Fortress unveils $2.5bn direct lending fund, as LPs seek relief from inflation

Fortress Investment Group is targeting $2.5 billion for a third direct lending offering to tap into opportunities spawned by market uncertainty and volatility.

Fortress Lending Fund III’s target was disclosed in a Connecticut Retirement Plans and Trust Funds report. No hard cap has been set. The pension system is considering investing alongside the pool through a separately managed account.

Fortress, the $54 billion affiliate of Japanese conglomerate SoftBank, held a first close in December, the report said. The vehicle has so far collected nearly $1.3 billion and is expected to wrap up later this year.

If it reaches its goal, Fund III will be 19 percent larger than its 2020-vintage predecessor, which raised $2.1 billion, and 32 percent larger than the 2019-vintage Fund I, which raised $1.9 billion.

Fresh opportunities have opened up for private debt as the market takes on more risk. Price pressures contributing to a rising-rate environment are of concern to LPs, who are on the lookout for inflation-oriented strategies that provide a steady source of income.

Fortress’s direct lending strategy has a flexible, all-weather focus, something that is “particularly advantageous” when times are tough, the CRPTF report said. It turned in its best returns during 2009 through 2011, on the heels of the financial crisis, and in 2020, when covid-19 generated dislocation.

The strategy emphasizes originating and acquiring senior secured debt issued by companies, mostly in North America but also selectively in Europe and elsewhere globally.

Target borrowers needing a liquidity solution or addressing more complex issues can be either private or public, sponsored or unsponsored. They operate in diverse industries, including consumer, financials, healthcare, industrials, leisure and entertainment, real estate and telecom.

Along with corporate lending, there is room to invest opportunistically, including in asset-based borrowers, such as commercial real estate owners and specialty finance firms, and in niche markets, such as litigation finance. Senior debt positions are secured primarily, but not exclusively, by a first or second lien.

Fund III will maintain this approach, building a portfolio of 50 to 80 investments and targeting a gross IRR of 12 percent to 15 percent.

The offering’s two predecessors are mostly unrealized with their full return potential still developing, according to the CRPTF report. As of December, Fortress Lending Fund II was earning a 10.3 percent gross IRR and a 9.3 percent net IRR, while Fund I was earning a 12.3 percent gross IRR and an 11.2 percent net IRR.

The direct lending strategy is part of Fortress Credit, which accounts for the lion’s share of the New York firm’s assets. It was set up in 2002 when co-CEO Peter Briger joined after a 15-year career at Goldman Sachs. Fund III will be led by co-CIOs Drew McKnight, Joshua Pack, Dominick Ruggerio and Aaron Blanchette.

Sixth Street also recently launched a direct lending fund aimed at the large-deal market, Buyouts reported. It is looking to bring in $4.5 billion to $5.5 billion.

The Sixth Street and Fortress vehicles are likely to apply upward pressure to private debt fund sizes. In the first quarter, the average size hit its highest level yet at more than $1.5 billion globally, Buyouts sister title Private Debt Investor reported.

Fortress did not respond to a request for comment on this story.