Wesley Edens, principal and co-chairman of Fortress Investment Group, recently told the Oregon Investment Council he was open to discussing lowering fees on the firm’s private equity funds.
However, any discussions about lowering fees should include a “comprehensive” review of fees charged by all the pension’s managers, said Edens, who appeared before the council earlier this month at Oregon’s request.
“You’ve got a bunch of different investments, let’s lay them out, I think there’s probably things we can learn
from that,” Edens said. “My goal is to be constructive to what your needs are, and we want to be a good long-term partner.”
One member of the council, which manages $65 billion in assets spread across several state pensions, tried to pin down Edens on a time frame for the fee review and discussion, but Edens said he couldn’t provide one.
“I don’t have a particular time frame; we’re happy to do it,” Edens said about the analysis and discussion. “What I don’t have access to is truly comprehensive information, because I’m not the beneficiary of that information.”
Edens told OIC he believes Fortress’ fee structure is on the “low end” of the industry. The firm does not charge LPs transaction fees, he said. Fortress charges on average an about 1.4 percent management fee, according to public filings.
“When people talk about [how] there’s a whole stream of fees that are incremental to the management fee, there’s none of that with us,” Edens said. “In fact, the fees we earn inside those companies are paid out as direct distributions to shareholders along the way, and so the only fee that is paid is really the management fee.”
Oregon has led the way among US pensions in demanding concessions from fund managers. The pension was the first to publish a set of guidelines it uses when considering making an investment in a new fund.
I think Fund V it's not very likely you'll make two times your money. I'm crazed about it.
The guidelines, published in the spring, include a provision that management fees “should not be a major profit center for the firm”. It says that “fees should be reduced for all but the most modest funds with larger funds taking larger reductions in ‘standard’ fees, acknowledging economies of scale.”
OIC has already used the guidelines to squeeze fee reductions from Lone Star Funds, a Texas-based firm that Oregon has invested in for several years. Oregon made a $400 million commitment to Lone Star’s two new funds in October after the firm altered its fee structures and governance procedures to make the funds more “LP friendly”. OIC is considering an additional $400 million to the funds depending on early performance.
Oregon requested Edens’ presence at the council meeting to talk about the firm’s fund performance, which has been depressed in the market downturn. At the market’s bottom, Fortress’ Fund V had a -77 percent internal rate of return, according to OIC documents. The fund is up 57 percent from the first quarter and up 19 percent alone in the third quarter, Edens said.
Fortress’ Fund V probably will not achieve the goal of making investors “two plus times your money”, Edens said. Fortress closed its fifth fund, along with a co-investment fund, in 2007 with a combined $5 billion.
“My goal is still for you to get two plus times your money. 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,” Edens said. “I’m crazed about it.”