Sculptor Capital Management Inc (SCU) 2012 Q1 法說會逐字稿

Good day, ladies and -- good morning, everyone and welcome to the Och-Ziff Capital Management Group 2012 first-quarter earnings conference call. My name is Lacey 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 Tina Madon, Head of Investor Relations at Och-Ziff.

Great. Thanks, Lacey. Good morning, everyone, and welcome to our call. With me today are Dan Och, our Chairman and CEO, and Joel Frank, our Chief Financial Officer and Senior Chief Operating Officer.

I would like to remind you that today's call may include forward-looking statements. These statements reflect the current views of management about, among other things, assumptions with respect to levels of assets under management, future events, certain expense levels, and financial performance, many of which by their nature are inherently uncertain and outside of our control. Och-Ziff's actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements.

For a discussion of the risks that could affect our results, please see the risk factors described in our 2011 annual report. The Company doesn't undertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future developments, or otherwise.

During today's call, we will be referring to economic income, distributable earnings, and other financial measures that are not prepared in accordance with US generally accepted accounting principles. Information about and reconciliation of these non-GAAP measures to the most directly comparable GAAP measures are available in our earnings release which is posted on the Class A shareholders page of our website. Furthermore, no statements made during this call should be construed as an offer to purchase shares of the Company or an interest in any Och-Ziff Fund.

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.

With that, let me now turn the call over to Dan.

Thanks, Tina. Good morning, everyone, and thank you for joining us. This morning I'll review our year-to-date investment performance of April 30 and assets under management as of May 1. I'll update you on the environment for capital flows and also discuss the investment opportunities we are seeing.

Our performance to April 30 has been strong. We have generated consistent, positive, absolute returns for our fund investors, with low volatility compared to the broader equity markets. Our year-to-date performance demonstrates our ability to take advantage of opportunities globally.

It also reflects our consistent and disciplined approach to investing, including a rigorous risk management process and low use of leverage. This was particularly evident in April, as market conditions became more volatile and challenging, especially in Europe and Asia where markets have underperformed.

Our performance as always reflects our intense focus on generating returns within our risk tolerances for our fund investors. As economic uncertainty in the US declined during the first quarter, we took advantage of investment opportunities globally by deploying capital in US structured credit, as well as in US and Asian long/short equity.

We were fully invested in the OZ Master Fund as of April 1, compared with a cash balance of approximately 21% at the beginning of the year. The strength of our year-to-date returns reflects the excess return we have been able to generate for our fund investors.

At the same time we have actively managed our exposures, maintained the diversification of our portfolios, and continued to be opportunistic in moving capital to what we viewed as the best investment opportunities. We believe these attributes position us both now and in the future to continue generating consistent, positive, absolute returns.

We remain confident that there is strong demand by institutional investors for alternative asset managers, as these investors increasingly seek nonvolatile returns to enhance the yield and diversity of their portfolios. We believe that this resulted in increased allocations to the hedge fund industry during the first quarter. However, while the market environment improved relative to the second half of last year, we believe there is still near-term concern among these investors about economic conditions globally.

As I have said in the past, the most important factor about future flows is not the exact point at which they start increasing, but rather the aggregate size of those flows over time and the corresponding market share that we will be able to attract. We remain confident that as investors deploy capital to alternative asset managers, we will be a leading beneficiary.

Interest in Och-Ziff is very strong. We have an active dialog with existing and prospective investors.

Focus on both our hedge funds and dedicated credit platforms remains high, and investors continue to look for opportunities to expand their strategic relationships with us. We believe that this will result in meaningful new capital allocations to us over time from a diverse group of investors globally.

Now let me turn to assets under management. As we announced this morning, our assets under management as of May 1 totaled $29.8 billion, increasing $1 billion or 3% from $28.8 billion on December 31 of last year due to $1.6 billion of performance-related appreciation and approximately $600 million of net outflows. These amounts included $200 million of performance-related appreciation for the month of April and $100 million of net inflows on May 1.

Year to date as of May 1, we have experienced ongoing demand from investors globally, with pension funds driving our inflows. We continue to see an increase in capital allocated directly by pension funds, while outflows mainly from fund-of-funds remain somewhat elevated.

The momentum we see in relation to our inflows remains strong, and we are pleased with the diversity of investors we are speaking with. However, investors that are new to investing with hedge funds typically have more complex due diligence processes than those of existing investors, thus making the timing of allocations from them lengthier and less predictable.

Similarly, leadtimes tend to be much longer for institutions seeking to expand their strategic relationships with us. These types of investors have a long-term orientation and represent important sources of future capital inflows.

Manager selection remains a priority for institutional investors and they focus intently on returns, product offerings, liquidity, transparency, risk management, and infrastructure, particularly against the backdrop of uncertain market conditions. We believe that each of these attributes is a competitive strength that differentiates us and positions us to gain additional market share of new flows in the industry.

Now let's turn to our funds' investment performance. Year to date through April 30, our Master Fund was up 5% net; our Europe Master Fund was up 4.9% net; our Asia Master Fund was up 5.2% net; and our Global Special Investments Master Fund was up 5.4% net. These returns were generated with 29% of the volatility of the S&P 500 index on a weighted-average basis for these funds. Our year-to-date performance was driven by our global long/short equity and US and European credit-related strategies.

Looking forward, we remain optimistic about the global investment landscape, which plays to the strengths of our capabilities. We believe our equity investment teams are well positioned to take advantage of opportunities in the equity markets.

Additionally, we continue to see compelling opportunities in credit. Many factors, including regulatory pressures encouraging banks to divest assets, upcoming debt maturities, and economic stress should continue to provide a multiyear opportunity in US and European Structured Products. We believe that our global presence, opportunistic approach to allocating capital, and deep expertise in each of our strategies provide us with an advantage in identifying and capitalizing on investment themes as they evolve.

Additionally, we continue to strengthen our investment capabilities and infrastructure. For example, we have added to our existing expertise by building extensive investment capabilities in our credit-related strategies. Collectively, these are important elements of our competitive differentiation, and position us to continue generating consistent, positive, absolute returns in the future.

With that, let me now turn the call over to Joel, who will take you through our financial results.

Thanks, Dan. Today I will review our 2012 first-quarter results and discuss how we are thinking about expenses for the second quarter. For the 2012 first quarter, we reported a GAAP net loss of $123 million or $0.87 per basic and diluted Class A share. As always, a discussion of our GAAP results is contained in our press release for your reference.

Now let's turn to the details behind our 2012 first-quarter Economic Income, beginning with revenues. Management fees totaled $118 million, of which approximately $115 million was attributable to the Funds segment and $2 million to other operations. Management fees remain at the 2011 fourth-quarter level, as assets under management were essentially unchanged from October 1 to January 1.

From January 1 to April 1, our assets under management grew by $1.1 billion to approximately $29.5 billion due to $1.4 billion of performance-related appreciation, partially offset by $300 million of net outflows. Our average management fee was approximately 1.7%, which included the effect of non-feepaying assets as well as our dedicated credit platforms and other alternative investment vehicles. Incentive income was approximately $1 million during this quarter and was all attributable to redemptions in the Funds segment.

Now let me turn to the 2012 first-quarter expenses. Comp and benefits totaled $21 million during the first quarter, with $20 million attributable to the Funds segment and $1 million to other operations. Of the total, salaries and benefits were $19 million, which were primarily related to the Funds segment. This amount reflected a 5% increase from the 2011 fourth quarter.

First-quarter comp and benefits also included $1 million of guaranteed bonus expense, which is essentially all attributable to the Funds segment. Salaries and benefits were 16% of management fees in the first quarter. We expect this ratio to remain at approximately 15% to 17% of management fees for the second quarter of this year.

Now, turning to non-compensation expense. Non-comp expenses totaled $23 million in the first quarter, increasing 8% from the 2011 fourth-quarter, with $22 million attributable to the Funds segment and $1 million to other operations. Non-comp expenses totaled 19% of management fees in the first quarter. We expect this ratio to continue to be 18% to 20% for the second quarter of this year.

Our 2012 first-quarter effective tax rate was 25%. We estimate that our effective tax rate for the second quarter of this year will remain in the range of 25% to 30%.

As a reminder, this range is based on our estimated 2012 full-year effective tax rate, which is subject to variables that won't be finalized until the fourth quarter of this year. These include the amount of incentive income we earn, the resultant flow of revenue expenses through our legal entity structure, and the effect that changes in our stock price may have on the deduction for vesting RSUs. As a result of these factors, our full-year tax rate could vary materially from our estimate.

Our 2012 first-quarter distributable earnings were $57 million or $0.13 per adjusted Class A share. As ewe sell in our press release this morning, our dividend for the 2012 first quarter is $0.10 per Class A share.

We used cash, as we typically do, to fund items related to the operation of our business. The most significant of these were withholding taxes to be paid upon the vesting of RSUs and principal repayments on our variable-rate borrowings.

In closing, I would like to reiterate the importance of our investment performance to both the growth in our assets under management and the growth in our earnings. Generating consistent, positive, absolute returns is as important as our ability to protect capital in volatile or declining markets. This is a key factor in fund investors considering us as the manager of choice.

Last year we successfully preserved capital during a period of significant market dislocation. We ended the year with assets under management that were slightly higher than at the beginning of 2011.

As Dan mentioned, our year-to-date investment performance has been strong. Positive investment performance leads to generation of incentive income, not only in the assets under management we began the year with, but also on the growth in the base due to the performance-related appreciation. The majority of this incentive will be taken in cash annually, which is a significant component of the operating leverage in our model.

As I discussed earlier, our assets under management as of April 1 increased approximately $1.1 billion since January 1, or nearly 4%, with essentially all this growth attributable to performance-related appreciation. We earned both management fees and incentive income on these assets, which has a significant impact on our future earnings growth.

We anticipate that growth in our total revenues for both management fees and incentive income will more than offset any increase in our operating expenses over time. The resulting operating leverage is a powerful driver of the earnings potential of our business and resulting growth in our dividend. With that, we will be happy to take your questions.

(Operator Instructions) Ken Worthington, JPMorgan.

Hi, good morning. First question, I think you mention in your prepared remarks that sales have been lackluster. We hear about the secular trends in alternatives. If the sales are not going to you, where are they going? Is it -- what asset classes are you really competing with?

Well, we don't know exactly what others are doing, but if you look at the HFR numbers, I think it is more of an industry phenomenon. Flows the last nine months have been slower than they were in the 12-month earlier period.

I think the key for us on the flow side is we have had both inflows and outflows. If you look -- let's just take a period starting the 15 or 16 months since the beginning of 2011. Feel extremely good about our inflow -- the overall number, the nature of it, the quality of the investor, the commitments that they are making, the reasons they come with us, et cetera.

As we mentioned on the call, outflows have been somewhat elevated versus historical. But our focus is number one on the inflows, number two on the performance. Och-Ziff is and has always been a performance-driven organization.

We are performing. We are generating excess return and outflow. Institutions pay attention.

This year, markets are up, and funds generally are doing well. But they don't forget 2011.

And the absolute return and generating absolute, positive returns is not just about generating returns when markets go up; it's also about protecting the capital when markets go down. And we continue to do that, and we think we continue to differentiate, and people notice.

Yes, so maybe it's not a sales problem; it is as you point out, a redemption problem. So on the fund-of-funds side, are the redemptions you're getting, is it their problem? Is it because some of the fund-of-funds that feed through you are having their own redemptions and have to redeem pro rata in the places that they are investing?

Or is -- are the fund-of-funds reallocating themselves and for whatever reason they are just reallocating from you guys at this point in time?

We're not sure exactly what their flows are, and it is not just an industry question. It also refers to specific fund-of-funds.

We do feel that the fund-of-funds that are invested with us, we think they are high-quality institutional organizations. We think they add value to their underlying investor.

We know from the due diligence and monitoring they do with us that they understand the business; they understand how to think about where to find returns; they understand how to think about providing solutions for their clients. And we can still continue them to be very valuable clients. Even though the flows from those entities are going the wrong way right now, we are confident that those entities over time are going to do well, are going to grow, and are going to grow with us.

Maybe just one more and I will requeue. On the fund-of-funds side, I assume you have a number of fund-of-fund clients. Is it one or two where you are seeing particular redemptions? Or are they all acting similarly at this point?

And if it is just one or two, I think in the release you say you've got 17% of your AUM from fund-of-funds, how concentrated or how -- are these with big fund -- is there a lot of assets left that could potentially come out here from the fund-of-funds that are redeeming? I don't know; just trying to get any more flavor here.

No, no, it's not one or two; it has been thematic. But I think what you just pointed out is very important. At this point, fund-of-funds are 17% of AUM, where it had been substantially higher a number of years ago. So obviously we can't tell you that it is going to stop going down tomorrow; but organizationally, if you look at where we are, pension funds -- direct investment by pension funds -- Joe will give you the numbers later, but are -- has become dramatically higher.

We obviously wish that the fund-of-funds were not withdrawn. But the direct nature, the percentage of our assets that are coming direct, continues to increase; and that is generally a good thing.

Great. thank you very much.

Roger Freeman, Barclays.

Hi, good morning. Yes, maybe just to key off of Ken's questions a bit. In your discussions with either existing LPs around expanding relationships -- and you mentioned strategic relationships or partnerships -- or with new ones, is the need or the desire on their part for a broad set of capabilities? Even into things like real assets, private equity, factoring in -- and obviously we certainly see the other side moving more into the liquid market space, credit, and even a little bit in the long/short space, as (technical difficulty) the relationships on their end.

I'm just wondering if there is any running up against each other in that respect.

Well, for us, every time we have gone to a new investment area or created a new product it has been about -- it's been based on where we see the investment opportunity. So we do have a very strong capability in real estate and have had it since 2003, so that is an area that is important. We do have very strong capabilities in credit, and there is no doubt we are looking to expand that and institutions are looking to expand the access.

There are some areas going forward that we think are going to be very important. Europe is a good example. Right now, Europe is an area where there is not a lot of interest in investing, and that is probably for good reason.

Having said that, we do believe -- and I think investors believe -- this type of turmoil tends to create opportunities. So to have an organization that has been there for 15 years, 65 people on the ground, fully built out across equities, credit, structured credit, real estate, that is going to have value.

So yes, the answer to the first part of your question is -- yes, we are thinking about -- when we think about -- I don't really use the term strategic relation. We use the term providing more solutions for clients and creating the capability for them to get better, quicker, more opportunistic access to our resources. That is how we think about it.

So, the answer to the first part of your question is yes, that is involving more asset classes; but it's involving the asset classes where we think we are very strong and amongst the best in the marketplace. Not adding asset classes because we think that maybe we demand this.

And we are not worried about bumping up into different firms. We think that there is room for as many world-class, high-quality, alternative firms as there will be.

Okay. Just in terms of your credit capabilities and looking to grow those out further, is that something that you can do just organically? Your history has been to grow the business from the bottom up. Is credit an area where you would look to potentially bring teams on, either geographically or just product-wise?

We don't intend to bring teams on. We think -- look, we've been in these businesses for a lot of years, and we have made a concerted effort over the past five years to become stronger. We think our teams in those areas, the teams that we built organically, are extremely strong.

And the results show it; investors see it. We have the results, and they see it. Our results continue to be -- to excel within their asset classes.

Okay. Thanks. Then just lastly, quick answer more broadly speaking on the flows. You and others have talked about this fairly dramatic lengthening of the cycle to bring new allocations in the door. I am just wondering if at some point do we run that lengthening cycle out. Right?

If we go from one year's to two years' eventually you get to a point where those discussions are now -- they're a two-year phase (technical difficulty) start to see the dollars coming in the door. I am sure it is more complicated than that, but is there a component of that, that is valid to think about?

Actually, it is a little bit different than that, Roger. In other words, what that refers to is -- I'll give you an example. A pension fund or a sovereign wealth entity who has not been invested in hedge funds, the process to do that can go from exploratory talks; meetings and discussions with the board; a proposal to the board; approval by the board; manager selection; due diligence and legal review, et cetera. The process I just described can be anywhere from six months to 24 months.

Having said that, as I say, go back to what I said earlier about let's just take the last 16 months. We have had very good inflows. It is not as if everybody waits together and runs this two-, three-, or four-year process.

So a lot of the lengthier processes that we were discussing some time ago have already closed. Others are in process.

Okay. All right. Thanks a lot.

Daniel Fannon, Jefferies.

Good morning. This is actually Jerry O'Hara stepping in for Dan this morning. I was hoping you might be able to just give a quick update on where the primary funds stand on high-water marks? My back of the envelope math I think has just maybe the European Fund below the high-water mark at this point. But perhaps you can add some color.

Actually, they are all past their high-water marks, including the European Fund.

Okay, great. Then the quick follow-up. There seems to be some new text in the 10-K this year in regards to vesting of pre-IPO units towards the back half of this year. I was just wondering if you maybe had any anticipation of increased turnover or the possibility of increasing additional -- or issuing increased equity around that time?

No is the answer to both questions. As we said, we have been aware that this five-year process is coming for four and a half years. We have been in discussions.

You have seen we have done things. We have made some new partners. We have promoted some people.

Everyone here feels very good about the long-term prospects of the firm. Everyone is committed.

Quite frankly, everyone here feels that when we look at what we have done, our performance, the power of the investment teams, the power of the organization, the brand, and then we look at the stock price, our view is that the stock price doesn't affect the value of the franchise. And we are all committed to working together to get it there.

Great, thank you.

Bill Katz, Citigroup.

Thank you. Good morning, everybody. Just coming back to the dynamics between gross and net sales. Could you just maybe give us qualitatively or quantitatively a little more feel for the volume differentials in some of the other asset -- other distribution segments? Can we spend some time on fund-of-funds?

But are you seeing an acceleration anywhere else? I know you have been focused on the high net worth area for instance. But just any sense, maybe RFPs or mandates or finals on a relative basis year-on-year, quarter-to-quarter, just to give us some flavor of the dynamics of these flows? Thank you.

I think what may be best, first of all, is just for Joel to run through the allocations, where the AUM comes from, and then maybe compare that to where it was 12 months ago. I think that is the best answer to that question.

Yes. I mean you saw in the press release the current quarter pensions are 29%; 12 months ago they were 24%. Funds-of-funds are 17%; 12 months ago there were 21%. Foundations and endowments are 14% now; they were 15%.

Corporate and institutional are about the same; they're about 12%. Private banks are 12%; they were 11% a year ago.

Affiliated capital is about the same. And then individuals and family offices, 7% now, 8% a year ago. So you can see the big differential is the fund-of-funds are down, pensions are up.

So, just in terms of the color you mentioned, Bill, in most areas, very slow, steady growth. On the pension fund side very good growth; and on the fund-of-funds, as we mentioned, a modest reduction.

Okay. Then just in expense, I know we are talking about small dollars, but the percentages are nonetheless rather large. Was there a fair amount of investment spending in Q1? Or is it just typical merit increases? Just surprised by the absolute dollars.

The big difference, I think if you take a look at it, was other expenses. And most of that relates to our commitment fee on the new financing, which will go away once we hit July.

Okay.

How big was that, Joel?

It was about $800 million.

Okay, and just last question. When you look at the share count -- this is a little technical question, I apologize. It is the average number a good proxy for go-forward, or is there still some further on, just due to any kind of vesting or new grants?

The average number now is a good number to go forward with. Don't forget we had the offering back in November; and since it is a weighted average number, obviously that was a big part of that; and then some RSU vesting. But the number you see now is pretty much in line with what you will see going forward.

Thank you.

Marc Irizarry, Goldman Sachs.

Great, thanks. Dan, maybe just to beat this dead horse a little bit more on the gross sales and subscriptions, can you talk a little bit about the progression that you have seen? It looks like April, the implied gross subscriptions for your May 1 AUM were maybe a higher level than they have been tracking for most of the year.

Are you seeing some sort of sequential increase as we move throughout the year here? Are the markets maybe playing a role in the way people are thinking about putting money in?

You know, Marc, I think drawing trend assumptions from one month is not going to be -- is not likely to work going forward. We don't see any specific one-month trends.

I mean look, there is no doubt that for roughly the past nine months flows into the industry we believe have been slower than they were for the 12-month prior period. Don't forget, investors also, especially over a six-month period, sometimes they are more interested in macro; sometimes they are more interested in some certain regional strategies.

At Och-Ziff, our number-one fund-raising focus has always been performance. Been 17 years. If we perform, if we build the resources, if we think ahead about where the opportunities are going to be, if we demonstrate that Och-Ziff's performance is not just about -- well, when the market goes up we tend to perform; when the market goes down, we underperform.

It is about true absolute return, true excess return. And that is going to drive flows.

So when we look at not just our performance but the opportunity set going forward and what we think our edge is and how much stronger we think we are than at any time in our history, we feel great about the prospects. We'd always rather have the next month be right, and I hope your thought on trends is correct; but we don't worry about that.

Okay, great. Thanks.

Cynthia Mayer, Bank of America.

Hi, good morning. Just maybe a question on the distribution. You distributed $0.10 out of $0.13. Is this proportion typical of what you plan?

And in terms of what you are holding back, can you let us know how you plan on applying that to your variable-rate borrowing? What is your plan over the next year or so?

Cynthia, generally, I think you have seen the difference between Distributable Earnings and the dividend be about the same, which is -- the items I gave you are generally the reasons why. We don't plan -- it is a matter of what the business needs.

Now you also know, I think, that in July the old term loan will have to be repaid, which will probably be repaid at par. What remains on that note is about $366 million, and that will be refinanced with a new term loan.

That is basically what we have to do. There is a 1% amortization annually on the new term loan, which is similar to the old term loan. So you won't see a material difference between the two. But obviously the outstanding debt is a lot smaller after we did the equity financing last year.

Right, yes, I was just trying to understand whether you plan to pay down the outstanding debt gradually over time using what you hold back.

No. What we plan to do is we will -- the amortization that we have to pay, we will pay. We have no plans to increase the paydown on that debt.

Got it. Okay. Then just in terms of the end of the lock-up coming, can you let us know a little bit about just how you plan to handle partners' ability to sell, what the restrictions are on that internally? Or if you haven't come to that yet, just when you think you would be able to let us know what the process will be for figuring that out?

I mean we don't have anything to announce about that at this time. But at the appropriate time, we will inform everyone at the appropriate time about what our plans are.

I think the most important thing, as I said, is internally the feeling is, number one, everybody's committed, everybody's focused, everybody sees the opportunity. And the general feeling is that the share price does not represent that.

And our focus is on driving the performance and doing the things that are going to get the share price to where we think it should be.

Right, okay. Then on the incentive income it looked like it fell this quarter versus previous quarters. I mean not including fourth quarter, which of course is larger.

But was that lower than in the past just because there were fewer redemptions? Or did the timing of the incentives change in some way?

No, I think if you take a look at the public documents you will see we didn't take -- quarter-to-quarter we didn't take a tax distribution this year, which is the majority of the difference between the two.

Oh, okay. All right. Let's see -- and lastly, I am just wondering if you could review how much of the assets at this point are in three-year lockup, and how much -- how many of those would reach maturity this year.

Well, on the longer term assets, it is about 19%; a little less than half is in the three-year lockup. And they are going to mature about over the next two years equally, about half and half.

Okay, great. Thank you.

That concludes the question-and-answer session today. I will now turn the call over to Ms. Madon.

Thanks, Lacey. 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 George Sard or Jonathan Gasthalter at 212-687-8080.

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day, everyone.