The latest stage in the slow shuttering of New York–based D.B. Zwirn & Co. came in late May, when its investors approved the transfer of about $2 billion in assets to crosstown rival Fortress Investment Group.
It’s a move that makes sense for Fortress in part because some of the holdings are similar to what the publicly traded alternative-investment firm already owns. Had the assets gone in a fire-sale auction, as they could have if Zwirn had been forced into bankruptcy, they might have fetched lower prices, driving down the value of assets held by Fortress. For example, both firms, according to a former Zwirn employee familiar with them, were lenders to radio-station chains Inner City Broadcasting Corp., based in New York, and Pappas Telecasting Cos., based in Visalia, California. Other investments on the books of both firms, according to the former employee, include loans made through Summitbridge National Investments, a Denver-based lender to small companies, and Petrobridge Investment Management, a Houston-based lender to oil and gas properties.
After a run of redemptions last year, managing partner Daniel Zwirn began closing the D.B. Zwirn Special Opportunities Fund, which at its height — in October 2006 — had more than $5 billion in assets. Zwirn’s main strategy was direct lending to middle-market companies, so his portfolio was highly illiquid; the wind down didn’t go well, because values were falling and assets were hard to sell.
By November 2008, according to the proxy proposal for the transfer of management to Fortress, “certain substantial investors had expressed a desire for changing the manager.”
Fortress had first looked at striking a deal with Zwirn as early as April 2008, but it did not make an outright bid until November. Goldman, Sachs & Co. and Blackstone Group were among the other firms looking at the portfolios, according to an industry source. In the transfer that closed in late May, Fortress paid $51 million for what was left of the D.B. Zwirn Special Opportunities Fund.
Neither firm would comment on the transaction, but Peter Briger Jr., the president of Fortress, told investors on a conference call shortly after the transfer that the firm had acquired the assets because it “could tie all aspects of the purchase together.” What he was saying was that Fortress had more expertise in the Zwirn holdings than did rivals, as it had similar assets.
Briger added that he anticipated that the workout would take four to five years, which is good news for Fortress because time is on its side. Now, for example, is a bad time for asset-based lending in oil and gas, which means it isn’t a good time to try to sell loans in that sector. And both firms still hold paper lent to companies through their joint ventures with Petrobridge, according to sources familiar with the deal.
“If investors have a choice, they do not want to be unloading their portfolio today,” explains Scott Johnson of GasRock Capital, a Houston-based competitor of Petrobridge’s.
Johnson points to the recent double whammy of a drop in commodities prices and the ongoing credit crisis: “If investors can hold out one or two years, until a better point in the cycle, they may well come out ahead,” he notes.
And although its assets have shrunk considerably — to $26.5 billion today from $32.9 billion at the beginning of 2008 — Fortress is in much better shape to wait around than Zwirn is.
