This week on the podcast Matt sits down with Joshua Pack, co-CEO of Fortress, a global asset management firm. They discuss how Fortress invests in an unconventional way in debts and assets by lending against intellectual property, patents, trademarks, legal claims and more to generate high returns. Joshua shares his unlikely career path to joining Fortress, the people-focused culture that encourages input from all levels, along with Fortress' investments in supply chains and logistics. Gain insight into the world of alternative investing and how Fortress finds value where traditional investors cannot.
Episode Transcript
Josh Pack 0:00
Yeah, it's kind of like an athlete. You know, like, I can't dunk a basketball, you
know, but I can, I can break down a company and I can look at it and I can figure
out what it's probably worth and how much you can lend against it or what it might
be worth in a fire sale.
Matt Waller 0:16
Excellence, professionalism, innovation, and collegiality. These are the values the
Sam M. Walton College of Business explores in education, business and the lives of
people we meet every day, I'm Matt Waller, Dean of the Walton College, and welcome
to the be epic podcast. I have with me today, Joshua Pack, who is co-chief executive
officer, and managing partner at Fortress. Joshua, thank you so much for joining me
today, I really appreciate it.
Josh Pack 0:47
Thanks for having me. I'm glad to be here.
Matt Waller 0:50
So, Joshua, if you wouldn't mind, let's start with just a little bit of background
on Fortress, and maybe the three different business segments and how much assets are
under management and the strategies of those segments.
Josh Pack 1:08
So Fortress is a global asset management firm. And, you know, we primarily focus on
kind of debt and assets. So we're not like a long only, you know, equity hedge fund
or somebody that trades in commodities, or someone that, you know, trades with other
types of equity, you know, type assets. At the end of the day, what we're focused
on is, is debt, and, and assets. And when we say assets, it could be a very kind of
broad spectrum of different things, it could, it could be a piece of real estate,
or it could be a non traditional type of asset, like a piece of intellectual property,
or a receivable, that's due from some sort of tort case, a law case, a litigation
asset. So it's a very kind of broad spectrum when we talk about assets. But on the
credit side, you know, we we do everything from making new loans to companies, and
these companies may not have access to capital, because of their size, or because
of their geography or because of where they are in their lifecycle either growing
really, really fast, or maybe they're in some sort of turmoil and shrinking. And so
traditional capital providers aren't necessarily available to them. And then we also
buy other pieces of debt on a secondary basis, either performing or non performing
loans. And in some cases, we get, you know, we put on our distressed debt hats, and
become very opportunistic in that regard as well. But the firm itself was, was founded
in in 1997, originally, it was a private equity firm, that did kind of buyouts and
things of that nature. And then in 2002, Peter Briger, who was a partner at Goldman
Sachs, left after the Goldman IPO. And Peter basically started Goldman's special situation
business, special situation group, which was a highly profitable business within Goldman
for many, many years. When he left, he reconnected with some of his colleagues and
started the credit arm of Fortress. And now when you look at Fortress, you know, we
manage almost 50 billion in total, AUM, and the vast majority of that is now credit.
So the credit business has really kind of eclipsed the private equity business, we
have about 900 employees. We operate in 12 offices worldwide. Our primary focus is
North America, Western and Southern Europe, Japan and Australia.
Matt Waller 4:06
This is interesting. So you, you make loans. Let's take an example of this. And so
I could imagine, you know, if you're a traditional business that has real estate,
like you own the lot, you own the building, you can get a bank loan. But if you're,
if you are, say, a software as a service, you might be very profitable. But it's hard
to get a loan from a traditional bank, I believe, is that right?
Josh Pack 4:35
That's, that's true. And the loan sizes that we look at is typically kind of 50 to
500 million. So we're dealing with businesses that I would say are kind of in the
upper part of the middle market. You know, take for example, maybe it's a it's a regional
restaurant chain, you know, that that operates 500 units and generates you know $100
million a year of of EBIDTA on 1.5 billion of sales, you know, that company might
want a, you know, $400 million credit facility, either refinancing debt, you know,
funding capex projects, or maybe the the sponsor, the ownership is taking a dividend
or distribution or something, or maybe they're acquiring another business. You know,
that's kind of a typical business that we lend to, we're also very large players in
in the software space, healthcare companies, energy is becoming a much bigger piece
of our pie, particularly as other lenders in that space kind of retract from it. Because
of, you know, ESG policies, mainly, I would say that, in the real estate part of the
world, that has historically been a place that we haven't done a ton of lending, when
the markets are very normalized. But when you look at it today, and the markets are
very disrupted, we're getting much more active in that space.
Matt Waller 6:07
When you mentioned intellectual property, I immediately think of patents and copyrights,
and trademarks.
Josh Pack 6:16
We like all of those assets, we have businesses that that will lend on those on those
different properties. And we have businesses that will, in effect buy those assets,
and sometimes you're really not allowed to buy the assets, but you have to kind of
buy the whole company in order to get to the assets. So, so that's kind of another
piece of our business, but from IP, you know, when you think about trademarks, and
brands, those are assets that we definitely like lending against, because there's
typically, you know, pretty robust cash flow streams associated with them. So there's
all kinds of licensing agreements, and, you know, take like a franchise, if you will,
or like, like Circle K gas stations, you know, they that they have a brand, they have
a logo, and they license that out to 1000s of different operators across the country.
So you're getting a cash flow stream, it's being paid by 5000 independent operators,
that's contractually increasing over time. So it's a very robust and kind of powerful
cash flow at the end of the day. And then you have things like, intellectual property
associated with patents. And, you know, if you're, if you're a startup business, and
you have some new technology, and you have some great patent, and you've been able
to develop, or maybe you have a family of patents, you know, accessing capital at
that stage of growth is pretty difficult. You know, there's the VC world, but that's
come in a lot, particularly recently. But what we're able to do is say, okay, we think
there's value to these patents, we'll move them over into a special purpose entity,
and we'll lend you money against those patents, that you can go use to grow your business.
Now, if they're successful in growing their business, great, they pay us off. And
we've probably gotten some warrants or some other equity, participation in their operating
business, but it's way, way cheaper than what you know, the VC firm would have given
them and experienced, much less dilution.
Matt Waller 8:29
I would think, too, there's a self selection that goes on little bit there, right?
Because firms that are most confident, they don't want to give up equity.
Josh Pack 8:39
Absolutely, absolutely. And they know they have something valuable there. And then
if the firm you know, heaven forbid, fails, then we kind of have this structure where
we can just step in and kind of take over the patent. So, you know, we'll just walk
away without collateral, and then we will figure out how to license that technology
out. And when we do our analysis and determining kind of what we can lend against
that. We do that, you know, kind of game theory that goes into well, if we own this,
you know, who is the likely users of it? How big is that market, we might look at
it and say, you know, firm XY and Z might be infringing on that patent and figure
out an enforcement route against it. So there's there's all kinds of different, you
know, decision trees that you can take along the way to come up with with determining
the value of that piece of collateral.
Matt Waller 9:33
Well, this is I'm so glad that I'm talking to you about this. This is a different
type of investment vehicle than I'm used to.
Josh Pack 9:44
What we have, it's with fortress that we think about our business kind of 50% of our
business, I would say is kind of standard, standard lending, standard private credit,
kind of standard, I'm stressed and distress credit type activities. And then the other
half of our business are kind of these niche and esoteric type of strategies that
we've developed over the years. And typically we kind of grow them up inside the firm,
you know, add people over time. And the IP business is a big one, you know, our trademark
and intellectual property associated with you know, film, and associated with music
is another one. We also have, I think, probably the largest litigation assets business
on the planet. And that's kind of a growing field, there's, there's a couple of public
companies that that that do it one, one is out of the UK. But really, I think, I think
we're probably the largest. And, you know, there's all kinds of ways to monetize large
kind of legal claims. At the end of the day, if you're, for example, if you're a fortune
100 company, you might have a few billion dollars of different kinds of litigation
claims coming out at any given moment in time, we can show up and actually, potentially,
you know, give you three or 400 million of liquidity against that multibillion dollar
pool after we've analyzed all of the claims. And so for the first time ever, the company
can kind of accelerate, you know, the cash flows that they get, and actually take
that, take that investment into earnings. So it's a powerful tool from a treasury
management perspective. And from our perspective, you know, we're gonna lend a couple
100 million dollars, we're gonna get a great pref return, you know, maybe it's 12,
15%. And then we're going to participate in the ultimate resolution of that entire
multibillion dollar litigation portfolio. So these end up being really, really great
investments, because the, the downside risk is so low, and the upside is pretty dang
high. We also do things where you have these really large law firms that are involved
in these massive tort cases, you know, whether it's talcum powder, or Roundup, or
or, you know, Johnson and Johnson, or, you know, diesel emissions, and all of these
big cases are in various stages of their life, you know, some have been settled already,
and they're just being signed off by the local, you know, states to come into agreement.
Some of them are in the earlier stages, and people are actually just collecting plaintiffs.
But if a law firm has these huge pools, we can provide them with some capital today.
Think of it as almost like a factoring of a receivable, you're making a determination
of how good is that receivable, ie, how good is that case, and then you come up with
an advance rate against that. For some law firms, you know, we will provide them with,
you know, a $50 million credit facility, and it will be secured by hundreds of millions
of dollars of potential fee income that they're getting from these large tort claims.
And they'll take that $50 million and they will use that to invest in acquiring new
plaint-, new plaintiffs. So for example, we are probably responsible for all the commercials
you see on TV for camp lejeune, you know, because a lot of the law firms that we're
involved with, are collecting plaintiffs for the camp lejeune claims. And so we've
provided them with a credit facility in order for them to go out and market that.
But at the same time, they're doing that piece of tort case, they also have these
other large cases going on that are way more further developed in their lifecycle.
Matt Waller 14:05
Fascinating. You've got the three different business segments. Are they separate funds
for each of them?
Josh Pack 14:15
So we manage we manage almost three dozen different funds, okay, that there's kind
of, we always tried to broadly categorize the different areas that we're investing
in, you know, some are easily defined. So like, if you take private credit, you know,
we we have this, this is where we're making haar loans, we're making new loans to
businesses on a senior secured basis. Typically, you know, the first person in line
in a business to get paid back. And our last dollar typically doesn't go through more
than say, 50% of the value of that company. And so today, you know, that's kind of
a 10, 11, maybe 12% unlevered yield that you're getting on that type of investment,
and then we'll put a little leverage on it so that we can generate kind of a 15 16%
gross return to our investors. But what's nice about the private credit business is
that it's, it's senior in the capital structure. So there's a lot of wiggle room in
case something goes wrong with the company, you're the first ones to get paid back.
And you have typically floating rate type of structures. So in an environment like
today, where you have rising rates, it's a very attractive place to kind of hide out
in order to earn a great current yield. Other, you know, alternative asset managers,
private credit businesses have experienced a lot of growth over the past five or six
years, you know, it's not growth for growth's sake, it's growth, because traditional
forms of credit have been retracting from the market overall. So private credit has
kind of filled that void, in basically kind of keeping the gears of the economy lubricated.
Matt Waller 16:10
Are your funds set up, like what you would expect for an alternative investment where
you have LPs and a general partner, and
Josh Pack 16:20
Yeah, we have the majority of our funds are closed end funds. So you know, they have
a life to them. So our our private credit funds have a six year life, our our credit
opportunities, funds, where we do some of these, you know, more esoteric investments
and more, more distressed types of investments, those have a 10 year life. And these
funds, you know, we aggregate kind of LP commitments, and then we, as the GP, manage
the investment of that capital, we do have a couple of open ended funds. One is called
drawbridge, which is our evergreen hedge fund. And then we have some other vehicles
that we've been kind of in the process of, of developing, both here and in Japan,
which are going to be more the evergreen structure as well.
Matt Waller 17:17
Joshua, would you mind speaking to your investments and activity in supply chain?
Josh Pack 17:26
Yeah, sure, I mean, most of our activity, and and frankly, there has been a lot of
activity, particularly over the past few years, you know, with with kind of the chaos
that the COVID created, but most of our activity is in shipping. And then also on
the real estate side, with respect to either kind of owning, or in some cases, actually
building large distribution centers for you know, for the big guys out there, you
know, all the do you think about the large, you know, ecommerce folks and some of
the other people, you know, we've we've done kind of built a suit programs with those
groups to help them expand, you know, their logistics empire, people always ask me
like, Well, why do they work with a group like fortress? You know, aren't you expensive?
And, you know, we're certainly not the cheapest cost of capital. But when you think
about, you know, some of these integrated, you know, Technology and Logistics businesses,
and you know, where they spend $1 like, is it better to trap $1 in some bricks and
mortar and concrete on an asset? Or is it better to invest in a streaming platform
business or to take that dollar and invest it in some sort of cloud computing business,
or retail marketing business, and it ends up being that they'd much rather use that
dollar and not invested in fixed asset. On the shipping side? You know, shipping is
a very dangerous place to invest. There's, there's lots of people that have lost lots
of money over the years, but we have, we have some great relationships, and we've
been very successful and in kind of being able to buy shipping assets, and that's
either, you know, dry goods and bulk shipping or even liquid container shipping, and
then, you know, hopefully selling at the top. We have a great track record in there.
One of the really interesting deals that we've done recently, during the COVID crisis,
we bought a bunch of wide body aircraft from a major airline that needed liquidity.
So we bought about a dozen of those airplanes. At that point in time. The market for
that was very, very low. Obviously the the you know the airline industry was pretty
much shut down. And what we could have done is kind of waited for the market to recover
and then put those airplanes under lease. But what we're actually doing with them
is we're converting them to cargo planes, which have, you know, significantly much
more demand now. And what this has actually done is it's actually grown into a business
for us, where we are now converting other people's planes, not only our own but other
folks into into cargo.
Matt Waller 20:32
This is such an interesting business, Fortress. Would you mind speaking a little bit
to your career? And how did you get here?
Josh Pack 20:40
I get asked a lot, you know, what should people be doing? Or what's the career path?
And, you know, of, of entering kind of the investment world? The straight answer is
there isn't a, there isn't a clear delineated path. I mean, everybody has their own
story. You know, just because you go to a great school, and you do X, Y, and Z doesn't
mean you're going to be successful. Starting off in life, I don't think anyone would
probably expect for for me to be where I am. The short story is that I grew up in
a military family. That was kind of the only direction that I ever really thought
about, you know, I watched, you know, Top Gun as a, as a 11 year old or 12 year old,
you know, 50 times and figured I wanted to fly jet planes. So, when I graduated high
school, I went to the Air Force Academy. And after a period of time there, I decided
that this isn't what I wanted to do. So I left there, and I kind of bounced around
for a while, you know, I did kind of four schools in five years, and kind of had a
midlife crisis that, you know, 21, 22 years old, and, and then when I, when I finished
school, I got a job. It was financial phone sales, where you were trying to kind of
convince companies to, to lease back their computer equipment and other things. And
it was, it was kind of a miserable job. But it was a great experience, because I got
to learn to communicate. And I got to learn to talk on the phone. And I got to learn
how to, to market myself and how to peel back layers of a corporate organization and
find out who's really making decisions and who's really important at the end of the
day. And, you know, back in those days you used to look at the classified ads. And
I found an ad that seemed interesting. Five friends from different investment banks
coming together in northern San Diego, and to start a company that was going to make
loans to branded businesses. So franchise types of businesses, I was able to join
as kind of their first employee as their second employee, I hung around for a year.
And then you know, some of the other partners that left hooked up with with Peter
and Fortress and said they were going to do this, this thing on the credit side and
I went out with them in 2002, and then plugged into Fortress as soon as we started
the fund. You know, I think I think investing is somewhat of a skill.
Matt Waller 23:21
Would you mind speaking to the culture of Fortress?
Josh Pack 23:28
We're a very flat organization, when we have our credit committee meetings, to just
make investment decisions. We open it up to the entire firm, you know, everyone from
the interns, to the new analysts to the senior managing partners. And we want, we
want dialogue, we want criticism we want, you know, we want somebody that maybe has
never done a legal asset, maybe somebody in our real estate group, and we have a legal
we have a litigation, litigation asset type of opportunity that we're looking at.
And he's not in that group. And he really knows nothing about it. But he's got four
or five questions, you know, we want him to ask those questions. You know, we want
our intern, you know, maybe, maybe she's, you know, had some experience with some
business before we want her to speak up. We really like having this kind of open dialogue
and open kimono type of investment structure where it's very transparent. And you
know, there's there's no real hierarchy about it. Everybody has a view and everybody's
welcome to present an opinion. And then within the firm itself, you know, these 25
different kinds of businesses or platforms that we have that exists within fortress,
you know, a lot of them are developed internally. You know, Jack Newmark, who recently
was appointed as the managing partner, he created our litigation and finance business
in our litigation assets business, and he did it over the past, you know, 1215 years,
and now it's a, you know, it's a three to $4 billion platform within our company,
everybody at the firm to can see that, you know, shoot, you know, maybe one day you
can be CEO, or when they you can be running one of these platforms. So, we like having
that upward mobility within the organization, we tend to bring people in to the company,
when they're younger, when they're more junior, and, and kind of instill in them the
Fortress DNA and kind of train them up. We haven't really had that much success bringing
in senior folks from the outside, unless there's a real specific kind of business
need, or somewhere where we just don't have any expertise. And frankly, we have a
lot of tenure. You know, the senior management team has been together for more than
15 years, some of us have been together for 25 years. You know, at the same time,
you want to be in a place that that, that you're having fun, you're still finding
interesting and and you're able to kind of you know, still get that still get that
buzz or still get that high off of going out and making a successful investment in
seeing it come to fruition.
Matt Waller 26:16
Well, Joshua, this has been so interesting. Thank you so much for taking time to visit
with us and congratulations on your remarkable career.
Josh Pack 26:28
Well, thanks for having me.
Matt Waller 26:29
On behalf of the Sam M. Walton College of Business, I want to thank everyone for spending
time with us for another engaging conversation. You can subscribe by going to your
favorite podcast service and searching. Be epic be E P IC
Matthew A. Waller is dean emeritus of the Sam M. Walton College of Business and professor of supply
chain management. His work as a professor, researcher, and consultant is synergistic,
blending academic research with practical insights from industry experience. This
continuous cycle of learning and application makes his work more effective, relevant,
and impactful.His goals include contributing to academia through high-quality research and publications,
cultivating the next generation of professionals through excellent teaching, and creating
value for the organizations he consults by optimizing their strategy and investments.
