Every Picture Tells a Story

(Accompanying music here.)

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Citi analyst Prasant Bhatia, who helped listed hedge fund and private equity shop Fortress Investment Group (FIG) to a 15 per cent haircut earlier this month, took another shot Friday, pointing out an entirely predictable discrepancy between what Wes Edens said back when, and what he’s doing now that the chips are down (see above).

Reiterating his sell recommendation, with a $9 target now only 10 per cent under Friday’s close, Bhatia noted the magical disappearance of a couple of key disclosures — including total assets under management, and the investment performance of the Castle entities — while picking up subtle changes in the disclosures it did make.

We do not currently know the full extent to which this disruption will affect us or the markets in which we operate. If the disruption continues, or results in a permanent, fundamental change in the credit markets, we and the funds we manage may experience further tightening of liquidity, reduced earnings and cash flow, impairment charges, increased margin requirements, as well as challenges in maintaining our reputation, raising additional capital, obtaining investment financing and making investments on attractive terms, and may need to make corresponding fundamental changes in our investment practices. However, to date we have been able to continue raising capital for our funds, both through new and existing funds, which serves both to increase our AUM and our management fee income and to give us a significant amount of capital available to be invested at a time when we believe attractive returns in distressed and other asset classes are available.

Bhatia, reading between the lines:

In our view, this new disclosure highlights how much Fortress benefited from the credit bubble and raises the question about the sustainability of its early investment performance.  Management seems upbeat about its prospects.

Unlike Citi itself, which kept dancing until the music stopped (© Charles Prince, CEO, Ret.), where performance is entirely sustainable for the foreseeable future, and management is struck dumb and quaking with fear at its prospects.

Beware: lynx over the undefended ramparts.