Sculptor Capital Management Inc (SCU) 2007 Q4 法說會逐字稿

Good morning everyone and welcome to the Och-Ziff Capital Management's 2007 fourth-quarter and full-year earnings conference call. My name is Michelle and I will be your coordinator for today. At this time all participants are in listen-only mode. All lines have been placed on mute to prevent any background noise. (OPERATOR INSTRUCTIONS). I would now like to turn the call over to your host for today Miss Tina Madon, Head of investor relations. Please proceed.

Great; thanks, Michelle. Good morning everyone and thanks for joining us for our inaugural call. With me today are Dan Och, our Chairman and CEO; and Joel Frank, our Chief Financial Officer. Dan will review our 2007 business results, Joel will take you through the details of our 2007 fourth quarter and full-year financials, and Dan will conclude with comments on our strategy for growth in the coming year. After that we will take your questions.

I would like to remind you that today's call may include forward-looking statements. These statements reflect the current views of Och-Ziff Capital Management Group with respect to, among other things, future events and financial performance, many of which by their nature are inherently uncertain and outside of our control. Actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements. The Company does not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise. Furthermore, no statements made today during this call should be construed as an offer of any of our funds.

Today's call is being recorded and is copyrighted material of Och-Ziff Capital Management Group. A replay will be made available later today via our website at www.ozcap.com. Now let me turn the call over to Dan.

Thank you, Tina. Good morning everyone and welcome to our first earnings call since becoming a public company last November. It is certainly an exciting and important milestone for us. We appreciate your interest in our Company and we look forward to a long-standing relationship with the investment community. I will briefly update you on our performance and results year-to-date and then I will spend some time later addressing our 2008 outlook and, as Tina mentioned, the opportunities we see.

Perhaps most important, we are on track with our growth initiatives for 2008. As we said on our roadshow, our objectives for the coming year are twofold. One, to grow our existing funds by extending our track record of investment performance; and two, to increase the investment strategies and geographic reach we can offer to our fund investors through the growth of our private investments business.

There is no question that January was a difficult month for the equity markets globally, but as you can see from our disclosed returns, we were successful in preserving capital by actively managing exposures in and across each of our funds. While we've not completed the month of February, the diversity of our operating model in terms of the number of strategies we employ and the breadth of our geographic presence, clearly provides significant benefit in navigating challenging market conditions. Now let's turn to our business results for 2007.

Before going through our results in detail, I would like to remind you of our strategic focus, to deliver consistent, positive, risk-adjusted returns to our fund investors throughout market cycles. This focus, characterized by our constant attention to risk management, capital preservation and a dynamic capital allocation process, is executed across all aspects of our business on a daily basis. It is a key consideration in deciding which new investment strategies we choose to implement or which new geographic markets we decide to enter. Additionally, our one-firm P&L ensures that we are all operating towards a common goal -- serving the best interests of our fund investors and that we are therefore aligned with both our public and fund shareholders.

In 2007, we produced strong results and advanced many of our strategic goals, including: the positive absolute returns in each of our funds; the continued development of additional investments platforms to create new opportunities for our fund investors; the growth we achieved in assets under management; the increase in our Economic Income, which is a key performance metric for our business; our strategic relationship with Dubai International Capital; and of course becoming a public company, which has positioned us to capitalize on a number of growth opportunities globally.

I'd like to make a few comments about our 2007 performance. 2007 was a challenging year for the financial markets but a year in which our model served our fund investors well. During the past 12 months, risk related to subprime mortgages along with the ensuing credit crunch hurt many well-known financial services firms and led to extremely volatile markets. This was particularly evident in the third quarter when we saw a mid-quarter decline of 10 to 15% in the global equity markets, and in the last two months of the fourth quarter, when we also saw broad market declines.

It is important to remember that our fund investors are primarily institutions who value non-volatile returns as compared to the capital markets, and the value of our mandate was readily apparent in recent months. Our fund investors consider preservation of capital during periods of market decline equally important to attractive returns when the capital markets experience positive performance. We believe that we delivered both during 2007. We expect to continue to do so in 2008 and over the long term.

Against this backdrop, our flagship Master Fund generated an 11.5% net return as of year end; our European Master Fund 14.8% net, our Asian Master Fund 12.2% net and our Global Special Investments Fund 17.2% net. These returns were generated with less than half the volatility of the capital markets and with a very limited amount of leverage. As has been the case throughout our 14-year history, we will continue to maintain low leverage and manage exposures based on what we see in the markets, while at the same time working hard to generate strong returns for our fund investors.

Our business is extremely diversified by strategy and geography. This diversification helps us manage risk and generate consistent performance. We deploy capital based on opportunity and with a view on risk exposures.

As you may recall from our prospectus, there were two charts we included to put our investment performance into context as compared to the S&P 500. The first showed -- year by year since our inception in 1994 -- our cumulative net returns for the months in which the S&P 500 total return was negative. The second showed the one-year, three-year and five-year net returns, volatility and Sharpe ratios of our OZ Master Fund compared to the S&P 500.

We've updated those numbers for you. They're included in the financial supplement pages which accompany our press release. Let me quickly highlight the key takeaways.

Quite simply our performance in down months for the S&P 500 is what I think best differentiates Och-Ziff and our investment approach. Last year, investors that were in the OZ Master Fund during the five months in which the S&P 500 was down, experienced a cumulative net return that was 13 percentage points higher than the cumulative total return of the S&P 500 in those same months.

On an absolute basis, the OZ Master Fund generated a cumulative positive net return of 1.4% for those five months compared with a cumulative negative total return of 11.6% for the S&P 500 during that same period. The consistency of our performance, especially in volatile markets, is indicative of our approach and a major reason why institutional investors continue to invest in our funds.

Although we focus on delivering positive absolute returns rather than returns that seek to outperform an equities benchmark, I do believe that an understanding of our success relative to a broad market index such as the S&P 500 provides a useful indicator of the attractiveness of our returns. It is important to note that as of 12-31-2007, we meaningfully outperformed the S&P 500 for the one-year, three-year and five-year periods with less than half the volatility.

As a reminder, we do not try to predict when market declines are going to occur. We always run our funds with low leverage and a very active risk management process; again why institutional investors continue to be attracted to our funds. Now let's talk about assets under management.

Capital net inflows and performance led to $33.4 billion in assets under management at year-end, a net increase of $10.8 billion, or 48%. Joel will provide additional detail on this increase, but at a macro level we saw net inflows across all of our existing funds, which due to our geographic and product diversity have a lot of room to expand.

Additionally, the after-tax proceeds we raised through our IPO and the share sale to Dubai International Capital, were important drivers of the increase. These proceeds were put into our Global Special Investments Fund, which we feel will accelerate the growth of our private investment platforms and private portfolio.

We expect these to become meaningful contributors to our earnings power over time, and to provide our fund investors with new products from which to gain different exposures and risks. I will talk more about these opportunities later on. Now let me turn the call over to Joel who will take you through our financial results for the 2007 fourth quarter and full year.

Thanks, Dan. I will briefly review our GAAP results, but I will spend most of my time reviewing Economic Income and Distributable Earnings, which we use to measure the financial success of our business. Economic Income is comprised of management fees plus incentive income less operating expenses. We believe this simple financial model is the most meaningful indicator of our performance. Distributable Earnings is calculated by taking Economic Income less income taxes, assuming all Group A equity units and restricted stock units were converted on a one-to-one basis to Class A shares.

For 2007, we reported a GAAP fourth quarter net loss of $775 million and a full-year net loss of $915 million. As discussed in our press release, these losses included expenses associated with our reorganization prior to our November IPO and other non-cash adjustments which flow through our GAAP numbers for 2007.

These adjustments will continue to flow through our GAAP numbers and will continue to negatively impact GAAP net income for the next five years. However, as I said previously, Economic Income is how we measure the financial success of our business and therefore I will now review those results in detail, beginning with revenues.

Management fees for the full year of 2007 were $477 million, 57% higher than in 2006, driven by the net increase in assets under management, as Dan previously mentioned. The increase in assets under management was split between net capital inflows of $7.6 billion and investment performance of $3.2 billion. In the fourth quarter management fees were $135 million, 53% higher than for the same period in 2006.

As a reminder, our management fees range from 1.5% to 2.5% of assets under management and are collected in cash at the beginning of each quarter. Our current average management fee is approximately 1.7%. Incentive fees, which are 20% of our fund profits, were $637 million for the full year 2007, which was a 2% decrease from 2006. The majority of the incentive fees are recognized annually at year-end. There are no claw backs, no hurdle rates -- It's just cash flow to the bottom line.

Incentive fees are tied to the absolute return of our funds each year. Although our incentive fees declined slightly year-to-year due to the challenging market conditions, 2007 was actually a very strong year for us as we continued to provide positive absolute returns and continued to outperform the equity markets during volatile periods. Therefore, we expect the effectiveness of our performance and our continued focus on preservation of fund capital will lead to growth in assets under management going forward. And growth in assets under management will lead to growth in revenues.

Operating expenses are comprised of salaries and benefits, variable-based discretionary bonuses and non-compensation costs. Bonuses are determined and expensed at year-end as they are based on overall results. Incentive fees are not crystallized and earned until the last day of the fiscal year and therefore we don't pay bonuses until year-end.

Salaries and benefits for the full year 2007 were $47 million, a 31% increase over 2006. The increase from year-to-year is due to growth in headcount related to the infrastructure needed to become a public company, and the expansion of our business.

Although we do expect headcount to continue to grow with the growth of our business, we don't expect the same magnitude of growth going forward. Headcount at year-end 2007 was 399 people globally versus 267 at year-end 2006, an increase of 49%. Growth in support services was 82 people, or 62% of the increase, and investment professionals and related support staff was 50 people, or 38% of the increase.

In the fourth quarter of 2007, salaries and benefits were $16 million, 26% higher than the fourth quarter of 2006, for the same reasons stated previously concerning the IPO and the expansion of the business. In general, 15% of management fees, as reflected in Economic Income, is a good proxy for our annual salaries and benefit expense.

In 2007, salaries and benefits were 10% of management fees, versus 12% in 2006. This illustrates the scalability of our business, meaning that assets under management growth will result in higher management fees, which we expect to more than offset any corresponding increase in the salary and benefits expense.

Bonuses are discretionary and variable and are our largest expense. Everyone in this firm is compensated based on the overall economic results of the firm and bonuses are variable and adjust accordingly. For the full year 2007, bonuses were $168 million or 13% higher than 2006, due to growth in staffing related to the IPO and to support the expansion of our business.

Bonuses are on average 15% of total annual revenues, as reflected in Economic Income, and have historically been paid in cash. For 2007, bonuses were 15% of total revenue and for 2006, 16%. Bonuses are mainly paid in cash. Going forward, a portion of bonuses may be paid in equity under our 2007 equity incentive plan, but the fair value of that equity will be included as an expense for Economic Income purposes.

Non-comp expenses for the full year 2007 were $100 million or 116% higher than 2006. 43% of this increase was driven by the interest expense related to our $750 million term loan, which was initiated in the third quarter of last year as part of our overall capital raising. An additional 27% was due to costs associated with our reorganization related to the IPO, and the remainder of the growth is general expenses related to the expansion of the business and infrastructure, examples of which are professional fees, insurance, technology and so on.

For the fourth quarter of 2007, non-comp expenses were $31 million or 129% higher than the 2006 fourth quarter. Non-comp expenses are generally 15% of annual management fees as reflected in Economic Income. For 2007, non-comp expenses were 21% of management fees and in 2006, 15%. Now that our IPO is complete, we expect these expenses to normalize, and therefore the 15% ratio to management fees will be more reflective of future results.

Given that management fees have historically more than covered non-comp costs, we believe that any increase in fixed expenses should be more than offset by the increase in management fees relating to the growth in assets under management.

So again, now that our IPO has been completed, we expect expense growth to normalize and our pretax margins to be sustainable.

Economic Income less taxes results in Distributable Earnings. Distributable Earnings per share is derived assuming all Group A equity units and restricted stock units were converted on a one-to-one basis to Class A shares. Our policy is to pay out substantially all of our annual Distributable Earnings, less cash needed for operating purposes, in four quarterly dividends. Dividends for the first three quarters of each year will be inclusive of management fees less salaries and benefits and non-comp expenses and the fourth quarter dividend will include incentive fees and bonus expense.

Distributable Earnings for the full year 2007 were $644 million, or $1.61 per adjusted Class A share, and for the fourth quarter 2007 were $506 million, or $1.27 per adjusted Class A share. The fourth quarter dividend was $1.20 per Class A share as we retained cash to fund non-P&L related cash outflows in connection with the IPO, the operation of the business and investments, which we believe will benefit our Class A shareholders.

The most significant components of retained cash were: $17 million of IPO related costs which were treated as a reduction to the proceeds recorded as paid in capital on our balance sheet; $5 million in prepaid expenses; and $5 million of investments in new businesses.

We continue to expect to pay out substantially all of our annual Distributable Earnings through our quarterly dividends.

Our 2007 effective tax rate on annual Economic Income, for purposes of calculating Distributable Earnings, was 20.6%, which again assumes all Group A equity units and restricted stock units were converted on a one-to-one basis to Class A shares. However, the tax rate going forward will vary depending on the amount and flow of revenues and expenses through our legal entity structure.

As an example, for the first three quarters, since revenues are principally comprised of management fees which flow through the corporate portion of our structure, the estimated tax rate will be between 43 to 45%. In the fourth quarter, when we earn incentive fees which flow through the LLC portion of our structure, the tax rate will be significantly lower. Although we can't predict the actual mix of management and incentive fees, applying the same mix as 2007, we expect that a 20 to 22% tax rate on annual Economic Income would be an appropriate estimate of our effective tax rate for 2008. Now, let me turn the call back over to Dan for some additional comments.

Thanks, Joel. We look at 2007 as a year of strong performance, growth and strategic progress for our firm. Becoming a public company was the logical next step forward and will help us to further capitalize on our track record and global presence.

Despite markets which continued to be challenging and appear likely to remain so for the balance of the year, we are firmly focused on executing our growth strategy. Going forward, a tangible driver of growth for our business is clearly continuing to attract assets into our existing funds by continuing to deliver strong, consistent investment performance, and by broadening and deepening our relationships with our fund investors.

We also see an opportunity to increase our assets under management from large institutional, international investors. As we said on our roadshow, we believe we should continue to increase assets under management at the high end of the growth rate for the hedge fund industry if we continue to build on our track record of investment performance and new product introductions.

But, as we also said on our roadshow, an equally important and tangible driver of our growth is the extension of our investment products and strategies through our private investments business. This includes our Special Investments Fund as well as new product introductions that we plan to make over time. Our private investments business is global with dedicated investment teams in New York, London and Hong Kong.

Throughout our history, we have been able to successfully identify and quickly respond to opportunities to enter new growth areas. We have invested in privately negotiated transactions since our inception with more than $7 billion of capital committed cumulatively since that time in more than 150 transactions in 33 countries to date. We've achieved a net IRR in private investments in excess of 20% with minimal use of leverage and we believe that these opportunities represent some of the most important asset classes of the future.

Through this platform we seek wherever possible to partner with management teams, private equity firms, corporations or finance providers. Our approach is to make flexible commitments across the capital structure from senior debt through common equity with average durations of 6 to 24 months and minimal use of leverage.

Think of this business as capitalizing on the investment opportunities that exist in the space between what hedge funds focus on and what private equity firms focus on. These types of opportunities we pursue fall into three categories -- thematic investments, based on macro trends we see around the world such as energy and water desalination; geographic investments, such as African natural resources and Indian real estate; and market specific investments, such as distressed loans or distressed mortgages.

In areas such as real estate and energy and alternative energy and in geographies such as Africa, Latin America and Central Europe, we already have strategies in place -- each with seed investments of several hundred million dollars -- and many of which we believe can grow to be multibillion dollar platforms over time. We discussed many of these strategies on our roadshow and as I stated earlier on the call, our growth plans are intact.

The growth potential in assets under management of these opportunities is why our partners made the decision to re-invest the capital raised through our IPO and the share sale to Dubai International into our Special Investments Fund. Having the capital available now significantly increases our ability to realize this potential as we expect that the pipeline for these types of investments will only accelerate.

Now let me walk you through an example to illustrate. You may have seen our announcement the end of last month on the creation of Africa Management Limited, a joint venture between ourselves, Mvelaphanda Holdings and Palladino Partners. This transaction gives the JV partners a platform to invest in both the private and public markets across Africa, with a particular focus on natural resources and related businesses.

Our initial focus will be on mining and oil and gas exploration. We have teamed with partners with the local market expertise to help facilitate this. We believe that this strategy will be one of the ones that grows over time to be significantly larger in committed capital than it is today.

With that we will now be happy to take any questions that you have.

(OPERATOR INSTRUCTIONS) Roger Freeman, Lehman Brothers.

I guess I was wondering if you could give us a little bit more of a sense, I guess within the Master Fund, what strategies have worked particularly well, which ones have not, any shifts you can talk about in AUM allocation within that fund?

Sure, why don't I talk about it in the timeframe starting last July when things in the market seemed to change? As you know, we always run our funds with very low leverage, very well hedged and extremely well risk managed. So we have not had to make material changes to the portfolio.

At the margin, we did reduce our merger arbitrage exposure in July of last year. We reduced it from approximately from low teens to very low single digits. Just based on our 25 years experience in merger arbitrage we had a view that once buyers and their lenders wanted out of many deals, it was a much less attractive investment area,so we reduced. As you also are aware from the roadshow we had a near zero allocation to credit coming into July of last year. We've increased that allocation to about 10%, and we see more opportunity in that area going forward.

To follow-up on the credit comment, so can you talk about what you are doing there? There have been reports that you have been buying up residential loans. Would that be in there or is that more in the special opportunities area?

Sure, one of the tenets that this firm was founded on is the concept that luck is when preparedness meets opportunity. And so the mortgages you're referring to, we bought a controlling interest in a subprime mortgage servicer approximately two years ago called Residential Credit Strategies, with the thought that should an opportunity or an unraveling develop in the subprime mortgage market, having our own servicing capability would create a substantial advantage. To this point, any mortgages that we purchased have been through Residential Credit Strategies, which keeps all of the risk -- it's a pure equity bet. It keeps all of the risks off the balance sheet.

Okay, I guess what are your thoughts in terms of what you're seeing through the servicer? Is pricing at what you would consider dislocated pricing or is it actually reflective of the types of default rates you're seeing?

It's a market by market, and a loan pool by loan pool decision, but let me put it in numbers. To this point, we have only invested a small amount of capital. We have been in discussions with several institutional investors for months about this opportunity and how it will develop. We're likely to get more aggressive over the next 6 to 12 months in this area. But to this point, we have not invested significant capital.

Not to beat credit to a dead horse here but the increase in allocation of 10% is it mostly around residential credit or are you looking across into commercial, corporate --

Almost all of increase thus far is senior secured loans. As I said, our investments in mortgages to this point are extremely small.

Got it, okay. In the special investment area, I think, as I recall from the roadshow, one of the things you needed to do was to increase AUM there and bring some of the partner money in so that you had more assets behind it as you went out to market it to other LPs and investors. Now that you have done that, what kind of reception have you gotten in meetings you have been having? Do you feel good about your ability to bring in the substantial inflows over the course of the year?

We do. We've gotten very good reception, specifically toward some of the new products that we talked about on the roadshow. Over time, as I mentioned on the call, we expect these to develop, many of these to develop as separate funds. And there has been a substantial interest in many of those.

Okay, and then on fund of funds flows can you talk a little bit about how those were during the quarter? They have been a little bit erratic across the industry over the past couple of quarters.

Our fund of funds flows were very consistent with how they have been historically. We didn't see any significant changes. I think I am aware of what you are referring to. I think that as you saw since our performance was so consistent, and we didn't feel any need to make major changes to the portfolio as a result of the environment, we did not see any substantial increase in flows either way from fund of funds.

Can you just tell me what your leverage was on the long and short side in the fourth quarter versus the third quarter?

That's not a number that we're going to disclose on the call. But it's not substantially dissimilar from what was included in the S-1.

Marc Irizarry, Goldman Sachs.

Maybe you can give us an update on the mix of both clients and assets in terms of geographies and where you see that sort of heading, Dan, over the next couple of months.

Let me give you the current numbers and then Dan can comment on where he sees it heading. North America in terms of breakdown of geographics, North America is about 56%, Europe is about 30%. The remainder of it is mostly Asia. And in terms of mix of type of clients, about 37% of it is fund of funds, about 24% foundations, 12% corporate, 12% pension and then a mixture of family and affiliated.

I will add one thing on the fund of funds. Most of the fundof funds that invest in our funds are really institutional, meaning that they are a conglomeration of other types of investors who tend to invest through fund of funds but have been with us for a very long time.

And in terms of future outlook, look we're going to stay very focused on our current client base. They are extremely important to our business and they know that. We are extremely interactive with them and those relationships will remain extremely important.

Clearly, there's a very substantial opportunity to raise capital from large international investors and that is something we're focused on. We think there's an opportunity to further our relationships with some of the very large domestic investors and in the future, there are other pipelines of assets that may prove attractive to us as well.

Dan, can you just expand a little bit then on geographies as well?

You mean in terms of where we expect -- which geographies we expect to source capital from?

Source capital and also deploy capital.

Well look, in terms of sourcing capital, Joel gave you a rundown of where we are. We don't have any substantial plans to change that mix although I think we are all aware of what we see in the world, which is that at the margin several of the international pools of capital are becoming significant and obviously that's something we would intend to focus on.

In terms of deploying capital we have not materially changed our geographic allocations. We don't really plan to materially change the geographic allocations. Our adjustments -- let's talk about what I went through on the prior question. Reducing our merger arbitrage was related to the investment discipline. Increasing credit exposure is related to the investment discipline. Each geography poses its own challenges and its own opportunities, but we don't have any plans to systematically change the geographic applications at this time.

And I don't know if this is a number you can share with us, but can you give a little bit of sense of how much of the fund is in cash and how quickly you can get liquid if you need to be or sort of invest more heavily?

I can't share a specific number, but we are extremely -- as is always the case, we are extremely liquid. In addition to our substantial liquidity, we early last year, as we discussed on the roadshow, early last year when liquidity was freely available, we established additional standby lines of credit at very, very low rates and very easy terms, just to have as added firepower when and if the world changed. So the portfolio is extremely liquid, extremely diversified, substantial liquidity and buying power, and in addition, we have several billion dollars of additional capability.

Great, and then just on special investments two questions. First one is you touched a little bit on some of the distressed loan opportunities. I was wondering if you could give a little more color there. Secondly as far as the LPs interest in special investments, have you seen that change at all over the last couple of months, given the volatility and concerns over liquidity more broadly? Thanks.

In terms of your second question, we have not seen a change in terms of the LPs. If anything they may be more interested. They understand that having flexible capital, having the global reach that we have, having the investment teams, having the relationships and the product areas is likely to create substantial opportunities. So, if anything we've seen a greater increase in the interest in that area. And I'm sorry -- just repeat the first part of your question.

You touched a little bit on distressed opportunities on the private side and I was wondering if you could give some or color there outside of maybe mortgages?

Sure. Distressed opportunities, I want to be clear. When we said we increased our credit allocation to approximately 10% that is not in the Special Investments area. That is in the liquid, tradable credit area, primarily senior secured loans.

In the Special Investment area, distressed is something we're very focused on. We have not yet allocated substantial capital. We believe we are at a crossroads in the markets where sellers don't want to adjust to what we think are the appropriate prices unless and until they have to. So, we have seen a small number of cases where they have had to. We expect to see more going forward.

Hojoon Lee, Morgan Stanley.

A number of other managers had a tough run so far this year although the group has been holding up better versus long-only. Could you give us a sense of what you are seeing in terms of sales and redemption trends, perhaps compared to last year? And second, are you seeing or would you expect investors to increase their allocations to hedge funds in this environment or are they becoming increasingly cautious towards the group as well?

Sure, if you go back to the exhibit that we updated in the press release, which shows our performance during down months for the S&P, I want to remind you as I said on the call, this is what has historically differentiated us from most other investment opportunities, and this has been amongst the most important and attractive reasons for institutional investors who want to partner with Och-Ziff.

So, assuming we can continue to perform as we have for the prior six to seven months and throughout our 14-year history, we believe this will continue to strengthen our brand and strengthen our attractiveness to institutions. So far, that is what we have seen in terms of meetings, relationships, flows and expectations.

Great, thanks. And just second, are you seeing any major shift in allocations towards strategies that seem to be doing better recently such as macros?

You mean by other funds?

Just hedge fund investors in general, whether they're shifting allocations or whether it's a fund of fund or other institutional investor, across hedge fund strategies.

We haven't seen any of those types of effects but don't presume just because we are that other funds tell us exactly what they do. So, I don't mean to imply that it doesn't exist, but there's nothing that we have seen that makes us answer yes to that question.

Lastly, assuming performance is similar to levels in 2007, could you just talk a little bit about how you see your margins going forward for the next several years?

Sure, look based on the scalability of our model, which is asset growth drives management fee growth, our management fee growth has more than offset expenses in the past and going forward, and we expect to be able to sustain the margins based on that model.

Robert Lee, KBW.

The question I have on the private investments -- how does that -- how should I think about how that plays into your risk-adjusted returns because I would assume that many of those -- you don't have market pricing on it, where you have got to determine the valuation in some way, shape or form? To what extent do you think your risk-adjusted returns really benefit from the fact that you have maybe 15 or 20% of your assets in these private investments?

To answer your question first the Master Fund just say you know 14% of the assets are invested in privates. But we mark to market all our securities, including special investments, to fair market value on a monthly basis, and just so everybody knows, we are working with an outside service provider to give us negative assurance on those valuations. So everything is marked to market and fairly treated within our performance numbers.

Joel, I think I missed your comment earlier when you gave a little bit of guidance about how we should think about comp and benefits related to management fees. Could you repeat that for me?

Sure, salaries and benefits range around 15% of management fees and have in the model historically and that's what we expect going forward. Again, just to repeat the scalability of the model, asset growth drives management fee growth, revenue growth and that of course, as you have seen in the past and we expect in the future, will cover growth and expenses -- fixed expenses -- going forward.

Lastly, I think you also mentioned that the presumption is going forward you will include some equity based compensation as a part of year-end bonus but that your expectation is to include the, I guess the amortization of those awards, in economic net income, just to back that out, should I assume that any shares granted will also not be included in the adjusted share count?

No, any shares granted obviously will be included in the adjusted share count, and as the equity awards, as they amortize, and as we provide them to individuals in place of cash compensation, will be in the economic numbers.

Ken Worthington, JPMorgan.

This is Tim Shea filling in for Ken this morning. Just two quick questions. The first one that we have is on the pipeline for new mandates, we were wondering if you have any visibility into what that is over the next few months.

Sure, the pipeline -- we don't have a numerical pipeline, but the level of interest, the level of meetings, the response, the feedback is consistent with what we have had for the past several years. So, while we encourage people not to look at month-to-month numbers, since sometimes these investments can be lumpy, we are confident the pipeline is consistent with what we have seen historically.

The second question that we have is just on the assets under management. Do you have the latest numbers as to what the breakout is on the fee-paying versus non-fee-paying assets?

I think what you have to assume is, as I said earlier, that our average management fee rate is approximately 1.7%. So, if you apply that the total assets under management, that should get you where you want to be.

Cynthia Mayer, Merrill Lynch.

I guess I am wondering what the growth of special investments will do to your earnings pattern. These are investments that mature over 6 to 24 months. Would you recognize them as performance fee assets? Would you recognize performance fees as they mature and would it make your earnings less lumpy or have no effect, do you think?

We recognize performance fees and special investments when we realize the profit. That is how we have always done it historically. It shouldn't have any material effect on the earnings stream, as at every point in time, there are special investments which are being realized in that quarter which were purchased in the past, as well as special investments purchased during that quarter where we hope to realize the profitability in future.

And let me add, just so you understand, that you can see the growth in the assets and they're actually valued on a monthly basis. Even though the incentive fees aren't there, you get a sense for what the performance is going to be and what the bifurcation is.

A follow-up to the geographic allocation. If you look at all your assets, can let us know what percentage is invested outside the US now?

Approximately 50%.

Okay, let's see -- a follow-up to the restricted share question. If you're going to award shares, would you expect then to be buying back shares to keep the share count even?

We don't have a formal policy in terms of share buybacks. But of course, as we have said previously, we will buy back shares to adjust for dilution purposes. So there's no formal plan, but our expectation is to consider that and implement that when we feel it's necessary.

Okay and how confident are you that the special investments will draw new money as opposed to sort of cannibalize existing accounts and just have some clients move some money over?

If you look at special investments to include not just the special investments funds but the new products we're rolling out, we're extremely confident. And that is based on --

And the new money you're getting -- can you sort of characterize the new money you're getting and where it's going?

Sure, let me just give you some of the reason for that confidence. Based on discussions that we're having, much of that new money is going to come from new relationships. So by definition that doesn't cannibalize.

Right.

We also believe, we believe based on discussions that these investment ideas, in addition to our international presence, our reputation and history with international investors, as well as being a public company, which is relevant internationally -- all of that together we believe is creating an advantage for us with some of the large international investors.

So, when you look at your pipeline are you seeing more interest in the special investments than in, say the Master Fund? Can you give us a sense of where you expect your net new flows this year to go to most?

Sure, on an arithmetic basis, I wouldn't expect to see more in the special investments. But let's remember a 10% increase in the amount allocated to the multi-strategy funds is approximately $3 billion. $3 billion would be more than 100% increase in the amount allocated to special investments. So, arithmetically we would expect -- we would expect more to the multi-strategy funds on a dollar basis than to the special investments funds. But in terms of growth rate our expectation is to see a higher growth rate at the special investments level.

Okay, I guess you mentioned that basically so far, so good in terms of February performance and I'm just wondering if you can -- does that mean you are positive so far for the month?

As you know, we don't disclose our numbers until the second business day but we're comfortable that our risk management and asset allocation is working according to plan.

Okay, I think that's it for me.

Prashant Bhatia, Citigroup.

Just looking at the flows, and I guess pulling out the $1.6 billion in IPO related flows, it looks like flows were up year-over-year. But there seems to be a downward trend in each of the quarters. Is there something driving that downward flow trend?

No, we continue to believe that if we continue to generate performance and continue to create new products that we will remain at the high end of the growth rate in hedge fund industry. Clearly, any trends in the hedge fund industry, positive or negative, are likely to impact our growth rate as well, but no trend -- we continue to see strong interest from current investors, strong interest from new investors, strong interest internationally and strong interest in all products.

Okay and just on the performance front, I think said you have about 50% of your AUM invested outside the US. I guess, is it appropriate then to use the S&P as a benchmark to gauge your performance, because the S&P has lagged several major global indices for quite some time now. So, I guess on an apples-to-apples basis, do you think that's appropriate to use the S&P?

Sure, as we said we are not sure any equities benchmark is really the best benchmark to use. Our institutions tend to use an absolute return barometer. We've done extremely well and certainly satisfied, and in most cases exceeded, their expectations. Anyone is welcome to use any index they like, but the first two months of this year, year-to-date 2008, international markets are down something like 15%. Obviously, if we threw international markets into the mix for 2008, our performance would look even better.

We just for 14 years and in the S-1, we've used the S&P 500, that is why we threw it in. Clearly anybody who wants to run our numbers, which are publicly available, against any benchmark, is welcome to.

But the major focus, is preserving capital, it's not just when equity markets go down. Investors also count on us to make sure in hindsight that we didn't have exposures to CDOs, that when credit imploded we had a near zero exposure; that when merger arbitrage seems to be susceptible to deals falling apart, we had reduced. All that goes into the mix and we are quite demanding on ourselves.

Okay, so in terms of client appetite, I guess absolute clearly matters more to your client. I guess what would you -- how much does relative performance matter, as you think about client willingness to give you new dollars?

Assuming that we're able to preserve capital and generate steady, consistent absolute returns, clients will continue to invest and increase their allocations to our funds. It is interesting to note, if you just look at the trends throughout the years. If you look at the numbers, which you have we have, grown assets consistently through this consistent performance.

Okay, I think you pointed to exhibit 10 where you talk about returns during down months being better. I guess how would that exhibit look in terms of up months versus the S&Ps? Do you tend to underperform there -- or how would it look?

If you go back to the -- for those of you who were with us on the roadshow presentation, you'll remember when we broke our 14-year history into three periods -- the '94 to '99 period -- and forgive me if my numbers are slightly off --but I believe the S&P was up about 25% per annum, our fund up about 24.5%. Then there was the 2000 to 2002 period where the S&P dropped 14% per annum and our fund was up about 9%. And the 2003 to 2007 to that date our fund was up virtually in line with what I believe was a 13% increase in the S&P 500.

Obviously with our substantial outperformance for the past six months if we updated the numbers we would be ahead of the market again. So, we feel -- our focus is on risk management, but it's also on generating return.

Okay and then just in terms of going forward on the GAAP versus economic reconciliation, should we expect all of that, the reconciling amount, to be non-cash or will there be a cash component to it as well?

It will all remain as non-cash and if you look at the reconciliation in the footnotes you'll see those are typically non-cash items.

Just finally on the strategic relationship that you have with Dubai International, any kind of thoughts on how that could develop over time? Is there a way to source more assets or is there anything concrete you can share with us?

We think it is going to benefit both parties in many ways. It is an extremely good relationship. And speaking for our side, certainly we're extremely pleased with the relationship. We believe they are as well.

Just one more -- you had talked about doing 150 or so private transactions. Could you just maybe split apart how many of those are sourced by your team, how many are externally sourced? How do you get those? How do you get a foot in the door on those transactions?

We have 29 investment professionals as well as the full resources of the firm, including myself, constantly focused on sourcing those opportunities.

So those are 100% internally sourced?

No, but the vast majority are internally sourced.

Roger Freeman, Lehman Brothers.

Just a couple of follow-ups. In special investments in this distressed area, which you really haven't committed sounds like much capital to, where do you think there are some opportunities? Is financial services an area that you are looking at?

We are looking at all areas of dislocation -- financial services, credit, retailers, real estate. We are looking at the areas of growth around the world. Let's not forget, we've got large, large teams deployed internationally, and we don't think international growth has disappeared.

We are also looking -- we discussed some thematic investments. We have investments we've been working on for years, thematically and geographically. So, energy and alternative energy and water desalination, we think there's going to be big investment opportunities for the future. We have invested a lot of time and resource in them. We think products will develop. Geographically, African resources, Indian real estate, Latin America -- once again, invested years in these areas and we think opportunities will develop. So we're going to be patient, but we think we will have a very strong pipeline in that area.

On the distressed, specifically around financial services, there's been a lot of capital raised, and you haven't participated in any of that. I'm wondering is it because the amounts here have been so big, that you just can't really participate, given the size of that fund right now? Or is it valuation?

The size is not the reason. We have not looked at all the transactions, but we have been involved in some of the transactions, and to this point I've chosen not to participate.

Got it; okay. And then as you talk about -- I think maybe you answered this already -- but as you talk about some of the new products in Special Investments, is that going to be sort of new thematic based types of products? Is that the way we should be thinking about that?

I think it will be -- think about them as investment platforms that we develop. So, one we discussed is the African resource joint venture, Indian real estate, Latin American investment opportunities. Energy and alternative energy, we mentioned water desalination. You can call them thematic, you can call them geographic,I don't want it to get too caught up in the nomenclature.

But we're happy -- I hope those examples give everyone a sense of how broad and well-developed our investment platform pipeline is. If the examples I have given, coupled with what we discussed in the roadshow, don't give you that please let me know because it's important you understand that.

That's helpful. Just lastly just on the dividend again you said you were going to pay out substantially all of the Distributable Income and a lot of the GAAP I guess this quarter was because of IPO related issues. Is it sort of fair to think you'll payout sort of maybe 97, 98% of that over time?

What we're going to do is, we will assess the cash needs of the business, and based on the cash needs of the business, which we think will be positive for our public investors, we'll make a decision on actual distributions. But as we said, it will be substantially all of the Distributable Earnings.

That concludes the question-and-answer session. I will now turn back to Mr. Och for closing remarks.

Thanks, Michelle. In closing, I appreciate your time and interest in Och-Ziff. I want to leave you with three themes that I believe are very important in understanding our Company and the tangible growth opportunities that we believe will generate significant earnings power over time.

The first is our track record in delivering consistent positive risk-adjusted returns to our fund investors throughout market cycles, with low leverage and low volatility. We have been successful throughout our entire 14-year existence, good markets and bad, as our assets under management have grown from $500 million to $5 billion to the $33 billion we have today. This track record is what differentiates us in the marketplace.

The second is that we are on track with our growth initiatives for 2008 and are delivering on the priorities we discussed on our roadshow -- growing our existing business, creating new opportunities for our fund investors by leveraging our international presence and diversification; and increasing our Economic Income, the key performance metric for our business.

The third is that we firmly believe the opportunities we're capitalizing on in our private investments business represent some of the most important asset classes of the future. We see this platform as a significant driver of our earnings power going forward.

We are proud of our accomplishments thus far and we are excited to about the road ahead. As a newly public company we believe we are in an excellent position to seize on the significant opportunities we see before us with the support of highly-talented investment professionals, well-respected strategic partners and world-class investors. Thank you very much and I'd like to turn the call back to Tina.

If you have any additional questions please don't hesitate to give me a call at 212-719-7381. Thank you everyone for joining us today and thank you for your interest in Och-Ziff. This concludes our call. You may now disconnect.