This week on the podcast Matt sits down with Josh 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. Josh 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.

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.

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.

Thanks for having me. I'm glad to be here.

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.

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.

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?

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.

When you mentioned intellectual property, I

immediately think of patents and copyrights, and trademarks.

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.

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.

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.

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.

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.

Fascinating. You've got the three different business

segments. Are they separate funds for each of them?

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.

Are your funds set up, like what you would expect

for an alternative investment where you have LPs and a general

partner, and

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.

Joshua, would you mind speaking to your

investments and activity in supply chain?

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.

This is such an interesting business, Fortress.

Would you mind speaking a little bit to your career? And how did

you get here?

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.

Would you mind speaking to the culture of

Fortress?

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.

Well, Joshua, this has been so interesting. Thank

you so much for taking time to visit with us and

congratulations on your remarkable career.

Well, thanks for having me.

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

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