data)
2. MANAGEMENT AGREEMENTS AND FORTRESS FUNDS
Fortress has two principal sources of fee income from its agreements with the Fortress Funds: contractual management fees, which are generally based on a percentage of fee paying assets under management, and related incentive income, which is generally based on a percentage of returns, or profits, subject to the achievement of performance criteria. Substantially all of Fortress's net assets, after deducting the portion attributable to non-controlling interests, are a result of Fortress's investments in, or receivables from, these funds. The terms of agreements between Fortress and the Fortress Funds are generally determined in connection with third party fund investors.
Management Fees and Incentive Income
Fortress recognized management fees and incentive income as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2015 | | 2014 | | 2015 | | 2014 |
Private Equity | | | |
| | |
| | |
|
Private Equity Funds | | | |
| | |
| | |
|
Management fees: affil. | $ | 29,222 |
| | $ | 35,330 |
| | $ | 58,362 |
| | $ | 70,643 |
|
Management fees: non-affil. | — |
| | 162 |
| | — |
| | 311 |
|
Incentive income: affil. | — |
| | 22,094 |
| | — |
| | 22,094 |
|
| | | | | | | |
Permanent Capital Vehicles | | | |
| | |
| | |
|
Management fees: affil. | 22,276 |
| | 16,318 |
| | 41,278 |
| | 31,496 |
|
Management fees, options: affil. | 21,014 |
| | 1,604 |
| | 25,158 |
| | 1,604 |
|
Management fees: non-affil. | 482 |
| | 583 |
| | 932 |
| | 1,691 |
|
Incentive income: affil. | 23,156 |
| | 19,246 |
| | 25,744 |
| | 23,255 |
|
| | | | | | | |
Liquid Hedge Funds | | | |
| | |
| | |
|
Management fees: affil. | 16,638 |
| | 29,998 |
| | 35,133 |
| | 57,065 |
|
Management fees: non-affil. | 2,054 |
| | 6,164 |
| | 4,548 |
| | 12,575 |
|
Incentive income: affil. | 41 |
| | 908 |
| | 53 |
| | 986 |
|
Incentive income: non-affil. | 39 |
| | 44 |
| | 39 |
| | 44 |
|
| | | | | | | |
Credit Funds | | | |
| | |
| | |
|
Credit Hedge Funds | | | |
| | |
| | |
|
Management fees: affil. | 29,834 |
| | 28,455 |
| | 59,488 |
| | 55,289 |
|
Management fees: non-affil. | 13 |
| | 20 |
| | 23 |
| | 44 |
|
Incentive income: affil. | 21,516 |
| | 16,429 |
| | 22,169 |
| | 17,733 |
|
Incentive income: non-affil. | — |
| | — |
| | — |
| | — |
|
| | | | | | | |
Credit PE Funds | | | |
| | |
| | |
|
Management fees: affil. | 31,068 |
| | 23,651 |
| | 57,387 |
| | 48,259 |
|
Management fees: non-affil. | 29 |
| | 34 |
| | 58 |
| | 68 |
|
Incentive income: affil. | 37,445 |
| | 1,765 |
| | 58,409 |
| | 30,625 |
|
Incentive income: non-affil. | 257 |
| | — |
| | 257 |
| | 643 |
|
| | | | | | | |
Logan Circle | | | |
| | |
| | |
|
Management fees: affil. | 884 |
| | 689 |
| | 1,837 |
| | 1,399 |
|
Management fees: non-affil. | 12,388 |
| | 10,753 |
| | 24,696 |
| | 20,649 |
|
Incentive income: affil. | — |
| | — |
| | 6 |
| | — |
|
Incentive income: non-affil. | — |
| | — |
| | — |
| | — |
|
| | | | | | | |
Total | | | |
| | |
| | |
|
Management fees: affil. | $ | 150,936 |
| | $ | 136,045 |
| | $ | 278,643 |
| | $ | 265,755 |
|
Management fees: non-affil. | $ | 14,966 |
| | $ | 17,716 |
| | $ | 30,257 |
| | $ | 35,338 |
|
Incentive income: affil. (A) | $ | 82,158 |
| | $ | 60,442 |
| | $ | 106,381 |
| | $ | 94,693 |
|
Incentive income: non-affil. | $ | 296 |
| | $ | 44 |
| | $ | 296 |
| | $ | 687 |
|
| |
(A) | See “Deferred Incentive Income” below. The incentive income amounts presented in this table are based on the estimated results of investment vehicles for the current period. These estimates are subject to change based on the final results of such vehicles. |
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2015
(dollars in tables in thousands, except share data)
Deferred Incentive Income
Incentive income from certain Fortress Funds, primarily the private equity funds, private permanent capital vehicle through its IPO in May 2015 and credit PE funds, is received when such funds realize returns, or profits, based on the related agreements. However, this incentive income is subject to contingent repayment by Fortress to the funds until certain overall fund performance criteria are met. Accordingly, Fortress does not recognize this incentive income as revenue until the related contingencies are resolved. Until such time, this incentive income is recorded on the balance sheet as deferred incentive income and is included as “distributed-unrecognized” deferred incentive income in the table below. Incentive income from such funds, based on their net asset value, which has not yet been received is not recorded on the balance sheet and is included as “undistributed” deferred incentive income in the table below.
Incentive income from certain Fortress Funds is earned based on achieving annual performance criteria. Accordingly, this incentive income is recorded as revenue at year end (in the fourth quarter of each year), is generally received subsequent to year end, and has not been recognized for these funds during the six months ended June 30, 2015 and 2014. If the amount of incentive income contingent on achieving annual performance criteria was not contingent on the results of the subsequent quarters, $46.4 million and $56.3 million of additional incentive income would have been recognized during the six months ended June 30, 2015 and 2014, respectively. Incentive income based on achieving annual performance criteria that has not yet been recognized, if any, is not recorded on the balance sheet and is included as “undistributed” deferred incentive income in the table below.
During the six months ended June 30, 2015 and 2014, Fortress recognized $58.4 million and $30.6 million, respectively, of incentive income distributions from its credit PE funds which were non-clawbackable or represented “tax distributions.” Tax distributions are not subject to clawback and reflect a cash amount approximately equal to the amount expected to be paid out by Fortress for taxes or tax-related distributions on the allocated income from such funds.
Deferred incentive income from the Fortress Funds was comprised of the following, on an inception-to-date basis. This does not include any amounts related to third party funds, receipts from which are reflected as Other Liabilities until all contingencies are resolved.
|
| | | | | | | | | | | | | | | | | |
| Distributed-Gross | | Distributed-Recognized (A) | | Distributed-Unrecognized (B) | | Undistributed, net of intrinsic clawback (C) (D) | |
Deferred incentive income as of December 31, 2014 | $ | 1,243,441 |
| | | $ | (938,915 | ) | | $ | 304,526 |
| | $ | 868,549 |
| |
Fortress Funds which matured (no longer subject to clawback) | — |
| | | — |
| | N/A |
| | N/A |
| |
Share of income (loss) of Fortress Funds | N/A |
| | | N/A |
| | N/A |
| | 173,199 |
| |
Distribution of private equity funds and credit PE funds incentive income | 81,671 |
| | | N/A |
| | 81,671 |
| | (81,671 | ) | |
Distribution of private permanent capital vehicle incentive income through IPO in May 2015 | 6,299 |
| | | N/A |
| | 6,299 |
| | (6,299 | ) | |
Recognition of previously deferred incentive income | N/A |
| | | (65,709 | ) | | (65,709 | ) | | N/A |
| |
Changes in foreign exchange rates | (449 | ) | | | — |
| | (449 | ) | | N/A |
| |
Deferred incentive income as of June 30, 2015 | $ | 1,330,962 |
| (E) | | $ | (1,004,624 | ) | | $ | 326,338 |
| | $ | 953,778 |
| (E) |
Deferred incentive income including Fortress Funds which matured | $ | 1,384,618 |
| | | $ | (1,058,280 | ) | | | | | |
| |
(A) | All related contingencies have been resolved. |
| |
(B) | Reflected on the consolidated balance sheet. |
| |
(C) | At June 30, 2015, the net undistributed incentive income is comprised of $1.0 billion of gross undistributed incentive income, net of $66.9 million of intrinsic clawback. The net undistributed incentive income represents the amount that would be received by Fortress from the related funds if such funds were liquidated on June 30, 2015 at their net asset values. |
| |
(D) | From inception to June 30, 2015, Fortress has paid $621.9 million of compensation expense under its employee profit sharing arrangements (Note 7) in connection with distributed incentive income, of which $21.5 million has not been expensed because management has determined that it is not probable of being incurred as an expense and will be recovered from the related individuals. As of June 30, 2015, Fortress has recovered $6.4 million from individuals relating to their clawback obligations. If the $1.0 billion of gross undistributed incentive income were realized, Fortress would recognize and pay an additional $498.7 million of compensation expense. |
| |
(E) | See detailed reconciliations of Distributed-Gross and Undistributed, net of intrinsic clawback below. |
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2015
(dollars in tables in thousands, except share data)
The amounts set forth under Distributed-Gross can be reconciled to the incentive income threshold tables (on the following pages) as follows:
|
| | | | | | | | |
| | | | | June 30, 2015 |
Distributed incentive income - Private Equity Funds | $ | 846,671 |
|
Distributed incentive income - Private Equity Funds in Investment Period or Commitment Period | — |
|
Distributed incentive income - Credit PE Funds | 801,657 |
|
Distributed incentive income - Credit PE Funds in Investment Period or Commitment Period | 4,776 |
|
Distributed incentive income - Private Permanent Capital Vehicle through IPO in May 2015 (see footnote (P) of incentive income threshold tables) | 7,043 |
|
Less: | |
| | Fortress Funds which are not subject to a clawback provision: | |
| | — |
| | NIH | (94,513 | ) |
| | — |
| | GAGACQ Fund | (51,476 | ) |
| | Portion of Fund I distributed incentive income that Fortress is not entitled to (see footnote K of incentive income threshold tables) | (183,196 | ) |
Distributed-Gross | $ | 1,330,962 |
|
The amounts set forth under Undistributed, net of intrinsic clawback can be reconciled to the incentive income threshold tables (on the following pages) as follows:
|
| | | | | | | |
| | | | | June 30, 2015 |
Undistributed incentive income - Private Equity Funds | $ | 26,310 |
|
Undistributed incentive income - Private Equity Funds in Investment Period or Commitment Period | 3,509 |
|
Undistributed incentive income - Credit PE Funds | 848,001 |
|
Undistributed incentive income - Credit PE Funds in Investment Period or Commitment Period | 26,482 |
|
Undistributed incentive income - Permanent Capital Vehicles | 1,191 |
|
Undistributed incentive income - Hedge Funds (total) | 115,083 |
|
Undistributed incentive income - Logan Circle | 105 |
|
Less: | | Gross intrinsic clawback per incentive income threshold tables - Private Equity Funds | (66,903 | ) |
Undistributed, net of intrinsic clawback | $ | 953,778 |
|
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2015
(dollars in tables in thousands, except share data)
The following tables summarize information with respect to the Fortress Funds and their related incentive income thresholds as of June 30, 2015:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fund (Vintage) (A) | Maturity Date (B) | | Inception to Date Capital Invested | | Inception to Date Distributions (C) | | Net Asset Value (“NAV”) | | NAV Surplus (Deficit) (D) | | Current Preferred Return Threshold (E) | | Gain to Cross Incentive Income Threshold (F) | | Undistributed Incentive Income (G) | | Distributed Incentive Income (H) | | Distributed Incentive Income Subject to Clawback (I) | | Gross Intrinsic Clawback (J) | | Net Intrinsic Clawback (J) |
Private Equity Funds | | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
NIH (1998) | Closed Jun-15 | | $ | 415,574 |
| | $ | (823,588 | ) | | $ | — |
| | $ N/A | | $ N/A |
| | $ N/A |
| | $ | — |
| | $ | 94,513 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Fund I (1999) (K) | Closed May-13 | | 1,015,943 |
| | (2,847,929 | ) | | — |
| | N/A |
| | N/A |
| | N/A |
| | — |
| | 344,939 |
| | — |
| | — |
| | — |
|
Fund II (2002) | In Liquidation | | 1,974,298 |
| | (3,442,900 | ) | | 3,534 |
| | 1,472,136 |
| | — |
| | N/A |
| | 696 |
| | 288,840 |
| | — |
| | — |
| | — |
|
Fund III (2004) | In Liquidation | | 2,762,992 |
| | (2,138,524 | ) | | 930,951 |
| | 306,483 |
| | 2,154,994 |
| | 1,848,511 |
| | — |
| | 66,903 |
| | 66,903 |
| | 66,903 |
| | 45,108 |
|
Fund III Coinvestment (2004) | In Liquidation | | 273,649 |
| | (225,188 | ) | | 68,246 |
| | 19,785 |
| | 252,921 |
| | 233,136 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Fund IV (2006) | Jan-17 | | 3,639,561 |
| | (1,357,054 | ) | | 2,225,663 |
| | (56,844 | ) | | 2,925,391 |
| | 2,982,235 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Fund IV Coinvestment (2006) | Jan-17 | | 762,696 |
| | (271,319 | ) | | 412,859 |
| | (78,518 | ) | | 625,163 |
| | 703,681 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Fund V (2007) | Feb-18 | | 4,103,713 |
| | (1,435,456 | ) | | 5,303,858 |
| | 2,635,601 |
| | 2,355,965 |
| | 81,806 |
| | 13,665 |
| | — |
| | — |
| | — |
| | — |
|
Fund V Coinvestment (2007) | Feb-18 | | 990,480 |
| | (173,600 | ) | | 526,359 |
| | (290,521 | ) | | 708,207 |
| | 998,728 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
GAGACQ Fund (2004) (GAGFAH) | Closed Nov-09 | | 545,663 |
| | (595,401 | ) | | — |
| | N/A |
| | N/A |
| | N/A |
| | — |
| | 51,476 |
| | — |
| | — |
| | — |
|
FRID (2005) (GAGFAH) | Closed Nov-14 | | 1,220,229 |
| | (1,202,153 | ) | | — |
| | N/A |
| | N/A |
| | N/A |
| | — |
| | — |
| | — |
| | — |
| | — |
|
FRIC (2006) (Brookdale) | Closed Dec-14 | | 328,754 |
| | (291,330 | ) | | — |
| | N/A |
| | N/A |
| | N/A |
| | — |
| | — |
| | — |
| | — |
| | — |
|
FICO (2006) (Intrawest) | Jan-17 | | 724,525 |
| | — |
| | (63,960 | ) | | (788,485 | ) | | 657,265 |
| | 1,445,750 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
FHIF (2006) (Holiday) | Jan-17 | | 1,543,463 |
| | (685,652 | ) | | 1,520,480 |
| | 662,669 |
| | 1,249,260 |
| | 586,591 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
FECI (2007) (Florida East Coast Railway/Florida East Coast Industries) | Feb-18 | | 982,779 |
| | (624 | ) | | 960,420 |
| | (21,735 | ) | | 818,492 |
| | 840,227 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
MSR Opportunities Fund I A (2012) | Aug-22 | | 341,135 |
| | (141,754 | ) | | 298,754 |
| | 99,373 |
| | — |
| | N/A |
| | 9,566 |
| | — |
| | — |
| | — |
| | — |
|
MSR Opportunities Fund I B (2012) | Aug-22 | | 82,760 |
| | (34,275 | ) | | 72,327 |
| | 23,842 |
| | — |
| | N/A |
| | 2,383 |
| | — |
| | — |
| | — |
| | — |
|
| | | |
| | |
| | |
| | |
| | |
| | |
| | $ | 26,310 |
| | $ | 846,671 |
| | $ | 66,903 |
| | $ | 66,903 |
| | $ | 45,108 |
|
Private Equity Funds in Investment or Commitment Period | | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
| | |
|
MSR Opportunities Fund II A (2013) | Jul-23 | | $ | 158,724 |
| | $ | (15,482 | ) | | $ | 162,338 |
| | $ | 19,096 |
| | $ | — |
| | $ N/A |
| | $ | 2,820 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
MSR Opportunities Fund II B (2013) | Jul-23 | | 2,264 |
| | (212 | ) | | 2,311 |
| | 259 |
| | — |
| | N/A |
| | 39 |
| | — |
| | — |
| | — |
| | — |
|
MSR Opportunities MA I (2013) | Jul-23 | | 36,425 |
| | (3,541 | ) | | 37,287 |
| | 4,403 |
| | — |
| | N/A |
| | 650 |
| | — |
| | — |
| | — |
| | — |
|
Italian NPL Opportunities Fund (2013) | Sep-24 | | 32,312 |
| | (5,768 | ) | | 24,044 |
| | (2,500 | ) | | 1,767 |
| | 4,267 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| | | | | | | | | | | | | | | $ | 3,509 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Continued on next page.
FORTRESS INVESTMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
JUNE 30, 2015
(dollars in tables in thousands, except share data)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fund (Vintage) (A) | | Maturity Date (B) | | Inception to Date Capital Invested | | Inception to Date Distributions (C) | | Net Asset Value (“NAV”) | | NAV Surplus (Deficit) (D) | | Current Preferred Return Threshold (E) | | Gain to Cross Incentive Income Threshold (F) | | Undistributed Incentive Income (G) | | Distributed Incentive Income (H) | | Distributed Incentive Income Subject to Clawback (I) | | Gross Intrinsic Clawback (J) | | Net Intrinsic Clawback (J) |
Credit PE Funds | | | | | | | | | | | | | | | | | | | | | | | | |
Long Dated Value Fund I (2005) | | Apr-30 | | $ | 267,325 |
| | $ | (127,971 | ) | | $ | 290,441 |
| | $ | 151,087 |
| | $ | 153,774 |
| | $ | 4,579 |
| | $ | 48 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Long Dated Value Fund II (2005) | | Nov-30 | | 274,280 |
| | (150,977 | ) | | 204,428 |
| | 81,125 |
| | 123,552 |
| | 42,427 |
| | — |
| | 412 |
| | — |
| | — |
| | — |
|
Long Dated Value Fund III (2007) | | Feb-32 | | 343,156 |
| | (283,517 | ) | | 190,703 |
| | 131,064 |
| | — |
| | N/A |
| | 17,839 |
| | 6,473 |
| | — |
| | — |
| | — |
|
LDVF Patent Fund (2007) | | Nov-27 | | 41,779 |
| | (34,903 | ) | | 33,493 |
| | 26,617 |
| | — |
| | N/A |
| | 1,071 |
| | 1,471 |
| | — |
| | — |
| | — |
|
Real Assets Fund (2007) | | Jun-17 | | 359,024 |
| | (352,783 | ) | | 105,051 |
| | 98,810 |
| | — |
| | N/A |
| | 9,043 |
| | 6,285 |
| | — |
| | — |
| | — |
|
Credit Opportunities Fund (2008) | | Oct-20 | | 5,646,864 |
| | (7,084,071 | ) | | 1,274,505 |
| | 2,711,712 |
| | — |
| | N/A |
| | 169,710 |
| | 362,870 |
| | 145,297 |
| | — |
| | — |
|
Credit Opportunities Fund II (2009) | | Jul-22 | | 2,335,264 |
| | (2,487,310 | ) | | 1,083,393 |
| | 1,235,439 |
| | — |
| | N/A |
| | 129,496 |
| | 112,816 |
| | 43,733 |
| | — |
| | — |
|
Credit Opportunities Fund III (2011) | | Mar-24 | | 3,088,327 |
| | (1,298,051 | ) | | 2,479,191 |
| | 688,915 |
| | — |
| | N/A |
| | 108,185 |
| | 26,852 |
| |