February 15, 2017 / 7:36 AM / a year ago

SoftBank's bet on Fortress is a smart acqui-hire

NEW YORK (Reuters Breakingviews) - Masayoshi Son is fond of his “crazy ideas.” Splashing out $3.3 billion for Fortress Investment, an alternative-investment firm, is unexpected but not exactly crazy. SoftBank, the Japanese entrepreneur’s tech and telecoms group, has big ambitions in investing, and the New York-based firm knows how to put money to work.

While the deal doesn’t directly involve the $100 billion Vision Fund that SoftBank is creating with the backing of Saudi Arabia and others, the two are clearly related. That fund’s manager, former Deutsche Bank trader Rajeev Misra, spent a year at Fortress before joining SoftBank in 2014. And the investment was arranged by F.A.B. Partners, a boutique set up by three of Misra’s former Deutsche colleagues last year, which is also helping with the Vision Fund.

Founded in 1998 as a private-equity shop, Fortress has diversified over the years into credit, hedge funds and conventional bonds. The latter, low-margin business accounts for nearly half of assets under management and helps explain the firm’s modest operating margin of 13.8 percent and pre-deal valuation of 8.2 times expected earnings. By contrast, Apollo Global Management boasts an operating margin of nearly 42 percent and trades at just under 10 times expected earnings.

Son is paying a healthy 39 percent premium to the pre-offer share price but just under 10 times expected earnings for 2017. He gets a $14 billion private-equity business and $19 billion in credit funds with a combined $1.3 billion in unrealized gains. He’s also retaining the services of Fortress’s three founders, who have committed to stay and plow half their deal proceeds into Fortress funds. That matters because buyout firms and hedge funds are at heart people businesses – if top talent leaves, the firms can quickly wither.

Fortress’s connections and expertise will be useful. It could help SoftBank source, structure and finance deals, for example. The business should also be able to continue growing its own assets by spotting undervalued securities and businesses.

In his high-profile meeting with then President-elect Donald Trump in December, the SoftBank founder promised to invest $50 billion in the United States and create some 50,000 jobs. Fortress is an unorthodox down-payment on that pledge.

On Twitter twitter.com/tombuerkle


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