Fortress Going Public? The Writing's On The Wall

So the New York Times carried the story today that Fortress Investment Group is considering going public at the breath-taking valuation of $5-7 billion. Now, whether or not this will happen tomorrow is not the point. The point, as I've written about in several posts (Hedge Funds as Asset Management Complexes - the Day Has Come, Convergence Redux, Broadening the Multi-Strategy Mandate - Where do Hedge Funds End and Private Equiy Firms Begin?, Where is the Hedge Fund Industry Going?), is that this type of move - hedge funds and private equity firms morphing into diversified asset management complexes (and subsequently going public) is simply inevitable. The potential rewards for the founders combined with the ability to create a sustainable legacy are just too great.  Some of the more interesting excerpts from today's NYT article are below:

If it should go ahead, a Fortress offering would be the first public listing of its kind. A successful offering could pave the way for a stampede of interest from other seasoned hedge funds as well as private equity giants that might be looking for ways to turn their huge hoards of private money into public asset-management companies.

Such a move would go against the grain: companies seem more likely to go private rather than public. But for Fortress, going public would give it another way to raise money to build the business as well as a tool — its shares — to retain talent. Stock would also give Fortress a currency to buy other companies. And it would allow the founders to cash out some of what they have built and create a succession plan.

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Going public solves succession and retention issues while creating a more permanent institution. Several major private equity and hedge funds have also contemplated going public, including the Citadel Investment Group, a $12 billion hedge fund in Chicago and the private equity firms Kohlberg Kravis & Roberts & Company and the Blackstone Group.

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Fortress is not a typical hedge fund. It manages $24.3 billion and has 500 employees, according to its marketing materials. It calls itself a “global alternative investment and asset management firm.” The description seems apt, considering its size and the fact that it has offices in London, Rome, Frankfurt, Geneva, Tokyo, Hong Kong, Sydney, Toronto, Dallas and San Diego.

The firm is a prime example of convergence in asset management: it operates private equity and hedge funds and it competes against banks to lend money directly to corporate clients. The result is a firm with various lines of business that looks more like Goldman Sachs than a traditional hedge fund.

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Assets in hedge funds have increased 3,000 percent since 1990 with almost 9,000 funds now entrusted with $1.2 billion of capital. Once a playground for the rich, hedge funds now have institutional investors, like pension funds and endowments.

That has translated to some transparency and the realization by managers that they do not need to produce 30 percent returns with huge swings, but rather 8 to 10 percent returns without the roller coaster ride.

The game has shifted to gathering assets, making fees from managing those assets and contemplating once-heretical moves like going public. The question, until now, has simply been who would go first. Fortress may be the first to let the drawbridge down.

The bolded text represent major themes across the alternative investment landscape, and directly line up with the themes I've written about in previous posts. Fortress is a fine firm and, assuming Wes, Peter, Mike et al can pull this off, congratulations to all. They are ahead of the curve. The only question is who's next: Blackstone? Carlyle? Citadel? DE Shaw? These are the types of firms who are prime candidates to follow in Fortress's footsteps. Let's see if the equity markets hold up and enable a bunch of these deals to get through. If the macro picture softens, a credit crunch ensues and the taste for alternative assets wanes, the window of opportunity to get these deals done will rapidly snap shut. Just like it will for conventional asset managers. And they're all just asset managers, right?

Comments

[howard Lindzon]

Its smart and a great early trend. Thought Vega would do it a few years ago.

Timing is key as assets can flood out as quickly as in

if Fortress is a success and financials stay strong, this space would get hot fast.

[Roger]

Matt, I hear you, and it's a move I personally would have thought unimaginable 5-10 years ago. That said, I don't really buy the "personal defeat" argument when the issues of billions of dollars of wealth creation and creating a sustainable legacy are on the line. A firm like DE Shaw, while secretive, has become much less so in the wake of Laminar and its expressed goal to massively grow its new institutional product. In a public format they're not going to have to divulge the algorithms driving their statistical arbitrage programs or anything like that. I think the secrecy issue is pretty much a red herring as public disclosures will not, in my opinion, materially impact their competitive edge or the ability to monetize this edge. As for Citadel, I personally find them a less attractive candidate, but since Ken has mentioned it before it seemed prudent to put them on my little list. DE Shaw seems like a much better fit for the public markets, especially once they get $5-$10 billion in AUM for their institutional product.

[Matt]

Can you actually see Citadel or DE Shaw going public? Interesting thought, but seems highly unlikely...two of the most secretive companies in existence, not to mention that tapping public markets would be considered an act of defeat. These organizations pride themselves on turning away investors (even as Griffin's citadel crumbles from redemptions.)

[Yaser Anwar]

Excellent Post!

I'd like to add, sometime back Legg Mason bought a majority stake in Permal Group, which is one of the largest FoHF companies, 25 billion in assets.

Legg Mason being one of the biggest Asset Management firms in the world, goes to validate that: At the end of the day hedge funds & private equity firms (whether they are involved in Alternate Investments, Multi-Strategy, LBOs, MBOs etc) are indeed asset managers, with just different methods to generate returns.

I wouldn't be surprised if either of the aforementioned firms decide to take the public route. Both ways lead to immense wealth (not that they are lacking any wealth) & source of funds.

So its just a matter of time before they go public.