Sculptor Capital Management Inc (SCU) 2008 Q1 法說會逐字稿

Good morning, everyone and welcome to Och-Ziff Capital Management Group's 2008 first-quarter 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). And I would now like to turn the call over to Ms. Tina Madon, Head of Investor Relations. Please proceed.

Great, thanks, Michelle. Good morning, everyone. We appreciate you joining us for our call today. With me are Dan Och, our Chairman and CEO and Joel Frank, our Chief Financial Officer. Dan will review our first-quarter 2008 business results, Joel will take you through the details of our quarterly financials and Dan will conclude with an update on our 2008 growth strategy. 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 LLC with respect to, among other things, future events, 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 revise any forward-looking statement, whether as a result of new information, future developments or otherwise. Furthermore, no statements made during this call should be construed as an offer of any Och-Ziff funds.

During today's call, we will be referring to non-GAAP financial measures, which are not prepared in accordance with U.S. generally accepted accounting principles. A reconciliation of our non-GAAP measures to the most directly comparable GAAP measures is available in our earnings release, which is posted on the shareholders page of our website.

Today's call is being recorded and is copyrighted material of Och-Ziff Capital Management Group LLC. Telephonic and webcast replays will be made available later today. You can find the details for both on 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 2008 first-quarter earnings call. We are glad to have the opportunity to speak with you today. I will briefly update you on our performance and results for the quarter and then I will spend some time later on discussing the progress we have made in building our private investments business. Perhaps most important, we remain on track with our growth initiatives for 2008.

The market environment during the first quarter was, by any dimension, extremely difficult. As U.S. economic conditions weakened further, credit spreads continued to widen and liquidity for credit products all but disappeared. Volatility reached multi-year highs as the global credit crunch spread beyond the U.S. and previously unaffected markets were impacted. Equity value saw significant declines worldwide.

Against this backdrop, the value of our investment process was readily apparent. Our absolute returns were strong and we successfully preserved our fund investors' capital. It is the consistency of this performance that we believe will lead over time to growth in our assets under management.

Our objective is to deliver consistent, positive, risk-adjusted returns to our fund investors throughout market cycles rather than returns that seek to outperform an equities benchmark. Our fund investors are primarily institutions who value nonvolatile returns and consider preservation of capital in declining markets equally important to attractive returns in positive markets.

Preservation of fund capital is not only important to our fund investors, but it is also essential to sustaining our future earnings power. As markets normalize and we continue to be successful in preserving fund capital, we expect our earnings to benefit from an asset base that has suffered relatively little, if any, performance-driven degradation. We also believe that over the long term, we will continue to grow assets under management at the high end of the range for the hedge fund industry. Our funds, because of their product and geographic diversity, have a lot of room to expand. The growth opportunities we see in our private investments business should also be an important catalyst to our earnings power over time.

As you are aware, we will not disclose our April investment performance or May asset flows until two business days after month-end, the same time our fund investors receive this information, which is this coming Friday, May 2. As a firm, we are satisfied with our results and we'll be reporting these numbers on Friday.

Now let's turn to our first-quarter business results, starting with our assets under management. As of March 31, assets under management totaled $33.3 billion, a net increase of $7.6 billion or 30% year-over-year, but essentially unchanged from year-end 2007 levels. Our first-quarter net inflows were positive, but were offset by performance-driven asset depreciation and were lower than the average net inflows we experienced in the first quarter of the last several years. Joel will take you through the specifics of the numbers, but we believe that the lower net inflows are affecting the hedge fund industry globally.

As the capital markets have become more challenging and volatile in recent months, investors have slowed the pace at which they are committing new capital to the industry and some are reducing their existing exposures to hedge funds generally. The pace of redemptions has also increased as investors rebalance in light of lower equity valuations. We are not completely immune to these phenomena. We believe the market environment will remain uncertain over the next couple of months and possibly over the next couple of quarters and therefore, the pace of activity for the industry could remain difficult. However, we believe the hedge fund industry is in the early stages of a secular growth cycle and that over the long term, the industry will experience increasing institutional demand for hedge fund products.

Since 1990, hedge fund assets under management have experienced a compound annual growth rate of more than 25% and historically, we have achieved or exceeded this growth rate. We believe that, over time, we should increase assets under management at the high end of the growth rate for our industry if we continue to extend our track record of investment performance and new product introductions while preserving investor capital.

We are optimistic and encouraged by the dialogue we are having with existing and potential fund investors. We also continue to see high interest levels from international pools of capital. While the realization of net inflows can be lumpy and current market conditions are extremely challenging, we remain confident in our ability to attract new capital.

Now a few words about our funds' investment performance and our risk management process. As of March 31, our flagship Master Fund was down 0.84% net. Our European Master Fund was down 1.74% net. Our Asia Master Fund was down 2.61% net and our Global Special Investments Master Fund was down 0.6% net. These returns were generated with less than half the volatility of the S&P 500 and with essentially no leverage.

As I have highlighted before, our performance in the down months for the S&P 500 is what we think best differentiates Och-Ziff and our investment process. The first three months of this year were a great example of this. Investors that were in the OZ Master Fund during these months experienced a cumulative net return that was 8.9 percentage points higher than the cumulative total return of the S&P 500 in those same months. Again, this consistency of our performance, especially in difficult markets, is one of the primary reasons why we believe institutional investors find the Och-Ziff model attractive.

We manage risk in our Global, European and Asia Master Funds through hedging and rigorous management of market exposures. These portfolios outside of their side-pocketed investments are invested in actively traded securities. We focus not only on market risk, but also on concentration risk to ensure that we are not unduly exposed to any one name, asset class, geography or strategy. We manage not only within each of our portfolios, but across them as well. We deploy fund investor capital based on the opportunities we see and the diversity of our fund allows us to react quickly and size investments appropriately to available opportunities regardless of market environment. While extreme market volatility makes the process more challenging, our approach to managing risk is integral to our ability to deliver consistent, absolute returns with an appropriate risk reward and to preserve fund capital.

The last nine months are another example of a difficult market period where we have preserved capital. This extends our record to 14 years. We believe that this most recent period has further established our leadership position with institutional investors in the absolute return universe. We don't try to predict when market declines are going to occur. We always run our funds at low leverage and a very active risk management process. Again, why we believe institutional investors are attracted to our funds.

Now let me turn the call over to Joel who will take you through our financial results for the quarter.

Thanks, Dan. I will briefly review our GAAP results, but I will spend most of my time reviewing Economic Income, which we use to measure the financial performance of our business. For the first three quarters of each year, Economic Income is primarily comprised of management fees less operating expenses. In the fourth quarter, Economic Income also includes incentive fees and discretionary bonuses. We believe that the simple financial model is the most meaningful indicator of our performance.

Distributable Earnings is a supplemental measure we use to assess the after-tax financial performance of the business and distribute dividends. It is calculated by taking Economic Income less income taxes assuming all Group A units and Class A restricted share units, excluding any RSU granted and forfeited in the current period, were converted on a one-to-one basis into Class A shares.

For the first quarter of 2008, we reported a GAAP net loss of $268 million or $3.62 per Class A share. As discussed in our press release, these losses reflect non-cash expenses associated with our reorganization immediately prior to our November 2007 IPO and non-cash amortization of equity-based compensation, which are primarily Class A restricted share grants awarded to employees at the time of the IPO. These adjustments will flow through our GAAP numbers and will negatively impact GAAP net income for the next five years.

However, as I said previously, Economic Income is how we measure the financial performance of our business. Economic Income for the first quarter of 2008 was $86 million, 15% higher than the first quarter of 2007. This result was driven by a year-over-year increase in management fees due to growth and assets under management more than offset the increase in operating expenses.

I will now review the components of Economic Income in detail beginning with revenues. Management fees were $145 million, 48% higher than the first quarter of 2007 and 7% higher than the fourth quarter of 2007. The year-over-year increase in assets under management was split between net capital inflows of $5.9 billion, including $1.6 billion in proceeds from our IPO and share sales to Dubai International Capital, and investment performance of $1.7 billion.

In the first quarter of this year, net inflows were $263 million, which included approximately $350 million in redemptions by partners for income tax planning purposes. These redemptions were sourced for non-fee paying assets, which were invested in our funds prior to the IPO. Investment performance was down $389 million.

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%, which is a blended rate that includes the effect of our non-fee paying assets.

Operating expenses are comprised of compensation and benefits and non-compensation costs. The first-quarter 2008 compensation and benefits totaled $25 million. Of this amount, salaries and benefits were approximately $16 million, a 59% increase over the 2007 first quarter, but unchanged from the 2007 fourth quarter. The increase year-over-year is due to growth in headcount, primarily during the second half of 2007 related to the infrastructure needed to become a public company, and to support the expansion of our business.

First-quarter compensation and benefits also included approximately $10 million of compensation expenses, primarily related to one-time non-recurring payments to certain existing personnel and new employees. We currently don't anticipate that these type expenses will recur at this level in the remaining quarters of this year.

Headcount as of March 31 was 412 people globally versus 399 as of the end of 2007 and 282 as of March 31 last year. Of the 46% increase year-over-year, growth in support services was 68% or 88 people and growth for investment professionals and related support staff was 32% or 42 people. Our current view is that, in general, 12% to 15% of annual management fees as reflected in Economic Income is a good proxy for our salaries and benefit expense. We anticipate adding additional headcount this year as we grow our business.

Non-comp expenses for the 2008 first quarter were $35 million, or 219% higher than the 2007 first quarter. 44% of this increase was driven by the interest expense related to our $750 million term loan, which we entered into in the third quarter of last year as part of our overall capital raise. An additional 37% was due to increased professional service fees, primarily related to the costs associated with our 2007 annual audit and related tax preparation and consulting fees.

On a comparative basis, we incurred these expenses primarily during the second and third quarter of last year in connection with our IPO, not in the first quarter. The remainder of the growth is general expenses related to the expansion of the business and infrastructure, including the cost of consulting fees related to the first year of our SOX compliance, examples of which are recruiting fees, insurance, technologies and business development.

Compared with the fourth quarter of 2007, non-comp expenses were $4 million or 14% higher. Essentially all this increase was due to our 2007 audit fees and related tax preparation and consulting fees. In the 2008 first quarter, non-comp expenses were 24% of management fees. Keep in mind that general and administrative expenses included our 2007 annual audit and tax preparation fees, which are seasonally related to our first quarter.

With flat asset growth, we currently expect non-compensation expenses to generally run at a rate of 18% to 22% of annual management fees. We expect this ratio to decrease over time, assuming stronger asset growth and thus management fee growth and due to completion of some of our operational and administrative goals. Some examples of these are our ongoing SOX compliance process, which must be completed by year-end and consulting related to certain system implementations. We believe maintaining our focus on preservation of capital and providing consistent, positive, absolute returns will lead to asset growth, revenue growth and the sustainability of our operating margins over time.

Economic Income less taxes results in Distributable Earnings. Distributable Earnings per share is derived assuming all Group A equity units and Class A restricted share units were converted on a one-to-one basis into Class A shares. Distributable Earnings for the 2008 first quarter were $50 million or $0.13 per adjusted Class A share.

Dividends for the first three quarters of each year will be inclusive of management fees less compensation and benefits, non-comp expenses and taxes and the fourth-quarter dividend will include incentive fees and discretionary bonuses. The amount available for each quarterly dividend may also be reduced by any funds we retain to operate the business.

As you saw in our press release, our first quarter 2008 dividend will be $0.08 per Class A share. We retained cash to fund non-P&L related items in connection with the operation of the business and investments, which we believe will benefit the growth of our franchise. The most significant components of retained cash in the first quarter were $11 million of investments in new businesses, and $7 million of refundable security deposits relating to office space. We continue to expect to pay out substantially all of our annual distributable earnings, less cash retained for operating purposes as we grow the business, through our four quarterly dividends.

Our 2008 first-quarter effective tax rate on Economic Income for purposes of calculating Distributable Earnings was 42%, which again assumes all Group A units and Class A restricted share units were converted on a one-to-one basis into Class A shares. I would like to remind you that our tax rate in each quarter depends on the amount and flow of revenues and expenses through our legal entity structure. We will not know our actual effective tax rate until the end of the year as we don't know the magnitude and the actual flow of the revenue and expense through our structure. However, if our incentive income is similar to 2007 and we assume comparable tax treatment and flow through our structure, we would expect an estimated tax rate of 42% to 44% for the first three quarters as taxable income is comprised of management fees less operating expenses.

For the fourth quarter, again assuming the same level of incentive fee as 2007, we would expect the tax rate to be lower, resulting in an annual effective tax rate of approximately 20% to 22% for 2008. The magnitude and actual flow of revenue and expense through our structure can materially change these estimates.

Now let me turn the call back to Dan for some additional comments.

Thanks, Joel. Despite tough market conditions, we remain firmly focused on executing our growth initiatives for 2008 and extending our track record of new product introductions. In our private investments business, our goal is to build the best investment platforms in the world. We believe many of the opportunities we have been focusing on can become multi-billion dollar standalone investment products over time.

During the first quarter, we made progress on a number of fronts. All of our private investment platforms continue to progress according to plan and we have begun active capital-raising discussions. Let me give you some examples. We made significant progress with our joint venture in Africa. We continue to develop opportunities and relationships and are in active discussions with interested investors.

Two years ago, our funds invested in a subprime mortgage servicing platform, which purchases and restructures portfolios on subprime residential loans. Given the opportunities we are currently seeing to acquire pools of assets at attractive levels, we are close to marketing this opportunity. As a reminder, the mortgages we have purchased to date have been done through this platform, which limits our exposure to the equity investment we have made alongside our partners.

We are ready to launch a dedicated emerging markets platform that will encompass some of our existing investment teams, along with investment professionals with new and varying expertise. We look worldwide for ideas with a particular focus on Asia, Eastern Europe and the Americas where we have already been active and in some cases, have been active for some time.

Our partners have made significant commitments and will continue to commit personal capital to all of these platforms and again, we are in active dialogue with current and potential new investors about all opportunities. With that, we will now be happy to take any questions that you have.

(OPERATOR INSTRUCTIONS). Marc Irizarry, Goldman Sachs.

Great. Thanks. Dan, thanks for the color on the business side. If you can talk a little bit about when you started to see some of the retrenchment in flows. You mentioned on an industry-wide basis, but for your flows in particular, where are you seeing -- are you seeing it in requests? In other words, what does the pipeline look like and what does your win rate look like and then any more color that you can provide on the outlook for flows would be great.

Sure. We believe very strongly that it is an industry-wide phenomenon and I think some of the recent articles you have seen published seem to indicate that as well. For us, the real issue was a slowdown in -- a slowdown in inflows. As we said, we continue to have a consistent number of meetings, a consistent level of interest, an even greater appreciation from institutions, particularly new entrants into the hedge fund business, an even greater appreciation by them of the value of our risk management process. And we expect those to result in future commitments, but we have noticed a slowdown in the actual pulling of the trigger in general.

And then in terms of actual redemptions, I think you called out $250 million or so in the first quarter from tax-related redemptions. Is that something we are also going to see impact the flows on April 1 as well on a firm-wide basis?

Marc, this is Joel. You mean in terms of more tax withdrawals?

Yes.

If that is what you are asking, no, there won't be -- that was the full magnitude of those withdrawals, so you will not see that recur again.

Great. And then if you can just talk a little bit more about the dedicated emerging markets platform, how large do you think that will be and then how are you in terms of the staffing on that side of the equation?

That is one example of one of the really important long-term growth opportunities. We identified emerging markets as a strong area of focus approximately three to four years ago. We have established some very, very strong businesses, very strong in Asia, very strong in Africa, very strong in Central Europe. About 12 months ago, focused very aggressively on some of the Latin American countries. And we believe that putting together the investment platforms that we have, and our indications from meetings we have with institutions would show that they agree, puts together a very strong, very unique product. We think emerging markets are a multi-year growth opportunity, so we will likely do what we generally do. We will invest our own capital. We will slowly and steadily raise capital from institutions and build the business and the capital simultaneously.

Great. And then just in terms of credit, I think you have talked about your credit exposure, that you dialed that back up a little bit as you saw the opportunities improve. What's sort of your outlook for credit markets at this point and then just generally for investment opportunities in credit?

The credit markets had a reasonably strong rebound during the month of April as you pointed out. We did establish positions prior to that. We are, at the margin, not establishing new positions at these levels, but we do believe that there will be opportunities. There continue to be companies that are having issues. There continue to be overleveraged balance sheets. There continue to be sectors of the economy that are very weak and of course, the entire mortgage area, which we are extremely well-positioned for through RCS, should present opportunities.

Okay, great. Thanks.

Roger Freeman, Lehman Brothers.

Yes, thank you. It's actually Steven Truong for Roger. Could you please discuss the strategies within the Master Funds during the quarter? It seems like it did better than the overall market. And in terms of the OZ Master Fund specifically, it actually increased slightly in terms of AUM and perhaps you can talk a little bit more about that please. Thank you.

Sure. Well, in hindsight, the ultimate strategy in the quarter was about preserving capital and it was the hedging and the risk management that was most effective. So as you pointed out, with the equity markets down 9% to 10% in the U.S. and more than that globally, while we were never satisfied with any loss, being down 84 basis points in the Master Fund is certainly a very strong relative performance.

The key is not where did we make money. The key is how did we not lose money in such volatile and explosive environments. The answer just goes to what we have been talking about since the inception of the firm and since the roadshow about the consistent risk management, the low leverage, very, very strong analytical capabilities and we also believe this is an example of our model and culture of having one firm-wide P&L is very important because that is instrumental in enabling us to not be in unattractive overvalued sectors and geographies and move capital to where the most attractive risk rewards are.

And can you talk a little bit more about in terms of net inflows into the Master Fund, the progression from the quarter into the OZ Master Fund?

We don't really break down -- we do give monthly numbers overall. We have not broken them down by fund, but suffice it to say, if you look at the numbers for the quarter, it was essentially -- essentially unchanged for the quarter without any substantial monthly variations.

Got you. Just to kind of switch gears then, I wanted to ask Joel about the dividend policy at $0.08. I'm pretty sure that is a roughly 62% payout. How should we think about it going forward in terms of your cash needs and in terms of what you may do in terms of hiring as well? Thank you.

In terms of the payout ratio, look, as we have said before, we intend to pay out substantially all of our distributable earnings on an annual basis. So I think the thing you have to do is you have to focus on the dividend annually. So the first three quarters, we will have management fees less expenses and less any cash flow that we need for the operating business and keep in mind too that some of the cash that we have retained we have used to invest in newer businesses, which will benefit our investors going forward. So again, depending on the operating needs of the business, we will have to determine how much cash we will pay out each quarter.

However, when we come to the fourth quarter, we will know at the end of that point what our cash needs were. We will also have our incentive fees and bonuses and at that point, obviously that is the bigger dividend and that is where we true up all the cash. So I think you have to look at it on an annual basis, not a quarterly basis and I think that should be the main focus.

Prashant Bhatia, Citi.

Hi. Just on the other operations that you detail in your exhibit three, that had a pretax loss of about $5 million, why does that loss get excluded from the Economic Net Income calculation?

You are talking about the GAAP numbers, Prashant, I believe?

On your exhibit three, you have got other operations. I think that might be you real estate operations you mentioned in the text.

Right, but don't forget those are GAAP numbers and those are non-cash flow type items that are adjusted for GAAP-related numbers. If it was a cash flow type item or something that really affected Economic Income, it will be in the numbers. And you're right. Other operations include our real estate business, but there are other adjustments in there and I am happy to go through in more detail offline the GAAP numbers if you like.

Okay, but just to clarify on the other operations where you have got a loss on earnings on investments, are those -- I understand it is non-cash, but those are your investments where you've lost money I guess due to marks, is that correct?

Not necessarily, Prashant and I think -- again, don't forget, these are GAAP-adjusted numbers, so it is not necessarily mark-to-market, it is not necessarily a specific investment and that is why, rather than spending a lot of time here, I am happy to go through these with you since it is a non-cash item.

Okay. And then in terms of the trend that we see in terms of declining net flows, can you provide some kind of detail maybe on the investor type that has pulled back a little bit and also talk maybe about gross inflows and then redemptions and the trend you are seeing there?

I think obviously it is a broad and general pull-back by all investors. There is no one specific type of investor or sector that has pulled back. It is a slowdown across the industry and of course, we have seen it as well. And in terms of inflows and redemptions, I think you have seen the numbers as we have stated them in our press release. We are not going to into specifics, but in general, in terms of redemptions, those have not been significant either. So for us, it is a slowdown on inflows and non-significant redemptions.

Prashant, it's Dan. Just to follow up since I tend to be in more of the investor meetings, especially more the prospective investor meetings, I will reiterate what Joel said. If you look at the numbers, our issue is not the dollar number of redemptions. Relative to total asset size, they weren't large at all. The issue was a slowdown in actual inflows versus the first quarter of other years. And we believe that is happening generally across the hedge fund industry and it is not one specific type of investor. We think in general that is where investors are. And most importantly, we remain very confident just based on conversations with investors, consultants, plan sponsors, etc. that the flows will come back.

Hojoon Lee, Morgan Stanley.

Hello. Hi, Dan. Could you broadly comment on the current market environment for your strategies in April, maybe compare that to the first quarter?

As I think everyone is aware, we will report our April performance and flow numbers this Friday and we did make a statement that we are satisfied with those numbers. I don't want to make any comments because I don't want different people to imply different things from the statements we make given that those numbers are reported broadly on Friday.

Okay, that's fair. As a follow-up, we see all this capital on the sidelines right now. Maybe you could just share with us what you are seeing in the investor meetings perhaps in terms of where investors are more interested in terms of geography or types of strategies that they are looking to put money into?

Of course. Well, it varies by investor type. I can categorize. There are those investors who are most interested in the steady, consistent performance, so that includes, for example, a large number of pension funds. They are attracted to the asset class primarily because of the preservation of capital. Clearly, the last nine months has enhanced our leadership position in that area.

There are investors who are interested in some of the dislocated areas. Credit, mortgages, recapitalization of financial service firms and real estate are at the top of that list. And then there are investors who remember that there still is growth and opportunity in the world and emerging markets and some of the other areas are a very strong focus of those investors.

The nature of the meetings hasn't changed dramatically. The nature of the interest hasn't changed dramatically. As I said, I think you have seen industry-wide just a slowdown in the pulling of the trigger.

And just last, we have recently seen some high profile fund managers leaving other firms. Maybe you could just share some thoughts on how you manage this type of risk at Och-Ziff.

Sure. We believe that the question you just asked demonstrates one of the strengths and differentiating factors of our model and of our culture. First of all, in terms of the probability of that happening, look at our historical retention ratio. It is perhaps the highest in the industry and we have been focused on that since inception 14 years ago. As I think you are aware, our six senior partners have all been together for 10 years and that consistency runs throughout the firm.

Second, if that were to happen, our model is designed to be substantially less dependent upon any one person than a silo-ed model. We have 18 partners. We have 28 managing directors. Our model and our culture are paying everyone based on one firm-wide P&L, is less dependent upon one individual than a silo-ed model. So we do not take that for granted at all. Quite frankly, we think the fact that we think about our people and value our people all day everyday is what makes that a strength.

Cynthia Mayer, Merrill Lynch.

Hi, thanks for taking my question. I'm wondering, over time, as you grow and create new products like a dedicated emerging markets strategy and you maybe hire some talent from outside, how would you expect that to feed through to Distributable Earnings? Should we expect the number of partners to grow and maybe see an increase in the number of shares outstanding or do you think we will just instead see a greater above-the-line comp?

Let me answer the first part of that, which is how we are going to attract the talent and I will have Joel handle the dilution aspects of it. We have always been in the business of attracting and retaining the best people in the world. We believe that having a public currency creates an advantage and an option for us to use as a firm that other firms don't have and we do intend to use it where appropriate.

Now, myself and the other partners own 80% of the equity of the firm, so clearly we are going to balance that intelligently, but we do intend to use the currency where appropriate and I will let Joel comment on how we will handle the dilution.

And Cynthia, just keeping in mind when we hire talent, we are going to hire talent to build products, which are going to grow assets and grow revenues and that is really key to the business. However, if -- whether it is an expense above the line, which will again be covered by the growth in revenues due to growth in assets, or it is an increase in stock, we are, as I have said in the past, we will always manage dilution to investors. We won't give or won't talk about specifics, but we are always looking at dilution and we are always looking at our operating margins. So I think both those things are well covered by hiring people who bring in assets and grow revenues and of course, our monitoring of dilution to our investors.

Okay, great. Just a follow-up to the flow discussion before, can you give us a sense of how much of your assets are sourced from fund of funds? I think it is not too much, but if you could just go over that again. And how are those funds holding up versus the ones you have sourced yourselves?

The fund of fund number is around 48% overall. However, keep in mind that the fund of funds that invest with us are institutionally based. Meaning that it is the same type of investor that invests with us individually and these are long-lasting fund of funds. These are fund of funds that have been with us for years that are not fly-by-night in and out. These are the same people. So what the institutional investors do is they want a middle man to help them make investment decisions and they will go through a fund of fund rather than investing directly, but it is pretty much the same institutional investor base.

So the behavior in terms of flows in the first quarter wasn't any different?

Was not any different, that's correct.

Ken Worthington, JPMorgan.

Hi, good morning. In terms of customer prospecting, can you talk a little bit about how you are ramping up the marketing and fund-raising activity abroad? You mentioned a little bit in your prepared remarks, but I wondered if you could give us a little bit more flavor?

Sure. Well, first of all, we already have strong presences in most of these markets through our investment platforms, which have helped develop our reputations. We already have -- I believe the number is 50% or 55% of our assets sourced internationally. So we already have 50% or 55% of our assets sourced internationally, so we are very well-positioned. But we absolutely are focused on expanding that. We are placing more investor relations personnel in the different geographical regions and that is in response to the fact that the investor base is broadening out, so it makes sense to have more people who can meet with current clients and prospect with new clients.

We are very focused on the sovereign wealth entities and other large international investors and when we talk about lumpy potential flows, I think it is a fair statement that sovereign wealth entities over the next several years are likely to be the lumpiest, but also potentially the most attractive. So while we feel very good about our international presence from an investor point of view, we are very focused on taking that to the next level.

Can you give us a little -- or some numbers there? How many people have you added recently or do you plan to add over the year and can you be a little more specific on the geographical regions? Like I think you are very strongly implying Middle East and so on, but which parts and I don't know, again, a little more information. Thank you.

Sure. In terms of the specific number, I don't have an actual number that we projected, but let me talk about the different regions and the different product areas and you can start to add up some of the numbers. In terms of geographic regions, very focused on Asia; China clearly an important part of that. As you said, the Middle East, extremely important. Europe continues to be very important. While we have attracted a large amount of capital from Europe, we think that there continue to be more and more prospects in Europe. That doesn't mean we are ignoring other areas of the world, but those are the high priority geographic regions.

In terms of personnel, likely -- likely to add two to three people in Asia on the Investor Relations side, likely to add two to three people and we, at this point, include Europe and the Middle East together, but likely to add two to three people in the Europe, Middle Eastern region. We have been adding and will add on the product side some of the private investments we mentioned. Most of them are their own marketing effort and so having individuals dedicated to them -- much as in the investment area, we have generalists and specialists who work together. We are using the same model in the Investor Relations area.

(OPERATOR INSTRUCTIONS). Robert Lee, KFB.

It's KBW, but good morning, everyone.

We knew that.

I knew that. A quick question and I apologize if you went over this earlier, Joel. I had to step off for a moment, but the $9.8 million of nonrecurring expenses, you sort of suggested that it may not run at that level. Should we -- can you maybe give us a little bit more characterization of what maybe that is and if that is something we should expect, maybe not that level, but at some level going forward or seasonally?

The majority of that $9.8 million was special awards to personnel for the first quarter. We don't expect that level or those one-time awards to recur again. There will be some level of expense going forward as we move forward, except -- again, I can't give you specific numbers. I would expect a much smaller number at that level.

And I assume that is incorporated in your 12% to 15% salary and benefit kind of --?

The 12% to 15% is salary and benefits purely. It does not include those numbers.

Okay.

And again, don't forget, because the majority of it was that one time in the first quarter and going forward, we expect it to be much smaller.

Okay, that's helpful. And Dan, I am just curious. You've been investing in a lot of new strategies and investment platforms. You talked about taking your capabilities and I guess combining them into an emerging markets platform. What is the decision point of where you start saying, okay, this is going to be a standalone product that investors can invest directly in and we start seeing it as another fund when you report. Is it a certain asset size? I am just trying to get a sense for what that kind of decision point is when we may start seeing some of these things in the quarterly reporting.

Sure, it's a combination of factors. We start with the investments platform itself, which is why you will note that most of what we are discussing we have been working on for three years. Now, there are things that we have been working on at this point for 12 months, so two years from now, that will be the new pipeline etc., etc. But we really focus on creating the investment opportunity.

In terms of a dedicated fund, it is a combination of where is there investor interest, because we are very responsive to what our investors are focused on and looking for. Where do we feel strongly that there is growth? We also recognize that for shareholders, creating these new products intelligently over time is important and so we are focused for that reason as well.

In terms of specifics, we touched on three funds and three products -- the joint venture with Africa, RCS, the subprime mortgage servicer and the emerging markets platform. To be clear, those are three funds that we have either begun or are about to begin active discussions with investors. Now, private equity fund raises, and these are generally private equity structures, tend to be longer in general than hedge fund, fundraising processes, but discussions have begun and that is in process.

Great. Thank you very much.

That concludes the question-and-answer session today. I will now turn the call back over to Mr. Och for final remarks. Please proceed.

Thank you, Michelle. We appreciate your time and interest in Och-Ziff. In closing, I want to leave you with three themes that we believe are very important to understanding our Company and its significant earnings power over time.

First, our track record in delivering consistent, positive risk-adjusted returns to our fund investors with low leverage and low volatility, coupled with our ability to preserve fund capital in down markets is a primary reason our assets under management have historically grown at the top end of the range for the hedge fund industry. This track record is what differentiates us in the marketplace and we successfully extended it into the first quarter of 2008. We remain confident that we are well-positioned to continue to grow assets under management at the top end of the range for our industry over the long term.

Second, preservation of fund capital is not only important to our fund investors, but is also essential to driving our future earnings power. As markets normalize and we continue to be successful in preserving fund capital, we expect our earnings to benefit from an asset base that has suffered relatively little, if any, performance-driven degradation.

Third, we are making consistent progress with our growth initiatives for 2008, current market conditions notwithstanding. An important driver of our growth is the extension of our investment products and strategies to our private investments business. We firmly believe the opportunities we are capitalizing on represent some of the most important asset classes in the future.

I look forward to sharing further updates on our strategic initiatives with you in the future and with that, let me now turn the call back over to Tina.

Thanks, Dan. Thank you, everyone, for joining us today and for your interest in Och-Ziff. If you have any questions, please don't hesitate to contact me at 212-719-7381. Media inquiries should be directed to Steve Bruce at 212-371-5999. This concludes our call and you may now disconnect.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.