FIG Initiation

RBC Capital Markets, LLC
Bulent Ozcan, CFA (Associate
Analyst)
(212) 863-4818
bulent.ozcan@rbccm.com
Eric N. Berg, CPA (Analyst)
(212) 618-7593
eric.berg@rbccm.com
Outperform
NYSE: FIG; USD 7.22
Price Target USD 9.00
Scenario Analysis*
Downside
Scenario
6.00
14%
Current
Price
7.22
Price
Target
9.00
28%
Upside
Scenario
10.00
42%
*Implied Total Returns
Key Statistics
Shares O/S (MM): 236.7
Dividend: 0.24
Market Cap (MM): 1,709
Yield: 3.3%
Priced as of market close ET, July 16, 2013.
RBC Estimates
FY Dec 2012A 2013E 2014E
Distributable
Earnings
0.48 0.85 0.98
Revenue (MM) 757.0 1,094.9 1,287.7
FEAUM (MM) 53,430 61,836 69,256
DPS 0.20 0.33 0.48
Div Yield 2.8% 4.6% 6.6%
Distributable
Earnings
Q1 Q2 Q3 Q4
2012 0.10A 0.09A 0.11A 0.19A
2013 0.19A 0.21E 0.22E 0.23E
2014 0.24E 0.24E 0.25E 0.25E
Revenue (MM)
2012 170.0A 161.0A 181.0A 245.0A
2013 248.0A 273.9E 282.1E 290.8E
2014 309.4E 317.1E 326.0E 335.3E
All values in USD unless otherwise noted.
July 16, 2013
Fortress Investment Group LLC
Initiating Coverage: With Catalysts Abundant,
Valuation Seems Compelling
Our View: We are initiating coverage on Fortress Investment Group with
an Outperform rating and a $9 price target. We believe that the alternative
asset management industry, in general, and Fortress specifically, is deeply
discounted versus traditional asset managers and could provide significant
upside. Attractive valuations and improving fundamentals make Fortress
Investment Group a compelling opportunity, in our opinion.
Key Points:
• Fortress’s shares are very attractively valued: In an undervalued sector,
Fortress appears to be the least-appreciated stock. We think investors
in Fortress could get an option on incentive-based earnings at little cost.
Assuming fee-based earnings of $0.30 during the next 12 months and
applying a mean traditional asset management 2013 P/E multiple of
16x, we estimate the shares should be worth $4.80. In addition, the
company has $2.95 of net cash and investments on its balance sheet.
On top of that, there is about $1.50 of undistributed incentive income,
which we believe could grow over time. Assuming a 50% discount on
undistributed incentive income, investors buying the shares around $7
are potentially getting value of $8.50 with the optionality of growing
undistributed incentive income. This seems compelling to us.
• Fortress has a very strong credit franchise: With a net internal rate
of return (IRR) of 22% since inception, Fortress has one the of the
best credit franchises in the sector. There is about $645 million of
gross unrealized incentive income embedded in the business and
management has said that it could increase realizations.
• Hedge fund performance is very strong and could lead to earnings
surprises: As of 1Q13, about 95.4% of incentive-eligible assets were
above their high-water mark and we would expect this figure to be close
to 100%, given the strong performance numbers in 2Q12. The firm's
largest hedge fund, the Macro Fund, is up 13.2% year to date. As a
comparison, the fund produced returns of 17.8% for all of 2012.
• Restructuring of Newcastle could accelerate incentive income
emergence: With the creation of New Residential, Fortress has reset
the clock and high-water marks, positioning the firm to generate
promote sooner. Incentive income can now be generated as soon as the
performance hurdle rate has been passed.
• Logan Circle Partners could be another longer term catalyst: Given the
lack of earnings, we don't believe that investors assign any value to
Logan Circle. Fortress bought Logan Circle in 2010 for $21 million and has
almost doubled the assets since then. With the expansion into equities,
fee rates could increase and growth of assets under management (AUM)
could accelerate. We would expect earnings to emerge as Logan Circle
achieves economies of scale.
Priced as of prior trading day's market close, EST (unless otherwise noted).
For Required Conflicts Disclosures, see Page 55.

Target/Upside/Downside Scenarios
Exhibit 1: Fortress Investment Group LLC
12.00
10.00
8.00
6.00
4.00
2.00
0.00
Current Share Price
7.22
Price Target
9.00
Upside Scenario
10.00
Downside Scenario
6.00
SharePrice(USD/sh)
Source: RBC Capital Markets estimates
Target Price/ Base Case
Our base case scenario results in 2013 distributable earnings
(DE) of $0.85. This is broken down as follows: $0.29 in
management fee DE and $0.56 in incentive income DE. We are
applying a P/E multiple of 16x to management DE and 8x to
incentive income DE to arrive at our $9 price target.
These are our assumptions: private equity multiple on
invested capital (MOIC) of 1.2x and Credit PE MOIC of 1.4x;
an annual fund performance of 14.0% for the Castles; hedge
fund returns of 3.5% per quarter and an organic growth rate
of 5.0% per quarter for assets managed by Logan Circle.
Upside Scenario
Our upside scenario results in 2013 distributable earnings (DE)
of $0.97. This is broken down as follows: $0.29 in management
fee DE and $0.68 in incentive income DE. We are applying a P/E
multiple of 16x to management DE and 8x to incentive income
DE to arrive at our $10 scenario value.
These are our assumptions: Private equity MOIC of 1.4x and
Credit private equity MOIC of 1.7x when exiting; annual fund
performance of 15.4% for the Castles; hedge fund returns of
3.9% per quarter; and an organic growth rate of 5.5% per
quarter for assets managed by Logan Circle Partners.
Downside Scenario
Our downside scenario results in 2013 distributable earnings
(DE) of $0.76. This is broken down as follows: $0.29 in
management fee DE and $0.47 in incentive income DE. We are
applying a P/E multiple of 12x to management DE and 6x to
incentive income DE to arrive at our $6 scenario value.
These are our assumptions: Private equity MOIC of 1.1x and
Credit private equity MOIC of 1.3x when exiting; annual fund
performance of 11.2% for the Castles; hedge fund returns of
2.8% per quarter; and an organic growth rate of 4.0% per
quarter for assets managed by Logan Circle Partners.
Investment Thesis
The alternative asset management industry in general,
but Fortress in particular, appears deeply discounted vs.
traditional asset managers and could provide significant
upside.
Fortress’ shares appear attractively valued. In an
undervalued sector, FIG seems to be the least appreciated
stock. Investors in FIG get the optionality on incentive-
based earnings at little cost. Assuming fee-based earnings
of $0.30 over the next 12 months and applying a 16x PE-
multiple, we estimate the shares should be worth at least
$4.80. In addition, the company has $2.95 of net cash and
investments on its balance sheet. On top, there is about
$1.50 of gross undistributed incentive income today, which we
believe could grow over time. Assuming a 50% discount on
undistributed incentive income, investors buying the shares
around $7 are potentially getting value of $8.50 - with the
optionality of growing undistributed incentive income. This
seems compelling to us.
Potential catalysts for the shares:
• Hedge fund performance is very strong and could lead to
earnings surprises. With more assets eligible for incentive
income and strong year-to-date performance, incentive
income could exceed expectations.
• Restructuring of Newcastle and Eurocastle could accelerate
incentive income generation. Fortress has recently reset
high watermarks and could earn incentive income.
• Very strong credit franchise. With a net internal rate of
return of 22% since inception and diminishing investment
opportunities, realizations could accelerate. There is about
$645 million of unrealized incentive income embedded in
the business.
• Logan Circle Partner could increase AUM and fee rates as it
expands into equities. We believe that market ascribes no
value to Logan Circle Partners.
Key risks to our thesis:
• Continued weak private equity fund performance could
lead to weaker than expected realizations and distributable
earnings.
• Potential tax reforms could result in carried interest being
taxed as ordinary income.
• Limited investor interest due to K-1 filing requirements and
associated back office burdens could keep demand for FIG
shares low.
• Lack of liquidity and float could keep interest in alternative
asset managers muted.
• Complexity of the sector and difficulty in analyzing
companies within the sector could lead to limited interest in
alternative asset managers.
July 16, 2013 Bulent Ozcan (212) 863-4818; bulent.ozcan@rbccm.com 2

Table of Contents
Table of Contents ......................................................................................................................................................................3
Key Questions............................................................................................................................................................................4
Quick Background on Fortress Investment Group LLC................................................................................................................6
Investment Thesis – Key Positives .............................................................................................................................................7
Fortress’s shares are very attractively valued – too compelling to ignore ..................................................................................7
Successful credit franchise should generate strong promote....................................................................................................15
Performance of hedge funds is strong and could lead to significant incentive income, which is not priced in ........................16
New Residential could generate incentive income immediately after the Newcastle asset spin-off (there is also option
value)..........................................................................................................................................................................................18
Optionality on upside of Logan Circle Partners at no charge.....................................................................................................20
Despite challenges in PE, Fortress has not had problems raising capital...................................................................................23
Fortress has one of the youngest management teams..............................................................................................................23
Investment Thesis – Key Negatives..........................................................................................................................................25
Private equity fund performance is weak (but improving) ........................................................................................................25
Finding opportunities in credit is more difficult.........................................................................................................................26
Potential tax rate changes could be an issue.............................................................................................................................27
Requirement to file K-1 is holding back investors......................................................................................................................28
Liquidity and float are low; hard to build a position ..................................................................................................................29
Analyzing companies within the sector is difficult given inconsistent accounting & utilization of non-GAAP measures
across the sector and the difficulty of projecting realizations...................................................................................................29
Company Description ..............................................................................................................................................................31
Milestones...............................................................................................................................................................................32
Business segments & Recent Financial Results..........................................................................................................................32
Assets Under Management (AUM) ..........................................................................................................................................44
Organizational structure ............................................................................................................................................................48
Management Team .................................................................................................................................................................50
Valuation Framework..............................................................................................................................................................51
Risks and Price Target Impediments ........................................................................................................................................53

Key Questions
Our View
1. Will private equity realizations pick
up given a lack of fund
performance?
While Fortress’s private equity (PE) performance has not been stellar, we believe
that realizations could pick up if portfolio company valuations improve. Fortress’s
funds have significant exposure to financial services companies and real estate. As
the economy improves, we would expect the value of companies such as Nationstar,
CW Financial Services, Italfondiaro or Walker & Dunlop to appreciate, leading to
exits and realizations. The underlying value of Fortress’s PE funds increased 25% in
2012, followed by an increase of 5% in 1Q13. We believe that two funds (FHIF &
Fund III) could generate promote in the near term, as they approach their respective
investment income thresholds.
2. Can Fortress raise capital for new
funds given the lack of PE fund
performance?
Fortress’s traditional buyout capital-raising activities had been dormant since 2008,
as management was focused on restructuring portfolio companies and its funds.
Now, management is re-focusing on raising capital. Fortress has raised $1.4 billion
year-to-date for its PE funds. Fortress is currently in the market, raising capital for a
second infrastructure fund. We also like the fact that Wes Edens, principal and co-
founder of FIG, set a soft target of $5 billion in PE capital raises. This is encouraging
as alternative asset managers generally do not like to give guidance. PE performance
does not appear to have affected the firm’s ability to raise capital.
3. Aren’t the funds overexposed to
financial services and a recovery in
real estate?
It is difficult to estimate how big the exposure to financial services and real estate is,
but we believe it is significant. However, given a benign economic backdrop and a
slow-but-steady recovery, we would consider the exposure to be beneficial since
valuations of real estate holdings could improve. Furthermore, more assets could be
acquired at attractive prices as financial services firms continue to divest non-strategic
assets. Likewise, increased regulation could lead to further delevering of banks, with
assets being put up for sale. Having established portfolio companies that can capitalize
on these opportunities is a positive in this environment.
4. Should investors be concerned
about investment opportunities in
Credit? Is the best performing
business coming under pressure?
The opportunity to put capital to work has declined significantly in the Credit
business line compared to 2008 and 2009. Fewer investment opportunities meet
Fortress’s hurdle rates. Nonetheless, we believe assets will become available that
meet minimum-return requirements. European banks, for instance, are still highly
levered compared to their US counterparts and could be forced to sell assets to
meet more stringent capital requirements. Moreover, while it becomes more
difficult to find attractive “targets”, tighter markets could lead to an increase in
realizations. So far, about $645 million of gross unrealized investment income could
be harvested during the coming quarters, according to the company. We believe
that this figure is likely to increase.
5. Could Fortress’s shares become
less attractive if Congress changes
tax treatment of carried interest?
While carried interest has been an issue since 2007, it seems more likely that
Congress could move forward and change the tax treatment of carried interest. The
Senate Finance Committee released its 8
th
tax reform discussion paper on June 6,
2013, focusing on tax treatment of carried interest. The Committee stated that tax
code reforms are needed to reduce or eliminate differences in overall tax burdens
across different types of entities, owners and income. Higher taxes could lead to
lower payouts and dividend yields. However, any change in the tax law would come
with a 10-year transition period that would allow the firm to optimize its corporate
structure. Changing the corporate structure and reorganizing as a corporation could
increase institutional demand for Fortress shares, potentially offsetting the negative
impact associated with higher taxes.

Key Questions (continued)
Our View
6. A number of institutional clients
cannot own limited partnerships.
What are the alternatives?
We agree that the limited partnership structure makes investing in alternative asset
managers difficult, if not impossible. Some investors do not want to deal with the
additional administrative burdens that come with owning limited partnerships.
Others cannot own the shares due to fund mandates. Nonetheless, investors
interested in alternative asset managers can gain synthetic exposure to the
securities by entering total return swaps or buying notes that provide synthetic
ownership.
7. Nomura owns 25% of Fortress’s
shares outstanding. Could Nomura
exit its holding, leading to a
decline in the share price?
We agree that Nomura’s large ownership could be an overhang. Determining the
timing of an exit is difficult. Prior to the IPO in 2007, Nomura agreed to buy about 55
million shares (or 15% of Fortress) for $888 million. This would imply that Nomura
paid over $16 for the shares. In 2009, Nomura increased its ownership to 25% by
buying about 5 million shares at an offering price of $5. Thus, we estimate that
Nomura’s weighted average cost basis is now in excess of $15. Economically, it
would make little sense to sell the shares at current levels. However, there is the risk
that Nomura might sell its holding as it might consider the ownership in Fortress as
non-core. In any sale, we would expect Fortress’s management team to be deeply
involved and either repurchase the shares from Nomura or find another strategic
owner.

Quick Background on Fortress Investment Group LLC
Fortress Investment Group LLC (NYSE:FIG) is a global alternative asset management company
specializing in asset-based investing. FIG has about $55.6 billion of assets under management
as of March 31, 2013. Headquartered in New York, it has seven offices in the US and eight
offices around the world.
While the company’s roots are in private equity (PE), Fortress has evolved into a diversified
asset management company over time.
Its primary business is to sponsor various investment funds and companies and provide
investment management services, including related managed accounts. Fortress offers
private equity funds, liquid hedge funds, and credit funds. In 2010, Fortress acquired Logan
Circle Partners, which offers traditional investment products. While Logan Circle Partners
initially offered only fixed income-oriented strategies, Fortress made the decision to expand
the product offering to include equity products. In April 2013, Logan Circle Partners launched
a growth equities investment business offering concentrated portfolios of publicly traded US
equities.
Exhibit 2: Overview of Fortress Investment Group LLC
Private Equity Castles Private Equity Hedge Funds Liquid Markets Logan Circle
Partners
AUM ($ in bn) $11.1 $4.4 $7.0 $5.6 $5.5 $21.9
Strategy General buyout
and sector-
specific funds
focused on control-
oriented
investments in
cash-flow
generating assets
and asset-based
businesses in
North America,
Western Europe
and Asia
Publicly traded
permanent capital
vehicles, that
invest in a wide
variety of real
estate related
assets including
securities, loans,
real estate
properties and
mortgage servicing
rights
Distressed and
undervalued
assets (some with
limited current
cash flows and
long investment
horizons) and
tangible &
intangible assets
(real estate,
capital assets,
natural resources
and intellectual
property)
Opportunitic
lending situations
& securities
Invest globally in
fixed income,
currency, equity
and commodity
markets, and
related derivatives
to capitalize on
imbalances in the
financial markets
Actively managed
fixed income and
growth equity
investment
strategies
Life of Business PE Invesmtent
funds: 10 years
Mortgage funds: 5
years
Perpetual Various (3 to 25
years)
Perpetual Perpetual Not applicable
Redemption Rights None None None Annual
redemptions
Monthly
redemptions
Not applicable
Private Equity Credit
Source: Company reports
While PE and Logan Circle Partners comprise the majority of AUM, the Credit and Liquid
Markets lines of business have been the main contributors to total revenues - due to
increased realization activity and strong hedge fund performance.

Investment Thesis – Key Positives
Fortress’s shares are very attractively valued – too compelling to
ignore
In general, markets are efficient and “price in” the depth and breadth of management talent
and a company’s competitive positioning. However, we believe that Fortress might be one of
the rare instances where the market does not fully appreciate a company’s earnings power.
Thus, we see a compelling opportunity that should not be ignored.
In general, we would consider the alternative asset management sector to be undervalued
relative to traditional asset managers.
Exhibit 3: NTM P/E - Alternative asset managers trading at a discount to traditional asset
managers
0.0x
5.0x
10.0x
15.0x
20.0x
25.0x
30.0x
35.0x
40.0x
45.0x
50.0x
04/02/2007
11/13/2007
06/30/2008
02/12/2009
09/28/2009
05/13/2010
12/27/2010
08/10/2011
03/26/2012
11/08/2012
06/26/2013
Traditional AM Alternative AM FIG
Source: FactSet; RBC Capital Markets (Priced as of market close ET, July 12, 2013)
In an undervalued sector, Fortress seems to be the least expensive alternative asset
manager. Why is that? Fortress was the first alternative asset manager in the United States
to go public, in 2007, followed by Blackstone and Och-Ziff the same year. While the IPOs
were priced at a premium to traditional asset managers, the group’s appeal faded with
doubts rising around realizations given the onset of the financial crisis. Industry-wide
realizations had decreased, no doubt. However, while realizations started to increase from
2009 to 2010, valuations have remained depressed. Alternative asset managers have been
trading at a 35% discount to traditional asset managers, on average, since 2010.
We believe that the
alternative asset
management sector, in
general, and Fortress
Investment Group LLC
specifically, are very
attractively valued relative
to traditional asset
managers

Exhibit 4: Distribution cycle – industry-wide exits have increased since 2009 ($ in billions)
$165
$268
$122
$86
$237
$337
$289
$0
$50
$100
$150
$200
$250
$300
$350
$400
2006 2007 2008 2009 2010 2011 2012
Source: Carlyle Group Investor Presentation; RBC Capital Markets
This discount has increased to over 37% as of July 12, 2013, based on the average next-
twelve month (NTM) P/E ratio. While traditional asset managers have recovered from the
financial crisis, alternative asset managers seem to have fallen behind in terms of re-
valuation. We believe that investors apply a discount to alternative asset managers given
some of the negative aspects of owning alternative asset managers, including having to deal
with K-1s, low liquidity and float, potential changes to tax rates and the limited partnership
structure, and the general complexity of analyzing alternative asset managers. In addition,
investors have not experienced a full harvesting cycle yet, given the difficult operating
environment for portfolio companies and the inability of PE funds to monetize holdings at
appropriate returns.
However, we believe that there are factors that need to be considered and could offset the
negative aspects mentioned above:
The average management fee for mutual funds is lower than for alternative asset classes.
Management fees are charged by mutual funds to cover portfolio management, fund
administration and compliance, shareholder services, recordkeeping, certain distribution
expenses and other operating costs. We estimate that the average management fee for
domestic equity funds is 70 basis points (bps)-75 bps; the average management fee for
international equity funds is 85 bps-90 bps; and the average management fee for fixed
income mutual funds is about 45 bps-50 bps. Management fees for separately managed
accounts are even lower. With the increasing popularity of exchange-traded funds (ETFs),
mutual fund companies might be forced to lower their fees even further, considering that
the average expense ratio for ETFs is about 40 bps-45 bps. For some, these expense ratios
are even lower. For instance, Vanguard ETFs have an average expense ratio of 15 bps.
Exhibit 5 depicts the decline in expense ratios charged by mutual funds. The trend is
unmistakable.
Expense ratios for
traditional asset managers
have been declining for
some time. We do not
believe that alternative
asset managers are
exposed to the same
degree to price
competition as traditional
asset managers

Exhibit 5: Expense ratios are declining
0bps
20bps
40bps
60bps
80bps
100bps
120bps
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
Equity Funds Hybrid Funds Bond Funds Money Market Funds
Source: Investment Company Institute; Lipper; RBC Capital Markets
Some of the decline in expense ratios could be attributed to an increase in AUM and
achieving economies of scale. However, we believe that the demand for inexpensive ETFs has
also been a contributing factor.
The average expense ratio incurred by investors in mutual funds in 2012 was 77 bps based
on data published by the Investment Company Institute (ICI). In contrast, alternative asset
managers earned an average of 102 bps in management fees during the same period.
Exhibit 6: Management fees exceed that of traditional asset managers (2012)
104.3 104.5
105.6
98.7 98.8
94bps
96bps
98bps
100bps
102bps
104bps
106bps
108bps
Apollo Global Mgmt Blackstone Carlyle Group KKR Fortress
ManagementFees
Source: Company reports; RBC Capital Markets
Management fees are lower for Fortress as it has expanded into the traditional asset
management sector.
Management fees are more predictable for alternative asset managers. Another advantage
alternative asset managers enjoy over their traditional asset manager counterparts is that
assets are stickier. Alternative asset managers can lock in assets for an extended period,
whereas traditional asset managers often experience inflows and outflows on a daily basis;
Alternative asset managers
charge higher fees and
assets that have longer
lock-up period than
traditional asset managers

their investor base is less patient and more willing to withdraw funds when performance
deteriorates.
Lock-up periods at Fortress vary by asset class, with 51% of fee-earning assets under
management having a lock-up period of one year or more.
Exhibit 7: 49% of fee-earning assets can be redeemed daily or monthly (1Q13)
Perpetual
8%
3 yrs -25 yrs
13%
5 yrs -10 yrs
20%
1 year
10%
Monthly
10%
none
39%
Dividend yields exceed those of traditional asset managers and the S&P 500 Index. Investors
in the alternative asset management segment are acquiring income-generating securities. In
fact, the dividend yield for alternative asset managers exceeds that of the broader market –
as well as the yield one could generate owning traditional asset managers.
Exhibit 8: Average dividend yield of alternative asset managers twice that of traditional asset
managers
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
2008/01/02 2009/01/02 2010/01/02 2011/01/02 2012/01/02 2013/01/02
Trad Asset Mgrs Alt Asset Mgrs Avg Alt Asset Mgrs S&P 500
Source: SNL Financial; FactSet; RBC Capital Markets (Priced as of market close ET, July 12, 2013)
Thus, we would consider alternative asset managers inexpensive relative to traditional asset
managers. It is peculiar that alternative asset managers should trade at a discount to
On average, dividend yields
of alternative asset
managers have exceeded
that of traditional asset
managers and that of the
broader market

traditional asset managers given better dividend yields, higher effective fee rates on average
assets under management and longer asset lock up periods.
There is a large amount of volatility in the dividend yields for alternative asset managers. This
makes sense as realizations contribute significantly to distributable earnings, and thus, to
dividend payments. However, we would argue that investors with a long-term horizon could
get a better return through a buy-and-hold strategy. We arrive at our conclusion based on
the fact that a basket of traditional asset managers would have yielded 2% from January 1,
2008 to July 12, 2013. In comparison, a basket consisting of alternative asset managers
would have yielded 4.8% over the same time period. This should appeal to income-oriented
investors.
Are alternative asset managers paying higher dividends because they are riskier or due to a
lack of growth opportunities? The data does not support this assertion. Using FactSet data as
of July 12, 2013, we observed an average beta of 1.38x for traditional asset managers,
compared to 1.27x for the alternative asset managers. Furthermore, utilizing data from the
Investment Company Institute, we compared the five-year constant growth rates for assets
and contrasted that with fee-earning asset growth for the following five alternative asset
managers: Fortress, Apollo, Blackstone, Carlyle, and KKR. Our conclusion is that from 2007 to
2012, alternative asset managers grew their assets almost 6x faster than traditional asset
managers.
Exhibit 9: While total AUM grew at 2.6% for traditional asset managers from 2007 to 2012,
alternative asset managers generated a five-year constant average growth rate of 14.9%
1.7%
(3.2%)
6.3%
2.6%
14.9%
17.1%
(10.0%)
(5.0%)
0.0%
5.0%
10.0%
15.0%
20.0%
Mutual
Funds
Closed-End
Funds
ETFs UITs Total Alt Asset
Mgrs
CAGR
Source: Investment Company Institute; RBC Capital Markets Note: Alt. Asset Mgrs group comprised of BX, KKR, CG, APO and FIG
We would expect the growth in assets under management for alternative asset managers to
exceed that of traditional asset managers. As we had written in our initiation on asset
managers (July 24, 2012), we would expect continued demand by institutional investors who
have to meet certain hurdle rates. We had pointed out in our initiation note that David
Swenson, an iconoclastic author and investor who as the head of the endowment at Yale has
argued for years that the traditional approach to diversification – buying a basket of stocks,
bond, and cash – needs to be modified to include alternatives. When Harvard University,
which also has a history of embracing the unconventional in investing, began using
alternatives, institutional investors everywhere responded by considering adopting such an
"endowment model." The exhibit below makes the need for going beyond traditional asset
classes clear. Most pension funds assume a return of 7.5% to 8%. However, a research report

published by a large broker shows that returns over the next 5 years will not be sufficient to
meet these goals.
Exhibit 10: Five year projected returns could be below the 7.5%-8% overall return
assumptions
0.0%
2.0%
4.0%
6.0%
4.5%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
Treasuries Investment Grade
Bonds
High Yield Equities 60/40 Portfolio
Source: Goldman Sachs estimate as of January 2013
US public pension funds have been revising their allocation to alternative assets in order to
boost their returns and reduce earnings volatility. The table below shows targeted allocation
to alternative asset classes.
Exhibit 11: Allocation to alternative asset classes by US pension funds has increased since 2007
($ in billion) Target Alternatives Allocation Target PE Allocation AUM
US Public Pension Plan 2007 2009 2012 2007 2009 2012 DB Total
California Public Employees Retirement System 14% 25% 29% 6% 10% 14% $243 $245
CalSTRS 13% 24% 26% 4% 11% 12% 155 156
New York State Common Retirement Fund 19% 19% 27% 8% 8% 10% 150 150
State Board of Administration -- Florida 12% 13% 17% 5% 4% 4% 127 156
New York City Retirement 5% 11% 17% 4% 9% 13% 122 132
Teachers Retirement System of Texas 9% 17% 29% 4% 7% 12% 112 112
New York State Teachers Retirement System 13% 17% 17% 5% 7% 7% 89 89
Wisconsin Investment Board 11% 14% 18% 4% 6% 6% 83 89
Ohio Public Employees 11% 19% 33% 3% 5% 10% 79 80
North Carolina Retirement System 8% 11% 24% 3% 5% 7% 77 84
New Jersey Division of Investment 15% 15% 23% 5% 6% 7% 72 75
Washington State Investment Board 29% NA 38% 17% NA 25% 59 70
State Teachers' Retirement System of Ohio 3% 7% 15% NA 5% 5% 65 66
Oregon Public Employees Retirement Fund 12% 16% 21% NA 16% 16% 60 61
Virginia Retirement System 10% 15% 9% 6% 8% 9% 55 57
State of Michigan Retirement Systems 13% 16% 16% 7% 9% 9% 51 56
University of California Retirement System 4% 9% 13% 3% 7% 8% 43 56
Minnesota State Board of Investment 12% 18% 18% 7% 10% 10% 48 53
Massachusetts Pension Reserves Investment Management Board NA 20% 22% NA 10% 12% 51 51
Pennsylvania Public School Employees' Retirement System 9% 17% 22% 6% 12% 16% 49 49
Average 12% 16% 22% 6% 8% 11%
Source: KKR Investor Day Presentation - 2013; RBC Capital Markets
Pension funds and other investors are increasingly being attracted to a barbell strategy
utilizing cheap beta, i.e. exchange traded funds and overlaying this with actively managed
strategies provided by alternative asset managers. Increased demand for alternative asset
classes is not just a US phenomenon. McKinsey & Company published a survey called “The
Mainstreaming of Alternative Investments” making two important points: A) alternative

investments have grown at over 7 times the pace of traditional asset managers; and B)
institutional investors expect to increase allocation to almost all alternative classes.
Exhibit 12: From 2005 to 2011, alternative assets have grown at a CAGR of 14.2%. This
compares to 1.9% for non-alternative assets
$2.9 $4.2 $5.7 $5.0 $5.6 $6.2 $6.5
$34.8
$39.8
$43.0
$35.4
$38.9
$43.6
$38.9
$-
$10
$20
$30
$40
$50
$60
2005 2006 2007 2008 2009 2010 2011
Alternatives Non-Alternatives
Source: McKinsey & Company
Exhibit 13: Institutional investors to allocations increasingly to alternative asset classes
3.1%
4.2% 4.1%
1.0%
6.2% 6.4%
5.9%
3.2%
6.8% 6.8%
6.5%
3.5%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
6.0%
7.0%
8.0%
Private Equity Hedge Funds Real Estate Inf.& Comm.
2009 2010 2013E
Thus, we would expect alternative asset managers to benefit from a secular trend towards
cheap beta exposure and a search for actively managed asset classes that help institutional
clients achieve their targeted returns.
To summarize, alternative asset managers’ shares trade at a discount to traditional asset
managers while providing higher dividend yields over time. Additionally, asset growth for
alternative asset managers exceeded that of traditional asset managers during the past five
years. We think that the pace of growth could remain high as demand for alternative asset

classes should benefit from a secular trend described above. In addition, alternative asset
managers could deepen existing client relationships and look for growth opportunities
outside of their traditional target market of institutional and high-net-worth clients. Avenues
of growth could include defined contribution plans and retail clients.
Exhibit 14: Retail alternative products are expected to gain market share
$5.1
$6.5
$8.0
$0.7
$1.4
$2.1
$0.5
$0.9
$1.5
$1.7
$0.2
$0.6
$-
$2.0
$4.0
$6.0
$8.0
$10.0
$12.0
$14.0
2005 2010 2015E
Active ETFs/Passive Solutions Retail Alternatives
Thus, we would argue that the alternative asset management sector is attractively valued. So
how does Fortress measure up to others within the sector?
We believe that Fortress’s shares remain undervalued perhaps because it had its challenges
during the financial crisis and had to suspend dividends from 3Q08 to 4Q11. Interestingly, for
a company that has its roots in private equity, performances of its traditional buy-out funds
have been somewhat weak. Nonetheless, we believe that this and some more is already
priced into the shares.
We arrive at our conclusion by doing a simple sum-of-the-parts analysis. Exhibit 15 shows
that multiple investors are assigning to pre-tax incentive income based on the last 12
months’ earnings. We are assuming that investors are willing to pay 17x P/E for fee-based
earnings. In the case of Fortress, this value equals $3.91. Then, we add net cash and
investments that the alternative asset managers carry on their balance sheet. This is equal to
$2.95 for Fortress. Finally, we estimate the pre-tax P/E multiple by taking the difference
between the current value (as of July 12, 2013) and our valuation based on fee income and
net cash & investments on hand and applying this to incentive income generated during the
past 12 months.
Interestingly, investors do not appear to assign any value to incentive income generated by
Fortress, despite the fact that the company generated an estimated pre-tax incentive income
of $0.62 per class A share over the past 4 quarters. This suggests to us that investors are
questioning whether Fortress can generate promote on a consistent basis in the future.
Investors seem to think that past performance is no guarantee of future results. We have to
admit that this should not come as a big surprise given that Fortress’s private equity funds
have generated an IRR of about 3% net of fees since inception, on average.
Comparing alternative
asset managers, we
concluded that the market
does not assign much value
to incentive income
generated by Fortress

Exhibit 15: Market appears to assign no value to the incentive income Fortress generates
Ticker
LTM Mgmt Fee
Earnings Multiple Assigned Value
Cash &
Investments
Valuation ex.
Incentive Income Current Price
Pre-tax LTM
Incentive Income
Multiple assigned to
Inc. Income
APO $0.65 17.0x $11.11 $5.27 $16.38 $24.99 $1.36 6.3x
BX $0.61 17.0x $10.37 $4.43 $14.80 $21.98 $1.14 6.3x
CG $0.52 17.0x $8.89 $4.41 $13.30 $26.75 $1.54 8.7x
KKR $0.47 17.0x $8.07 $9.00 $17.07 $20.46 $1.12 3.0x
FIG $0.23 17.0x $3.91 $2.95 $6.86 $7.14 $0.62 0.5x
Source: Company reports; FactSet; RBC Capital Markets (Priced as of market close ET, July 12, 2013)
As shown above, investors seem to assign little value to incentive income generated by
Fortress. However, one should not ignore that Fortress was able to generate pre-tax
incentive income of $0.62 per class A share in an improving, but difficult economy. Concerns
about the company’s ability to generate incentive income could be overdone, in our view.
Management disclosed during its 1Q13 earnings call that it has $545 million of unrealized
incentive income in its credit PE funds. Management also said that it has another $100
million of unrealized PE-style incentive income in the liquidating Redeemable Capital Account
(RCA) classes of its credit hedge funds. In total, there is about $731 million of gross
undistributed incentive income, or about $1.50 of undistributed incentive income in today’s
money.
One difference between Fortress and its peers is that the company does not show net
accrued performance fees as an asset on its balance sheet. In order to do a like-for-like
comparison, we excluded these from net cash and investments for the competitors. As a
result, Fortress looks even cheaper compared to its peers after these adjustments.
Exhibit 16: Fortress appears even cheaper excluding net accrued performance fees
Ticker
LTM Mgmt Fee
Earnings Multiple Assigned Value
Cash &
Investments
Valuation ex.
Incentive Income Current Price
Pre-tax LTM
Incentive Income
Multiple assigned to
Inc. Income
APO $0.65 17.0x $11.11 $1.62 $12.73 $24.99 $1.36 9.0x
BX $0.61 17.0x $10.37 $2.43 $12.80 $21.98 $1.14 8.0x
CG $0.52 17.0x $8.89 ($0.20) $8.69 $26.75 $1.54 11.7x
KKR $0.47 17.0x $8.07 $7.70 $15.76 $20.46 $1.12 4.2x
FIG $0.23 17.0x $3.91 $2.95 $6.86 $7.14 $0.62 0.5x
Source: Company reports; FactSet; RBC Capital Markets (Priced as of market close ET, July 12, 2013)
Successful credit franchise should generate strong promote
While there have been performance issues in the traditional private equity business, driven
by the large exposure to financial services and real estate, Fortress’s credit segment has
flourished. A majority of the investments were made between 2008 and 2009, which
certainly contributed to the strong performance. Using public information, we have
calculated net IRRs for various credit-related assets. Based on these data, we believe that
Fortress is one of the most successful private equity investors in the credit sector.
Net IIRs of 22% since
inception for the Credit
business are the strongest
among its peers

Exhibit 17: FIG’s credit funds have generated net IIRs of 22% since inception
15%
18%
11%
9%
22%
0%
5%
10%
15%
20%
25%
Apollo Global
Management
Blackstone
Group
Carlyle Group KKR & Co Fortress
Investment
Group
NetIIRsSinceInception
Management disclosed that it has $545 million of gross unrealized investment income
embedded in its credit private equity funds. We believe that these could be harvested over
the coming quarters. In addition, management disclosed that it has another $100 million of
unrealized private equity-style incentive income in the liquidating RCA classes of its credit
hedge funds. Credit private equity and credit hedge funds make up Fortress’s credit line of
business. Thus, while the company does not get much credit for it in terms of valuation,
Fortress has in its credit business unrealized incentive income of about $645 million. This
does not show on its balance sheet. Likewise, incentive income is recognized on the income
statement only after realization events, with marks having no impact on earnings.
Performance of hedge funds is strong and could lead to
significant incentive income, which is not priced in
We believe that Fortress’s earnings could be boosted by significant incentive income during
the coming quarters. More than $4 billion of total AUM, or 95.3% of incentive-eligible assets,
is above their respective high-water marks. In 1Q13, Fortress generated about $32 million of
incentive income. Given strong 2Q13 returns, we could see an uptick in incentive income,
which the market does not appear to ascribe much value to. After all, given recent
performance and despite a weaker month of June, management indicates that nearly all
incentive eligible assets are above their high-water marks (note that the FPF fund
investments, which are included in Liquid Markets AUM are predominantly private equity
style investments which generate incentive income only when realized.)
As of 1Q13, the company had about $36 million of undistributed incentive income. In 2Q13,
Fortress generated returns of 9.4% in the Macro Fund and 10.1% in the Asia Macro Fund.
While returns for the Asia Convex Fund were up only 1.57% and “weak” relative to the
Macro and Asia Macro Fund, we note that this fund is fairly small in terms of incentive
income-eligible NAV.

Exhibit 18: Liquid hedge funds could generate strong promote (as of 1Q13)
PE Fund ($ in'000)
Incentive
Income Eligible
NAV
Gain to Cross
Incentive
Income
Threshold
Percentage of
Incentive
Income Eligible
NAV Above
Incentive
Income
Threshold
Undistributed
Incentive
Income
YTD Incentive
Income
Crystallized
Macro Funds
Main Fund Investments $1,928,957 $303 98.6% $15,541 $1,552
Sidepocket Investments 22,430 14,002 n/a 454 -
Sidepocket Investments - Redeemers 223,422 133,596 n/a 4,385 -
Managed Accounts 1,077,530 12 99.9% 8,993 1,150
Asia Macro Funds
Main Fund Investments $675,295 $0 100.0% $4,377 $72
Managed Accounts 106,022 - 100.0% 619 -
Fortress Convex Asia Funds
Main Fund Investments $75,063 $2,137 0.0% $0 $0
Fortress Partners Funds
Main Fund Investments $69,348 $29,856 0.1% $1 $0
Sidepocket Investments $138,465 $22,259 n/a $1,855 -
Total 4,316,532 202,165 95.3% 36,225 2,774
The company reported in July that the year-to-date net returns for its largest fund, the
Fortress Macro Fund, was 13.2%. As a comparison, net returns for the full-year 2012 were
17.8%.
Exhibit 19: Strong year-to-date liquid hedge funds performance
($ in mm) April May June YTD 1Q13 AUM
Macro Fund 4.78% 4.62% -0.58% 13.2% $3,055
Asia Macro Fund 4.25% 4.41% 0.83% 12.9% $792
Convex Asia -0.31% 0.76% 1.18% 0.67% $75
Partners Funds -1.43% 0.73% n/a 1.43%
Partners Offshore Funds -0.86% 1.25% n/a 3.53%
$1,226
Given recent fund performance, we would expect fundraising and inflows to accelerate in
the Liquid Markets segment. There are currently three hedge funds around the core macro
philosophy – the Macro Fund, Asia Macro Fund and Convex Asia Fund – and we could see the
number of hedge funds increase to five that use a macro strategy, based on the
conversations we had with the management team. Management also said that it would like
to see AUM of $2 billion-$5 billion for each fund.
Partners Funds, the second-largest fund by AUM, was launched in 2006 and had about $1.7
billion in AUM as of 2010. Since then, AUM has declined to about $1.2 billion as of 1Q13. The
fund is currently being revamped.
Partners Funds could start
attracting assets after
repositioning

Exhibit 20: Partners Funds AUM has been declining since 2010
$0.3b
$1.4b
$1.3b
$1.6b
$1.7b
$1.5b
$1.4b
$1.2b
$-
$0.2b
$0.4b
$0.6b
$0.8b
$1.0b
$1.2b
$1.4b
$1.6b
$1.8b
$2.0b
2006 2007 2008 2009 2010 2011 2012 1Q13
AUM
The Partners Funds, which are in essence fund-of-funds, allocate capital to hedge funds,
private equity funds, long-only strategies and can make tactical direct investments when the
opportunity arises. Demand for this product has been declining since 2010. Fortress wants to
restructure this fund to include a number of basic alternative investment strategies. The
objective is to provide a customized portfolio to the client with different weighting &
exposures to the various funds underneath the Partners Funds. The focus will be on
institutional clients, offering them broader capabilities and special-situation funds. We
believe that this customized solutions-oriented approach could potentially lead to a
turnaround in net flows and AUM growth. Under the traditional fund of funds approach,
clients would have little influence over the investment strategy, making risk management
difficult for them. Under the proposed approach, clients can determine the allocation to the
various investment strategies offered by Partners Funds. This allows for customization, which
in turn enables the client to do a better job managing their risk and asset exposure. Stuart
Bohart, President of Liquid Markets and Head of Strategy, said he could also envision offering
products to retail investors and defined contribution plans. Over time, we could see Fortress
targeting a broader client base.
New Residential could generate incentive income immediately
after the Newcastle asset spin-off (there is also option value)
Fortress manages three permanent capital vehicles it calls “Castles” (Newcastle, Eurocastle
and New Residential). These are public REIT-type structures with aggregate AUM of about
$4.4 billion. In addition to providing comfort about reliability of future management fees,
permanent capital vehicles allow the firm to raise capital quickly when opportunities arise. As
the exhibit below shows, it takes about 18 months to achieve a final close for a traditional
private equity fund. Thus, being able to raise and put it to work quickly could allow the
company to capitalize on opportunities it might miss otherwise.
According to management, raising a few hundred million dollars through secondary offerings
could take less than a week using the permanent capital structure. While the company could
use its own balance sheet to invest, having a permanent vehicle structure reduces earnings
volatility. This is important, especially during down markets.

Exhibit 21: On average, it takes about 18 months to achieve a final close
11.1 11.7
14.5
16.9
18.2
16.2
17.7 18.2
0
4
8
12
16
20
2006 2007 2008 2009 2010 2011 2012 1Q13
Avg.TimeSpentinMarket-Months
Source: Preqin; RBC Capital Markets
In an effort to increase the pace of realizations, Fortress has carved out all of Newcastle’s
residential assets into a new publicly traded company called New Residential (NRZ). These
assets include excess mortgage-servicing rights, residential mortgage-backed securities, non-
performing loans and other residential real estate. The carve-out reset any high-water marks
and allows Fortress to earn incentive income once the performance hurdle rate has been
passed. Thus, Fortress is now more likely to earn incentive income and earn it sooner than it
would have been absent of any restructuring.
Newcastle (NCT), the original permanent capital vehicle, will now focus on commercial real
estate investments, along with senior housing and other real estate debt.
As for Eurocastle (ECT), the company’s third permanent capital vehicle, Fortress has
restructured the balance sheet and lowered management fees expenses it charges for its
services. Whereas it used to charge management fees of 1.5% on equity capital of roughly
$1.9 billion, it now charges management fees of 1.5% on equity capital of about $.5 billion.
We believe lower fees could make the fund more attractive and lead to capital contributions
as management fees declined from about $7 million to $2 million per quarter. The company
disclosed that it raised $140 million (which is part of the $0.5b) since restructuring the
balance sheet. No doubt, the recapitalization has lowered management fee revenues to the
tune of $5 million per quarter. However, we believe that Fortress could offset the decline in
revenues by raising additional capital over time. With the restructuring, ECT has also reset
the capital base upon which its entitlement to incentive income is calculated and any high
water marks. Unlike NCT and NRZ, ECT has an 8% preferred return threshold.
Management indicated that there are still some attractive investment opportunities,
especially in Italy. The company owns Italfondiario SpA, a primary and special servicer of
residential and commercial loans. This view is consistent with what some of Fortress’s
competitors have been saying, which is that there should be plenty of opportunities to invest
for private equity firms given that banks have to “delever” due to the adoption of Basel III.
With the implementation of Basel III, we would expect assets to come to the market as
financial institutions could choose to reduce risk-weighted assets instead of raising capital.
This could be an opportunity for private equity firms with a financial services focus.
As for new capital raises, the company said there will be additional permanent vehicle
structures going public in the near term. Wes Edens, who runs the private equity business,
disclosed during last quarter’s earnings call that Fortress will float the $400 million
Restructuring of
permanent capital vehicles
could accelerate incentive
income generation
Transitioning to running a
balance sheet light
company continues. This
should provide downside
protection

transportation infrastructure fund (Worldwide Transportation Infrastructure) later this year.
He said he is optimistic about the fund and its ability to grow assets under management as
he estimates that there are about $2.4 trillion of assets in that sector. He also mentioned
that there are two other vehicles that have good prospects of going public “in the relative
near term.” Management indicated that Fortress could spin off the senior living facility assets
currently residing in Newcastle. The ultimate goal is to grow the assets under management
from $4 billion currently to about $10 billion to $20 billion across a limited number of
strategies around the world.
Clearly, the focus has changed. Whereas Fortress invested its balance sheet significantly in
the past, it has changed its strategy during the financial crisis. Whereas Fortress used to
invest anywhere from 2% to 5% in the funds, it now co-invests less than 2% in private equity
funds. It uses permanent capital vehicles instead of its own balance sheet. We believe that
while this solution provides less of an upside during times of economic prosperity, it provides
downside protection when the economy starts contracting.
Unlike some of its competitors, Fortress does not recognize undistributed incentive income
on its balance sheet. As of 1Q13, Fortress had about $730 million of gross undistributed
incentive income. About $69 million of this was due to the value of options Fortress received
from Newcastle for raising capital. Newcastle granted Fortress the option to purchase
5,750,000 shares of Newcastle’s common stock at the public offering price of $9.35 in
January 2013. In addition, Newcastle granted Fortress the option to purchase 2,300,000
shares of Newcastle’s common stock with a strike price of $10.48 in February 2013. These
options were fully vested upon issuance, became exercisable over 30 months and have a 10-
year term. The main takeaway is that the $730 million of gross undistributed incentive
income that has not been recognized in distributable earnings could grow as the valuation of
Newcastle rises.
Optionality on upside of Logan Circle Partners at no charge
With demand for alternative asset strategies increasing, traditional asset managers such as
BlackRock are pushing harder to gain a foothold in the alternative asset space. Fortress, on
the other hand, is approaching growth from the other end of the spectrum and is building
out its traditional asset management offering.
Fortress acquired Logan Circle Partners in April 2010 for about $21 million in cash. Logan
Circle offers core fixed income products, including short, intermediate and long duration,
core/core plus, investment-grade credit, high yield and emerging market debt. When it was
acquired, AUM stood at $11.7 billion. As of March 31, 2013, AUM had grown to $21.9 billion.

Exhibit 22: Logan Circle Partners’ AUM has almost doubled since acquisition ($B)
$11.7
$13.5
$20.7
$21.9
$0.0
$5.0
$10.0
$15.0
$20.0
$25.0
2010 2011 2012 1Q13
Logan Circle Partners appeared to be in the “penalty box” after it was acquired by Fortress.
This is a business that is 95% driven by consultants (gatekeepers) and consultants do not like
to see changes. In our view, this explains the sharp increase in AUM from 2011 to 2012, the
year consultants became interested in Logan Circle again after realizing that the investment
teams would not pack up and leave. The fact that 14 out of 15 funds beat their respective
benchmarks since inception most likely contributed to asset growth, as well.
Fortress appears to be dedicated to growing this business as management said that it would
like to build it out for the long term. When Logan Circle Partners was acquired, Fortress
made a decision not to downsize the platform. Based on management, the platform can
support five to six times Logan Circle’s current AUM. This led to losses, with the current
quarter finally coming close to a breaking even. Could this business have been profitable
after the acquisition? Fortress says yes, and that it deliberately decided not to cut expenses
and shrink the platform.
We believe that the lack of earnings is one reason most investors do not assign any value to
the business. On the surface, Logan Circle Partners appears to be a money losing business
that just broke even. This could change. Management wants to grow assets under
management and invest for the long term, which is most likely why it did not try to cut costs
and maintained an underutilized platform. Consequently, we think investors buying
Fortress’s shares are getting a traditional asset management business essentially for free.
Fortress paid $21 million for Logan Circle. Now, with assets almost doubled and a “multiple
expansion” since 2010, we estimate Logan Circle could be worth at least twice the amount
Fortress paid for it.
Fortress is saying that it wants to add new products to the platform with the goal of fully
utilizing this scalable platform. The company is also pushing cross-selling. Stuart Bohart took
on the additional responsibility of raising capital for Logan Circle Partners. While Logan Circle
Partners had net flows of $841 million in 2011, net flows increased to $5.7 billion in 2012.
We project net flows of $4.6 billion for 2013.
In April 2013, Logan Circle Partners announced that it was launching a growth equities
business focused on investing and managing concentrated portfolios of publicly traded US
equities. This new group is led by David Shell out of Tampa, Florida. He joined Logan Circle
Partners from Goldman Sachs Asset Management (GSAM), where he managed over $20
Logan Circle Partners could
grow assets and average
effective fee rate as it is
adding equity funds and
new products to a scalable
platform

billion in assets. Other investment professionals include Joseph Hudepohl, Scott Kolar,
Warrant Fisher and Gregory Frasca – all GSAM alumni.
Having an equities offering should lead to higher revenues as the average fee on the fixed
income products is about 16 bps versus about 75 bps for equity-oriented strategies. Logan
Circle Partners’ client base – high-net-worth clients, 401k plan sponsors, subadvisory
relationships, pension funds, insurance companies, among others – could be receptive to this
new offering. Management indicated that over time, they could also offer 40Act funds.
Consequently, effective investment management fees at Logan Circle will increase as the
company gathers assets in equity strategies. Fortress believes that it could attract about $20
billion in AUM over time.
Fortress provided the following sensitivity table of distributable earnings when it participated
at KBW’s Asset Management Conference June 5, 2013. This table assumes that AUM doubles
and shows the impact on distributable earnings based on various operating margins.
Exhibit 23: Logan Circle Partners could be accretive to earnings if AUM doubles
($ in millions) $40,000 $40,000 $40,000
Mgmt Fee Rate (bps) 16 16 16
Gross Annual Mgmt Fees $64 $64 $64
Operating Margin 30% 40% 50%
Annual Fund Mgmt DE $19 $26 $32
Annual Fund Mgmt DE/Share $0.03 $0.05 $0.07
LCP AUM Growth to $40 Billion
What this table did not incorporate was changes in mix of assets. We recreated the
sensitivity table assuming equities (75 bps fee) contribute increasingly to total AUM of $40
billion. Taking a different asset mix, one can see that earnings could exceed the earnings
sensitivity provided by management in June.
Exhibit 24: Logan Circle Partners’ earnings based on various asset mix combinations
20% 30% 40% 50%
25% $0.04 $0.07 $0.09 $0.12
30% $0.04 $0.07 $0.10 $0.13
35% $0.05 $0.08 $0.11 $0.14
40% $0.05 $0.09 $0.12 $0.15
45% $0.06 $0.09 $0.13 $0.16
50% $0.06 $0.10 $0.14 $0.18
55% $0.07 $0.11 $0.15 $0.19
OperatingMargins
Equity as % of Total AUM
Source: Company reports; RBC Capital Markets estimates
The above table assumes that equities earn an average management fee of 75 bps and fixed
income funds earn an average management fee of 16 bps.
We believe that demand for equities could increase in the near term, allowing the growth
equities team to gather assets. This team used to manage nearly $20 billion at Goldman
Sachs. Thus, we think it is likely that equities could make up 30% to 40% of total AUM over
With $40b in AUM and a
change in asset mix, we
estimate Logan Circle
Partners could add about
$0.10 to earnings on an
annual basis. At a 16x P/E
multiple, that could add
$1.60 to valuation

the next few years and that margins could be around 35%. This should add about 8 cents to
11 cents to distributable earnings.
Despite challenges in PE, Fortress has not had problems raising
capital
While there have been issues with the performance of Fortress’s PE funds, as we will discuss
in more detail under “Key Negatives”, investors seem to understand why performance was
weak. At least this is our view, as Fortress started raising capital in 2012 after pretty much
halting capital-raising efforts in 2008.
Fortress’s capital raise has attracted not only existing, but also new investors; the company
disclosed that about one-third of capital raised in 2012 was from new customers. Year to
date, Fortress has raised about $2.5 billion in capital. About $1.4 billion was raised in private
equity alone – with $960 million flowing into Newcastle, $140 million assigned to Eurocastle
and $340 million being raised for the transportation and infrastructure fund (WWTAI).
Furthermore, the company is raising an infrastructure fund that could close in 3Q13. This
fund will be more focused on infrastructure investments and de-emphasize investments in
transportation. Fortress is also raising a second mortgage servicing rights (MSR) fund. Wes
Edens mentioned during last quarter’s earnings call that capital-raising efforts are going well
and that he would expect to have a closing by 2Q13.
Wes Edens has set a soft target of $5 billion in private equity raises for 2013. He also
mentioned during a recent conference that raising sector funds is a much quicker process
than the 18 months needed to close on a more traditional private equity fund. In fact, he said
that the fund-raising effort takes only a few months for sector funds.
While it remains to be seen whether Fortress can achieve its goal, there should be no doubt
that fund-raising efforts were not impacted to the degree investors might have expected
given weak fund performance. More importantly, Wes Edens believes that he can raise a
multiple of the $5 billion in the coming years. We like the fact that Fortress seems to be able
to raise capital in private equity after almost four years of abstinence while it was fixing
issues with its existing funds.
Fortress has one of the youngest management teams
A question that comes up frequently with respect to alternative asset managers is succession
planning. This is not surprising given that these firms are run by individuals with charisma
and vision. Leaders who are willing to roll up their sleeves and create value for their
investors.
As such, one of the major concerns of investors is what could happen if one of the founding
members everyone associates with the firm leaves. Will the funds still be able to generate
strong returns? Will the firm be able to retain assets? Will the firm be able to raise new
capital? These are all legitimate questions and one of the major risks associated with
investing in the sector is key man risk.
We admit that there is a large pool of talent that publicly traded private equity firms can fall
back on to identify the next person to head the business. This pool has probably become
larger as talent started leaving investment banks due to increased regulation and potentially
lower compensation. Nonetheless, whether the risk is perceived or real, a founding partner
leaving the firm could affect share price performance.
Fortress raised $1.4b in
private equity capital year
to date. FIG is currently in
the process of raising an
infrastructure fund and a
second MSR fund
With one of the youngest
leadership teams, key man
risk appears to be less of an
risk at Fortress

We believe that this is less of a risk at Fortress than it might be for other firms because the
average age of the co-founders is 50.
Exhibit 25: Fortress has one of the youngest leadership teams in the industry
50 yrs
55 yrs
64 yrs 64 yrs
69 yrs
0
10
20
30
40
50
60
70
80
FIG APO BX CG KKR
Age
We need to emphasize that all these leaders have the stamina, focus and vision to continue
doing their job for years to come. They all perform at the highest level. However, key man
risk remains one of the major concerns on investors’ mind and can affect stock performance.
In a sense, it is similar to what Logan Circle Partners experienced when it was acquired by
Fortress. While the investment management team stayed, concerns about potential changes
and the possibility of portfolio managers leaving led consultants to use their products less
than they would have if ownership had not changed.

Investment Thesis – Key Negatives
Private equity fund performance is weak (but improving)
We would agree that private equity fund performance has not been stellar: there were
performance issues with the 2005, 2006 and 2007 vintages. We believe the firm’s exposure
to financial services firms and real estate is significant (Fortress initially operated as a real
estate private equity investment partnership), although it is difficult to be precise. For
instance, Fortress owns Florida East Coast Railway. This company is in the business of
transporting freight, operates 351 miles of track, and owns many real estate assets in Florida.
Thus, the valuation of Florida East Coast Railway is not only impacted by how much freight it
transports, but is also a function of the land that it owns. According to management, Florida
East Coast Railway owns about 30% of total industrial real estate in South Florida (Broward
and Dade County).
Potential future promote is driven by what happens to valuations of companies such as
Nationstar (one of the largest mortgage servicers and lenders), CW Financial Services
(commercial real estate finance and investment management company), Springleaf
(consumer lending, credit insurance, other credit-related products), Italfondiaro (special
servicer with expertise in management of secured and unsecured loan portfolios), and
Walker & Dunlop (commercial real estate finance).
Exhibit 26: Major portfolio company holdings in PE funds
PE Fund Key Drivers of Potential Future Value Generation
NIH
Fund I Italfondiaro
Fund II GAGFAH
Fund III Nationstar, GAGFAH, Eurocastle, Gatehouse
Fund III Coinvestment Nationstar, Holiday, Florida East Coast & Flagler, Eurocastle, GAGFAH, Gatehouse
Fund IV Florida East Coast & Flagler, Springleaf, Penn National Gaming, CW Financial, Brookdale, Nationstar
Fund IV Coinvestment Florida East Coast & Flagler, Springleaf, Penn National Gaming, CW Financial, Brookdale, Nationstar
Fund V Penn National Gaming, Walker & Dunlop
Fund V Coninvestment Penn National Gaming, Walker & Dunlop
GAGACQ Fund GAGFAH
FRID GAGFAH
FRIC
FICO
FHIF
FECI
The key takeaway here is that investors should not write off these investments as portfolio
valuations could improve with an improving economy. Furthermore, these portfolio
companies could grow their assets as financial services firms are disposing of their non-core
business or limiting financing.
The Wall Street Journal reported June 10 that Springleaf is in talks with bankers about a
possible IPO. An improving operating environment allowed Springleaf to raise money in the
high-yield debt market in May for the first time in many years. It could go public by the end
of this year or early next year. Fortress paid $120 million for 80% ownership in 2010.
In 1Q13, the underlying value of its PE funds increased 5.2% or $800 million, following an
appreciation of over 25% last year. Management also disclosed that the private equity
portfolio appreciated over $100 million in the month of April. The table below shows that
there are two private equity funds that could cross their respective incentive income
threshold, namely Fund III (2004 vintage) and FHIF.
Weak PE fund performance
and significant exposure to
the financial services sector
has been a headwind

Exhibit 27: FHIF and Fund III could generate promote (1Q13)
PE Fund ($ '000) Vintage Maturity
Net Asset
Value
MOIC
Estimate
Gain to
Cross
Incentive
Income
Threshold
Appreciation
Needed to
Generate
Promote
1Q13
Private Equity Funds
FHIF 2006 Jan-17 2,240,908 1.5x 85,563 3.8%
Fund III 2004 Jan-15 2,297,125 1.4x 561,563 24.4%
Fund IV 2006 Jan-17 3,891,801 1.2x 1,240,431 31.9%
Fund V 2007 Feb-18 3,934,856 1.0x 1,729,240 43.9%
Fund IV Coinv. 2006 Jan-17 626,263 1.0x 451,776 72.1%
Fund III Coinv. 2004 Jan-15 129,859 1.1x 167,921 129.3%
FECI 2007 Feb-18 908,830 0.9x 606,737 66.8%
FRID 2005 Apr-15 587,260 0.9x 873,000 148.7%
Fund V Coninv. 2007 Feb-18 636,162 0.6x 806,422 126.8%
FRIC 2006 May-16 242,146 0.8x 283,589 117.1%
FICO 2006 Jan-17 (58,222) -0.1x 1,220,614 n/m
NIH 1998 Indefinite $8,461 2.0x n/a n/a
Fund I 1999 Apr-10 55,485 2.8x n/a n/a
Fund II 2002 Feb-13 154,136 1.7x n/a n/a
GAGACQ Fund 2004 Nov-09 n/a n/a n/a n/a
Total 15,655,070 1.2x 8,026,856
Wes Edens said during a recent investor conference that he still expects private equity funds
to return twice the invested money to investors and generate returns of over 20%. While
many factors drive the exit multiple and returns, we like management’s enthusiasm and
focus. Over time, the private equity business could generate performance fees of $1 billion
to $2 billion, according to Mr. Edens. As we had indicated above, we do not believe that
incentive fees are priced into the shares of Fortress. Even achieving half the incentive fees
indicated by management, Fortress should be able to generate interest in its shares.
Finding opportunities in credit is more difficult
One of the challenges for Fortress and other in the sector will be finding investment
opportunities in credit. Dean Dakolias, who runs the Credit business, said that investment
opportunities that meet Fortress’s return objectives are scarce. Credit private equity is
targeting returns in excess of 20% and credit hedge funds have a minimum target of 10%.
Investment discipline explains why the net IRR since inception has been about 22%, the
highest among its peers. Peter Briger, Principal and Co-Chairman, said during the March
earnings call that opportunities in credit “are not there today”, and that the market has
become more competitive in the last quarter. In addition, with interest rates and financing
costs increasing, it seems that opportunities will remain few. There is about $5.9 billion of
dry powder in credit as of the end of the first quarter and capital-raising activity in Credit is
dormant now with the team focusing on traditional private equity.
We believe, however, that investors should not be overly concerned about the limited
opportunities available to the Credit business. Given that banks in Europe are going through
a long process of de-levering, we would expect more opportunities to come. Bank balance
sheets there are two times higher levered than in the US. New regulation and higher capital
With pricing up, fewer
investment opportunities
meeting targeted IIRs,
realizations could pick up

requirements could force banks to sell assets at prices that could meet Fortress’s hurdle
rates. Basel III rules could be a catalyst.
Furthermore, a lack of opportunities implies that investments might be ripe for harvesting.
As mentioned above, there is about $645 million in gross unrealized incentive income
embedded in the credit business. With an improving economy and continued appreciation in
capital markets, we believe that this amount could grow.
Potential tax rate changes could be an issue
The tax treatment of carried interest has been in the spotlight for some time now. With the
need to raise tax revenues and reduce the budget deficit, we would expect this debate to
continue. This is despite the fact that as the Private Equity Growth Capital Council pointed
out, changing the tax treatment of carried interest would only pay for 3.1 hours a year in
federal government operations.
Private equity firms generate income in two ways. They receive a management fee, which is
taxed as ordinary income, and carried interest. Private equity funds receive 20% of
partnerships profit when the return exceeds a certain hurdle rate, i.e., carried interest.
Currently, carried interest qualifies to be treated as long-term capital gains.
In 2007, the Congress held hearings on this topic. The Obama Administration’s 2008 Budget
Blueprint included a sentence that carried interest should be taxed as ordinary income. In
2010, the US House of Representatives passed HR 4213, the American Jobs and Closing Tax
Loopholes Act.
While it is difficult to predict whether the tax treatment of carried interest will change and
be a part of a tax reform bill, if passed, taxing carried interest as ordinary income could have
an adverse impact on capital distributions and dividend yields as it would significantly raise
the amount of taxes owed. HR 4213 could prevent Fortress from completing certain types of
internal reorganization transactions or converting to a corporation on a tax-free basis. The
proposed legislation could also increase the ordinary income portion of any gain realized
from the sale of class A shares.
However, there is a 10-year transition period before capital gains could be taxed as ordinary
income. Thus, the impact of any changes would not be immediate and there could be
sufficient time to revise any tax law changes under a new administration. Furthermore, it is
difficult to predict how the company’s shares would react to any changes in the tax law.
Currently, there is a reluctance to own shares of alternative asset managers as institutional
investors don’t want to be burdened with filing K-1s, cannot own them due to fund
mandates or due to the float not being sufficient. This is why a large number of institutional
investors are not investing in alternative asset managers.
Alternative asset managers could reconsider their corporate structure and reorganize as a
corporation, if carried interest is taxed as ordinary income. This, in turn, could increase
demand for their shares and liquidity, helping offset some of the negative effect of having to
pay ordinary income taxes.
Investors could remain on
the sidelines until there is
more clarity about tax
treatment of carried
interest. However, any
change in tax treatment
would require a 10-year
transition period

Requirement to file K-1 is holding back investors
As mentioned above, certain institutional investors do not want to invest in alternative asset
managers due to the requirement to file K-1s. Limited partnerships are required to issue a
Schedule K-1 to unitholders. This would require them to build out their back office.
Each unitholder has to report the partnership’s taxable income on a K-1. Certain portion of
the income from owning the A shares could have tax consequences for tax-exempt entities if
it was deemed “Unrelated Business Taxable Income” (UBTI).
The bottom line is this: Owning shares of any alternative asset manager structured as a
limited partnership can lead to incremental administrative burdens.
However, institutional investors can avoid this by entering into a total return swap/buying a
note that provides a synthetic exposure to returns. Our understanding of a TRS/note is that
broker would structure this such that the counterparty would receive the cash flow
associated with the underlying assets – for a fee. The broker would take care of any filing
requirements/back-office duties. This would allow institutional investors to own the
economic benefits in companies such as Fortress without having to outright own the shares.
This, of course, is a very high-level description of the structure and the details would be
beyond the scope of this note. Some institutional clients are prohibited from owning a
limited partnership due to fund mandates. Owning a TRS/note would alleviate increased
administrative costs associated with owning the underlying securities outright.
Exhibit 28: Analyzing top 10 owners - About 11% of Fortress’s shares are owned by brokers
providing synthetic exposure to underlying securities
10.9%
9.5% 9.2%
5.6%
3.0%
0.0% 0.0%
0%
2%
4%
6%
8%
10%
12%
FIG OZM BX KKR APO CG OAK
About 67.7% of shares are owned by the top 10 holders. Three out of those top 10 owners
are brokers owning 10.9% of total shares outstanding. This shows that there is demand for
the security and investors willing to own the shares can do so by entering into a TRS or
buying a note that provides them synthetic exposure to Fortress.
Were alternative asset managers to change their corporate structure due to a loss of tax
advantages associated with being a limited partnership, we believe that more institutional
investors could be enticed to own their shares. As mentioned previously, some institutional
investors cannot own limited partnerships due to fund mandates. Owning the shares directly
Incremental administrative
burdens make investing in
limited partnerships less
attractive – but there are
options to avoiding these

would add to liquidity, there is likely a high probability that brokers providing exposure to
limited partnerships match buy and sell orders internally before routing any trades to the
exchanges.
Liquidity and float are low; hard to build a position
Another argument for not owning shares of Fortress is lack of liquidity. There are 236.7
million shares outstanding. Nomura, which had owned 55.1 million shares, acquired another
5.4 million in the 2009 secondary offering, raising its ownership to 25% of public shares
outstanding. Top 10 shareholders own about 68% of shares outstanding.
Exhibit 29: 90-day average volume (in millions)
5.05
2.61
1.54
1.31 1.13
0.60
0.38
0.00
1.00
2.00
3.00
4.00
5.00
6.00
BX KKR APO FIG OZM CG OAK
Some investors are concerned about their ability to build up ownership in Fortress and to
exit their investment at a later point. Excluding shares owned by Nomura, the public float
declines to about 176 million. Assuming that an investor wanted to own 5% of Fortress’s
outstanding shares, the investor would have to buy 7% of the shares outstanding excluding
Nomura’s shares. This could be accomplished in about nine trading days given the daily
average trading volume – if one could get the shares. Thus, liquidity could be an issue. We
would assign a low probability to inside owners selling their shares given current valuation.
Analyzing companies within the sector is difficult given
inconsistent accounting & utilization of non-GAAP measures
across the sector and the difficulty of projecting realizations
We believe that some of the valuation discount applied to Fortress and others in the
alternative asset management sector can be explained by the complexity of the industry and
the difficulty of comparing companies within the sector.
For instance, while some alternative asset managers disclose the value of accrued
performance fees on their balance sheet, Fortress does not. Furthermore, Fortress does not
disclose economic net income (a non-GAAP measure of earnings power), while others do.
Fortress believes that economic net income (ENI) adds volatility to earnings and that it
should be ignored since over time, ENI and distributable earnings will converge. ENI shows
marks on portfolios, unrealized incentive fees and carried interest as earnings, which can
fluctuate from quarter to quarter. However, when analysts come up with their price targets,
they utilize ENI and give credit to accrued performance fees. There are other examples of
Quickly building and exiting
a position could be an issue
given limited public float

non-GAAP measures being used to demonstrate value creation. Simple exercises such as
figuring out capital raised and capital deployed are inherently difficult because not all
companies disclose these measures for the various business units. Likewise, it is extremely
difficult to project earnings as there is very little visibility into realizations. This leads to many
surprises and misses when the companies report earnings.
The chart below depicts this and shows the average deviation of reported earnings versus
the mean analyst expectation over time. The data goes back to 1Q08 or latest quarter data
was available.
Exhibit 30: Earnings surprises – actual reported earnings versus estimated earnings (%)
(254.4%)
(34.9%)
(572.3%)
48.6%
(23.8%)
(700%)
(600%)
(500%)
(400%)
(300%)
(200%)
(100%)
0%
100%
FIG APO BX KKR CG
Source: FactSet; RBC Capital Markets
Yet, we believe that the lack of transparency could lead to opportunities. We would not
expect the accounting to change, nor would we expect the alternative asset managers to
agree to use common non-GAAP measures to make their performance more comparable.
Consequently, the sector as a whole trades at a discount given the issues described above
and we think that Fortress could be trading at a discount to peers as it neither uses ENI nor
capitalizes accrued performance fees, which some analysts use to arrive at their price target.

Company Description
Fortress Investment Group LLC (NYSE:FIG) is a global alternative asset management company
specialized in asset-based investing. Its primary business is to sponsor various investment
funds and companies and provide investment management services, including related
managed accounts. Fortress offers private equity funds, liquid hedge funds, and credit funds
in addition to traditional investment products. Fortress was founded in 1998 by Wes R.
Edens, Randal A. Nardone, and Robert Kauffman, who retired in December 2012.
Headquartered in New York, it has seven offices in the US and eight additional offices around
the world. Fortress offices outside the US are located in Rome, Frankfurt, London, Hong
Kong, Shanghai, Singapore, Sydney, and Tokyo. As of March 31, 2013, Fortress had AUM of
US$55.6 billion with more than 1,500 institutional clients and private investors worldwide.
Fortress earns three forms of income:
 Management fees based on the amount of capital it manages;
 Incentive income based on the performance of alternative investment funds, and
 Investment income (loss) from its principal investments
Exhibit 31: Fortress snapshot
Fortress Snapshot
Founded 1998
Founders Wes Edens, Randal Nardone, and Robert Kauffman
Headquarters New York, USA
Key Management Peter Bringer Jr. (principal and co-chairman of the board)
Wes Edens (co-founder, principal, and co-chairman of the board)
Randal Nardone (Interim CEO, co-founder, principal and director)
Employees 993 (as of Mar 31, 2013)
Core Businesses Private equity, liquid hedge funds, and credit funds
Total Revenue US$969.9 million (as of Dec 31, 2012)
Total AUM US$55.6 billion (as of Mar 31, 2013)
Fortress conducts its business under three major segments:
 Private equity (PE): Private Equity comprises private equity funds that invest in debt and
equity securities of public or privately held entities in North America and Western
Europe. Publicly traded alternative investment vehicles, which Fortress refers to as
“Castles”, invest primarily in real estate and real estate-related debt investments.
 Liquid hedge funds: These funds invest in fixed income, currency, equity and commodity
markets and related derivatives globally. In addition, this segment includes an
endowment-style fund, which invests in Fortress Funds, funds managed by external
managers, and direct investments.
 Credit funds: This segment includes credit hedge funds, which make highly diversified
investments in assets, opportunistic lending situations and securities, on a global basis
and throughout the capital structure. Credit private equity funds which comprises family
of funds focused on investing in various categories including, investing in distressed and
undervalued assets, investing in tangible and intangible assets in real estate, capital
assets, natural resources and intellectual property, and a family of Asia funds including
Japan real estate funds and an Asian investor-based global opportunities fund.

Milestones
Exhibit 32: Milestones
Year Highlights
1998 Founded by Wes R. Edens, Robert Kauffman and Randal A. Nardone
1999 Launched Fortress Investment Fund I
2002 Launched the Drawbridge Special Opportunities Fund and the Drawbridge Global Macro Fund
Newcastle Investment Corporation's IPO on the NYSE
2004 Eurocastle Investment Limited's IPO on the LSE (currently listed on the Euronext Amsterdam)
2006 Launched the Fortress Partners Fund
2007 Added Nomura as a strategic partner
Fortress's IPO on the NYSE
2008 Launched the Fortress Credit Opportunities Fund
2009 Launched the Fortress Japan Opportunity Fund, first yen-denominated fund
Engaged to manage funds and accounts previously managed by D.B. Zwirn & Co
2010 Acquired Logan Circle Partners, entered the fixed income asset management business
Agreed to acquire CW Financial Services from majority shareholder Otéra US Holding Inc.
Completed acquisitions of European mortgage assets and platforms from Residential Capital
Completed acquisition of American General Finance
Received an investment-grade rating of BBB from Fitch Ratings and BBB- from Standard and Poor’s, in
each case with a stable outlook
2011 Opened offices in San Francisco, Shanghai and Singapore
Launched the Fortress Asia Macro Fund, the Fortress Credit Opportunities Fund III, the Fortress Real
Estate Opportunities Funds and the Worldwide Transportation & Infrastructure Fund
2012 Launched Fortress Convex Asia Funds
Announced the successful close of Fortress Japan Opportunity Fund II
Launched Fortress MSR Opportunities Funds
2013 Launched a new growth equities investment business to be headed by Chief Investment Officer David
Shell
Business segments & Recent Financial Results
Private equity
Fortress started its private equity business in 1998. Since inception, Fortress has invested
approximately US$21 billion of equity capital in 19 private equity investment funds/vehicles
on behalf of pension funds, university endowments and foundations, and other institutional
investors. As of March 31, 2013, this segment had total AUM of US$15.5 billion.
Fortress Investment Funds: Private equity segment of Fortress includes primarily a series of
funds named as “Fortress Investment Funds” (referred to as private equity funds), which are
organized to make control-oriented investments in cash flow-generating, asset-based
businesses in North America and Western Europe. Investors in private equity funds
contractually commit capital at the outset of a fund, which is drawn down as investment
opportunities become available, generally over a one- to three-year investment period.
Proceeds are returned to investors as investments are realized, generally over eight to 10
years. Management fees of 1.0% to 1.5% are generally charged on committed capital during
the investment period of a new fund, and then on invested capital or NAV and may decrease
in later periods. Fortress also earn approximately 10% to 25% share of the profits on each
realized investment in a fund (incentive income) subject to the fund's achieving a minimum
return as a whole. As of March 31, 2013, private equity funds had total AUM of US$11.1
billion.

Castles: Fortress manages two companies, Newcastle Investment Corp. (NYSE:NCT) and
Eurocastle Investment Limited (Euronext Amsterdam: ECT), together referred as “Castles”.
The Castles were raised with broad investment mandates to make investments in a variety of
real estate-related assets, including securities, loans and real estate properties. Fortress
earns management fees from each Castle equal to 1.5% of the company's equity. Further,
Fortress also earns incentive income equal to 25% of the company’s funds from operations in
excess of specified returns to the company’s shareholders. As of March 31, 2013, Castles had
total AUM of US$4.4 billion.
The exhibit summarizes the private equity funds and returns from inception to date.
Exhibit 33: Private equity funds & returns ($MM)
As on Mar 31, 2013
Fund Name Inception Date Maturity Date AUM Return*
Private Equity Funds:
Fund I Nov-99 Winding Down - 25.7%
Fund II Jul-02 Feb-13 - 35.5%
Fund III Sep-04 Jan-15 1,286 7.2%
Fund III Co investment Nov-04 Jan-15 109 1.6%
Fund IV Mar-06 Jan-17 3,042 3.5%
Fund IV Co investment Apr-06 Jan-17 501 -0.4%
Fund V May-07 Feb-18 2,796 -0.5%
Fund V Co investment Jul-07 Feb-18 605 -8.8%
GAGACQ Co investment Fund Sep-04 Permanent - 19.3%
FRID Mar-05 Apr-15 786 -2.5%
FRIC Mar-06 May-16 169 -3.6%
FICO Aug-06 Jan-17 - -100.0%
FHIF Dec-06 Jan-17 1,083 7.3%
FECI Jun-07 Feb-18 434 -1.4%
WWTAI Jul-11 Jun-24 140 -
MSR Opportunities Fund IA Aug-12 Aug-22 100 -
MSR Opportunities Fund IB Aug-12 Aug-22 25 -
Private Equity - Castles:
Newcastle Investment Corp. June-98 Permanent 2,492 NA
Euro castle Investment Limited Oct-03 Permanent 1,877 NA
TOTAL 15,445
* For private equity funds and credit PE funds, returns represent net annualized internal rates of return to limited partners after management fees and
incentive allocations, and are computed on an inception to date basis consistent with industry standards.
Private equity funds revenue: Total revenues from private equity funds (Fortress Investment
Funds) increased by 4% or US$1.3 million to reach US$36 million for the quarter ending
March 31, 2013 compared to the same quarter last year. The increase is due primarily to an
increase in management fee to US$32.9 million compared to management fee of US$29.7
million a year earlier. The increase of US$3.2 million was primarily a result of an increase in
management fee from Fund IV, Fund V and FRID as a result of increased market values of
certain portfolio companies.
Incentive income decreased slightly by US$1.9 million to reach US$2.8 million for the quarter
ended March 31, 2013 compared to the same quarter last year. Incentive income decreased
mainly due to a reversal of $2.8 million and $3.6 million of previously recognized reserves for
the potential clawback of incentive income from Fund II during the three months ended
March 31, 2013 and 2012, respectively, which was partially offset by recognition of US$1.1

million in incentive income during the quarter as a result of a realization event that occurred
in Fund I.
Private equity - Castles revenue: Management fee from Castles increased by US$3.2 million
or 23% to US$17.8 million for the quarter ended March 31, 2013 compared to the same
quarter in 2012. The increase was the result of a US$3.8 million increase in Newcastle AUM,
and another US$0.9 million increase due to an increase in property management fees related
to a senior living property management business. These increases were partially offset by a
US$1.5 million decrease in management fees from certain investments, which were
concluded in the first quarter of 2012, as well as changes in foreign exchange rates.
Exhibit 34: Private equity segment revenue breakdown
Private equity funds revenue ($MM)
35 36
30 30 30 30 30 31 33
1
5 3 2
3
-3
1
31
37 36
27 30
34 33 33
36
-5
0
5
10
15
20
25
30
35
40
Mar-
11
June-
11
Sep-
11
Dec-
11
Mar-
12
June-
12
Sep-
12
Dec-
12
Mar-
13
Management Fee Incentive Fee
Private equity Castle revenues ($MM)
14
13
12
14 14 15 14 14
18
0
5
10
15
20
Mar-
11
June-
11
Sep-
11
Dec-
11
Mar-
12
June-
12
Sep-
12
Dec-
12
Mar-
13
Exhibit 35: Pre-tax distributable earnings & AUM for private equity
Pre-tax distributable earnings ($MM)
22
28
20
23 22 21 22 21 22
5
7
8
6 7
6
6 10 10
27
35
28
29 29
27
28
31 32
0
5
10
15
20
25
30
35
40
Mar-
11
June-
11
Sep-
11
Dec-
11
Mar-
12
June-
12
Sep-
12
Dec-
12
Mar-
13
Private Equity Funds Castles
AUM ($B)
9
11 11
3 3 3 3
3 3
4 4
4
10 10 9 10 10 11
13 13 13 12
13 14
15 14
15
0
2
4
6
8
10
12
14
16
18
Mar-
11
June-
11
Sep-
11
Dec-
11
Mar-
12
June-
12
Sep-
12
Dec-
12
Mar-
13
Private Equity Funds Castles
Pre-tax distributable earnings: Pre-tax distributable earnings from private equity funds
decreased by 3% or US$0.7 million to reach US$21.6 million for the quarter ended March 31,
2013 compared to US$22.3 million in the same quarter last year. The decrease is primarily
due to increase in general and administrative and allocable expenses by US$2.0 million

during the quarter, which were offset by an increase in revenue by US$1.3 million. General
and administrative and allocable expenses increased by US$2.5 million during the quarter
ended March 31, 2013 compared to the same quarter last year, primarily due to placement
fees associated with capital raises.
Castles’ pre-tax distributable earnings increased by 47% or US$3.6 million to reach US$10.0
million for the quarter ended March 31, 2013 compared to US$6.8 million in the same
quarter last year. The increase was primarily due to an increase in management fee of
US$3.2 million.
AUM: Private equity segment AUM increased by 17% or US$2.3 billion during the quarter
ended March 31, 2013 to reach US$15.5 billion from US$13.2 billion during the same quarter
in 2012. The boost was due to an increase in private equity funds AUM by US$1.1 billion or
11% to reach US$11.1 billion during the quarter ended March 31, 2013 compared to the
same quarter last year. Castles AUM also increased by US$1.2 billion or 36% during the
quarter ended March 31, 2013 to reach US$4.4 billion from US$3.2 billion in the same
quarter last year. Investment performance of private equity funds was strong during the
quarter ended March 31, 2013, with valuations in underlying investments increasing by 5.2%.
Appreciation in valuation was driven largely by the public company portfolio, which includes
a gain in Nationstar and a 10% gain in Brookdale during the quarter ended March 31, 2013.
Liquid hedge funds
Fortress’s liquid markets hedge fund business was launched in June 2002. The liquid hedge
fund business consists primarily of the Fortress Macro Funds, Fortress Asia Macro Funds,
Fortress Convex Asia Funds and the Fortress Partners Funds. These funds invest daily in
markets around the world to gain from the opportunities in global currency, interest rate,
equity and commodity markets and their related derivatives. As of March 31, 2013, liquid
hedge funds have US$5.5 billion assets under management.
Fortress Macro Funds: These funds invest in global fixed income, commodities, currency and
equity markets, and their related derivatives, through a macroeconomic investment
approach and seek to capitalize on the imbalances in financial markets that are influenced by
economic, geo-political and capital flow factors. Macro funds invest primarily in major
developed markets and sometimes also invest in emerging markets if market conditions
present opportunities for attractive returns. These funds have the flexibility to allocate
capital opportunistically across asset classes, markets and instruments. Fortress charges
management fees based on the AUM of the macro funds at a rate of 1.5% to 2% annually.
Further, Fortress earns incentive income of 15% to 25% of the fund's profits, generally
payable annually. As of March 31, 2013, Fortress Macro Funds had US$3.1 billion assets
under management.
Fortress Asia Macro Funds: Fortress launched Asia Macro Funds in March 2011. The Funds’
investment program focuses on global trading and capital flows that affect one or more of
the Asian countries or are affected by them and the region as a whole. Management fee
rates for these funds range from 1.5% to 2.0% and Fortress also earn incentive income
generally equal to 20% of funds’ profits. As of March 31, 2013, Asia Macro Funds had US$0.8
billion assets under management.
Fortress Convex Asia Funds: Fortress launched Convex Asia Funds in May 2012. These funds
focus on managing volatility-based strategies that are constructed to deliver low returns in
normal market environments and outsized positive returns in periods of heightened capital
markets volatility or dislocation. The Convex Strategies team seeks to deliver returns that are
negatively correlated through a market cycle. This is achieved in part by trading instruments

FIG Initiation

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