Fortress – On the Ramparts

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% of AUM, alternative assets, asset managers, Blackstone, FIG, Fortress Investment Group, Gagfah, hedge funds, KKR, Logan Circle Partners, Newcastle Investment Corp, private equity funds, Springleaf Holdings

When I posted my first writeup on Fortress Investment Group (FIG:US), it was May-2012 & the share price was only $3.11. Buying the shares (& writing about them), I felt like I was in the thick of battle – trying to defend a breached portcullis in a last-ditch & perhaps doomed effort! [In hindsight, the more revulsion I hear about a post/company, the more promising the investment opportunity might actually be…] But the situation certainly looked much safer by December (with the share price at $4.38), when I posted a follow-up piece: Another Assault on Fortress. And now here we are, standing proud & tall on the ramparts, masters of all before us – the share price is $8.17, and even traded up to $9.00+ recently!

But ramparts aren’t about the view, they’re designed for spotting danger. My last fair value price target was $8.84 per share – we need to do a fresh survey. How much upside potential is now on offer? And more importantly, has our margin of safety been eroded to unacceptable levels?

OK, let’s do a quick wrap-up of 2012, and then take a closer look at progress YTD-2013. I plan to stick with roughly the same valuation methodology, so I definitely recommend you revisit my last two posts (linked above). However, it would be handy to reproduce this table here:

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Another Assault on Fortress

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% of AUM, alternative assets, asset managers, dry powder, Ex-Cash Ratios, FIG, Fortress Investment Group, high dividend yield, incentive fees, Logan Circle Partners, Price/Cash, RailAmerica, share buyback

In May, I published a series on alternative asset managers, which culminated in a write-up of my latest purchase (at the time), Fortress Investment Group (FIG:US). Based on its net cash/investments per share, plus a fund management valuation of 6.3% * $46.4 bio of Assets under Management (AUM), I pegged FIG at a Fair Value of $7.80 per share. Based on FIG’s $3.11 share price at that point, this offered substantial Upside Potential of 151%. This turned out to be v fortunate timing, as I caught the 2012 bottom (in fact, pretty much the 3 yr low) for FIG:

Xmas Trimmings, etc.

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ASFI, Asta Funding, BIW, CLNY, Colony Financial, Conwert, correlation, CWI, distressed assets, FIG, financial crisis, Fortress Investment Group, intrinsic value, Karl Ehlerding, KWG Kommunale Wohnen, Leverage, majority control, Merry Xmas, Price/Book, Stavros Efremidis, TRIB, Trinity Biotech

Asta Funding (ASFI:US) $9.37:   I’ve marginally trimmed my stake from 3.8% to 3.6% – consider this to be purely risk ‘house-keeping‘. This realizes a +22% gain vs. my write-up price on this small slice, and a +31% gain vs. my actual net entry price (which inc. the impact of dividends). I never got around to an Asta follow-up, as the share price (& NAV) just steadily chugged higher. Despite the rising share price, I’ve been bemused (even encouraged) by the general air of neglect still attached to this stock. Even ASFI shareholders have expressed a distinct lack of enthusiasm for the company’s progress in the past year! This is particularly in reaction to the company’s diversification into personal injury & divorce financing. Which puzzles me…

I’d counter this distaste in a number of ways: i) This new direction was prompted by Asta’s reluctance to pay up to acquire new distressed consumer receivable portfolios*. Personally, I’m delighted – how often do you see management take an absolute, rather than a relative, approach to value? [Picking up distressed debt at 9 cts on the dollar, while everybody else pays 10 cts, doesn’t mean you’ve bagged an actual bargain!] And to resist pissing away idle cash burning a hole in their pockets is quite admirable too. Of course, returning capital (via share buybacks) is a great alternative – Asta’s pursued this to a limited degree during the year. However, considering current metrics, I consider the short term return/attraction of a buyback is fairly even balanced against the potentially higher returns on offer from a (gradual) investment of their cash into distressed assets.