Sculptor Capital Management Inc (SCU) 2015 Q1 法說會逐字稿

Good morning, everyone, and welcome to the Och-Ziff Capital Management Group's 2015 first Quarter Earnings Conference Call. My name is Crystal, and I will be your operator for today. (Operator Instructions) I would now like to turn the call over to Tina Madon, Head of Investor Relations at Och-Ziff. Please proceed.

Thanks, Crystal. Good morning, everyone. With me today are Dan Och, our Chairman and CEO; and Joel Frank, our CFO 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 2014 annual report and the press release we issued earlier today for a description of the risk factors that could affect our financial results and our business and other matters related to the forward-looking statements. The company does not undertake any obligation to update publicly any forward-looking statements.

During today's call, weUSll 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.

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.

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

Thanks, Tina. Good morning, everyone. We appreciate you joining us today. During the first quarter and year-to-date, the investment performance of our funds were strong, and we continue to make progress in diversifying our products and sources of assets under management. Conversations with investors about our fund and new product offerings remained positive. Our investment strategies performed well during the quarter and year-to-date. Notably, our equity strategies, both in our multi-strategy funds and then approximately $1 billion we managed in our dedicated equity funds.

Our 21-year history as equity investors, combined with the synergies among our investing teams, was integral to the strength of these returns.

Our investment performance is amongst the most important factors in attracting additional assets under management to the firm and the trends in our asset growth are reflective of this. We ended the quarter with $48.3 billion in assets under management, a 13% increase year-over-year.

At the same time, we continue to further diversify our asset base. Our dedicated credit, real estate and other single strategy funds accounted for 30% of our AUM at the end of the quarter or $14 billion, a 43% increase year- over-year. Our long-term assets also increased, totaling 33% of our AUM at the end of the quarter or $16 billion, a 32% increase year-over-year, as our Institutional Credit Strategies platform continued to grow.

We are making good progress with the development of new product offerings. WeUSve recently launched a real estate credit fund, and we continue to evaluate opportunities to develop platforms that leverage the investment capabilities within and across our strategies.

With that, let me briefly review our products. Our multi-strategy funds at AUM totaling $34 billion at the end of the first quarter, increasing 4% year-over-year. We believe that performance of our multi-strategy funds was strong during the quarter and investor interest in them continues to be high.

The OZ Master Fund generated a net return of 3.8% in the quarter and a net annualized return of 12.9% since the firm's inception, with 36% of the volatility of the S&P 500 Index and a sharp ratio of [1.8].

By comparison, the sharp ratio of the S&P 500 was [0.4] and the MSCI World Index was [0.3] for the same period. We believe these results are reflective of our consistent approach to investing and managing risk and of the reason, weUSre a leading manager for multi-strategy asset return funds.

They are also reflective of the strength of our equity's team, which manages the long/short equity special situations strategy in our multi- strategy funds as well as the assets in our dedicated equity funds. The platforms that make up our dedicated equity long/short strategy returned 7% or more on a net basis through the end of April.

The AUM in our dedicated credit products totaled $11 billion at the end of the first quarter, increasing 49% year-over-year and 8% since December 31 of last year. The assets in our opportunistic credit funds totaled $5.2 billion, increasing 9% year-over-year. Of this amount, the OZ Credit Master opportunities fund, our global opportunistic credit fund, totaled $1.6 billion, increasing 76% year-over-year and 29% since year-end. It generated a net return of 0.8% in the first quarter and an annualized net return of 16.9% since inception.

Our closed-end opportunistic credit funds continue to perform well with gross IRRs of 19% or more since inception and gross MOICs of 1.5 times or more. During the quarter, the assets in these funds declined by $333 million. The majority of this amount related to distributions because the investment periods of these funds have expired and they are in the process of realizing investment. However, we believe that most of these capital will be reallocated to us over time if we continue to generate strong performance in our existing funds and offer new investment opportunities to our LPs.

The assets of our Institutional Credit StrategiesUS platform totaled $5.9 billion at the end of the quarter, increasing 122% year-over- year and 13% since year-end. We closed one CLO in the first quarter, adding approximately $500 million of additional fee generating capital to our asset base.

The assets in our real estate funds totaled $2.1 billion at the end of the first quarter, increasing 19% year-over-year. Our second opportunistic real estate fund generated a gross IRR of 35.7% since inception and a gross MOIC of 1.6 times. Our first fund generated a gross IRR of 25.1% since inception with a gross MOIC of 2 times. The investment period for these funds have expired and both are in the process of realizing investments. Their strong returns were a major catalyst for the success we achieved in raising $1.5 billion of capital for our third real estate opportunity fund last year, and we believe, they should drive additional interest by LPs in our real estate platforms.

During the quarter, we introduced a closed-end real estate credit fund with a target size of $800 million, which will invest in a range of real estate credit assets in the US This fund will leverage the investment expertise of both our real estate and credit teams. We believe that there are a number of additional growth opportunities across our business, both here and the US as well as internationally. We believe that we are well-positioned to translate these into new investment opportunities for LPs. This will not only further diversify our business and in turn the sources of our revenues and earnings, but also accelerate our assets and earnings growth over time.

We are excited about our new product pipeline, and I look forward to updating you in future quarters about additional products as they develop.

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

Thanks, Dan. For the 2015 first quarter, weUSve reported GAAP net income of $26 million or $0.15 per basic and $0.14 per diluted Class A share. The press release we issued this morning contains a full discussion of our GAAP results that is available on our website. On an economic income basis, our first quarter distributable earnings were $127 million or $0.25 per adjusted Class A share and our dividend was $0.22.

Now turning to the details of our economic income results. Our total revenues for the 2015 first quarter were $230 million, a 7% increase year- over-year, as average assets grew 12% for the same period through a combination of organic growth and performance-related appreciation. Management fees were $164 million, a 6% increase year-over-year and essentially unchanged from the fourth quarter of last year.

Our average management fee for the first quarter was 1.43%. Incentive income totaled $65 million, 11% higher than the incentive income we earned in the first quarter of 2014. Approximately 75% of this amount was tax distributions related to accrued, but not crystallized, incentive income on our longer-term assets. These distributions are taking at year-end as of the end of the first quarter based on annual investment performance.

Therefore, they won't occur again until the end of the year assuming relevant tax growth income is generated.

Now for a brief recap of our economic income operating expenses.

2015 first quarter comp and benefits expense was $33 million. Of this amount, salaries and benefits were $28 million, essentially unchanged compared to the 2014 fourth quarter. The remaining $6 million was bonus expense.

Salaries and benefits were 17% of management fees in the first quarter. For the second quarter, we anticipate the ratio will remain in the range of 17% to 19%.

2015 first quarter non-comp expenses were $40 million, 15% higher on a sequential basis. This increase was due primarily to increased expenses related to regulatory matters and higher interest expense related to the senior notes we issued last November.

Non-comp expenses were 25% of management fees in the first quarter. For the second quarter, we expect this ratio will increase to a range of 30% to 32% due to increase in legal expenses relating to the investigation. We expect this elevated level of legal fees to continue past the second quarter, but we are hopeful that this increase will normalize by the end of this year. As always, I will continue to provide quarterly guidance as the year progresses.

Our effective tax rate for the 2015 first quarter was 19%. For the second quarter and full year, we estimate that our effective tax rate will be in a range of 18% to 21%. As always, these estimates are subject to many variables that won't be finalized until the fourth quarter of this year and therefore, could vary materially.

In closing, I'd like to reemphasize the importance of strong investment performance to the growth in our assets under management, and in turn, earnings.

As Dan mentioned, our asset growth grew 13% year-over-year. The diversification of our business is increasing rapidly with a 43% increase in assets in our dedicated strategy funds during the same period year-over-year.

This is directly correlated to the strong investment performance of these funds, which is important, not only to attracting additional assets to them, but also to increasing our ability to add new platforms and broaden the investment options we can offer our LPs. As our assets grow and our business diversifies further, we expect that the consistency and growth in our revenues and earnings will increase.

Our track record, the quality of the investment process for each of our funds and our ability to develop innovative, new investment products are the most important criteria to current perspective LPs in allocating capital size. This creates sustainable growth momentum that impacts not only the current year, but carries into future years for both asset growth and earnings growth.

With that, we will now take your questions.

(Operator Instructions) Our first question will come from the line of Bill Katz from Citi. Please proceed.

Okay, thanks. Good morning. Appreciate you guys taking my questions. Joel, may be we can start with how you ended down the regulatory side. Any more color on what this covers and any impact it has on the ability to gather assets?

Look, it relates to the investigation, as I said. I can't give a lot of details. But we're hoping, although we can't predict exactly, this will all be over by the end of the year.

Does the Department of Justice investigation?

This is the FCPA investigation, yes.

Okay. And then just want to step in back, you certainly appreciate about the very strong growth coming out of the long-term business. But the hedge fund business continues to be a little more episodic in terms of organic growth. Dan, just I'm sort of curious, you mentioned there's still appetite, but yet, your net flows continue to bounce around a little bit. How do we get comfort that this business can continue to be a net grower going forward?

Look, if you look at our asset growth, one-year, three-year, five-year, 10-year, virtually any period you want to pick, we've had a low- to mid-teens compounded rate of growth. It's driven by a lot of things, but performance is obviously very high in the list. You can see that performance continues to be very strong once again by any period that you want to measure. We're very comfortable with the dialogue we are having with investors, and we think our strategy for growth, going forward, is very strong. You've heard 30% of our AUM is now at a dedicated credit real estate and other single strategy funds. Long-term assets are now over 30% of our assets under management. And we are very confident that the hedge fund business, the multi-strategy hedge fund business, where we are still a leader, will continue to grow, going forward.

So as you look ahead, maybe just a follow-up and you guys can take other questions. As you look ahead, is it more of the other business now? Is the primary area of growth more combined growth that of hedge funds? Or you think the hedge funds can still be an equal contributor to the business?

We expect the hedge fund businesses to continue to grow and to continue to be very significant and very relevant to the growth. I mean, you've seen over the eight years or so that we've been having these calls. The growth in assets can be very episodic. It's hard to correlate with any specific performance numbers with any specific that's occurring in the wall. But as I said, over any period you want to look, we've got low- to mid-teens double-digit growth in assets under management. We think our strategy for growth is strong than it's ever been. The diversification of the business is clearly stronger than it's ever been. You saw, when we release last quarter that the performance numbers in everything that we're doing, not just the multi-strategy platforms numbers in credit, real estate and other are at the top of their class. That's something that's very important to Och-Ziff. And we -- it tend to continue doing that going forward.

Okay. Thanks for taking my questions.

Our next question will come from the line of Robert Lee. Please proceed.

Thanks for taking my questions. Just kind of curious to know, looking forward, as you've expanded the platform CLOs, credit, real estate, how is that impacting kind of your use of cash flow? I mean, I guess, in the past, you've pretty much distributed, let's say, close to 95% of your cash flow or so. But you are finding or do you believe that whether it's retention rules for CLOs or just even to make commitment to save the new real estate credit fund that's going to maybe, going forward, the amount you can actually distribute or will distribute would be somewhat less proportionally?

Well, our plan is to distribute the majority of our distributable earnings. However, to your point, as we grow in different products and as we do different things, if we feel that use of cash flow from the business is actually a benefit to our investors, of course, we're going to do that. Right now, we don't have any plans to materially do that, but things will change, things are fluid as we move into new products and do different things.

Okay. And then, Dan, you mentioned, I guess, in Q1, you started a real estate credit fund with the $800 million target. Can you just maybe update us on, at least from the closed-end fund perspective, maybe what other strategies you may currently be in the market with today and kind of your targets for them?

Well, we don't have any specific funds to update you on today, but we'll certainly do that as they develop. We think there will be more opportunities for us in the credit space. We think there will be more opportunities for us in the real estate space. There are areas, such as energy, where there certainly could be opportunities. Don't get -- we're more focused on where is the investment opportunity, what is the best thing for us to do for the clients, is there a reason that this structure creates an advantage for the client and that drives the structure. But we absolutely do anticipate more closed-end structures in each of those areas that I outlined.

Okay. And just one last question on fund raising. I know there is a joint BDC in registration with, I guess, (inaudible) But any kind of general timeframe or sense when you think maybe able to get that through registration and start marketing it?

Well, it takes time in order to go through this process and get it market itself. We can't pinpoint exact time, but there'll be some time before this get started. And to Dan's point, this is one of many of those type of vehicles that we're thinking about.

Okay, great. Thanks for taking my questions, guys.

Thank you.

Our next question will come from the line of Craig Siegenthaler from Credit Suisse. Please proceed.

This is actually Ryan Sullivan sitting in for Craig this morning. Just a quick question for you. It looks like the European Master fund had quite a large outflow during the quarter relative to its size. So can you just give us some color around this? And just -- was it one large redemption that was spread across the number of investors. And lastly, just have outflows in the strategy stabilized at this point or should we expect more in 2Q?

Look, if you look at our geographic funds, the European Fund in particular, it's been a seven-year trend where institutions have shown less of an interest in geographic allocations or they desire to give us the access. I think it will do with the uncertainty in the world. So the European fund, rough numbers, it was $7 billion-ish billion-ish in 2007. It's dramatically smaller now. What's going on today is not relevant. And I think you've seen the firm grow dramatically with our European and Asian funds having a substantial reduction in assets. So we're not concerned about that risk at all.

Okay, great. And then one last -- one quick follow-up here. Can you give us some color on any new sales activity thus far in Q2 2015 just across the platform?

Well, I mean, the color would be that, we continue to do the things we've been doing, so there is a very strong approach on the multi-strategy fund. Very strong approach on the credit products that you know we have and other products that you know we have. Obviously, the credit real estate fund is something new, and we're speaking with clients about other areas where we see opportunity. When you see a dislocation in the energy market, we believe a lot, and I say it for the concept of luck is when preparation meets opportunity. So when energy dislocate, and we've got a team, and we've got a track record, we've got a capability, that gives us the ability to attack long/short equities in other area that's relevant. This is something we've been doing for over 20 years. We've got a very strong team. I think you heard on the call, we've got about $1 billion in dedicated long/short equity funds. I think you heard on the call that it returns in all of those funds during the first four months was 7% net or higher. Those are very compelling returns. We can show a 20- year track record of very compelling returns with very low risk. We think that there's a lot of growth of $1 billion in that area as well.

Great. Thanks very much for the questions.

Thank you.

Our next question will come from the line of Ken Worthington from JP Morgan.

Good morning. This is Will Cuddy filling in for Ken this morning. Thanks for taking our questions. We saw in the first quarter and even going through April, a very strong environment for active management. And you've just mentioned a good environment for you to fix stocks in your offshore portfolios. Can you give more color about how you see the environment currently and the quality of idea that you're getting for your portfolio now versus a year ago?

We are seeing a substantial amount of opportunity in the event-driven space in the US, that remains our largest allocation. We continue to see opportunities in Asia. The major focus there is on China and Japan, which both have a -- they've got individual stories that are 15 years there and our 40 people on the ground has been very beneficial. Europe has become more interesting from an event-driven perspective for a number of different reasons. On the credit side, it continues to be a tale of two cities. Performing creditors is very tight. So our focus there is on the Institutional Credit Services where we can add a lot of value acknowledging that you're in a very low rate environment. And then, opportunistically, using the synergies and the combination of our resource. I think the credit real estate fund is a very good example. Having both the real estate team and the credit team creates opportunities that we otherwise would not have, and that's a benefit for our clients. So that's the overall backdrop. Of course, we are conscious of some of the macroeconomic things going down. The seeming lack of growth in the world, the decline in interest rates, et cetera. But that's a constantly moving process that we actively manage through our asset allocation and risk management.

Okay, great. Thanks. And our other questions are answered. Thank you for (inaudible - multiple speakers)

Thank you.

Our next question will come from the line of Gerald O'Hara.

Just a couple of quick ones from us. Apologies if I missed it. But the April redemptions, do you give any color on where the source of that was perhaps in the longer-term lock-up assets? Or if there's some additional color you might be able to provide?

Well, we're generally down. It's usually across the board. But you can see the ratio of longer-term assets has grown rather than going down. So you can get a sense of what's going on in different sectors. But we generally don't go into a lot of details. And to just to give you some color, it's across the board. It's not one single -- a group of assets.

Okay, okay. I'll (inaudible) for us. Thank you.

Thank you.

Our next question will come from the line of Mike Carrier from Bank of America.

Thanks a lot. I had a question on -- you just did the flow picture, and if I think about the products that you have, the performance and some of the expansion that you guys are driving, but then when I look at the flows, it just seems like it's not in line, meaning, it seems, it's in an odd event. So just wanted to get a sense that when the salespeople are talking to their clients, are these allocation decisions, are they performance in this some product areas. It just seems odd, given what we're seeing in terms of the strategy in the performance record.

Well, if we would agree with that, having said that, as you've seen over the past eight years, that is often the way these things work. And the key for us is to -- if we're continuing to excel and to provide clients things they're looking for. And obviously, at the top of that list is performance. But it's very confident that as it has at every point in our 21-year history, it will ultimately result in continued growth in assets under management.

Okay. And then on -- the strategic growth in terms of the new product areas, primarily on the credit side. When you think about the client base that you guys have developed over your history, particularly on the hedge fund side, and then when you look at what you're doing currently, is there more opportunity to access and increase client base over the next few years as you continue to diversify and build out some of these different strategies?

Absolutely. I mean, first of all, there are often opportunities with the same institution. The -- at institutions, you have different groups that make decisions in these different products areas. There are clients who actually does not have a relationship with where the opportunity to do something on the credit side or on the real estate side. I mean, I think, we've talked about that. When we first started these new product areas, the vast majority of capital was multi-strategy hedge fund investors who knew the firm investing in those products. As we've advanced, and they begun to differentiate themselves in the way that you've seen, a larger and larger number of the clients to those products are first time relationships with Och- Ziff. By the way, that then gives us the opportunity to show them the other things we're capable of doing. So that -- the process has begun, but I think you correctly point out, it's a very, very big multiyear opportunity.

Okay. Thanks a lot.

Our next question will come from the line of Jonathan Casteleyn from Hedgeye.

Hi. Good morning. We're getting pretty close to walking into the 2016 presidential race. And a few namesake candidates were spoken out against the carried interest tax regime for the alternative business. Can you just talk to me if -- tell me if you think that's an issue? Will any potential alteration there affect the business or do you have any sort of tax plan or subsidies, et cetera, as to why that wouldn't be an issue?

No. Look, the way we look at this is we don't know exactly what's going to happen and what the focus is going to be. If it's the same for all the alternative managers will be in the same place. And we will deal with it as it comes. Obviously, we see what's going on. But right now, there is nothing to predict and nothing that we are planning to do.

So the industry is basically run in lockstep. Your regime is the same as your other competitors, et cetera at (inaudible - multiple speakers)

Look, I don't know, but I assume that, obviously, if somebody has longer-term assets with capital gains and that may be affected differently. But we don't know what's going to happen. We don't know what's going to happen and we can't predict the changes in the tax laws. So it's very hard to say what the ramifications would be, if there's any change. So we will, as I say, we will monitor, and we'll see what happens going down the road.

I see. Okay. And can you discuss very quickly the catalyst for the legal expense bump up. I mean, I understand the investigation has been going on for quite some time. I'm just curious as to why now the stepped-up expenses or vigilance or back and forth. I'm just curious as to what if any there was a catalyst?

Sure. There are different progression points in any investigation. I can't go in a lot of detail, but those progression points may effect expenses. But look, the whole thinking here is, we're hopeful that the investigation and the effective legal expenses will be over by year-end. We can't predict exact timing, but that's our hope for this case.

Okay. And then lastly, in the distribution channels, at one point, last year, you called out private banks. And I am just curious how that channel is currently flowing? And if you can just sort of categorize where you're seeing the best penetration where, from a disruption standpoint, you might be able to get more yield from your distribution partners?

Look, in terms of allocations of private bank, it's pretty much been static quarter-over-quarter. You can see from statistics that we present. In terms of the opportunity, it's still a tremendous opportunity. And we hope and feel that there will be growth in that area going forward.

Understood. Thank you.

And with no further questions, I would like to turn the call back over to Ms. Madon.

Thanks, Crystal. 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.

Ladies and gentlemen, that concludes today's presentation. You may now disconnect. Have a great day.