Fortress defends railroad investments

Wesley Edens,co-chairman of the publicly listed investment firm that in recent years made two large railroad buyouts, told the Oregon Investment Council that the railroad business has done 'phenomenenally well even during a very difficult time'. One of the two rail investments, RailAmerica, recently made an initial public offering.

Wesley Edens, principal and co-chairman of Fortress Investment Group, recently told the Oregon Investment Council his firm’s transportation investments are holding up well despite the difficult economic climate.

“The way we’ve invested in transportation is in the railroad business in the US, which has done phenomenally well even during a very difficult time,” Edens told the OIC during a 2 December meeting.

Wesley Edens

In November 2006, Fortress bought railroad holding company RailAmerica in a $1.1 billion transaction. In October, RailAmerica raised $330 million by selling 22 million shares at $15, slightly below the original public offering range of $16-$18. About half the shares sold were owned by Fortress-managed private equity funds, according to the New York Times’ Dealbook blog.

Speaking of the deal, Edens told the OIC that RailAmerica “had about a $600 million revenue line going into the crisis that went town to $480 million” but its earnings before interest, tax, depreciation and amortisation went up from $80 million to about $150 million.

“The management team did an amazing job on cost containment,” Edens said.

He added that “the other transportation assets look like they have got a tremendous ways to go”.

RailAmerica isn’t Fortress’ only rail investment. In June 2007, Fortress bought Florida East Coast Industries, owner of the Florida East Coast Railway and a real estate development business, in an all-cash transaction valued at $3.5 billion.

Fortress’ latest quarterly filing indicates that one of Fortress’ private investment funds, which has a $275 million investment in a “railroad and commercial real estate company”, was down about $41 million and had spent the past eight quarters below the level of the original investment. Fortress said it would not write down the investment, though, because the fund that owns it is a single-asset fund whose life extends until 2017 and the firm expects “this value will recover during the fund’s life”.

The OIC requested Edens’ presence at the council’s meeting to talk about the performance of the firm’s funds, which have been depressed in the market downturn. At the market’s bottom, Fortress’ Fund V had a -77 percent internal rate of return, according to OIC documents. The fund is up 57 percent from the first quarter and up 19 percent alone in the third quarter, Edens said.

Fortress’ Fund V probably will not achieve the goal of making investors “two plus times your money”, Edens said. Fortress closed its fifth fund, along with a co-investment fund, in 2007 with a combined $5 billion.

“My goal is still for you to get two plus times your money. I think on a couple of these funds that’s very likely. I think Fund V it’s not likely you’ll make two times your money,” Edens said. “I’m crazed about it.”