FIG Valuation – Not the typical widget maker

Ever since hedge fund performance took the limelight, hedge funds have been charging exotic fees to the range of 1-2% of total assets plus a considerable chunk (10-30%) of actual profits. For companies like Fortress, revenues come from two sources:

Management Fees – This is the fee that asset management companies levy from their investors for managing buyout and hedge funds. Though management fees are structured differently for each fund and can be based on factors like asset size, potential growth, management activity requirement, we can assume some simplistic numbers from the hedge fund industry. I would afford this type of stream a high multiple – say 20-25x earnings – due to its persistence, stability and growth potential.

Incentives/Performance Fees – These fees are a direct function of the performance of its fund. For larger alternative investment companies that manage a fairly diverse portfolio, the fund performance is usually cushioned because of the non-correlated returns of their individual components. Therefore I’d afford this stream a lower multiple of earnings – say 12-18x earnings – due to the risks involved but greater diversification than, say, Goldman Sachs.

We apply this separation to the target price set by each of the five analysts covering Fortress – Goldman Sachs, Lehman Brothers, Duetsche, Bank of America. For the sake of simplicity, we ignore the weightage that these analysts most likely attached to numerous other variables.

To be continued…

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