When Fortress Investment Group LLC takes its private equity infrastructure fund public — expected as early as year's end, the alternative investment firm will provide limited partners instant liquidity.
Fortress also will be one of a number of alternative investment firms with a greater ability to expand their investor bases. The permanent capital provided through public investment vehicles is prized by alternatives managers because it takes general partners out of the expensive business of raising funds while also raising assets that help the firm's stock price.
Permanent capital also upsets the current balance of power, tipping it more in favor of general partners.
Fortress has put its own spin on the private-to-public trend.
A number of firms — Fortress among them — have converted private real estate investment trusts into public REITs, spun portfolios on their balance sheets into public vehicles and launched a variety of other publicly traded offerings. Other private equity funds have converted privately held private equity portfolios into publicly traded business development companies.
In this latest approach, Fortress plans to convert a private equity infrastructure fund into a publicly traded vehicle with the prior approval of the fund's limited partners, Fortress executives said.
Earlier this month, Fortress closed on an additional $600 million in commitments for its infrastructure fund, the now $995 million Fortress Worldwide Transportation and Infrastructure Investors. The fund originally had closed on $395 million last year, but was reopened this year, said Joe Adams, a New York-based managing director and chief investment officer of the infrastructure fund.
“We had more attractive investment opportunities than we had capital, leading us to do an additional private fundraise,” Mr. Adams said.
The investors in the second round of fundraising weren't investing in a blind pool because they were able to see the investments Fortress already had made. The fund had focused on middle-market value-added infrastructure, including the Montreal, Maine & Atlantic Railroad, a 480-mile railroad between Montreal and the east coast of Maine, according to Fortress' presentation to the Washington State Investment Board, Olympia.
These existing projects had provided an 18.5% gross internal rate of return, 12% net return as of Dec. 31 and a current dividend of 8%, Fortress' presentation materials show. Fortress was targeting 20% gross returns.
Officials knew the infrastructure fund could be taken public before they made the investment, said Kate Sandboe, corporate governance officer at the Washington State Investment Board, which oversees $100.6 billion in assets.
Indeed, the Fortress materials presented to the Washington board briefly mention a potential to convert to an “evergreen structure through public listing,” which would permit long-term ownership of infrastructure projects plus liquidity for investors, the materials said.
Executives at Fortress, which is a public company, told investors during a quarterly earnings earlier this year that it planned to take the fund public. Mr. Adams declined to speak about those plans.
“It has been done before. It's not the most common path that people choose,” Mr. Adams said.