Sculptor Capital Management Inc (SCU) 2013 Q1 法說會逐字稿

Good morning, everyone, and welcome to Och-Ziff Capital Management Group's 2013 first-quarter earnings conference call. My name is Bhupinder; 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. Please proceed.

Thanks, Bhupinder. Good morning, everyone. With me today are Dan Och, our Chairman and CEO, and Joel Frank, our Chief Financial Officer and Senior Chief Operating Officer.

I'd 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 thus out of our control.

Och-Ziff's actual results and financial condition may differ, possibly materially, from the anticipated results and financial conditions 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 2012 annual report.

The Company does not undertake any obligation to publicly update or revise any forward-looking statement whether as the 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 GAAP. Information about and reconciliations 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 the 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 welcome to our call today. This morning I will review our year-to-date performance and our assets under management. I will also discuss the investment opportunities we are seeing and update you on our capital flows. After that Joel will take you through our financial results and then we will take your questions.

The year-to-date performance of our funds through April 30 was strong. As we begin our 19th year in business we remain intensely focused on delivering consistent, positive, absolute returns with low volatility to our fund investors. We continue to allocate capital opportunistically across our strategies and geographies which were central to the returns that we have generated this year.

Our performance reflected the value and the flexibility that our multi-strategy approach and international capabilities provide. These attributes enabled us to respond quickly as market conditions changed and to capitalize on investment opportunities globally.

Institutional investors remain focused on allocating capital to alternative asset managers who can provide access to various investment strategies and platforms that have proven performance metrics. Year-to-date through May 1, we experienced solid organic net inflows and remain confident that allocations to the industry will become more significant as institutional investors further seek to mitigate risk and enhance the return of the equity and fixed income portfolios.

Now let me turn to our assets under management. As we announced this morning, our assets under management as of May 1 totaled $35.6 billion increasing $3 billion or 9% to $32.6 billion on December 31 of last year due to $1.8 billion of performance revenue appreciation and approximately $1.2 billion of net inflows including $597 million of CLO assets. These amounts included $400 million of performance-related appreciation for the month of April and $300 million of net inflows on May 1.

Our year-to-date net inflows primarily reflected an ongoing level of strong interest in our credit products. Our dialogue with investors remains very active about both our multi-strategy and credit platforms and we are pleased with the diversity of investors we are in discussions with. Our assets under management from pension funds increased and we believe that our inflows from this source will continue to grow.

We are devoting more time to building new client relationships in addition to managing existing ones. We are making a substantial investment in expanding our [fund] investor relations capabilities and have made progress with senior hires for this team in several areas including credit. We plan to expand our coverage teams globally and believe that over time these steps will contribute to increased capital flows.

Now for a quick update on our fund's investment performance. Year-to-date through April 30 our Master Fund was up 5.4% net, Europe Master Fund up 3.5% net and our Asia Master Fund up 10.7% net. These returns were generated with about half the volatility of the S&P 500 Index on a weighted average basis for these funds.

Our year-to-date performance was driven primarily by our credit-related strategies in the US and Europe and by long/short equity globally. We remain fully invested in the Master Fund.

We are optimistic about the investment opportunity set worldwide. While market fundamentals were stronger during the first four months of this year, uncertainties in Europe, China and elsewhere persist. We continue to believe the current environment plays to the strengths of our investment approach.

We see compelling opportunities and long/short equity and the potential for increased activity in merger arbitrage. We also see additional opportunities in US structured credit. Outside the US we believe that Asia is becoming more interesting, particularly Japan given the Bank of Japan's recently announced stimulus plan. With that let me now turn the call over to Joel who will take you through our financial results.

Thanks, Dan. This morning I will discuss our 2013 first-quarter results and review how we're thinking about expenses for the second quarter. For the 2013 first quarter we reported GAAP net income of $26 million or $0.17 per basic and diluted Class A Share. A discussion of our GAAP results is contained in our press release for your reference.

Now let's turn to the details behind our 2013 first-quarter economic income beginning with revenues. Management fees totaled $126 million, essentially unchanged from the 2012 fourth quarter. From January 1 to April 1 our assets under management grew by $3 billion to approximately $34.9 billion.

Our average management fee was approximately 1.56% for the quarter compared to 1.6% for the 2012 fourth quarter. The sequential change was primarily due to growth in our dedicated credit platforms and CLOs. As a reminder, our average management fee includes the effect of non-fee paying assets as well as our dedicated credit platforms, our CLOs and other alternative investment vehicles.

The management fees for our credit products are lower than those for the multi-strategy products, which reflects market convention for credit assets. Incentive income was approximately $101 million during the first quarter. This amount was primarily attributable to the incentive that crystallized on approximately $1.5 billion of longer-term assets under management.

Of this amount approximately 59% resulted from the restructuring of [returns] to certain assets in our credit platforms during the quarter due to the expansion of our relationship with an existing investor. The remaining 41% was attributable to the portion of our three multi-strategy assets that matured during the first quarter.

As I mentioned on the last call, approximately $765 million of our three-year multi-strategy assets will crystallize in the third quarter of this year. However, we can't predict performance and therefore the amount of incentive income we may earn on these assets.

Now let me turn to our operating expenses. Comp and benefits totaled $23 million during the first quarter, of this amount salaries and benefits were $21 million, a 7% increase from the 2012 fourth quarter. First-quarter comp and benefits also included $2 million of bonus expense.

Salaries and benefits were 17% of management fees in the first quarter. We expect this ratio to continue to be approximately 16% to 18% of management fees for the second quarter of this year.

Now turning to non-compensation expenses. Non-comp expenses totaled $31 million in the first quarter, a slight increase from the 2012 fourth quarter. Non-comp expenses totaled 24% of management fees in the first quarter. We expect this ratio to continue to be 24% to 26% for the second quarter of this year.

Our 2013 first-quarter effective tax rate was 21%. We estimate that this rate will be in the range of 20% to 25% for the second quarter of this year. As a reminder, this range is based on our estimated 2013 full-year effective tax rate which is subject to variables that won't be finalized until the fourth quarter of this year. Because of these factors our full-year tax rate can vary materially from our estimates.

Our 2013 first-quarter distributable earnings were $137 million or $0.29 per adjusted Class A Share. As you saw in our press release this morning, our dividend for the 2012 first quarter is $0.28 per Class A Share.

As we typically do, we use cash to fund items related to the operation of our business. Consistent with prior quarters 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'd like to again highlight the operating leverage of our financial model as well as its simplicity. The growth in our management fees and incentive income should more than offset growth in our operating expenses. Both our management fees and incentive income are paid in cash and flow through to the bottom line and our dividend policy is to pay out essentially all of our distributable earnings each quarter.

Any incentive income we earn as revenue is not subject to claw backs and the majority of our assets under management are not subject to hurdle rates. Both the operating leverage and simplicity of our model were clearly evident in our financial results last year and in the first quarter of this year and are important drivers of our earnings growth and margin expansion as our business grows over time. With that we will be happy to take your questions.

(Operator Instructions). Bill Katz, Citigroup.

I also missed the first few minutes of your opening comments, so you may have addressed this, if so, again, I apologize. Just talk a little bit about the accelerated crystallization and the net economic impact on a go-forward basis, maybe what happened and what -- the opportunities here. And then away from this particular relationship, are there other relationships that have a similar type of opportunity as well?

So basically, Bill, what this was was we have a strategic investor where we are restructuring the relationship. They were invested in our longer-term credit assets for about two and half years. In order to expand the relationship and take more assets to manage we restructured the entire relationship and earned incentive on the assets they were already invested in.

So again, are there other opportunities going forward? Of course, we have other strategic relationships and there may be more. Will this type of crystallization happen again? We can't predict that and, again, it could be a one-off thing. But again, as these relationships mature and grow there could be different types of things and different types of structures that could create this kind of incentive.

On a go-forward basis though is there any detriment to the economic relationship just given the expanded relationship?

Not at all.

Okay. The other question is a little more tactical in nature. You mentioned that -- in the press release that you see good demand in the pension side for volume. I think fund to funds has been an area of weakness just given what is going on at the industry at large.

Could you talk a little bit about the ins and outs, if you will, and what is happening on the fund to fund side? Is there any sort of dissipation -- slow down, excuse me, in the redemption pressure there?

Our fund to funds as a percentage of AUM it is roughly 15%, so that stabilized at the levels -- decent levels. We feel very good about the fund to funds who are our clients. We think they've done a good job as the industry has changed of demonstrating to their underlying clients what value they provide, why they are important, how to provide solutions for their clients. We are very supportive of these fund to funds and we are optimistic that going forward they will grow and we will grow with them.

Okay. All right, thanks for taking my questions, guys. Again, sorry for the background noise.

Daniel Fannon, Jefferies.

First, just can you remind us what percent of total AUM is in the three-year lock up at this -- or in some sort of longer-term lockup structures?

Our longer-term assets are about 20% of AUM and the three-year tranche in particular is about 4% of that.

4% of total, okay, great. And also just as a quick follow-up, I just noticed quarter over quarter it looks like credit as a total percent of the Master Fund was down a little bit. Is that a function of opportunity set? I know it was obviously a big theme throughout most of 2012, but if perhaps you could kind of touch on that a little bit as well it would be helpful.

I wouldn't read a lot into a small shift, but we are always dynamic in terms of moving around (inaudible) opportunities. Credit in particular -- credit spreads tightened across the board throughout most of 2012 and early 2013. So we have been shifting our portfolio, taking advantage of the resources, the uniqueness of the opportunities that we have. And we do believe that you are going to continue to see differentiation between our performance in those areas and most of our competitors.

Great, thank you.

Roger Freeman, Barclays.

Just on the restructuring of the LP agreement does -- is it fair to say that those crystallized fees are pulled forward all else being equal from what you earn at the end of this year?

No, I'm not sure -- are you asking will that have been earned at the end of this year (multiple speakers)?

Assuming that there were no returns between now and then, I mean --.

Yes, not necessarily, not necessarily. So they have been invested for two and half years, this was our longer-term assets which run about three years. So it doesn't mean (multiple speakers) --

Oh, okay.

-- it would have been -- okay, so it would have been crystallized at some point anyway. What this allowed this investor to do was access more of our capabilities and our products, and in order to do that we just restructured the whole relationship, made it more flexible for them and they gave us additional assets to manage as well.

Okay. But if they were -- would you say two years and change and -- they might have been part of the 3Q three-year crystallization?

They weren't part of the three-year multi- (multiple speakers) tranche, it is a different product.

Got it, okay. And then I guess just on the -- oh, yes, I wanted to ask just on -- credit obviously has become a bigger focus for you and you have done very well in it. It is the -- I think it's sort of the one asset class that's not hedged. And I'm just thinking about the -- as that has become bigger and potentially more so, does that have an ability to increase the volatility of returns or it is kind of reduced the low correlation just because you are kind of subject to the credit -- the absolute credit market returns?

We don't think so. First of all, obviously credit has become -- we think we're performing very well in credit and we've got some new products and some new investor relationships. But if you look at the multi-strategy fund, event driven long/short equity is roughly 50% of AUM as opposed to early 2012 when that number was closer to 30%.

So that -- part of the point of having different investment disciplines, the different geographical capabilities is to move where there is opportunity, try and be ahead of the opportunities on the way in and, very important, I think we have been very good historically and -- I was going to say 18 years, but I guess it is now 19 years -- at moving out before it is too late. So there is a lot of shifts going on.

Japan which was completely uninteresting in early 2012 has become very interesting lately. You can't predict these things in advance, that is why you got to have people on the ground and be prepared.

Just from an overall sort of portfolio risk management perspective, is there an upper limit to what you are comfortable having credit as of a percent mix of the total?

Well, I think for all of our asset classes there are limits based on the risk return, based on liquidity, based on downside scenarios. We always run our risk management and assume what is the downside in a bad environment, not a good environment. So you are correct that in general credit instruments become less liquid than large-cap equities in difficult environments. And so, look, we have always run our risk management in that way and we will continue to do so.

Okay. And then just lastly, in terms of the pace of discussions and, more importantly, the time horizon from initial dialog to funding, is that starting to -- are you seeing that shrink in any meaningful manner?

I don't think we are seeing it shrink, but don't forget part of what we're trying to do is in certain instances not have it shrink. To the extent that we are trying to get a multi-six-figure investor where we are providing a solution to them, meaning it's not just oh, okay, here is a product you have, I'll put it in, let's move on. Those things take a long time.

On the other hand, getting larger amounts of assets committed for longer periods of time that fit the client really well, where we think we are really situated to perform and excel for them is very important. We noted -- Joel can give you some better numbers, but as a general matter as our three-year tranche -- as investors' investments in our three-year tranches have expired in the vast, vast majority of cases they have reinvested and added and/or looked at new products.

So with a lot of these investors we are not necessarily looking to shrink the timeframe, we are looking to be their manager of choice on a multi-product basis and on a strategic basis and make sure that they are happy with our returns, our risk management and everything else that we do.

Okay, great, thanks, Dan.

Ken Worthington, JPMorgan.

Hi, this is [Paul Angs] on for Ken. Your focus on long/short at 50% is as big as it has ever been in terms of allocation by strategy. I'm wondering if you think that this can get much bigger. And given its size is Och building more resources here or is it just able to scale with what it has?

Well, first of all, you have to realize that that is across the globe. So if you look at the actual allocation in any geography it is not particularly substantial relative to -- we are generally not one of the largest players in terms of size in equities in any of the geographies. So we can maintain our liquidity, maintain our [nimbleism].

Every asset class we are in has different risk return characteristics, has different liquidity characteristics. I think we've shown historically that we are pretty good at anticipating how that can change particularly to the downside before it changes. Very well hedged, liquid, long/short -- large-cap long/short equity -- has different risk characteristics and other asset classes.

But we are very comfortable with the -- not just the performance of the fund, and not just the risk profile of the fund, but we are also very comfortable with how our differentiation and how our resources are enabling us to do some things that others aren't necessarily doing which also reduces the risk.

Great. Thanks very much.

Robert Lee, ABW.

Maybe going back to the credit products, I mean is that -- a couple of things there. Number one, as those become a larger piece of the overall business and I guess my understanding is that's obviously not the CLO products, but the other credit products are more of the PE style type structure.

Is there any way of getting a sense of kind of the -- I guess I will call it the accrued performance fees that you kind of have as of this date that in theory could be crystallized at some point down the road -- maybe somewhat similar fashions with some of the PE firms or some of the other firms kind of report each quarter?

Obviously we don't disclose that at this point and the -- we will evaluate and we constantly evaluate based on the size and the quantity of what is invested in those assets when we will disclose. I know that is not exactly what you are looking for, but we can give you a sense of the size of the asset. The non-credit -- the credit assets that are in CLOs are about $3.5 billion; the rest of the assets fit in the multi-strat funds. So it gives you a sense of size.

And I think the industry has some information on where those types of asset structure credit and corporate credit have -- what they have been returning over time. So you can get a sense. But at this point we are not disclosing that type of detail.

Okay and maybe -- I appreciate that and hopefully we'll get some more down the road. But maybe drilling into the credit a little bit more within that kind of credit bucket, I mean are there -- is that all one big fund that you are kind of raising assets in? Is it really kind of a combination of maybe some SMAs, is there -- I'm just guessing -- a mezz fund and a distressed fund? How should we think about the product set underlying that in terms of its makeup?

The main things that we are doing right now are structured credit in the US, structured credit in Europe and structured -- and credit on a global basis. I think the key strategically is that we believe we are just at the beginnings of the growth in our credit business. This is an area where we think that we can add capabilities that benefit everybody.

When we added the CLO capability that benefited all of our constituents, it added resources. There was an enormous amount of capacity on the loan side. It worked for multi-strategy investors, credit investors, people internally, et cetera.

We think -- when we look at the size of some of the credit businesses around the Street, and some of them are very good and very well-run, we think there are a host of things that we can do going forward that will benefit all of our constituents as we add them, make us stronger, give clients more options for us to provide solutions and hopefully grow the assets substantially.

Okay, I appreciate it. And maybe one last question just on the multi-strat products. It has been clearly more of a challenge to generate net flows into those strategies broadly. Is it really simply just kind of the mix where kind of the legacy fund to funds or high net worth isn't -- private banks are moving out and pensions are moving in, so it's really just the mix and there is a little bit of timing between the two?

Or is there something maybe broader that you are sensing that there is just not as much even institutional interest in kind of the traditional multi-strat products as you thought or maybe there used to be?

With us and is primarily the mix, you've seen it in the numbers. You see a big reduction in fund to funds as a percentage of AUM over a certain time period and a commensurate increase primarily on the pension side as well as on the private bank side.

We've had very substantial interest and continue to have substantial interest on the institutional side. As you've pointed out, there have been outflows as well as inflows, but we definitely continue to do very well and see strong interest in terms of the inflows.

Great. Thanks for taking my questions, guys.

Cynthia Mayer, Bank of America-Merrill Lynch.

Maybe just following up on all the credit questions, I'm wondering if you would just give a little color on the investors of the credit product and are they -- is the mix of investor types and geography any different for them than your Master Fund and other strategies? I will just leave it at that.

The mix is [absolutely] different, but I will say as a general matter, most of the investors and most of the dollars invested in our credit products today are from investors with whom we already had relationships. And that makes sense because those are the first people that are going to see what you do and be on top of it.

So we did mention that -- that we are going to be focusing globally, in terms of all our products, on expanding and growing the number of relationships that we have. But we certainly think on the credit side there is a lot of opportunity to expand that.

Okay, so it is mostly existing -- from existing relationships of pensions or --?

I don't think we have given a breakdown of the credit fund specifically. But as a general matter the answer is yes, most of the assets are certainly institutional.

And just to point out, that is expansion of current relationships, not necessarily a current investor moving from one product to another. It's an expansion because obviously we are providing more capability.

Right, right. Presumably they are taking their assets from someplace else and bringing them to you in addition to what they already have?

Correct.

Okay. And I guess just in terms of the mix of demand for Master Fund, are you finding continued demand for three-year -- for the three-year lockup or for the more one-year -- traditional one-year structure?

A little bit of both. In other words, we do see interest in the three-year tranche, but people who are invested in that three-year tranche might move to a one-year lock up, they may move to other products. So it is sort of a mixture of everything. But there is still interest in the three-year tranche as well.

Okay. And do you think there might at some point be more interest in the Asia and Europe products that you have as -- maybe as people get a little less risk-averse or they see some of the really strong returns in the Asian product? Or is there something more than simply returns that is deterring people from that? Like they really just prefer a diversified product instead of something that has got a focused geography to it?

Look, we do think at some point there will be more interest. What we see going on is I think investors look at the three major geographic regions and say, okay, even if I know that things are not going well in Europe it still may be a good investment opportunity. And credit may be very attractive if assets are sold but if not they aren't.

And Asia, which was kind of dormant and uninteresting for most of 2012 all of a sudden this thing happened in Japan that is at once in a 20 year or maybe once in a 50 year kind of change -- transformation and you weren't going to see it coming unless you were on the ground.

So I think investors are looking, I know from our discussions they say, look, I feel even if I know where the economies are going I'm not sure I know what that is going to mean for the investment classes and when. So I think I am better off giving you the money to manage on a global basis as you see fit.

At some point in time interest will develop in Europe or Asia more specifically. Look, right now we do have specific information in Europe on the credit side. So in response to that, we did create an investment product that focuses on European structured credit -- European credit only. But we do think it will happen at some point.

Okay, great. Thanks a lot.

Patrick Davitt, Autonomous Research.

You mentioned as a lot of the three-year money crystallized most re-upped and actually put more money with you. And it looks like the vast majority of your 1Q flows were on the March 1 flow date. Is that related at all to that phenomenon?

No.

No, okay, thank you. And then, it doesn't look like you accrued any compensation on this large performance fee. Will that flow through in 4Q or is there not going to be any compensation on that?

No, and basically the way we look at discretionary bonuses is based on the overall economic for the firm for the full year. This is only one component of that. So at the end of the year when we understand the full economics of the firm and people's performance that is when we make decisions on discretionary bonuses.

All right, thank you.

Bulent Ozcan, RBC.

A quick question on the inflows. I'm trying to assess what percentage of the inflows are from continuous customers, existing customers versus new customers? Could you give a breakdown of that?

We actually don't -- we don't break that information down publicly.

Okay. And then in terms maybe of pension fund opportunity -- it's just like you guys are getting more traction there. How big is the opportunity and how deep can you penetrate the market? Are pension funds kind of hitting their limit in terms of exposure to all the new asset managers? What is your opportunity there?

If you look at the behavior of pension funds and we know what you are referring to -- you are talking about public pension funds in the US, I think, because that is primarily where the focus has been. I think they have shown they are interested in increasing their investments with alternative managers, specifically those alternative managers they feel very strongly about.

You saw a number of -- you saw a number of investments in excess of $1 billion made with certain funds by certain investors; we were really honored to be one of them and we think that is [indicative]. But we also want to remind you there are corporate pension funds that are -- have not been nearly as focused on alternatives, we think that is an opportunity.

Internationally there are a lot of pension funds in other countries like Australia that have had compulsory savings which is an enormous pool of assets. We've done well there, but we think there is a lot of opportunity.

Europe has been relatively dormant for a few years for reasons I'm sure you can all understand. We think there is a real opportunity for some pick up in flows from Europe.

The Middle East, the (inaudible) funds in the Middle East constantly bring in new capital -- when you're talking about sovereign wealth funds, they are not the topic of [these events]. Remember as a general matter sov wealth funds have a huge amount of excess capital and take in more every month on every day.

So we think there is a lot of opportunity around the globe. Our focus -- of course we want to do really, really well with pension funds, but we think our model -- we think we have done there -- well, not because we targeted pension funds, but because we have got the performance, the products and the solutions providing the type of relationship that they are looking for.

My final question deals with your global -- the effort to build the global coverage team and also the performance out of Europe in the April month. Could you just give us an indication of what the goal is in terms of the coverage team? And as far as Europe, you guys have great performance; April seems a little weak given what you have reported this morning. What was driving that performance in Europe? Thank you.

Well, in terms of the global coverage amount, I think what you are asking about is the investor relations coverage team. We are just -- we have embarked on a plan to expand the size of our investor relations coverage team.

We think that the number of investors with whom we can have relationships, the complexity of each relationship, the number of products we have, the reputation of the Firm keeps expanding. And so, it makes sense to expand the size. It allows each investor relations person to give more focus -- even more focus and more attention to those clients who would like it as well as touching more clients.

In terms of your -- I don't have any specific comments on the performance of any one geography last month. We think that -- we feel very good about our performance to this point this year across products and across the globe and I believe investors feel the same way.

Thank you very much.

Marc Irizarry, Goldman Sachs.

Just, Joel, quickly on the distributable earnings and the dividend. So I guess if the base distribution was maybe $0.12 to $0.13 and the rest was from the crystallizations this quarter, when you look out to the fourth-quarter distribution should we expect that your distribution will be really dependent on the performance from here on in? And is there -- should we just be thinking about it right now, there is no comp expense associated at all with that dividend that we are seeing?

No, it's performance for the full year, Marc, because this is only one product and one investor, so it is performance for the full year, not just from here and at the end of the year. And in terms of compensation, as I said earlier, we take every element of the economics on the overall economics of the Firm into account and people's performance, et cetera.

So, we will -- at the end of the year we will look at that and then assess what we think makes sense competitively and what makes sense for the Firm and we will make a decision then in terms of discretionary bonuses.

Okay. And then on the credit business, you mentioned that there are a lot of existing investors there and I guess you have one that sounds like just on the face of it they are relying on you even more to make the decisions given what is going on in credit markets and I guess how -- what their performance was there too.

Can you just give a sense of -- it seems like the credit business, you can argue that there is some opportunistic investors who are in there versus strategic allocators to that asset class. Can you just kind of differentiate of the $3 billion or so that you have in credit is that really more of an opportunistic type business for now in terms of the client dollars in there or are there real strategic allocations towards credit as an asset class in those dollars in that bucket?

Well, of course credit is very much a strategic business for us and we believe that the investors that we have look at credit strategically. That doesn't mean they don't move from one asset class to another opportunistically. But, look, there are some firms that have very large amounts of capital under management on the alternative credit side, on the alternative fixed income side and our goal is to move in that direction.

We think we are going to do it by performing, by creating the right products, by finding the opportunities. We are also going to take advantage of our resource. For example, we have been very focused for at least two years on -- maybe of credit in commercial real estate.

We looked ahead and said, okay, the banks want to have less; the banks don't want to put as much new product on their balance sheet. We've got a structured credit capability; we've got a private equity real estate group that can help us research and source opportunities. That is an edge for us; it is an edge for our clients. Weather we turn that into a specific product or just use that to enhance other products we will see.

But strategically I think a lot of institutions are looking at their fixed income portfolios and getting a yield of -- [you tell them the] exact number, but they are getting a yield of 2%-ish or something in that neighborhood. So if their goal is to get 7.5% or 8% and they are getting something closer to 2%, we think there is a very, very substantial opportunity for those alternative managers who can provide the right types of returns on a strategic basis.

Okay. And then can you just talk a little bit about -- you mentioned some of the folks you have hired to further build out your relationship capabilities. What is the strategy to tap into the high net worth/retail channel at this point and any update on progress there?

Those are really two separate areas, which is fine. The expansion we spoke about is primarily the focus on the institutional side. A few years ago we did decide that it made sense to focus on the private banks in terms of high net worth; we think that has worked well.

We are being patient and thoughtful on the high net worth side. We want to make sure that anything we get involved in is something that is going to be a good experience for the client. We are very conscious of exactly who the intermediaries are, what the level of due diligence, what the level of client understanding is. So I think that long-term that is definitely an area of interest and focus for us. It is not the area we are pushing hardest on right now.

Okay, great. Thanks.

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

Thanks, Bhupinder. Thank you, everyone, for joining us today and for your interest in Och-Ziff. If you have any questions, please don't hesitate to call me at 212-719-7381. Media inquiries should be directed to Jonathan Gasthalter at 212-687-8080.