Defending the Fortress

On 2 December 2009, Wes Edens, founder of Fortress Investment Group, walked into the Oregon Investment Council (OIC) for a candid, public conversation about the performance of his funds. The following four extracts from the exchange shed light on the normally private interactions between LP and GP.

OIC: Why do you think your portfolio has been hit harder than other real estate portfolios? On average our portfolio is down 25 to 30 percent. The numbers we have [show] your returns are down more than that, significantly more than that. Why were your portfolios hit harder than other portfolios?

Wes Edens: “I don’t have a great answer. At the end of the day, the numbers will be what the investments are liquidated for, and I feel very comfortable when all is said and done on these investments we’ll stack up very well versus other folks. I think we probably got punished a little bit more early on because we had more holdings in public companies.”

OIC: We’re paying fees on committed capital. Would you be willing to defer part of your fees?

WE: “With respect to fees I’m open to a discussion to look at the fees and look at them truly side by side across everywhere. When we look at our fee structures versus other fee complexes in the industry … our fee structure actually matches up very well. One thing that is very important is I’ve never ever charged transactional fees, monitoring fees … when people talk about there’s a whole stream of fees that are incremental to the management fee, there’s none of that with us.”

OIC: We want you to make money, but we prefer you make it on the carry when we’re making money too.

WE: “I’m 100 percent aligned with that. It’s the right thing to be focused on because the last thing you want is to be suffering the difficulties on the market and the valuations and not feel the people that are managing for you are every bit as focused on that. I can tell you I am. I come in early and stay late and work on this stuff pretty hard.”

Nori Gerardo Lietz, a partner with Partners Group, the OIC’s real estate consultant: Is it a realistic expectation on their part that that capital they’ve given to you is in fact going to be returned 100 cents on the dollar?

WE: “I can tell you that I think Funds II, III and IV are all very likely to be good funds. When I say good funds, our investment objective at the beginning of these funds is always to give people back two times your money at a 20 plus percent return and that is a little bit off from where Funds III and IV are right now […] I think on a couple of these funds that’s very likely. I think Fund V … it’s not likely you’ll make two times your money. I’m crazed about it.

“I think vintage analysis for 2007 is going to be a pretty miserable vintage analysis. I don’t really care about vintage analysis; you gave us the money, we said we would try and make you two times your money, and that’s what we’re going to do.”