A sharp credit contraction caused by the banking crisis and rising interest rates will fuel a wave of defaults, said Pete Briger, co-founder of Fortress Investment Group, which on Monday was sold by SoftBank to an arm of Abu Dhabi’s sovereign wealth fund and the asset manager’s own employees.
In an interview with the Financial Times, Briger said the expected market turmoil created the best opportunities for distressed asset investors since the 2008 financial crisis. As such, it was a good time for Fortress employees to buy the firm, which specialises in distressed debt and other debt-based investment strategies and has $46bn in assets.
“The amount of credit that is in the world right now is going down every day . . . making it harder for companies to borrow. The banking system itself is also experiencing a restructuring because fractional reserve banking no longer works in its current form,” said Briger.
“A lot of damage has been done to asset values, particularly in real estate, growth equity and venture capital,” he added.
On Monday morning, SoftBank announced it was selling the US-based investment group to Mubadala Capital, an arm of one of Abu Dhabi’s sovereign wealth funds, and Fortress management.
Mubadala will buy 70 per cent of Fortress, while insiders such as Briger will buy the remaining 30 per cent. Fortress employees will control the board of the company and have the ability to become majority owners in coming years depending on the group’s financial performance.
While terms of the deal were not disclosed, the Financial Times previously reported that Mubadala and Fortress management would pay up to $3bn, less than the $3.3bn SoftBank paid to take the firm private in 2017. Fortress and Mubadala declined to comment on pricing of the deal.
SoftBank’s 2017 takeover of Fortress came as founder Masayoshi Son sought to build an asset management arm inside the Japanese investment conglomerate. But SoftBank’s large interest in Chinese ecommerce giant Alibaba caused US regulators to rule in 2018 that the two firms could not be integrated.
The arms-length partnership has been “good throughout”, said Briger, but once SoftBank began to raise its own Vision funds, “we became less interesting to them” and were “not strategic”.
In August, SoftBank said it would consider selling Fortress after a spate of investment losses stemming from its Vision funds.
“They were interested in selling for their own idiosyncratic reasons,” said Briger, who noted coming investment opportunities had made it “a very good time to be buying a company like ours”.
During sale talks, Fortress told its investors that it was “in control of its own destiny” and could ensure the deal’s structure would not undermine investment performance, the FT previously reported.
The buyout will create an opportunity for all Fortress employees to own a piece of the group and spur a succession plan. Briger and Fortress co-founder Wes Edens will step down as co-chief executives, while managing partners Drew McKnight and Joshua Pack will become co-CEOs.
The succession is meant to offer greater opportunity for a new generation of Fortress investors to take leadership positions, said Briger, who will become chair, oversee personnel issues and remain on Fortress’s investment committee.
“I could start my own fund within the firm . . . I’m definitely not retiring to play golf,” said Briger. “I probably won’t be the final say on 400 emails a day.”
Edens, who led Fortress’s private equity business, will continue overseeing legacy investments such as the 2007 takeover of a Florida-based rail line, which has been transformed into high-speed commuter rail network called Brightline.
Fortress was the first large private capital firm to go public, listing its shares in early 2007. It spurred a wave of similar offerings as Blackstone, KKR, Apollo and Carlyle all eventually went public.
But Fortress’s buyout arm struggled as overleveraged deals such as its takeover of ski operator Intrawest soured during the crisis. Fortress’s private equity business has not raised a new buyout fund since the crisis.
Its credit arm, overseen by Briger, has grown, though not as fast as those of rivals such as Blackstone. Credit-based assets under management have risen from $24bn at the time of SoftBank’s purchase to $42bn presently.
The group invested heavily during the pandemic and has launched a number of strategies tailored for litigation finance, intellectual property and investments geared towards wealthy individual investors. Fortress is also raising new flagship funds for “opportunistic” investments and those targeting non-performing loans in Europe.
Briger said Fortress’s careful approach to attracting new assets in recent years will be an advantage as higher rates create issues for many competitors.
“The opportunity really hasn’t been there in the last 10 years,” said Briger of debt-based investment opportunities. “But there have been some firms that have grown incredibly large at the wrong time in the cycle.
“I think we will get bigger in this kind of environment. I think those firms that have gotten a lot bigger in credit and mezzanine credit could live to regret that.”