Citigroup analyst Prashant Bhatia cuts private-equity and hedge-fund firm Fortress Investment Group (FIG) To Sell, citing declining rates of return and mounting debt.
Bhatia’s first concern is Fortress’s flatlining return on assets:
We estimate that funds representing $13b of committed capital (~85% of total) have flat to negative IRRs through July ’08. Lower historical performance may make it more difficult to attract assets across strategies going forward. We believe both major hedge funds ($18b AUM) are flat to down YTD as well.
Also of concern is the possibility that Fortress will cut its dividend as a result of diminished retained earnings:
We estimate that the firm’s quarterly dividend has exceeded its after-tax distributable earnings for three consecutive quarters. Furthermore, we note that the firm recently increased total debt by 50% by drawing down the remaining $265m of its revolver.
Bhatia is predicting slower growth going forward and suggests that “performance fee realisation” at Fortress will be “minimal.”
Bhatia isn’t down on all private equity groups however, and suggests that Blackstone might be a better bet:
In our view, the risks associated with FIG now outweigh the potential rewards. We continue to see better risk/reward from Blackstone (BX), a significantly more diversified alternative asset manager w/ a core competency of improving the underlying businesses that it acquires.
Bhatia cuts his rating to Sell, and lowers his price target from $14 to $9.
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