Is Fortress REALLY the Only Public Hedge Fund or Alternative Investment Vehicle?

Stock Tickers: FIG, SHLD, AINV, ALD, ACAS, EQS, GS, C, MS

So you thought that Fortress (FIG-NYSE) was really the only hedge fund to be public.  It may be the first out of the true ‘hedge funds’ that take a percentage of performance, but they are just one more in the field of alternative investment companies that are now public.  Last night Cramer referred to Eddie Lampert and Sears Holdings (SHLD-NASDAQ) as being a hedge fund also.  KKR already went public in Europe, or at least part of it did.

On top of this, there are many closed-end and private equity and investment vehicles out there that are actually competitors to hedge funds.  The reason that these are competitors is because they often compete for the same sort of investment monies depending on where the business cycle is and they sometimes work in conjunction with each other or find themselves on opposite sides of the table as competitors.

American Capital Strategies (ACAS-NASDAQ) is one such company.  The company has offices in many cities and participates in private equity investing, mezzanine financing, employee buyouts, recapitalizations, and many other special situation investments. It has a market cap of $6.8 Billion and it has a very large dividend yield north of 7%.

Allied Capital Corp (ALD-NYSE) is another.  It participates in buyouts, acquisitions, recapitalizations, note purchases, growth capital, middle market investments, debt financing and the like.  ALD has a $4.2 Billion market cap, under an 8 P/E ratio, and north of an 8% dividend yield.

Apollo Investment Corp (AINV-NASDAQ) is also in the field.  It offers mezzanine and secured borrowings, second lien debt, subordinated debt, debt preferred or convertible, equity common equity, co-investments.  It has a $1.9 Billion market cap and has been paying out an 8% dividend yield.

What is interesting about these is that all of these trade with P/E ratios of under 10.0 and they have high dividends.  What you need to know is that there is a reason.  Very few in the public know these companies, they are all multi-headed and multi-department operators that have their hands in many aspects of private equity, management buyouts, venture capital, and lending & investing.  They all tend to have income that is ‘volatile’ and their dividends are often ‘juiced’ because of capital gains or because of one-time sales. Operating results are also highly dependent on many factors in many industries that are often not in their control.

One much smaller company in the field is one called Equus (EQS-NYSE).  It has a microcap value with what is only a $71 million market cap.  They paid out a huge dividend last year that skews the entire balance sheet so trying to shine a light on P/E ratios and dividend yields is even less comparable.  Equus invests in some public securities historically but they mainly prefer to invest in private companies for longer-term capital gains.

If you think these are grossly different then read how Fortress describes itself and compare to the descriptions above: Fortress is a leading global alternative asset manager with over $30 billion in assets under management as of December 31, 2006. Fortress raises, invests and manages private equity funds, hedge funds and publicly traded alternative investment vehicles. Fortress was founded in 1998.

So as you can see, there are other ‘alternative investment’ vehicles out there that already trade as US public companies, and this list is actually only the more established older gaurd names.  There are many such investment and holding vehicles that have been public for some time.  They also tend to have sporadic and mixed results, and you better look into what each company does and who they invest in before you start thinking you can just catch a long-term fad and think you have a great shot at clipping some fairly high dividend yields in what may be artificially low P/E ratio stocks. If only it was that easy.

Now that Goldman Sachs (GS) and others have been so active in private equity and hedge funds, how do you rank them since they are no longer just an investment bank? What about Citigroup (C) or Morgan Stanley (MS)?  There are also about 20 to 50 other smaller companies that could be counted in this list, and with the success of the FIG IPO seen today you can imagine that this won’t be the last.

Jon C. Ogg
February 9, 2007