“We estimate that funds representing $13 billion of committed capital have flat to negative internal rate of returns through July 2008,” said analyst Prashant Bhatia in a note to clients dated Aug 4.
The stock was down more than 13 percent to $10.24 in afternoon action.
He noted that dividend at Fortress had exceeded the Citigroup’s estimated after-tax distributable earnings over the last three quarters and said cutting the dividend may be a more attractive option than trying to sell assets in a difficult market environment.
Bhatia said he believed that some of Fortress’ funds continued to own assets related to subprime mortgage originators and servicing in their private portfolios.
He estimated that these publicly traded subprime originators have lost almost 95 percent of their value and said Fortress would have trouble unloading these assets in the future without taking a substantial discount.
On July 20, the Wall Street Journal reported that a Fortress fund, the
Bhatia said he estimated that the value of the unrealized gain in the public securities held by Fortress funds have declined by over $8 billion and said it viewed that 85 percent of this decline in value of the public securities portfolio was driven by market depreciation.
“… we estimate that the public portfolio currently has an unrealized loss of $500 million and if sold today would result in a performance fee clawback of $100 million,” Bhatia said.
He added that if the private portfolio also had some loss content, the clawback could exceed $200 million.
Some investors reviewing the stock performance of firms taken public by Fortress recently will likely conclude that much of the value has already been extracted from these firms, Bhatia said.
The analyst added that this may force Fortress to accept lower prices on their IPOs going forward, which could hurt the firm’s returns.
The recent underperformance in the public portfolio and some newer investment vehicles combined with slower inflows industry-wide, make management’s targeted capital raises difficult to achieve, Bhatia said.
During the first quarter, Fortress, one of only a handful of publicly traded hedge and private equity companies, said it raised $2.6 billion in capital.
Bhatia said while he viewed Fortress as a firm that can benefit during times of distress, the reality was that it did not have a track record “spanning multiple cycles.”
He added that this raised the question of whether the firm prospered as a result of the credit bubble and now may not be able to repeat its past success.
The analyst cut his 2008 earnings estimates on the stock to $0.50 per share from $0.70 and the price target to $9 from $14. (Reporting by Ramya Dilip in Bangalore; Editing by Jarshad Kakkrakandy)