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IT’S A COLD, DAMP OCTOBER MORNING IN DOWNTOWN
San Francisco. Outside the Federal Reserve Bank building, a group of
about 20 protesters huddles. Part of the growing Occupy Wall Street
movement, the protesters are a reaction to the worsening economic
malaise in the U.S. and the role the banking industry played in creating it.
Unclear in their demands, the protesters are very specific in the targets of
their outrage: the bankers, traders, hedge fund managers and otherWall
Street executives still getting rich while so many others are struggling.
One block away, 42 stories up, surrounded by fog so dense that it is
all but impossible to see across the street, a slightly rumpled Peter Briger
Jr. sits slouched at his desk, peering through metal-rimmed glasses at
his Bloomberg terminal. On a clear day Briger can see the Golden Gate
Bridge from his window, but otherwise the corner office is a near replica
of the one he left in NewYork a few months earlier, when he relocated
COLLECTORS
By Imogen Rose-Smith
PHOTOGRAPHS BY MIKE MCGREGOR
83506_wmas.indd 37
11/30/11 11:01 AM
Briger has been the
firm’s biggest revenue
generator since 2008
83506_wmas.indd 38
11/30/11 11:01 AM
to the West Coast. The Fortress Investment Group co-chairman
prefers it that way. As co-CIO of the firm’s $11.8 billion credit business, he tries to avoid unwanted distractions that might prevent him
from doing what he does best — make money.
It is a safe bet that not a single one of the protesters would recognize Briger for what he is: a titan of finance. The former Goldman Sachs Group proprietary trader, who co-founded that firm’s
extremely profitable Special Situations Group in 1998, joined
Fortress in 2002 and launched its Drawbridge Special Opportunities
funds. Five years later, when he and his partners took Fortress public
— marking the first listing by a significant alternative-investment
firm in the U.S. — Briger became a billionaire. His specialty: investing in distressed debt and beaten-down loans that no one else wants
or that are being dumped by sellers under financial duress.
The unhappy crosscurrents that are igniting protests against
capitalism and causing political dysfunction in Washington are
creating the best investment opportunities that Briger and the credit
team at Fortress have ever seen.The credit crisis in Europe, populist
uprisings in the Middle East and the debt downgrade of the U.S. are
among the economic and geopolitical factors that have set the stage
for a global fire sale. Debt-laden nations like Greece and Portugal
have to sell assets to raise capital. Banks and other lenders have
begun the process of getting illiquid assets off their balance sheets to
meet heightened capital requirements. Among the few providers of
financing in the risky sectors of a capital-constrained world, Briger
and his team stand to make billions of dollars for themselves and
for their investors. Although members of the Occupy Wall Street
movement might find that objectionable, for the capital markets to
heal, the world desperately needs people like Briger.
“THE PETE BRIGER I KNEW
20 years ago and the Pete Briger
I know today are actually the
same person. He wears his heart
on his shirtsleeves.”
— WESLEY EDENS, FORTRESS INVESTMENT GROUP
“We invest in areas where the main money flows don’t go,” Briger,
47, told Institutional Investor during a series of exclusive interviews
over the past four months. “And there you have the world’s biggest
supply-demand imbalance that’s ever existed in financial asset liquidations.” He estimates that there have been approximately $3 trillion
in asset dispersions, or sales, since 2008.And with regulatory reforms
and ongoing global credit issues, he projects that the number could
grow to $5 trillion, or even $10 trillion, over the next five years.
Briger calls the act of buying the unwanted assets of banks and
other lenders “financial services garbage collection.” With canny
self-mockery, he often refers to himself as a garbage collector, picking
through the noncore assets that other companies are discarding. It
is what he has been doing practically his entire career, first during
the savings and loan crisis of the late 1980s and then in Asia during
its economic meltdown a decade later. At Goldman, when Briger
was buying up mortgages that no one else wanted and profiting
83506_wmas.indd 39
from them, his colleagues called him “a junkyard dog,” says Marc
Furstein, who was co-head of the opportunistic real estate business at
Goldman in the late 1990s and now is president and chief operating
officer of the credit funds at Fortress.
“Our business is not glamorous,” explains Briger. “It is a business
of discipline. It’s closer to the banking business than it is to the hedge
fund business, except that we’re able to be a lot more opportunistic
than banks.” Briger and his team consider their direct competitors to
be firms like middle-market lenders CIT Group and Ally Financial,
which used to be GMAC, the former asset management and lending
arm of car manufacturer General Motors Corp..
Wesley Edens, Robert Kauffman and Randal Nardone founded
Fortress in 1998 as a pure private equity firm. In 2002 the partners
expanded into hedge funds when they brought in Briger to start the
credit business and Michael Novogratz, another Goldman alum, to
run macro funds (which Fortress calls its liquid markets business).
Last year the firm acquired Logan Circle Partners, a traditional
long-only fixed-income manager based in Philadelphia and Summit,
New Jersey, with $12.9 billion in assets. As of September 30, Fortress
managed $43.6 billion among its four businesses. Edens still oversees
private equity, which represents $12.7 billion of assets. Novogratz’s
liquid hedge funds have $6.2 billion.
The idea behind Fortress was simple: to create what Edens and
Briger call “a business for all seasons,” a firm whose different parts
would perform better during different points of the economic cycle
and the sum of whose parts would be greater than the whole. Initially,
the approach worked extremely well. In 2004 the credit business
delivered the largest distributable earnings, followed by private
equity in 2005 and the liquid hedge fund business in 2006. Each
business made money each year.
Fortress’s diversification strategy has been far less effective since
the financial crisis. In 2008 funds in all three businesses lost money
in the wake of the mortgage meltdown and collapse of the credit
markets. Edens’s private equity funds were hit particularly hard, losing nearly one third of their value. But whereas Briger and Novogratz
both bounced back with strong performance in 2009, the private
equity business has only more recently seen its fortunes improve.
Among the three businesses, since 2008, Briger’s credit group has
delivered the most revenue.
The Fortress Drawbridge funds invest mostly in private credit
— loans and debt that trade through private transactions — though
they can also invest in public bonds and structured credits, including
mortgage-backed securities and collateralized loan obligations.The
funds have delivered annualized returns of 10.2 to 10.7 percent since
inception. Starting in 2005 the credit group began raising private
equity funds. The first, Fortress Credit Opportunities I, has had
annualized returns of 28.1 percent since its January 2008 inception.
Briger’s investing prowess has earned him respect and friends in
high places. “I have great admiration for Pete’s commercial skills,”
says former Goldman Sachs partner J. Christopher Flowers, founder
and CEO of NewYork–based private equity firm J.C. Flowers & Co.
“He is very talented, and he has an excellent long-term track record.
I have almost no money with anyone outside my own firm, but I do
have money with Pete.”
Co-CIO Dakolias says Fortress benefits from current regulation
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ASSET MANAGEMENT
Co-CIO Dakolias says Fortress
benefits from current regulation
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11/30/11 11:01 AM
Briger’s group should benefit from the Dodd-Frank Wall Street
Reform and Consumer Protection Act and its prohibition of proprietary trading by banks, which almost certainly will limit Goldman’s
ability to put capital to work through its special-situations group.“We
are a net beneficiary of current regulation,” says Constantine (Dean)
Dakolias, Briger’s co-CIO in credit.
Two of Fortress’s main competitors, New York–based CIT and
Ally, have been forced to retrench and exit some businesses after
overexpanding in the period leading up to the financial crisis. Last
year Fortress bought the European residential mortgage business
owned by Ally at a considerable discount. Even though Fortress’s
prognosis for the housing market in countries like Spain is not good,
Briger and his team are confident that they can make money given
what they paid for the businesses and their experience at servicing
similar loans. Part of the day-to-day job of overseeing the Ally loans
falls to Furstein, 43, who is responsible for noninvestment functions,
including the all-important areas of financing and contracts. Of the
300-person Fortress credit team, about 100 report to Furstein.The
other 200, responsible for deal making and managing the assets, report
to Briger and Dakolias.
“The way that Dean and I think about the world every day is, we
are trying to look at perceived risk and actual risk; and where perceived
risk is greatest and we can do our homework and understand the actual
risk, that’s where we want to invest money,” Briger says.“And you have
to make sure you are getting paid the right premium.”
It is an investment approach that comes with a healthy dose of
paranoia. Briger expects loyalty. This summer, when he moved the
credit business to San Francisco, largely for personal reasons — his
wife is from the Bay Area — he brought about 30 members of the
senior investment and treasury team, including Furstein, with him.
Dakolias will likely join them within the next 12 months.
Briger’s personality dominates the credit team. Employees, even
the most senior, habitually refer to “Pete’s business.” Defections
to other firms are rarely tolerated. But though he is strong-willed,
Briger believes he works well with others. “I like to think of myself as
a good partner,” he says.
He needs to be. Briger has a history of partnering with others, but
not every relationship has gone well. Although a brief collaboration
with Flowers ended amicably, Briger later fell out with another former
Goldman partner, Edward Mulé, with whom he had successfully
worked at that firm.
Briger’s ability to play well with others has rarely been under more
scrutiny than it is now. Though Briger might be king of his own
empire, Fortress is a polyarchy dominated by three powerful personalities: Briger, Edens and Novogratz.The contrast between Edens
and Briger is particularly striking. Edens is tall and polished; Briger
is stocky and brusque. Edens, who this past summer climbed the
Matterhorn, may once have been a trader in the same markets as
Briger, but he has the let’s-make-a-deal skills and upbeat demeanor
common to private equity.
Edens is unstinting in his admiration of Briger. “The Pete Briger I
knew 20 years ago and the Pete Briger I know today are actually the
same person,” he says.“He is one of the most consistent people I have
ever met in my entire life. He wears his heart on his shirtsleeves, and
that is one of his great strengths. I think the world of him.”
Novogratz, known as “Novo,” is charming and charismatic. After
83506_wmas.indd 41
As chief operating officer, Furstein oversees about one third of the
300-person credit group and works closely with Briger and Dakolias
graduating from Princeton University, he enlisted in the army, where
he flew helicopters. His schoolmate Briger went to Goldman, where he
traded mortgages.Although Novogratz and Briger have been friendly
since Princeton, they view the world very differently. “Someone will
come into my office, and after they leave I’ll think, ‘What a nice guy,’ ”
says Novogratz, 46.“They walk into Pete’s office, and Pete is thinking,
‘How is this guy going to screw me?’ ”
Daniel Mudd, 53, who took over as CEO of Fortress in August
2009, describes the relationship among the partners this way: “The
businesses are like siblings. They share DNA, but they are also
intensely competitive siblings.” And like any siblings, Mudd adds,
they have different personalities.“Wes is naturally an optimist, saying,
‘What can I do to expand; what can I see over the horizon?’ ”Youngest
sibling Novogratz is the realist, Mudd continues, and middle sibling
Briger “is by nature a pessimist, and his team is a reflection of that.”
The potential for tensions among the partners has been heightened
by the dismal performance of Fortress as a publicly traded company,
although, to be fair, its problems have been far from unique in the
financial services industry. Its shares have been decimated since the
financial crisis. At a recent price of $3.40, Fortress is down more than
90 percent since February 2007, when it started trading at $35 a share,
as are the holdings of its founders, who have not sold a single Fortress
share since the IPO.
BRIGER GREW UP THE ELDEST OF THREE CHILDREN.
His father, Peter Sr., was a tax attorney, and his mother, Kathy, was
a senior executive in the credit department at Chemical Bank. At
a time when few women were well known on Wall Street, Kathy
11/30/11 11:01 AM
ASSET MANAGEMENT
Briger — whose job it was to decide which loans the bank would
finance — had a wide reputation as the person at Chemical with the
power to say no.
Briger attended a private grammar school in NewYork. Keen on
sports, he persuaded his parents to let him go to the Groton School
in Groton, Massachusetts. Following high school he majored in
history at Princeton. Novogratz was one year behind him and lived
in his dorm.
When Briger graduated from Princeton, in 1986, problems in the
U.S. savings and loan market were just coming to a head. Savings and
loan associations, called thrift banks, had overexpanded. Between
1986 and 1995 nearly one quarter of the 3,234 S&Ls went bankrupt;
a further 1,600 banks failed or received Federal Deposit Insurance
Corp. assistance. As a result, some $25 billion to $30 billion of assets,
mostly distressed mortgages, needed to get sold, creating a great
opportunity for the young Briger, who started as an analyst trainee
with Goldman in NewYork. He then moved to Dallas to sell bonds
as part of the mortgage group covering banks. After about a year
he relocated to Philadelphia, covering the banks there. In 1990 he
returned to NewYork to become a mortgage trader. (Briger would
go on to get his MBA from the University of Pennsylvania’sWharton
School, attending classes on weekends.)
Furstein worked in New York for Goldman’s vaunted financial
institutions group, run by Flowers. Much of the group’s effort was
spent advising banks on how to clean up their balance sheets. As a
proprietary trader, Briger was interested in banks’ hard-to-value
assets: the loans made to bodegas, lumberyards and other noninstitutional borrowers. He would figure out their worth, buy them and
turn a profit. Furstein and Briger started working together. “We were
looking at the things no one else wanted,” says Furstein, who spent a
year building what would become the infrastructure for Goldman’s
Special Situations Group. “Pete hasn’t changed.”
“PETE SAID, ‘YOU WOULD
not know how to run this business.’
He convinced me that the way
he did distressed investing was
a lot more complicated.”
— Michael Novogratz, Fortress Investment Group
In 1996, Briger was promoted to partner. By then the investment
opportunities created by the fallout from the S&L crisis were coming
to an end, and he was ready to move on to the new hot spot: Asia.
The financial crisis started there in July 1997 with the devaluation
of the baht after theThai government decided to cut the currency’s
peg to the U.S. dollar.The contagion quickly spread to other Asian
countries, including Hong Kong, Indonesia, Laos, Malaysia, the
Philippines and South Korea. The ensuing deleveraging created
plenty of intriguing investment opportunities.
In Hong Kong, Novogratz was heading up Goldman’s trading
and risk management for fixed income, currencies and commodities.
Briger had gotten Novogratz a job interview at Goldman after his
former college schoolmate left the army. Novogratz started working
83506_wmas.indd 78
on April Fools’ Day 1989 as a money markets salesman in NewYork.
A few years later he moved toTokyo, eventually getting into trading.
In 1997, Novogratz made a fortune for the bank during the Asia crisis.
He could see that the next opportunity was going to be in distressed
credit, and he wanted in. “I remember telling Pete I wanted to run
that business,” he says. “He looked at me and said, ‘You would not
know how to run this business.’ And he convinced me that the way he
did distressed investing was a lot more complicated.”
Briger arrived in Asia in early 1998, bringing with him deputies
Mark McGoldrick and Robert Kissel. Initially, McGoldrick and
Briger shared an apartment inTokyo.Today, McGoldrick, who runs
alternative-investment firm Mount Kellett Capital Management in
NewYork, remains one of Briger’s closest friends and is a godfather to
his children. (Kissel stayed in Hong Kong; in 2003 he was murdered
by his wife.) Briger, who split his time between Tokyo and Hong
Kong, immediately commandeered the large corner office that had
just been assigned to Novogratz. “Pete said, ‘I got you your damned
job; after this we are even,’ ” Novogratz recalls.
Briger proceeded to fill that office with 20 to 30 traders, all
hustling to make money from distressed loans. His approach was
much more granular than that of the macrominded Novogratz.
Goldman launched the Goldman Sachs Special Opportunities
(Asia) Fund, which Briger co-ran with Goldman partner Mulé.
Operating out of NewYork, Mulé provided corporate credit expertise.The proprietary trading operation they ran became known as
the Special Situations Group.
It was a great time and place to be investing in distressed credit.
In one particularly innovative deal, Briger and McGoldrick teamed
up with GE Capital Corp. and its then president for the Asia-Pacific
region, current Fortress CEO Mudd, to snap up 400,000Thai auto
loans at 45 percent of face value for $500 million.They reportedly
doubled their money in less than two years.
In 2000, Briger briefly quit Goldman and joined Flowers, who
had left the bank in 1998 and gone into the private equity business.
Although Briger returned to Goldman after less than a month, he still
felt it was time to move on. Goldman had gone public in May 1999,
an event that signaled the end of an era for many of the bank’s then
partners. Briger returned to NewYork to join Michael Mortara, his
mentor and close friend, at GSVentures, a new Goldman initiative
set up to invest venture capital in financial services companies. In
November 2000, Mortara suddenly died from a brain aneurysm.
Briger resigned three days later. (Mortara’s son Matthew works for
the corporate credit team at Fortress today.)
Furstein had decided not to go with Briger to Asia. Instead, in
January 1998 he had moved to San Diego and teamed up with
Dakolias. The two had known each other since they were undergraduates at Columbia University in the late ’80s. Dakolias, who
majored in physics, had found his way into finance advising banks
on how to sell their mortgage portfolios during the S&L crisis.That
sometimes put Dakolias in deals involving Briger and Furstein —
and honed his expertise at pricing risk.
Dakolias, Furstein and a third partner formed a broker-dealer and
a specialty finance company. In early 2001 they sold both businesses
toWells Fargo & Co. Briger asked them to meet him in San Francisco.
There, at Briger’s hotel, they mapped out a plan for what would
continued on page 78
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THE GARBAGE
COLLECTORS
continued from page 41
become Drawbridge Special Opportunities
and the Fortress credit business.
What the trio came up with did not look
like any other hedge fund at the time. In
addition to buying up credit, the fund would
make direct loans. Its closest competitor
outside the Goldman business that Briger
had left behind was Ableco Finance, a specialty lending business formed by NewYork–
based alternative-investment firm Cerberus
Capital Management. Briger was uncertain
whether the trio’s plan would work in a hedge
fund structure. He had run across Edens
when the latter was working on the loan desk
at Lehman Brothers Holdings and gotten
to know him when he was running private
equity at BlackRock. “I thoughtWes was the
smartest guy in my business,” Briger says. “I
still think that.”
By 2001, Fortress was managing $1.2 billion in private equity. Edens extended an
attractive offer to Briger: Buy in as a founding
partner and build his business there. Briger,
who joined the firm as co-president alongside
Edens, figured that if the hedge fund model
did not work, he and his team could become
part of the private equity group.
Fortress also wanted to bring Novogratz
on board as a principal to build a macro
hedge fund business. Novogratz had ended
his Goldman career as head of Latin America
in 2000, and by late 2001 he was anxious
to start working again. He and Briger had
talked about sharing office space. And
Novogratz and Edens had sketched out
almost identical ideas for a multibusiness
alternative-­investment firm whose collective
whole would be worth more than its parts.
Dakolias and Furstein joined Fortress
first; Briger arrived in March 2002. The
early days were hectic, remembers Leslee
Cowen, an executive in the corporate and
83506_wmas.indd 79
public securities group. “We were going
at 60 miles per hour from the very first
month,” she says. For the first two months,
they did not have capital. “We spent the
time looking for investment opportunities,”
says Cowen, the fourth employee in the
credit group. Among the early transactions
was a rescue loan to Williams Cos. that was
arranged by Lehman Brothers and included
Warren Buffett’s Berkshire Hathaway as a
lender. The loan, secured by a substantial
portfolio of assets, allowed theTulsa, Oklahoma–based energy company to avoid filing for Chapter 11. Fortress also extended
credit protection to Kmart vendors when
the discount retailer was in bankruptcy.
Mulé had left Goldman at about the
same time as Briger. The two former colleagues had planned to go into business
together and started making some joint
investments. But Mulé and Briger failed to
agree on the economics of the business and
parted ways. Mulé went on to form Greenwich, Connecticut–based credit-focused
hedge fund firm Silver Point Capital with
Robert O’Shea, another ex–Goldman partner. Silver Point and Briger’s group at Fortress had an unwritten agreement that they
would not hire from each other. According
to sources, when Mulé hired a junior investment professional from Fortress, Briger felt
it was a violation of that agreement.The two
have barely spoken since.
Andrew McKnight joined Fortress in
2005 from NewYork–based hedge fund firm
FirTree Partners. He had previously worked
on the distressed-bank-debt trading desk at
Goldman. In addition to the opportunity to
work with Briger, he says he was attracted
to the scale of the Fortress operation. “You
can go after more-attractive risk-adjusted
returns,” says McKnight, who is a member
of the investment committee, with responsibilities for distressed corporate credit.“What
you have is the ability to organize loans and
offer solutions and refinancings, which if you
were a hedge fund with just five guys and a
Bloomberg terminal, you just could not do.”
McKnight, 34, also came to appreciate
how easy it is to get an investment idea heard
by Briger and Dakolias. The relatively flat
reporting structure within the credit group
means that even the most junior employee
can suggest an investment at the weekly sector meetings. “We are on a short list in the
private markets as someone who can move
quickly and get deals done,” says Furstein.
“You can get Pete and Dean and the investment team to listen to the basics of a transaction.They can sit down right there and then
and tell you the terms of the deal.Then if the
due diligence proves accurate, you are done.”
Dakolias, 45, says having a rich pipeline
of deals and good relationships with strong
sourcing partners are critical to Fortress’s
success, as is the firm’s focus on details.
“We’re maniacal,” he adds. “We work 24-7
in terms of understanding our assets, understanding our liabilities, understanding how
everything is structured.”
Of course, it’s easy for something to go
wrong when lending to lower-quality borrowers. For a firm like Fortress, it’s very important
to have good legal documents and vigilance.
“We build these customized documents; we
come at the loan business from a very structured, experienced way,” says Furstein.
The team does not always get things
right. One of its most embarrassing and
bizarre missteps was an investment in structured notes. Starting in 2004, Marc Dreier,
a New York–based attorney and founding
partner of his eponymous law firm, began
offering structured notes he claimed were
being sold by Solow Realty & Development Co., the real estate firm operated by
Sheldon Solow, his longtime client. The
only problem was, Solow knew nothing
about the notes and had not authorized the
attorney to sell them. It was a fraud.
Dreier used the money to expand his
practice and fuel his opulent lifestyle. Fortress was one of about 15 hedge fund firms
that had money with Dreier. It invested
about $100 million with him before the
fraud was exposed in late 2008. Dreier was
arrested in Canada after he was caught
impersonating a Canadian pension official
to a Fortress investment executive.The former lawyer is now serving 20 years for fraud
at the Federal Correctional Institution at
Sandstone, Minnesota.
“It was clearly a mistake,” says Briger of
the Dreier investment.Although the Fortress
credit group did a significant amount of due
diligence (“the process is a good process,”
he says), “we made a bad judgment.” Still,
Fortress managed to recover 70 cents of
every dollar it lent to Dreier — more than
any other hedge fund creditor — because
it had structured protections into the original investment and aggressively pursued
11/30/11 11:01 AM
its claims. “We haven’t tried to brush [the
situation] under the rug,” says Briger. “We
care a lot about getting that money back.”
BY 2007 ALTERNATIVE-INVESTment firms were riding high. There was
a huge amount of ambition to turn these
entrepreneurial businesses into something
more permanent. The 2004 purchase of
hedge fund firm Highbridge Capital Management by JPMorgan Chase & Co. had
shown one way, but another tantalizing
option was to do a public share offering.
Fortress was the first U.S. alternativeinvestment firm of any size to take the
plunge, debuting on the New York Stock
Exchange on Friday, February 9, 2007.
Fortress’s listing was followed by those of
Blackstone Group, which went public that
June, and Och-Ziff Capital Management
Group, which had its IPO in November.
The principals who took their alternativeinvestment firms public made themselves
very rich indeed. When Fortress went public, Briger, Edens, Kauffman, Nardone and
Novogratz became billionaires on paper
overnight. But Briger dismisses the financial
motivation, pointing out that all of the partners were already very well off. He says the
real appeal was creating a firm that would last.
“We thought that having that public name
would give us branding more quickly and
do more things and potentially make more
money for the business,” he explains.
Edens was a big proponent of the IPO.
Given his team’s background, he felt confident they could get the deal done. “We have
a lot of experience in capitalizing companies
publicly, and we have had a lot of success
doing it,” Edens says. “We had strong views
about what we wanted to accomplish with
Fortress.We thought if it made sense to us, it
was a sensible thing to do.”
From December 31, 2001, shortly before
Briger and Novogratz joined Fortress,
through the end of 2006, the firm’s assets
grew from $1.2 billion to $35.1 billion, a
96.4 percent compounded annual growth
rate. Private equity accounted for the lion’s
share of the assets — $19.9 billion, including some $2 billion in credit funds — followed by hedge funds, with $10.5 billion
(split roughly evenly between the hybrid
and liquid funds), and $4.7 billion in publicly traded alternative-­investment vehicles
called Castles.
83506_wmas.indd 80
The original economic arrangement
among the founding principals of Fortress
was very informal. “I don’t think we had a
signed partnership agreement for at least
the first five years,” says Edens. Sometime
after Briger and Novogratz joined, the five
principals began to revise the partnership
agreement approximately once every two
years, negotiating payouts based on where
the businesses were at the time. With the
IPO came a much more formal agreement: For the next five years, the principals
would each get a flat salary of $200,000.
The only additional compensation they’d
receive would be through dividends and
stock-price appreciation — effectively tying
their financial fates to the success of the
company’s shares.
The IPO was swiftly followed by what
Briger calls “the worst financial crisis in
history.” But he saw the storm coming. It
eats at him that he did not short subprime
mortgages — the trade a few hedge fund
managers, most notably John Paulson, put
on in 2006, allowing them to reap billions
of dollars during the collapse of the real
estate market. Given his background, Briger
should have seen the opportunity, but the
Drawbridge funds rarely if ever short.
Investment professionals in the Fortress
credit group are paid according to what both
their funds and the firm make, and although
they are assigned to sectors, they can move to
other areas of the business.The idea is that the
team is not stuck making deals in bad markets,
and, at least in theory, no one has an incentive
to invest if the opportunity set is not there. By
late 2007, Fortress was doing less and less in
commercial lending, and it had little presence
in the mortgage market. In corporate credit
the firm was taking positions that were very
senior in the capital structure, making it less
vulnerable in the likelihood of a default.
When Briger’s group takes risks, it is
cautious. Take its dealings with billionaire
property developer Harry Macklowe. In
February 2007, at almost the very top of the
real estate market, Macklowe decided to roll
the dice by buying a $6.8 billion portfolio
consisting of seven Manhattan skyscrapers.
To do so, he needed a loan, and he needed
it fast. He turned to Briger. Fortress lent
Macklowe $1.2 billion, but Briger insisted
that he give a personal guarantee, unusual
at the time, meaning that Macklowe’s own
multibillion-dollar fortune was on the line,
as was his greatest asset: the General Motors
Building, which occupies an entire block on
NewYork’s Fifth Avenue.
By February 2008, Macklowe needed to
refinance the loan, but the credit market for
commercial real estate had largely dried up.
Sensing Macklowe’s vulnerability, some of his
rivals approached Fortress and offered to buy
the loan, a move that could have given them
control of the property developer’s empire.
Briger just wanted Fortress’s money back. He
would not sell the loans, but he made it clear to
Macklowe that he had to sell the GM Building
in the worst economic environment anyone
could remember.
It was a painful process for Macklowe.
In May 2008 he agreed to sell the building for $1.5 billion plus the assumption of
$2.5 billion in debt. But the developer has
not given up on the idea of using Fortress
as a future lender.
“They are straightforward, and they do
what they say,” says real estate attorney Jonathan Mechanic, who represented Macklowe
during the deal. “They stepped up and provided financing for Harry through a very difficult time. Harry paid them back. The fact
that they are prepared to do business with one
another again is huge.”
Before 2008, just as it hadn’t been a
problem for homeowners with poor credit
scores to get a loan, it was very easy for hedge
funds to borrow money. Briger locked up billions of dollars in inexpensive, nonrecourse
secured bank loans. Kenneth Wormser
helped arrange financing for Fortress and
other hedge fund managers over this period.
“Fortress never touched mark-to-market
financing; they wanted something much
safer,” says Wormser, who was working at
Natixis Capital Markets in NewYork at the
time and is now co-launching an investment
banking venture, GreensLedge. “It was
always painful to get the deals done because
of the requirements they had.”
Fortress’s disciplined approach to
financing paid off in September 2008 when
Lehman Brothers filed for bankruptcy, convulsing markets around the world.The Fortress credit funds didn’t receive margin calls
or have to mark down collateral. The firm
actually had fresh capital it could draw on to
take advantage of the massive repricing of risk
assets that was suddenly under way. Briger
even borrowed more, getting well in excess
of $1 billion of nonrecourse financing from
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ASSET MANAGEMENT
Wells Fargo to buy residential-­mortgagebacked securities.
“When Pete came to us with the idea of
providing financing for RMBS, it could not
have been at a worse time in the market,
because everyone hated RMBS and it felt
like the world was ending for the asset class,”
says Wells Fargo CFO Timothy Sloan. The
subsequent trade turned out to be extremely
profitable for both Fortress andWells Fargo.
With credit markets falling, and hurt by
mark-to-market pricing, the main Drawbridge Special Opportunities fund was down
26.4 percent in 2008, but it bounced back to
return 25 percent in 2009 and 25.5 percent
in 2010. Novogratz’s macro fund lost 21.88
percent in 2008 and briefly put up gates,
blocking investors from getting their money
back, but it rebounded the next year, delivering a return of 24.18 percent, and was up
10.7 percent in 2010.
Meanwhile, Edens’s private equity business was struggling.The majority of Fortress’s
private equity investments are in financial
services, leisure, real estate, senior living and
transportation — all of which were directly
or indirectly affected by the financial crisis,
in particular the collapse of the housing and
commercial real estate markets. In the fall
of 2008, the private equity group needed to
refinance two key acquisitions not long after
Lehman filed for bankruptcy and temporarily shut down the high-yield debt market to
new issuance. Fortress was further hurt by
the investments it had made in its own funds.
In 2007 the firm’s private equity business
made $312 million in pretax distributable
earnings; the macro hedge fund business,
$161 million; and Briger’s hybrid hedge
fund business, $61 million. The groups,
respectively, had $16 billion, $9.5 billion
and $7.1 billion in assets under management. In 2010 the private equity business
made $145 million, the liquid hedge fund
business $64 million and the credit business
$168 million; they had assets under management, respectively, of $15 billion, $6.4 billion
and $11.6 billion.
During the years leading up to the IPO,
Edens’s private equity business had been a big
profit driver. In 2006 and 2007, Novogratz’s
funds had a strong run.With their high margins, low risk and low leverage, Briger’s funds
were always slower and steadier. “Pete’s
business is like the tortoise,” says Novogratz.
“Right now he is a very strong tortoise.”
THE FRIDAY BEFORE FOURTH OF
July weekend this year, Chris Flowers was
playing squash and ruptured his Achilles
tendon. Realizing that the best medical treatment was going to be hard to come by, with
doctors, like everyone else, heading out for
the holiday, Flowers called Briger — not
because his fellow Goldman alum has any
special medical expertise but because Briger
is a board member of Manhattan’s Hospital
for Special Surgery. Flowers knew Briger
would help him locate a top surgeon quickly,
and he did. Briger had done the same four
years earlier for Wormser when he fell and
broke his pelvis. “Pete offered to make sure I
got the right doctor,” saysWormser.
The ultracompetitive Briger finds himself
in an interesting dilemma: Can he live in a
world where he is succeeding but remains
tied to a private equity group that is not doing
as well, under the scrutiny of being a publicly
traded company in a sector blighted by the
same trends benefiting his business?
“The business model of private equity
is not the same, certainly, as when we went
public,” Briger says. “But these are people
businesses, and we want to have an entity
that sticks around for a long time.You have
to look at all of these businesses as cyclical. If
you want to run out every time somebody is
involved in a cycle, it is a mistake.”
Characteristically, Edens is extremely
optimistic about the prospects for his private
equity portfolios going forward. “The last
three investments we made in Fund V are
going to be some of the best investments we
have ever made,” he says, referring to the fund
that Fortress launched in 2007.
The private equity business is improving.
Between the first quarter of 2009 and June
30 of this year, valuations of Fortress’s private
equity investments went up 77 percent.The
private equity group has refinanced more
than $12 billion in debt and has extended 85
percent of the debt maturities on its portfolio
companies past 2012. Edens’s team has completed three successful IPOs and is back in the
market raising capital for new funds.
Fortress has taken steps to improve the
business at the corporate level. Bringing
in Mudd as CEO was a significant event,
removing the burden of management
responsibility from Edens, who had held the
position previously, and the other principals.
As of September 30 the firm had reduced
the amount of debt on its balance sheet to
$270 million from $800 million in 2008. In
August, Fortress announced that it would be
reinstating its dividend payment, which had
been suspended in 2008. It remains a source
of frustration to Edens that Fortress’s net
cash and investments in its own funds represent about 60 percent of the total market
capitalization of the company.
“The valuation of the company right now
I think is ridiculously low, I really do,” insists
Edens.“I think how we are being valued right
now is ridiculous, and over time we hope these
valuations are a lot better.”
Fortress isn’t the only alternative-­
investment firm whose share price has taken
a beating.Today, Blackstone trades at about
$14 a share, having gone public at $31, and
Och-Ziff is at about $10 after a high of $32.
Fortress did have discussions in the aftermath of the crisis with at least one financial
institution about taking the company private.
The talks, though serious, eventually went
nowhere. The principals are committed to
making Fortress a success, says Mudd:“Pete,
Wes and Mike all left successful firms. They
came here to start something and to run a firm
exactly the way they thought it should be run.”
In August the principals signed a new fiveyear partnership agreement. Going forward
they will receive payments based on the performance of their existing fund assets as well
as on their success at raising new assets —
so if one business grows at a faster rate than
another, the principals associated with those
funds will be rewarded commensurately.
“We wanted to make sure that the people
who are doing well on a forward-going basis
are compensated in a manner that is consistent with that,” says Edens. “It is human
nature to want to have some of your rewards
be tied in some portion directly to what
you are doing.”With no relief in sight for the
global markets, financial conditions continue
to benefit the credit group. “Now is a great
time for what Pete does,” says Mudd.
Briger’s group has been busy. In addition
to the purchase of the Ally mortgage business last year, Fortress bought CW Financial
Services, the second-largest special servicer
of commercial-mortgage-backed securities
in the U.S. It also paid $156 million for a
$751.4 million student loan portfolio from
CIT.That means Briger probably owns the
loans of some of the OccupyWall Street protesters who are camped out a block away
from his office.
••
Reprinted from the November 2011 issue of Institutional Investor Magazine. Copyright 2011 by Institutional Investor Magazine. All rights reserved.
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