Sculptor Capital Management Inc (SCU) 2013 Q3 法說會逐字稿

Good morning, everyone, and welcome to your Och-Ziff Capital Management Group 2013 third-quarter earnings conference call. My name is Conti and I will be your event coordinator for today. At this time all participants are on 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, Conti. Good morning, everyone, and welcome to our call today. With me are Dan Och, our Chairman and CEO, and Joel Frank, our Chief Financial Officer and Senior Chief Operating Officer.

As a reminder, today's call may include forward-looking statements. Among other things these statements reflect management's current views on assets under management, the capital flow environment, expense levels, financial performance, investment opportunities and strategic business priorities, many of which are inherently uncertain and outside our control.

Och-Ziff's actual financial results, investment performance and assets under management may differ, possibly materially, from those indicated in these forward-looking statements. Please see our 2012 annual report for a description of the risk factors that could affect our financial results and our business. The Company does not undertake any obligation to publicly update any forward-looking statement whether due to 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 our website at www.ozcap.com.

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 from 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. With that I will now turn the call over to Dan.

Thanks, Tina. Good morning, everyone, and thank you for joining us. This morning I will briefly review our year-to-date investment performance and our assets under management. I will also update you on our capital flows and on the environment we see for investment opportunities globally.

During the third quarter and again in October we generated strong performance with a low volatility for our fund investors, further extending the strong absolute turns we generated in the first half of this year. The flexibility we have to move capital across strategies and geographies was again evident and we remain highly opportunistic in capitalizing what we viewed as the best investment opportunities.

Our investment teams operated within the framework of our consistent and disciplined process to identify opportunities globally. This approach has been central to the repeatability of our returns historically and the subsequent value we have created for our fund investors.

We remain confident that allocations to hedge funds will grow. We believe institutional investors will continue to increase the proportion of their portfolios invested with alternative managers to enhance their equity and fixed income returns.

According to HFR, net inflows to the hedge fund industry during the third quarter of this year were the highest in nine quarters and year to date they exceeded those for all of 2012, suggesting an improving trend line. While these are just a couple of data points, we believe that we are well positioned to benefit as capital allocations to the industry's increase.

Now let me turn to our assets under management. As you saw in the 8-K we issued this morning, our assets under management as of November 1 totaled $38.5 billion. This amount reflects growth of $5.9 billion or 18% from $32.6 billion on December 31. The year-to-date increase was driven by approximately $3.5 billion of performance-related appreciation and $2.4 billion of net inflows which includes the two CLOs we closed this year.

Pension funds and private banks remain the largest sources of our net inflows year to date. We continue to experience strong interest from fund investors across our platforms and have made solid progress in establishing relationships with new investors.

Excluding the CLOs we have raised, our net inflows through September 30 have improved significantly year over year, driven by an increase in our gross inflows which are more than 50% higher than they were for all of 2012. Although we can't predict future flows, the trend in our net flows appears to be improving.

We also made significant progress in expanding the capabilities of our fund investor relations team through additional hires globally and restructuring the team to focus on important sources of new capital. We believe that these steps position us to attract significant additional assets, not only to our well-established multi-strategy platforms, but also to our growing credit, real estate and long/short equity platforms. These four areas remain our strategic priorities for asset growth, although we continue to look for additional opportunities to meet the needs of our fund investors.

Now let me give you a quick update on our fund's investment performance. Year to date through October 31, our Master Fund was up 10.9% net, our Europe Master Fund was up 10.1% net, and our Asia Master Fund was up 10.5% net. These returns were generated with 36% of the volatility of the S&P 500 index on a weighted average basis for these funds.

Our year-to-date performance continues to be driven primarily by our long/short equity and credit-related strategies. During the quarter we took advantage of market volatility to add to our long/short equity allocation where our focus remains on selecting positions with defined events and catalysts while also seeking investment opportunities with strong underlying fundamentals.

We remain fully invested in the Master Fund. In the US with an improving economic backdrop we continue to be cautiously optimistic about growth prospects for the medium-term, but we remain patient, thoughtful investors. We believe the current environment plays to our strengths and our global reach. With that let me now turn the call over to Joel.

Thanks, Dan. This morning I will review our 2013 third-quarter results and discuss how we are thinking about expenses for the fourth quarter. For the third quarter we reported GAAP net income of $25 million or $0.16 per basic and $0.14 per diluted Class A share. As always, our press release includes a detailed discussion of GAAP results.

Now let me turn to the 2013 third-quarter economic income starting with revenues. Management fees totaled $138 million, increasing slightly on a sequential basis as assets under management grew approximately $1.2 billion from April 1 to July 1. From July 1 to October 1 our assets under management grew another $1.7 billion to $37.8 billion.

Our average management fee for the quarter was approximately 1.5%. As a reminder, the management fees we earn vary based on which platforms our assets under management are invested in and we anticipate that our average management fee will fluctuate over time based on the mix of products that drive our growth.

Incentive income was approximately $72 million for the third quarter. The majority of this amount related to crystallize incentive income earned on the expiration of approximately $800 million of three-year multi-strategy assets with the remainder related to redemptions. The majority of these assets were reinvested for an additional three years in the same multi-strategy platform and the remainder across other platforms within the firm.

Now let me turn to our third-quarter expenses. Comp and benefits totaled $28 million during the third quarter of this year. Of this amount salaries and benefits were $23 million, up 6% from the second quarter, and the remainder were primarily guaranteed bonus expense. The increase was driven by our hiring activity globally during the quarter on both the investing side as well as the infrastructure side.

Salaries and benefits were 17% of management fees in the third quarter. We anticipate that this ratio will remain approximately 16% to 18% of management fees for the fourth quarter of this year.

In addition to employee bonuses our partner incentive plan will also impact our compensation expenses in the fourth quarter. As a reminder, our eligible pre-IPO partners may receive an annual discretionary performance award which will be a mix of partner units and cash. We can award a maximum of 2.8 million units this year and 10% of the annual incentive income we earn up to a cap of $39.6 million.

Now turning to non-compensation expenses. Non-comp expenses totaled $29 million in the third quarter, a decline of 15% sequentially primarily due to a net increase of professional fees. Non-comp expenses totaled 21% of management fees in the third quarter and we anticipate this ratio to be 21% to 23% for the fourth quarter.

Our third-quarter of effective tax rate was 16%, declining sequentially due to an increase in our estimate of annual incentive income for this year which impacts our full-year effective tax rate calculation.

As I have discussed in the past, our effective tax rate is impacted by several factors, including the amount of revenue we generate and how our revenue and expenses flow through our legal entity structure. As a result our actual quarterly and annual effective tax rates can vary materially from our estimates. We estimate that our effective tax rate for the fourth quarter of this year will be in the range of 15% to 20%.

Our third-quarter distributable earnings were $130 million, or $0.27 per adjusted Class A share. As we disclosed in our press release this morning, our dividend for the third quarter is $0.25 per Class A share.

As we approach the end of the year and begin to look towards 2014, I'd like to again emphasize the elements of our model which position us to deliver superior earnings growth over time. Our year-to-date investment performance has been very strong, demonstrating the repeatability that our investment and risk management processes have achieved historically. Our assets under management have increased by 18% during the same period.

As Dan mentioned, current and prospective fund investors have reacted positively to our performance and this remains the most important criteria in their decision to invest capital with us. We believe we're well-positioned for additional asset growth and that we will see continued acceleration in organic net inflows as our business diversifies.

Complementing our investment performance and asset growth is a financial model that is simple and transparent with a clear linkage between our distributable earnings and our dividend.

First, the management fees we earn more than exceed our fixed operating expenses and our cost structure is scalable, meaning that we expect our operating expenses to grow at a lower rate than our assets under management over time. The resultant operating leverage flows directly through to our distributable earnings.

Second, we earn 20% incentive income annually in cash on the majority of our assets as we generate investment returns. And the 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. Cash bonuses, which are discretionary, are the only operating expense paid out of the incentive income; the remainder flows directly through to our distributable earnings.

The assets we have in platforms and earned incentive income cumulatively over a multi-year period, such as our three-year multi-strategy or dedicated credit assets, also create significant additional earnings potential. [These are effectively] the structures reflected in our distributable earnings and dividends both this year and last year.

Third, as our assets grow we earn management fees and incentive income on that growth. Year to date through November 1 our assets under management have increased by $5.9 billion. We are earning management fees and incentive income on that asset growth which have been and will continue to be reflected in our earnings this year.

The compounding effect of asset growth on our distributable earnings and dividends can be significant over time. Henceforth our dividend policy is to distribute substantially all of our distributable earnings as dividends to our shareholders each quarter. We believe that the combination of these elements is a powerful driver of our current and future earnings potential. With that we're happy to take any questions you have.

(Operator Instructions). Robert Lee.

Maybe a first question for you, Joel. Just could you maybe help us think about incentive-related comp in the fourth quarter? I mean, if I go back and look at it, and I've kind of thought of it in the context of your full-year revenue generation, some proportion of that. And I mean I think last year, just to use that as a framework, but I think it was like 19%.

So, is that the right way to be thinking of your incentive comp in the fourth quarter as really a function of the full-year revenue? And then maybe what is kind of a reasonable range we should be thinking about four this year?

No, I think the easiest way to look at incentive comp, Rob, is -- as you have modeled it throughout the year, is just look at the performance that we are going to generate over the next couple of months and add that to the commutative effect of where we are now. I think that is the easiest way of modeling this out. So you will look at asset growth, obviously you will factor that in. But typically it's based on the investment that -- the investment returns that we have over the next couple of months.

Okay. Maybe a question for you, Dan. I'm just curious, you mentioned in the prepared comments that you are seeing -- continuing to see demand from pensions and private banks. But I am just curious within the pension segment.

Do you think part of what you're seeing as some increased demand, is that driven -- how much of that is driven by the fact that, hey, you have had a strong equity market the last year and a half or so and a lot of pensions may be reaching kind of their -- it is time for them to reallocate, take down some of their equity exposure here or there and that yourselves and maybe some of your peers are the beneficiaries of that? Or do think that is maybe having some near-term effect?

We are seeing demand and client allocations in a number of different areas. If you look at credit, we presently have about $6 billion of assets under management in the credit area. You will recall some topic on this calls we would talk about what it's going to take to get to the first billion. We've also got demand for a multi-strategy product, a lot of interest in the real estate side, a lot of interest in the long/short equity side.

So what we are really seeing is across the board interest in our products, across the border interest in the way Och-Ziff does things, a desire to establish new relationships with Och-Ziff and to increase relationships that have occurred. I don't know if you heard Joel note on the call, the three-year tranche that generated most of the incentive this quarter rolled into a new similar structure. So that is always very, very important to us.

All right, and maybe the follow-up to that, I mean if we look ahead to next year, you had a lot of assets kind of roll off their initial three-year tranche I guess this year, this quarter I guess, earlier in the year. Again, as we kind of look to next year my sense is that a lot of -- there's not as much of that next year that it's a good thing that things have rolled over into a new three-year tranche. Just kind of on a near-term basis you may not have as much of that kind of phenomenon next year where you have things rolling off a three-year tranche. Is that correct or --?

Well, I think the thing to think about is some have reinvested in a three-year tranche again, some have reinvested in other products. So approximately 4% of AUM is in our three-year multi-strategy tranches. But there are also some credit assets as well that are in those three-year products and you may see some of that during the year next year.

Great, thanks for taking my questions, guys.

Bill Katz, Citi.

Hi, this is Steve Fullerton filling in for Bill. How much of the recent traction improvement flows that you guys have seen is from new investors versus LPs consolidating assets?

We don't disclose those numbers, but it has been across the board. It's new investors, it's current investors increasing, it is current investors interested in expanding the relationship with us. This concept to them, they look at the quality of our investment products, they look at the quality of the organization, of its controls, of its operations, of its transparency and we think all of that is playing out well.

We also feel good about the fact that the expansion -- the expansion we feel is benefiting all of our investors. For example, on the credit side we've now got $6 billion of assets under management on the credit side. We have dramatically increased our resources and capabilities over the past several years on the credit side.

If you are an investor in a multi-strategy fund you are benefiting from that. You are benefiting from the flows, you're benefiting from the capabilities, you're benefiting from the increased product capability -- same thing with the real estate side. There is no doubt that investors in the credit funds and the multi-strategy funds have benefited from the capabilities we have on the real estate side.

And we believe investors in the real estate side also benefit from the flows and product coming from other areas of the firm. And that has always been -- it's been a very important part about how we think about growing. Where do we think we have capability, where can we deliver value to clients and excess return to clients and where can we do it in a way that benefits all of the investors.

Okay, great. And then can you just detail the factors that drove the decline in the fee rate? I know you guys said mix, but was there anything else and how should we think about that going forward?

No, it is mostly -- you talk about the management fee, rate. Most of it relates to flows into our credit assets, which typically, as you know, have lower management fees than our other funds. But this is a very important part of our organic growth and our assets under management. But that is basically the reason.

Okay, great. Thanks a lot.

Marc Irizarry, Goldman Sachs.

Dan, can you talk a little bit about the -- just the progress in the I guess high net worth channels and even maybe some of your strategic initiatives that are underway in terms of building out the business in some of the more retail oriented channels?

Sure. Look, our goal -- right now we haven't done anything specific that we are discussing in terms of those new channels and platforms. Our goal, which is similar to what we did with the private banks, is not to create the channel, is not necessarily to be the first. We want to be the best alternative available for any channel that decides to come into our space.

We think we executed that well with the private banks and that has worked well for everybody. We believe that we are -- positioned that way for any new channels. So as I said, right now we don't have anything specific to announce, but we do believe that any new group of investors looking to come into the alternative space in the areas that we touch, we believe that Och-Ziff is one of their best alternatives. And if we maintain that along with our infrastructure and transparency we will be well-positioned to take advantage when it is appropriate.

Okay and then can you just give us a little more perspective on the credit business and maybe if you take us through maybe the clients who are interested in your credit strategies these days? And I guess when you look at the credit markets, are you concerned about maybe certain of the areas in terms of capacity and how do you think about that?

Well, our concern in the credit markets has more to do with the fact that in many areas spreads have contracted and in many areas prices have increased. Our goal in the credit area, our goal in expanding credit products has been to find those areas where we feel we can deliver excess return. Where we feel that we can provide value that is significant to clients and do it in a way that enhances all other areas of the firm that invest in the credit side.

We are very proud of the fact, as we said, that we have $6 billion AUM versus where we were when we first got this started. Having said that, when we look at some of the managers who are very strong in the credit area their AUM in that asset class is substantially higher than ours. And so, we think we have a lot of room to do some very good things for clients going forward.

Okay, then Joel, can you give us sort of your -- I guess your outlook for 2014 in terms of maybe headcount where you are today? And then as we think about building out some of the businesses like credit, how should we be thinking about 2014 expenses?

So, right now we are at about 532 people in headcount. And as the business grows we will obviously add people, but for the most part a lot of the additions have been in the infrastructure supporting the people. There have been some investment professional hires but to a lower extent.

So I think obviously as management fees grow that more than offsets the growth of compensation and other expenses over time. And I think that what you have seen this year is going to -- some of that will continue next year. But again, because of the scalability of the business, I think that the growth in management fees and the growth in assets will more than offset that expense.

Okay, great. Thanks.

Daniel Fannon, Jefferies.

Good morning, guys, it is actually Jerry O'Hara sitting in this morning. Just a quick question on the fund raising environment, if you could perhaps kind of give us some color on that. And to the extent that some of your peers have actually exited the business recently, if that is presenting some opportunities?

Well, to your second question, we don't think that is really having any impact. In terms of what we are seeing in the fundraising environment, because it is -- I can't really comment on the overall industry; I don't know what other firms are doing. But we are seeing interest in a number of different areas. Pension funds and private banks, which have been the most robust for the past couple of years, continue to be robust.

We are seeing more interest in Europe than we have seen over the past couple of years. I think that has a lot to do with the fact that Europe looks a little bit more stable. We are seeing more interest in large clients looking to establish more significant relationships. And as long as we continue to perform and continue to drive value, we think we can continue to grow.

And we like the fact that the growth is in more than one area. That is always very important in this firm. We are thoughtful about capacity, we are thoughtful about driving returns, we are an investment driven organization, that is what we intend to be in the future.

And so, when we can expand in an area such as credit or expand in an area such as real estate, which has a lot of capacity, the investors in those areas do very well. And investors in other funds at Och-Ziff benefit from it. That is our formula and that is what we are going to keep doing going forward.

Great. And just a quick follow-up on that. If I have my notes right from a couple calls earlier, you mentioned the majority of assets coming into the credit products at that time were existing clients. Has that sort of mix begun to shift? Or if we can maybe kind of talk about that dynamic, I know you don't disclose the actual numbers.

Yes, generally -- we don't disclose the exact mix, but it is really a mixture of new and current investors.

But it's also what you'd expect. Early on it was invest -- current investors coming up and saying, we know your credit products, we know the teams, we'd like to do this. And then as we develop a track record, develop a reputation, develop visibility we think you are going to see new investors come in.

Okay, great. Thanks, guys.

Cynthia Mayer, Bank of America-Merrill Lynch.

Hi, thanks a lot. Just coming back to the rapid growth in credit, is it possible to get any color on the performance of the credit assets? Because your disclosure on Master Fund performance is so good, is there a particular way we should look at that versus benchmarks versus peers? How do you think it's most helpful for us to think about that?

Well, we don't disclose it and obviously that is always a consideration quarter to quarter based on the size of the business and the growth. The returns have been excellent compared to whatever statistic you want to look at. But right now we are at a point where we don't disclose the details.

Okay. And Joel, I guess the non-comp expense was below your guidance I think for the quarter. Was that a function of anything particular in the quarter or is it just -- obviously probably a lot of it is just the leverage in the model. But it was I think down a little bit sequentially too. Was there anything special going on?

Well, as I said last quarter, we expect it to moderate over time and it has. I mean there will be some variability in that, but I think if you follow the guidance I give I think that will probably get you where you need to be.

Okay, and just coming back one last time to the question of next year in the three-year assets. If I look back three years the fundraising was a little bit lower I guess in terms of what would three years -- three years ago from 2014 versus three years ago from 2013. And so, should we expect that the three-year assets crystallizing in 2014 would be a little bit lower? Or at this point given the strong performance should we think about it as on a par or higher?

Look, obviously, I will give you guidance quarter to quarter on what we think is going to mature both for the end of -- obviously 2013 and 2014. Again, because there will be maturity across the board both in the three-year tranches and some of our credit assets there will be some incentive collected next year. But as I said, Cynthia, we'll give you guidance prior to that.

Okay. Thanks a lot.

Bulent Ozcan, RBC.

I have a question, so you basically have identified credit, real estate and long-term equity as an opportunity, but you also said that you're looking for additional opportunities. Could you expand on that comment a little bit? And are you looking into different asset classes, (inaudible) basically provided by banks some such strategies? Could you expand on the comments on the additional opportunities?

Sure, if you look at how we've grown historically it has been, whether it is geographically or by investment discipline, it's finding an area where we think there's an opportunity, dedicating, committing, building a business, doing it in a way that works for the clients who invest in that area and for the rest of the clients and for the firm.

So what we mean by that is very simple, right now multi-strategy -- our multi-strategy funds, our credit funds, our long/short equity funds and our real estate funds, which are strategic growth areas, are all very significant and provide a lot of opportunity.

Having said that, we're always on the lookout for areas where we think we can provide value to clients, some of that will just lead to new things that we do within the current fund structures. It is potential that it can lead to new investment opportunities. Our new products tend to be driven by where we see investment opportunity, not necessarily where others -- our marketing funds are raising assets. That is the key.

And maybe on the (inaudible) opportunity, I've read that you've been granted a $50 million quota to raise Chinese (inaudible). What is the opportunity here? How large could that be and how do you think about it in terms of the timeframe?

It is a long-term opportunity. I don't think anyone knows. I think it is fair to say that it is potentially significant, you would want to be one of the firms that was selected and it is a good example of where what we do at our firm in terms of reputation, our preparedness and our commitment to geographic expansion and to having a significant business is relevant.

We have had operations in Asia since 2001. We do have an office in Beijing. We have been investors in China, our firm has a reputation in China. And we think that along with the global relationship of the firm was relevant to the decision. So doing those types of things, it goes back to my comment about the retail distribution.

We are not going to plan for distribution, we are not going to be the ones to figure out a distribution channel. We want to be the ones when people say we want the best, who is the best? That is our goal. We want them to say Och-Ziff in any of the areas we are focusing on. If we can do that then we are doing the right things for our clients and we will grow.

And my final question, I am not sure if you can comment on that or would want to comment on it. But it seems like the Ziff family is going through some restructuring with their funds. Will that impact Och-Ziff in any way? Could we see more additional capital being allocated to Och-Ziff to manage funds? Or I don't know if you can comment on any of the news on the Ziff family.

We don't expect that to impact our firm in any way.

Okay, thank you much for taking my questions.

Patrick Davitt, Autonomous.

I would like to ask the 4Q compensation question a little bit differently. You obviously had much higher pre-4Q incentive fees this year that don't really appear to have much compensation associated with them. So is it fair to assume that above and beyond what you would normally accrue for this year's performance, because this is three-year money, they will be a lot more on top of that? Or has there been some accrual for this already because it is three-year money?

If you are asking -- I think what you are asking me is what bonus expense is going to be at the end of the year, is that correct?

I'm not asking what it is going to be. Yes, I am just saying (multiple speakers) has there been some compensation accrued for the three-year money already maybe even before this year?

The way we look at bonuses is we look at what the economics of the firm are on a year-to-year basis. And at the end of the year when everything crystallizes then we will make a decision on what bonuses are. So it is based on the economics of the firm on a year-to-year basis and it is based on the performance of individuals.

If you look at the last couple of years you will get a sense of what those numbers have been, which is good guidance. But don't forget also you have to add in something for the partner incentive plan, which I spoke about earlier.

Right, okay, thank you. And then more broadly, I am just curious how your conversations broadly with LPs have changed, particularly since June, around the paper expectation volatility which keeps swinging around pretty significantly?

We don't sense that has had any significant impact on the conversation. The conversations continue to be consistent with what we discussed earlier on the call.

Okay, thank you.

That concludes the question-and-answer session today. And now I would like to turn the call over to Ms. Madon. Please proceed.

Thanks very much. 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. Thank you.

Thank you for your participation in today's conference call. This concludes your presentation. You may now disconnect. Have a good day.