Fortress Investment Group LLC

Goldman Sachs US Financial Services Conference 2011 December 6, 2011

TRANSCRIPT:

Dan Mudd: Good afternoon, everybody, and thanks for coming. I thought what I would do is move fairly quickly through a set of slides that kind of lay out the base of the story and, probably, engenders a few questions from you guys to talk about how we are positioned.

I will begin and ask you to read the disclaimer at your leisure.

I would say, if you look at the headlines, investors remain pretty focused at least yesterday and today on Europe. The volatility has spiked, we've got commodities go up and commodities go back down. We've had an enormous amount of political and regulatory uncertainty, some of which has made some markets, quite frankly, uninvestable.
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I think that one of the most important dynamics that you are looking out in the world right now, which I actually think some investors are missing, they are underestimating the interconnectedness of these markets. While we may be obsessed about Europe right now, if you roll back the tape four weeks, we were obsessed about the U.S., eight weeks, we were obsessed about the U.S., we haven't yet been obsessed about China.

I think that time will come, and I think for the period of the next three or four or five years, you are going to see a cycle of focus bounce between or rotate between the U.S., Europe and China. As that wheel turns, you will see knock-on effects on the peripheral markets, be they the Nordics or Japan or the Middle East and that cycle will run itself around and around and around until the process of deleveraging has occurred. I think that will be a long time.

The point, I always make on this is that this is no joyful state of affairs for us as human beings, but it is actually a very good investment environment for us at Fortress Investment Group, maybe the best we've seen in our life time.

Let me lay out a couple of slides that just sort of talk about the overall status of the market and why we think that's so. In 1999, the average pension plan at a Fortune 500 company was overfunded by at approximately 130% of obligations. Today, that percentage has fallen to 72% of obligations. The 28% average funding shortfall becomes all the more problematic when you consider the investor math in the upper right corner. If you think you're going to get 2% to 3% on [bond] returns, if you're going to get 4% to 5% on stocks, you've got a 60-40 allocation with a little bit of something else. All of a sudden, you go down to see the investment committee of your pension authority and you are about four points short, and that's before any allocation to alternatives.

When you look at alternatives, then you see the standard 12% to 20% kind of return target in the space. It is a logical go to must-go-to place for investors sooner or later, and the timing of that is, of course, the question. You look at each of the individual businesses that sit in the alternative space, hedge funds have grown over the past 20 years with about 20% annualized growth up to $2 trillion today and those are expected to continue through the odd years.

Private equity assets are also on the rise, with a little bit of tapering recently. But if you look at the about $2 trillion in private equity right now, there's actually about $1 trillion of additional dry powder uncalled investment that's available there, so, significant opportunities to raise capital in the private equity space. In a recent survey, 90% of investors indicated that they expect to maintain or increase their allocation to private equities in the medium-term.

That said, I also think there's another important dynamic here, which is big is big, big is good, small is small, small is really hard. We're kind of in the middle, probably trending towards the big end in terms of alternative asset managers.

Let me just say, I wouldn't want to be me and you and a couple of other guys going out to raise our first private equity fund in this environment. We'll talk about that when we come to fund raising. But we like where we are, we like the sectors we're in and we think we have room to grow there.

That bias towards experienced managers is only one element. I think another one is the range of offerings. Fortress, for those of you that are new to the session, basically, is one of the few firms that covers the entire range of alternatives.

We have hedge fund businesses, we have classic buyout-oriented private equity businesses, we have credit special situations investments and we have a long-only fixed income business.

So, I think there is an enormous benefit to the intellectual capital and the kind of size of the radar screen that you're looking at when you are in this business. What you know about credit in Europe through your credit fund can actually inform how you might be investing in Europe in your macro fund; opportunities you see in private equity having knock-on effect in the other businesses. So, as you're big enough to not just be me and you but to develop that broader insight, you become actually better at what you do.

So, as Marc said, we're about $44 billion right now in those businesses, we cover the waterfront and we have that intellectual capital to be able to see a lot of what goes on in the market.
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The other thing is there have been times that have been good to invest in the market and obviously there have been times that have been not so good, so these cycles operate. The RTC workout period was a terrific time to put money to work in distressed.

The dislocations in Asia and the Russian debt crisis gave great opportunities for folks that were investing in currencies, in rates and some commodities. The Dot-Com bubble and the revaluations that came the low interest rates that came following that were terrific opportunities in private equity. You have the Great Recession, which I guess is what we're calling what's going on right now, and that seems to be offering a premium to investors who are not just investors or not just allocators, but are operators. So, the short message here is the same as it was a second ago, this is not a time that I would want to be a one trick pony.

Fortress, likewise, if you look at the cyclicality or the contribution of the various businesses that we've had over a period of time, this shows the proportionality going back to '07 where the segment revenues have come from. You see private equity large in the beginning, compression in the middle, some increases since then, a huge growth in our credit business, and performance which correlates to those opportunities that we saw along the way. So, I think this is just a way of showing that by virtue of covering that waterfront and being in these different businesses, Fortress has always got a number of positive things going on in the company.

Highlights, let me just bring you up-to-date, since I spoke here last year in terms of some of the things that we said we would get done last year and, in fact, we have gotten done this year. There were two overhangs, one, was the reinstatement of the dividend; we've announced the commencement of the dividend in the fourth quarter with a payment in the first quarter of next year, $0.05 a quarter with a top up depending on where we are in promote in the fourth quarters going forward.

Secondly, as the historians in the group know, we were one of the first firms in this space to go public, and with that came a five year lockup on the principals, with that a five year term of employment that came to that actually does come to a conclusion in January of this year. In the last quarter, we announced the renewal of the terms and the term of commitment of all of the principals that run each of the investment functions of our business. That was important.

Another highlight, capital raising; we are now raising capital in all four of our businesses. That's the first time since 2007, so we are raising money for sector funds in private equity, flagship funds and special funds in credit, the hedge funds as well as in Logan Circle, the long-only manager, and I'll talk about how that's going which is, cut to the chase, is actually pretty well.

There are eight new funds for Fortress out in the marketplace right now that include transportation, real estate and energy in addition to the ones that I mentioned.

A quick update, we raised and disclosed that we had raised $2.7 billion through October 31, given where we are right now I think that that number will increase to well-over $3 billion by year-end. And I'd add to that that the momentum going into the first quarter of '12 looks quite good. We anticipate closes in some of the
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private equity-style funds which tend to have either a front loaded, early mover distribution or a back-ended last minute turning in your homework the night before its due component. And between those two things, you get sort of dribs and drabs in the smaller closes.

We've had for our third credit fund first closed in...

Dan Bass: In September $300 million and $500 million in October.

Dan Mudd: He is our CFO and not just a kibitzer, so, he can speak with authority. And so, with those final closes in private equity-style funds, we feel pretty good about where the pipeline is, both through year-end and after year-end. Third, performance has been strong particularly on the Private Equity side, Credit Hedge Fund, Private Equity business, and the valuation gains that we've seen through the third quarter have hung in there.

Four, we continue to build out the global component. We need to go where the capital is in order to raise capital. As you all know, the traditional distribution of who is investing and who is investing in this market has changed somewhat, so we've opened offices during the course of the year, pretty aggressively in Singapore and Shanghai, as well as an office for the credit business out in San Francisco, where it sort of center of balance has moved significantly to the West.

And our financial position; the cash and the balance sheet investments are up 12% year-to-date, and our investments and cash net of debt is $2.08 a dividend paying share for the balance sheet value that investors have in Fortress.

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So, all of those highlights we actually feel pretty good inside the company about let me talk briefly about each of the businesses and then get to your questions. Main issue in Private Equity has been operational improvements, driving cash flow, terming out restructuring debt, getting the right management teams in place, and getting all of those funds back up to par, and we like where are.

We had another period of continued appreciation, 6.5% year-to-date, and since the trough in Q1 '09, those valuations are up about 66%. So, pretty reasonable progress there, third quarter as you all know, a little bit tougher, but underneath it you will see that the operating performance has actually been quite strong. So, we would expect with a little bit of help on the beta side that we would continue to see improvement there.

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Strong Operating Performance Across Key Portfolio Sectors

2011 Estimated Operating Cash Flow Growth(1)

Financial Services 63.4%

Transportation 13.6%

Senior Living 8.9%

Certain logos, trade names, trademarks and copyrights included in the Presentation are strictly for identification and informational purposes only. Such logos, trade names, trademarks and copyrights may be owned by companies or persons not affiliated with Fortress or any Fortress managed funds, and no claim is made that any such company or person has sponsored or endorsed the use of such logos, trade names, trademarks and copyrights in the Presentation. (1) All calculations use EBITDA or equivalent metric. 2011 estimated figures are composed of actual results from January 1, 2011 through September 30, 2011, and projected results for 4Q 2011.

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Transportation, operating cash flow where it's equivalent in each of these businesses is up 13%, financial services up almost 64%, senior living about 9%, so operating performance pretty strong across those sectors.

Opportunities going forward continue to fall into those businesses. So senior living, we own Holiday and Brookdale, we have partial ownership positions there. We are the largest operator of senior living beds in
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the country at this point and we see some very interesting opportunities given the demographics to take the intellectual software and the management software from those businesses and translate them overseas. If you think about the demographics in a China or you think about the demographics in a Japan, that's interesting; and we have signed up some partners and moved some people there to help make that happen.

And then in transportation infrastructure, we own a couple of railroads. We're one of the largest short-line railroad operators in the country. We also own and are raising money in our transportations fund, because we've got exposure in containers, aircrafts, trailers, handling equipment, and so forth. So those are sectors that we like. They're asset based, theyre cash flowing, they're global, they benefit from scale, and I think you'll continue to see us invest there from a private equity standpoint.

Right now, probably raising and investing in sector based funds and then in the not too distant future raising probably a general purpose buyout type fund.

Credit business is basically on fire good fire by the way. This business was built for this world. I've got 960 people about in Fortress, 330 of them or so are in the credit business. It's a reflection of the fact that it's fairly tight at the top in terms of an investor, investment allocation standpoint, very broad at the bottom in terms of operators and originators.

We are not dogmatic, we're not geographical, we're not allocators, --we find good deals that involve getting your hands dirty, digging in, working out, restructuring, re-performing, servicing assets and doing it in a way that is not competitive at the bidding altar -- is the basic formulation of that business. Pete Briger, who
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leads the business and is one of the [principals] of the firm, has been basically doing that since, I guess, he was in high school.

And if you look across the business you see our first credit opportunities fund, which has just reached the end of its investment cycle with annualized inception-to-date returns of over 28%; those types of returns have made it a real pleasure to go out and raise additional capital from investors who are pleased with that kind of performance. Our credit funds have got about $3 billion of dry powder by the way as of the end of the third quarter. That becomes AUM when it's called. So, that's not been called yet.

The opportunities there are enormous. I won't insult your intelligence by demonstrating to you that the world is a mess, large financial institutions and others have to de-lever, they have to sell assets, they have to sell companies, they have to let go people, they have to de-lever, they have to blah, blah, blah, blah, blah. That's going to go on for a period of time.

When we counted up RBS, Bank of America, Citigroup, Lloyd's and Lehman, we got to about $3 trillion of announced sales. We haven't counted much of the stuff on the right and we think that's an incremental $5 trillion to $10 trillion of sales. Here we are more or less four years into it and we've seen only about 20% or 30% of the progress to date. So we think the opportunities for our credit business -- unfortunately, for us as human beings -- will continue for some good period of time.

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...and Credit Business Is Well Positioned to Capitalize

Fortresss Credit business has doubled AUM in the past five years, growing from $5.5 billion in 2006 to $11.8 billion as of 3Q 2011(1)
Core Credit Platform Launched 2002
Drawbridge Special Opportunities

Credit Build-Out 2005 - Present

Credit Opportunities I & II Japan Opportunity Fund I Global Opportunity Fund Long Dated Value Real Assets Net Lease Life Settlements Credit Opportunities III

Recent or potential new strategies

(1) As of September 30, 2011.

Other Sector Specific Other Regional Specific

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The credit business building out of its original platform which was a Credit Hedge Fund in 2002, now represents 8 or 10 different funds, some of which are liquidity focused, some are in private equity-style, some are focused on longer dated opportunities and some are geographically focused. But the opportunity to build-out these businesses and continue to invest has never been so attractive.

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Liquid Hedge Fund, a very tough third quarter, very tough year when you are a macro fund in a macro world you wind up basically traveling with everybody else. And, I would say broadly that's a little bit where we are. We probably stayed a little too positive for a little too long about the state of the world and have since gotten a little bit more pessimistic there.

But as you see, over time, we've seen parts of this movie before and Mike Novogratz and his team have traded tactically through environments like this. We like the research process, we like the duplicate ability and obviously we like the CIOs in our main macro fund. But, out of that also have come additional opportunities to focus on additional opportunities in the Liquid Hedges Fund space.

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So, just like in credit, I told you we started with one fund and now we've got 6 or 8 or 10 different funds. In the hedge fund business, we started out with a Global Macro Fund and we have since built out in Asia specific Macro Fund where we've raised a couple of hundred million, set-up an operation in Singapore, actively raising capital there. Our Commodities Fund which is in London and is over $1 billion; Fortress Partner's Fund, think of fund of funds but with an endowment investment approach, those guys are out on the road and raising capital.

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So you see over a period of time on this chart a similar story, a similar strategy to what we talked about in credit where we go from a flagship fund, to a family of funds, to a series of opportunities that are really come out of both the opportunities that are out there as well as what you are hearing from your investors. We hired a vol fund - Black Swan guys in Asia to start a fund there. And we're starting that process and we see additional ones that will come along after we fill out the convex strategies team build-up the Asia business.

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Financials, I think the key points with respect to Fortress are that 80% of our AUM is locked-up in long-term structures. There is $3 billion of dry powder there that becomes AUM when called, 100% of the main credit fund is above high watermarks. We've got in that business $275 million of undistributed PE incentive income. The cash on the balance sheet in the investment values have built through the course of the year from I think, $800 or $900 million back to over $1.4 billion, you've got $2.08 a share of pure balance sheet value in a stock that's trading around $3.50. We've also brought our debt down from a maximum of about $800 million to where it is today, which is about $270 million. And, we Dan and I will continue to be working the company toward a zero net debt position.

We've done a lot of work and made a lot of progress in terms of building out the financial strength. You decide how you want to build up the valuation from the bottom up or the top down. But if you take the three fundamental drivers of value in the business, base fees 80% of the $33 billion of alternatives is locked up in 8 or 10-year funds with probably, at this point of duration of four, five years attached to it. There's a multiple there. You look at the opportunity to earn incentive income based on performance in any of the hedge fund products, add that there and you add the $2 of share value that I've talked about a couple of times.

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If you use the valuation of one of the wisest and most trenchant observers of the financial scene, Marc Irizarry, in his current model he is putting a 12 multiple on the management fees and estimating fee earnings that equate to approximately 75% of where the current stock price is trading.

So, I think the implication is that if you buy a Fortress stock, you're buying the potential for those incentive fees, you're getting $2 of balance sheet cash and investments either for free or at a deep discount, so, we all think it's pretty compelling and that's the way we're thinking and behaving inside the company and the way that we're describing it to you outside the company.

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Priorities for 2012, last year I talked about the priorities for 2011. I told you we set out what we're going to do in terms of the principals agreement, in terms of the debt, in terms of the dividend, in terms of the operating performance. We did it, I am back. Here is what we're going to try to do in 2012.

Capitalize on this investment opportunity delivered from this market, continue the capital raising momentum. We now have an infrastructure in place that's global. We think we've covered all the major places that we need to be. We weren't there before. We were very spotty in terms of our global coverage. Continue to build out the capabilities, so we can actually execute trade around the back office in some cases the front office internationally and then translate all that into strong financial performance on behalf of our shareholders. So that's where we are, and we like it.

I appreciate you listening and I'd be happy to take your questions.

Marc Irizarry: Great. If I can just ask the first one here, if you look at some of the mandates that LPs are giving out these days, they seem to be more across, maybe across asset class, perhaps lower fee and maybe a little broader if you will. How is Fortress positioned in terms of fund raising? Is the world going a bit more towards sort of broadening out the mandate and providing the solution, and how far along are you as a business in terms of having everything that you need to deliver on solving the problems?

Dan Mudd: I would caution you and everybody in the room I know you have a desire for a dispositive binary answer to this question: LPs are moving to X. Now, I spend half of my time trying to raise capital for Fortress, so I
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spend a lot of time talking to these folks. And I would represent to you that I can't give you a dispositive answer to the question. There are bunch of different things going on, Marc. So I'll pick two or three examples that maybe illustrate this quickly; you're a state pension fund, you've got a young age cohort, so they are a ways from retirement; you've got a forward-looking CIO, that didn't have his or her nose broken in 2008 and still has the support of their investment committee and their board.

Got money to invest, they don't need it for a while, yes, those guys will come in and say, I want to be innovative, I want to have a new thing, I want to have a relationship, I want to be crossed with multiple of your funds. I'm prepared to commit to invest to hundreds of millions of dollars, if not billions of dollars over a period of time as long as you guys deliver the performance, bigger, broader, more important relationship and I want a break on the fees.

And we're usually willing we're always willing to have a conversation about a break on the base fees and there is a lot of pressure there. But, in terms of performance, if you guys perform I'm happy to share, right? So, directionally, yes, that's one group, right. There are folks in the middle, remember I showed that chart that sort of said this is my problem, I'm 4% short in terms of the returns that I have to deliver when I have to deliver on a basis of 8%, that are allocating more and in specific situations are looking for separate accounts and in some cases if unless you're above for a Fortress like a $250 million kind of number, it's hard to make the economics work to do something special on fees or management or reporting or structure. And above that we get more and more friendly.

So, that's the group in the middle. Honestly, there are sets of people, who are still shell-shocked. Don't have the support of the investment committee, have a big payout ratio, new CIO, old CIO caught in the headlights, whatever. Those are much more difficult and much more cautious conversations characterized by more consultants, more lawyers, more due diligence and you just have to have we've got 50, 60

Dan Bass: Sixty.

Dan Mudd: People on our front end sales force that do this all the time and of that group probably, 30% of it is working on responding to these kind of queries and then you've got folks who are it's just toast.

Marc Irizarry: And the scope of your business, when you think strategically I mean you added Logan Circle on the fixed income side. Are acquisitions maybe a part of filling up, so where are you in terms of scope of the product?

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Dan Mudd: There was a period of time where it looked like you could do that by acquisition. At this point in time I've had a harder time finding opportunities to build out scope by investing in basically people and relationships at what I consider a tolerable multiple. So we focused on building out some of those funds, where I've showed you the pictures of those, or separating out something as we're doing in Global Macro and developing a sleeve in Asia.

If those opportunities come up I think we're well positioned by virtue of being in most of the alternative strategies, but we don't have a long-short business, we could think about that. We don't have a pure real estate business, we could think about that. We don't have pure long-only commodity sleeve. Those are all things that we could think about and we would be in a pretty good position to have buy versus build discussion about it, because we have the parts of it available inside Fortress, but there are also teams and groups and piles of assets floating around the world a little bit that we could look at.

Marc Irizarry: Questions out there?

Audience Member: I just had a question on the credit business, if you could just go through a couple of different things. First of all, if you could bracket a range of potential net flows for 2012 and also the pace of deployment if you would Pete Briger's Group go through that $3 billion and then more? I'd love to hear any of that.

And then also on the components of total IRRs for the credit group, how much is from cash-on-cash returns and how much is from dispositions?

Dan Mudd: Yeah. Let me start and I'll reintroduce Dan Bass to the answer. Our first credit opportunity fund closed in?

Dan Bass: 2008.

Dan Mudd: 2008, its reached the end of its investment period cycled the cash around twice and earning the returns that I talked about. That was a $2.2 billion.

Dan Bass: Yes.

Dan Mudd: Correct me if I'm wrong.

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Dan Bass: Yes. No.

Dan Mudd: $2.2 billion fund, the second fund was $2.5 billion...?

Dan Bass: $2.5 billion.

Dan Mudd: $2.5 billion and as I indicated in the comments we're on a pace to be at that level or better than that level for the third fund based on the recidivism of investors and the performance. You pick up from there.

Dan Bass: Yeah. From a pace perspective, we've invested about $2 billion in '10, $2 billion year-to-date on '11, so you extrapolate the $3 billion, thats sort of been our pace the last two years. $3.2 billion in the slide is prior to the $500 million that we raised in October, so you add that to the mix. So, if you just extrapolate history it's about a year and half's worth of things. Although we see Europe picking up as an investment opportunity, so it could be faster.

But so that is from a realization versus a mark perspective, Fund I is probably 25% of the investments have been realized, Fund II, a smaller amount. So, it's predominantly still in the ground.

Audience Member: And so when we think about the return profile for like 2012, we'll come up with projected IRR, let's say it's 15%. How much of that is from the cash the dividends or the interest received as opposed to when you capture it at the disposition?

Dan Bass: It's hard thing to answer. Most of the assets in this business are generating a cash yield but not all. Some of them are deeply discounted pools of loans, non-performing, so there really is limited yield, that's all just collecting out the cash. So, it's a hard question to answer specifically. But there is some level of yield that's already in there.

Marc Irizarry: We've got time for couple more questions. Back there?

Audience Member: I'm not sure how much you can disclose on some of your portfolio investments, but you showed the note on Springleaf in filing for IPO. I know that's been kind of held up on some approvals, as well as the health of
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the market. So question will be when do you think you'd able to get that IPO done and if the market isn't open for that opportunity, what other plans do you have in place?

Dan Mudd: Yeah. So it's in the queue and your point about the factors in terms of market timing availability and all that are exactly right. There are quarterly periods where you can trade and you can't trade, et cetera. We've made a pretty successful start to refinancing the balance sheet of the company. We like where the company is basically operating. That was the last investment in a fund that's got eight years to go, almost eight years to go in its first life. So that's the benefit of these kind of trades is that you don't have a gun to your head in terms of going to the market, public or private.

And to Dan's point was really about the credit business picking cash flowing investments that will pay the bills along the way until you have a realization event. That applies in our private equity business as well. So given that was a very attractive acquisition price, given that the company was operating well in its segment with like half of the delinquencies of other people in that space. A space which, by the way, is being vacated by the big guys, it will be basic math about what the right timing is for that.

Audience Member: You mentioned that you were raising eight funds, right now. How you logistically go about focusing on eight funds at the same time?

Dan Mudd: That's a great question. So, here's how I think about it. There are on the lock up capital side the point of main effort is right now a flagship credit fund, right? So, multiple billion dollar flagship fund, existing investors, global distribution, track record, so, that gets a point of main effort there, we're constantly raising money in the hedge funds and in Logan Circle, so that's a steady as she goes effort.

Let me step back for one second, so, we have the 60 person group, sales group, that consists mostly of people who were in the verticals. So when you talk to a capital raiser in credit, if you when I listen to them they sound more like PMs, more than they do like sales people, right. So those guys are focused vertically on selling credit funds, selling private equity funds, selling liquid products. There is also a group of about 10 people, who have specialty functions on insurance companies, pensions, Japan, Europe, Middle East, what have you.

So within the credit business we are raising a power assets fund, troubled power assets that need to be combined and deleveraged and all that sort of thing. We'll have a more junior person who is focused fulltime on raising capital for that fund. But at the end of the day those people are facilitating the process of getting the CIOs in front of investors; nobody is going to give us some money until they talk to the CIOs.

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Then, every week, it happened right before I came here this morning, that whole group sits in one room or gets on a video conference and talks through, what are you doing, who are you talking to and we have a CRM system that will tee up whoops, we got two guys going in to talk about two different products to CalPERS [for example], let's fix that. So, we literally call it the air traffic control meeting and that's the way we avoid mid-air collisions.

Marc Irizarry: Great. Well, Dan, thank you very much.

Dan Mudd: Thank you all. I appreciate it.

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