Sculptor Capital Management Inc (SCU) 2014 Q3 法說會逐字稿

Good morning, everyone and welcome to Och-Ziff Capital Management Group's 2014 third-quarter earnings conference call. (Operator Instructions). I would now like to turn the call over to Tina Madon, Head of Investor Relations at Och-Ziff. Please proceed.

Thanks, Sonia. Good morning, everyone. 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, many of which are inherently uncertain and outside of our control. Och-Ziff's actual results may differ, possibly materially, from those indicated in these forward-looking statements. Please see our 2013 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 update publicly any forward-looking statement.

During today's call, we will be referring to economic income, distributable earnings and other financial measures that are not prepared in accordance with 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. 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. Now let me turn the call over to Dan.

Thanks, Tina. Good morning, everyone and thank you for joining us. During the third quarter, we made good progress in executing on our strategy to expand and diversify our business. We continue to grow the assets in our dedicated credit, real estate and long/short equity products, which in total reached $12.6 billion as of September 30, or 27% of our assets under management. This compares with $7.5 billion or 20% just a year ago.

We also continue to develop our capabilities as a solutions provider, taking advantage of the deep investment expertise we have in each of our strategies. Our experience has been that institutional investors are increasingly turning to firms like ours for this expertise. We believe that we are benefiting from the secular trend of the largest investors increasing their allocations to leading alternative asset managers across multiple asset classes.

The integration between our investment teams globally enables us to create additional opportunities both in terms of potential returns and our ability to offer varying products, which help our LPs meet specific investment criteria. Our investors have been very receptive to the expansion of the platforms we offer. They remain focused on alternative managers who can consistently deliver strong investment returns with lower risk. We believe we are well-positioned to further increase our marketshare of the growing demand for absolute return strategies through our diversified product offerings and global footprint.

Now for a brief recap of our assets under management. As we announced this morning, our assets under management as of November 1 totaled $46 billion, increasing approximately $5.8 billion or 14% from December 31 of last year. The increase was due to approximately $4.8 billion of organic net inflows, which were 83% of the total and $978 million of performance-related appreciation. Pension funds globally and private banks in the US remained our largest sources of net new capital year-to-date through the end of the third quarter. Together, they represented approximately 50% of our total assets under management as of October 1. We continue to benefit from institutions who invest with us directly.

In real estate, we completed the final closing of our third real estate fund in September, bringing total commitments to $1.5 billion. Interest in the Master Fund remains high with assets under management increasing 7% year-to-date through November 1. The momentum in both our opportunistic and long-only credit products is also strong. We closed our eighth CLO in September and see substantial additional opportunity in this business.

Now turning to our investment performance. During the third quarter, market conditions were much more challenging globally. Geopolitical concerns and increased market volatility eroded investor confidence and contributed to rising risk aversion across asset classes. These unsettled conditions persisted in October. With this as a backdrop, we protected investor capital through our consistent approach to investing and managing risk. As always, we actively hedged our exposures and managed our portfolio allocations in a systematic and thoughtful way. We maintain significant flexibility so that we can always allocate capital to what we believe are the best opportunities to generate risk-adjusted returns as market conditions change.

Year-to-date through October 31, the Master Fund had a net return of 2.1% with about half the volatility of the S&P 500. Positive performance in the US credit and US event-related strategies partially offset by negative performance in the European and Asian long/short strategies were the primary drivers of year-to-date net returns. We remained fully invested in the Master Fund during the third quarter; although we adjusted our capital allocation across strategies and geographies as the quarter progressed.

We continue to identify what we believe are pockets of opportunity, particularly in equity special situations and merger arbitrage as large-scale M&A activity remains strong. While spreads in many areas of credit continue to tighten, in some cases exceeding prior highs, we are finding additional opportunities to invest in both corporate and structured credit. With that, let me now turn the call over to Joel who will take you through our financial results.

Thanks, Dan. For the 2014 third quarter, we reported GAAP net income of $23 million or $0.13 per basic and $0.09 per diluted Class A Share. You can find a full discussion of our GAAP results in our press release, which is posted on our website.

Now let me review our economic income results for the quarter beginning with revenues. Management fees were $168 million, up 5% sequentially and 22% higher than the third quarter of last year as assets under management increased driven by a combination of strong organic growth and performance-related appreciation. These increases reflect the success we are having expanding and diversifying our business. Our average management fee was approximately 1.46% reflecting asset growth in our multi-strategy credit and real estate products. Our average management fee will vary from quarter to quarter based on the mix of products that drive the growth in our assets under management, but our management fees are stable and a growing source of revenues. Incentive income was approximately $60 million during the third quarter. About half of this amount relates to the recognition of incentives earned on our first real estate fund. The remainder primarily relates to incentives crystallized in certain longer-dated assets.

Now for a brief recap of our operating expenses for the quarter. Comp and benefits totaled $42 million. Of this amount, salaries and benefits were $26 million, up 4% sequentially. Bonus expense was approximately $16 million. About half of this amount related to the recognition of the incentive from our first real estate fund. The remainder related to guaranteed bonus expense. Salaries and benefits were 15% of management fees and we expect this ratio to be 16% to 18% in the fourth quarter. Non-comp expenses totaled $31 million, essentially unchanged sequentially. Non-comp expenses totaled 19% of management fees and we expect this ratio to remain in the range of 19% to 21% in the fourth quarter.

Our effective tax rate for the quarter was 25%. We estimate that this rate will be in the range of 20% to 25% for the full year. As always, this range is subject to variables that won't be finalized until the fourth quarter and therefore could change meaningfully. Our distributable earnings were $117 million or $0.23 per adjusted Class A Share and our quarterly dividend is $0.20.

In closing, our strategic plan has been driven by providing solutions to our clients. This has had the added benefit of diversifying our asset base by product, duration and source of capital, as well as the benefit of diversifying the timing of crystallization of a portion of our incentive income. To point to just a couple of examples, our standalone credit, real estate and dedicated long/short assets together make up 27% of our total assets under management today compared with 7% just three years ago. And we have nearly $10 billion in dedicated credit assets today compared with just under $1 billion three years ago.

As a result, we have generated very strong growth in our assets under management. While this growth may vary quarter to quarter, over the last five years, our assets have grown a compounded rate of 16% and over the last three years at a rate of 18%. Our management fees have also grown significantly during these timeframes. Additionally, while our incentive income may vary year to year, the increasing diversity of our business enables us to earn incentive from multiple products across a range of asset classes. This in turn should further increase our ability to consistently earn incentive each year. The incentive we earn equals 20% of the profits we generate across virtually all our products and has not been subject to fee compression, which makes it a valuable revenue stream to our shareholders.

In years when we have protected capital, but not earned a significant amount of incentive, this outcome is also extremely valuable. This is what our LPs want -- low risk returns compared to the broader markets. This means protecting capital in the volatile and down markets and generating strong absolute returns where markets perform. These types of returns lead to strong asset growth, higher management fees and more assets to earn incentive on. Over the last five years, through October 31, the Master Fund has generated an annualized net return of 7.3% and a sharp ratio of 1.96 delivering significant value to our LPs.

The growth in our assets and our management fees combined with the recurring nature of our incentive and a scalable expense base drives strong earnings expansion over time. Lastly, our dividend policy reflects the benefits of a business that's not capital-intensive. Over the last five years, through September 30, we have paid out approximately 90% of our distributable earnings as dividends delivering significant value to our shareholders. With that, we will be happy to take your questions.

(Operator Instructions). Bill Katz, Citi.

Okay, thanks very much and I appreciate you taking the questions. Dan, maybe first one for you. You mentioned in both the press release and in your prepared remarks that you are seeing rising demand for your platform. When you look at the flows over the last few months in particular, things have really slowed down a little bit. So I guess a two-part question. What's driving that and what gives you the confidence that you can see a pickup of organic growth? And the second part of that question is is the CalPERS AUM in or out of the reported numbers at this point in time? That or at least subject to withdrawal.

We feel very good about our strategic plan to be a solutions provider to our clients and to continue to develop as a multiproduct alternative asset manager. Any measure you want to use, one-year asset growth, three-year, five-year, the new products we mentioned, $12.6 billion in AUM, up from a very small number three to four years ago, dialogue we're having with clients, we feel very good about what we've accomplished. We feel extremely good about the future. That comes from both looking at what we have internally that we know we can deliver, as well as what we think clients are looking for. Flows can be seasonal or episodic. We've had a number of calls over the years where you've asked about flows and slowdown in flows, but we believe our business is about absolute return and in absolute return investing, there's not one month or one quarter that tends to surprise on the upside, but we found over 20 years if you do it properly, there's compounding and growth and as you grow, people see more and more value. We think that's what we have in terms of our strategic plan and we are going to continue to execute.

And in terms of CalPERS, we don't disclose specific asset growth, but I'll also add to Dan's point, and even looking at year-to-date. Year-to-date our net flows through September 30 are $5.4 billion compared to about $2 billion in 2013. Again, they can be episodic, they can change, but that's significant organic growth regardless of how you look at it year-over-year.

Okay, and just one other question for me and then I'll get in the queue. Just from a big picture perspective, just given where the stock is trading, any thoughts of potentially shifting your payout structure to lower the payout to give you a little more capital flexibility to repurchase some shares? What are your thoughts as you think about that dynamic?

Look, we think about the best use of the dividend flow and of course, that's part of the discussion. We haven't concluded any of that and in fact, using some of the cash flow to invest in products and do other things is another part of what we discuss. So we are constantly thinking about it. We haven't concluded anything specific, but it's a part of our discussion.

Okay, thank you.

Daniel Fannon, Jefferies.

Good morning, thanks for taking our questions. It's actually Jerry O'Hara sitting in this morning. Just could we get a quick update on where we stand in terms of the longer-dated assets, potentially maybe even a little bit about demand, but also just the absolute number as it currently stands at the end of the quarter?

Yes. So 32% of the AUM is in our longer-dated assets, which includes our three-year tranche, real estate and some of our credit assets.

And also is there any update you might be able to provide just around the retail offering, whether it be just thinking about it, infrastructure or anything that you might be able to add color-wise?

Look, there are a lot of products that we think about doing and of course, retail is one of them. Whether that's a 40X fund, whether that's a BDC, whatever it's going to be, we are constantly discussing that and thinking about what's the best for our business, what's the best way for us to access that market. Obviously, you know the private bank platform, which is a big part of our assets, is something that we've accessed and we've accessed fairly well. It's about 17% of our AUM. So I think that's one venue that we've been through, but, of course, we're always considering the other venues as well.

Great, thanks. And one last question quickly while I have you, the incentive income generation from the first real estate fund, is that also something that's going to be just a function of when realizations occur or is that something that is actually a little bit more I guess seasonal in nature, something we might be able to model in going forward. Not model in, but is it something that the third quarter will see maybe potentially increased activity or is it spread throughout the year episodically as you might say?

It's spread throughout the year, but certainly related to realization, but also there are other aspects. It's a private equity structure, so you have to get past clawbacks and other stuff before we actually take it into cash flow. Remember, we're dealing with cash flow, so when we actually collect it, we'll take it in and there are some bonuses tied to that. So I don't expect -- I'll try to give guidance when I know this is going to happen. I don't expect it to be material through the end of this year and through next year, but that could change and if that does change, then I'll obviously give you guidance as best I can.

Great, thank you, guys.

Robert Lee, KBW.

Great, thanks. Good morning. I'm just curious, you guys have had a lot of success with the CLOs the last couple of years clearly. I mean what are your thoughts on the shifting CLO rules around risk retention? Because traditionally you haven't retained a lot of capital and prospectively at some point in the future you may need to retain some capital to issue CLOs. So just your thoughts on how you think that impacts your business going forward.

Well, first of all, obviously, we've been aware. This is something that -- risk retention has been around in Europe with those European CLOs and obviously we know it's coming here, so we know a part of our business is to plan for that. There are many ways that we can fund this, whether it's out of cash flow if we think that's the right thing to do or other ways of funding it that we have been planning and thinking about and again using the balance sheet to invest in products is one way of doing it. And depending on where that source of cash comes from, we'll figure it out. But there are many, many ways of doing it. We're well aware of it. We also think -- obviously some of the bigger providers like us, the people who are investing in these, you have to have the wherewithal and the capital to do it. So we think that that's an important part of the CLO business and continuing the CLO business is having those resources to do it.

Okay. And maybe a question, a little bit of a modeling fourth-quarter question. If we think ahead and given where performance is year-to-date on a net basis, what's the right way to be thinking of the potential incentive compensation? Is 2011 a good template in the sense of when there was a year where the performance fee generation was less than in other years? Is that a reasonable template to look at for how we maybe want to think about compensation expense in Q4? Obviously we don't know what November and December will bring, but is that a reasonable template? Is there a percentage of total revenue that we should be thinking of as a reasonable range to try to think about compensation expense?

Sure, I think -- look, I think if you look over the last few years, the bonus percentage of total revenue is something to look at. Certainly 2011 is the year that you could focus on, but I would look over the last several years as a proxy for what you should do and as a percent of total revenues.

Okay, great. And one last question, I know part of the incentive fees this quarter were related to realizations in the real estate fund. There isn't a lot of visibility into it. Is there any way of giving us a guide in terms of real estate and other products that may have -- that have a -- generate performance fees on realization, kind of what kind of the embedded gains may be on those in the aggregate? Obviously, we don't know the timing, but are we thinking that there's $2 billion of investment gains to be harvested over however many coming years? Any color on that I think would be helpful for us.

All right. Look, we try to give as much guidance as we can when and if we know these things are going to be realized and taken into income. Right now, I don't expect anything significant, but, of course, to the extent I can going forward, I will certainly give you guidance.

Okay, thanks for taking my questions.

Ken Worthington, JPMorgan.

Hi, good morning. This is Amanda Yao for Ken. Can you talk about the returns in the non-Master Funds? How were the returns in credit and real estate this year? What percentage of your AUM are in products that are below their high watermarks and therefore wouldn't be eligible for performance fees if the year were to end today?

Well, the performance -- we don't disclose performance in those funds. I will tell you the performance has been very good. Obviously, the credit funds have been performing very well. That's one of our bigger performers for the year, along with -- followed by long/short equity. In terms of assets in our longer-term funds, I think you get a sense -- longer-term assets of 32% of AUM. Our credit assets are close to $10 billion, so I think you get a sense of what we're going to do, $1.5 billion in our real estate funds to give you a sense of size. And although we don't have any numbers, performance has been very good and we'll give you whatever we can going forward. That's one thing that we have been thinking about and discussing in terms of disclosure of some of the longer-dated assets and some of the other asset classes.

Okay, thank you for the color.

Marc Irizarry, Goldman Sachs.

Great, thanks. Dan, can you just give us some perspective long/short equity special SIPs I guess is 63% of Master Fund when you think about the opportunities going forward and just being almost two-thirds in that strategy. Now how do you sort of expect the opportunities over time to shift in terms of your investment strategy? I guess related to that, the longer you stay in let's say long/short, does that affect the way maybe investors view the opportunity in terms of allocating toward Och-Ziff and maybe some perspective on how maybe LPs will react to being more heavily long/short? Thanks.

Event driven long/short is one of the areas that we've been very focused on for the past 12 months or so. Primary focus is in the US where we see a very strong diversified event cycle and reasonable clarity in terms of economic conditions and outcomes. We've also got a very opportunistic focus in Asia where there are some things going on in Japan and China in particular that we're very focused on and feel that we have a very strong handle on.

It's also very important to note, you saw the numbers for October. Our ability to manage risk and our ability to stay hedged we think is something that has differentiated us and we think is something that we continue to do and that's important. And clients are very focused on not just upside return, but they're focused on downside control and we think this is another episode that demonstrated what we do.

Our clients are very comfortable with our allocation. They understand why we have allocations. They understand the opportunities that we see. They know that we focus not just on the upside in an opportunity, but on downside risk and liquidity, the ability to change our minds and move if something makes sense. So they know who we are and they understand our model and what we focus on.

Okay. And then just in terms of the regulatory landscape, given maybe LCR or different liquidity rules that are out there, is that affecting you think the forward opportunity in maybe some of the R businesses or other areas of historically where you've been active?

Well, we do think that, over the past several years, a number of the regulatory changes and reductions in balance sheets, reduction by banks and investment banks in terms of some of the businesses they are involved in have created some opportunities. Some of them we've pursued opportunistically such as a market event and some of them we've pursued as real strategic business opportunities such as some of the things we've done in the credit area. So we think -- I don't know if the specific thing that you mentioned is going to be relevant, but we absolutely have been clear for several years that the changing nature and behavior of banks and investment banks creates opportunities for our firms and our LPs and we intend to continue to pursue them.

Okay. And then can you just remind us again redemption notices for year-end, any -- I guess how much of your AUMs -- will we get sort of an annual redemption notice and when would those come in? Thanks.

We generally don't disclose that. Most of the capital is subject to 45-day notice. We have some short in those periods too and we'll give you a better sense once we know.

Okay, great. Thanks.

Bulent Ozcan, Royal Bank of Canada.

Good morning. I had a question regarding the investor base. So if I look at it as of 3Q 2014, about 72% of your investments are based in North America. If you go back to 2009, 2010, that used to be about 57%. My question is are we going to see an increase in basically other regions outside of the US in terms of this ratio such as in Asia and Europe? And if so, what are you undertaking to basically broaden your footprint outside of the US or North America?

Well, we don't focus on the ratio. Our goal is to excel in all three regions, as well as any other part of the world where we're going to focus. And sometimes there are opportunities to expand the investor base and sometimes there aren't. I think Europe is a pretty good example. Europe went through a period where for reasons endemic to Europe it was difficult to raise assets, but we maintained our focus. We are more positive about prospective inflows from Europe than we had been in the past several years. We think there are some new things that we can do in Asia. So our goal is to expand those regions, but we don't think of it as a ratio. If we expand both those regions and do as well as we can do, we're also going to want to try and expand in North America as much as is appropriate and the ratio would be what the ratio is.

Okay. And then in terms of the discussions that you're having, there was a lot of news on the pension funds basically trying to reduce the exposure to hedge funds. On the other hand, it sounded like there are also sovereign funds who are actually getting more involved in that space, want to increase their exposure. Could you give us some perspective on the discussions that you are having with these sovereign funds and if we should expect some flows from sovereign funds basically making up some of the outflows that might happen by pension funds reducing their exposure to hedge funds? Thank you.

We don't know what activity will be going forward in any of the different classes -- pension funds, private banks, endowments, other sources. Our goal is just to maintain our premier position where we have that position and expand in terms of new products and new relationships and we think you've seen it. I know we've gone through these numbers before, but we think that they're very important. 27% of our AUM now from products that essentially didn't exist several years ago. Approximately $14 billion, as Joel said, in long-dated assets, something that we as a firm did not have several years ago.

We think that shows several things. It shows that clients are committing capital to Och-Ziff in ways that they didn't do previously. It shows that clients are big believers in Och-Ziff on a long-term basis because you don't commit long-term capital to a firm that you don't think is getting better over time. It increases the stability of the firm. It increases our attractiveness to employees and our ability to generate investment returns. And as you've seen, it increases the diversification and stability of the firm and sometimes that manifests itself in terms of long-term capital and sometimes it manifests itself in terms of an incentive allocation occurring during a quarter other than the fourth quarter, growing and diverse management fees. So we think those virtuous circles are in place and since they start with investment excellence and providing value to the LP, we think those virtuous circles will remain in place.

Thank you. Bill Katz, Citi.

Just a follow-up on new growth opportunities. As you look out into 2015 and beyond, we certainly appreciate the migration of the franchise, but what specifically might you be targeting in terms of opportunity and maybe the question really is now that you've scaled some of your long-term AUM, are you at a point now where you can start to step-function that AUM in terms of big mandates because a lot of your peers are chunking in some very big mandates? I'm sort of curious if you have now sort of hit that level of infrastructure.

Well, in terms of new products, we don't have anything specific to comment on now. We really mean what we say about solutions provider. So it's driven by -- our discussions with clients tend to be where do we see investment opportunity either now or going forward where we have capabilities and how does it fit with what they are looking to do. I think clients have shown that they are willing to make commitments. We have some very large commitments, some very long-term commitments. I hope going forward, Bill, to answer your question, I hope that they continue to make those types of commitments to us. But I do think we have what needs to be in place. I would understand why -- as I commented to the last question, I think you've seen that over the past four years. Clients don't commit $14 billion in long-term assets to a firm that they don't believe has the infrastructure investment capability stability and growth going forward.

Okay, thanks for taking my extra question.

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

Thanks, Sonia. 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 Jonathan Gasthalter at 212-687-8080.

Thank you for joining today. This concludes the presentation. You may now disconnect. Good day.