Sculptor Capital Management Inc (SCU) 2015 Q4 法說會逐字稿

Good morning, everyone, and welcome to the Och-Ziff Capital Management Group's 2015 fourth-quarter and full-year earnings conference call. My name is Gem 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. Good morning, everybody, and welcome to our call. Joining me today are Dan Och, our Chairman and CEO; and Joel Frank, our CFO. 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 these forward-looking statements. The Company does not undertake any obligation to update publicly any forward-looking statements.

During today's call, we'll 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 or any other entity.

With that, I'll now turn the call over to Dan.

Thanks, Tina. Good morning, everyone. As you all know, 2015 was a difficult year for equity and credit markets globally, and 2016 has gotten off to an extremely challenging start in global markets and in the industry. We have experienced periods like this in the past, and while they can be difficult in the short term, we believe they ultimately play to our strengths. We are well positioned to manage market uncertainty.

Dynamic capital allocation has always been a cornerstone of much of our business, and it will be critical in this environment. Our focus remains on identifying investments and situations that we believe can perform, regardless of market direction. Volatility creates opportunity for us. Investors turn to our firm in turbulent times for a number of reasons. Our risk management, our reputation for outperformance in choppy markets, and our focus on capital preservation. I feel good knowing we have expertise in the eye of the storm, as we saw in energy, in credit, or in Asia this past year.

Let me quickly recap our performance in 2015, beginning with our multi-strategy funds. The OZ master fund generated a gross return of 1.6% and a net return of minus 38 basis points. On a gross basis, merger arbitrage in the US, and long/short equity in Asia generated the strongest returns within the portfolio, and our credit strategies in aggregate produced a slightly positive return. Long/short equity in the US had the weakest performance, as our long positions underperformed while our short positions performed strongly. Since we were modestly net long in this area of the portfolio, this dynamic adversely affected our returns.

Our Europe and Asia multi-strategy funds had strong performance years in 2015, with our Asia fund generating a gross return of 13.8% and a net return of 9.6%. And our Europe fund, a gross return of 8.9% and a net return of 5.8%. While our regional strategies comprised a small portion of our multi-strategy assets, they were important contributors to the performance of the master fund and demonstrated the strength of the investing teams we have in these geographies.

In opportunistic credit, OZCO, our global credit opportunities fund, generated a modest loss on a gross-to-net basis last year. We have been reducing risk in the portfolio, giving us significant buying power to put to work in the coming months. As the credit markets become more and more dislocated, the forward opportunities set becomes extremely interesting to us as distressed investors.

Our closed-end opportunistic funds continue to successfully harvest investment, despite difficult markets last year, reflecting the success we have achieved in investing across a range of credit assets. As of year end, these funds had since inception gross IRRs of 17% to 24% and gross MOICs of 1.4 to 2.1 times.

In real estate, we are taking the same highly selective and measured approach to deploying capital in our third opportunistic fund that we did in our first two funds. We have committed approximately 25% of the fund to date, and continue to be vigilant about finding the right opportunities, given market volatility and where we are in the real estate cycle. Our first two real estate funds continue to return capital LPs, although we remain extremely disciplined in our approach to the timing of realizing investments. We are very pleased with the performance of these funds. As of year end, our first fund had a since inception gross IRR of 25% and a gross MOIC of 2 times. Our second fund has a since inception gross IRR of 35% and a gross MOIC of 1.7 times.

In terms of our more recent initiatives, our dedicated equity funds generated an average net return of over 4% on approximately $1 billion of capital last year, due to an overweight allocation to European and Asian equities. We are pleased with this performance, especially since 2015 was a difficult year for many long/short equity funds, particularly those with an event-driven orientation.

As we turn to 2016, the environment clearly requires caution. That said, we are opportunistic investors, with deep expertise across a number of asset classes and geographies. This gives us a significant competitive advantage in capitalizing on the types of market dislocations that are currently taking place.

There are three areas in particular that we believe will be sources of interesting investment opportunities in the coming months -- credit, merger arbitrage, and energy. Each of these areas will also create new opportunities in equities, particularly on the event-driven side. In credit, we believe the opportunity set is evolving rapidly. There are definitive signs of distress and dislocation in some parts of the global credit market, including US high yield, emerging markets, energy, and commodities. We are closely watching to see if these areas become a reinforcing cycle, a broader risk aversion that creates new investment opportunities.

We expect volatility to continue as market participants navigate the growing uncertainty, and stress in the credit markets could have a wide-spread impact on broader markets in the coming months. This is an interesting dynamic for us, because we have such a strong investment team with expertise in so many areas of the credit markets. This positions us to capitalize on a broad universe of opportunities, not only in credit but in many other areas, as well.

For the same technical and structural reasons that will potentially create significant opportunities in credit, merger arbitrage has become very attractive and we see a number of merger situations where spreads are particularly wide. Our capital attribution in this strategy in the master fund doubled to 12% in the fourth quarter of last year, the highest it has been since 2007.

In energy, we continue to believe the dislocation in the North American private energy sector is creating a number of compelling investment opportunities across the capital structure, including credit, equity, and private investments. In the currently depressed commodity environment, there is greater need than ever for access to external capital. We believe the expertise of our energy private equity team will enable us to capitalize on those opportunities and create significant value.

As I mentioned, the evolution of all these areas creates opportunities in equities. We own many [a venture and] investments that we believe remain fundamentally undervalued, and we have conviction that these positions will perform in the future. In addition, our investment teams are working hard on many situations that we believe have reached interesting price levels.

Now, turning to our assets under management. We entered 2015 with $45.5 billion in AUM, a 4% decline from the prior year, because of net outflows of approximately $1.2 billion, distribution of about $900 million, and just a small amount of capital appreciation. As of February 1, we had $43.7 billion in AUM. We saw $4.7 billion in net outflows from our multi-strategy funds in 2015 and another $1.2 billion so far in the first quarter of this year. These net outflows were primarily from the master fund, as market volatility and challenging marketing conditions for the industry overall, negatively affected our flows.

As always, there are many reasons that factor into allocation decisions by our LPs. Some of the larger ones include reducing exposures to the hedge fund industry and rebalancing to maintain asset allocations or to achieve different return and risk profiles. Uncertainty stemming from the FCPA investigation has also had some impact on investment decisions by certain LPs.

On the credit side, we saw $3.2 billion of net inflows through a combination of new capital commitments to our opportunistic funds and CLO issuance last year. Over 60% of the $1.1 billion net inflow on the opportunistic side reflected a five-year capital commitment. Our closed-end opportunistic funds returned about $730 million last year due to realizations.

Diversification clearly strengthened our business in 2015 as client interest and inflows to newer products offset some of the outflows we saw on the multi-strategy side. Although markets have been volatile, we remain focused on our strategy to grow and diversify by introducing new products where we have a track record and can address investor demand. Last year we initiated a number of new products in real estate credit, European performing credit, and in the UCITS space. These are in addition to announcing a partnership with NorthStar Asset Management to develop closed-end credit funds. We anticipate that each of these will show asset growth this year as we start building them to scale.

As we look ahead to what will likely continue to be a volatile year, we see considerable opportunity for experienced managers with sufficient capital and deep investment expertise. In challenging markets, LPC asset managers who can offer exactly what we have -- a track record of excellent performance, a diverse array of products, a strong global franchise, and a robust infrastructure. It is this combined offering that enables us to take advantage of opportunities across markets and I believe this agility will be crucial in 2016.

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

Thanks, Dan. This morning, we reported 2015 full-year distributable earnings of $252 million, or $0.49 per adjusted class A share. This amount reflects a fourth-quarter loss of $36 million, or negative $0.07 for adjusted class A share. We will not pay a dividend this quarter.

2015 full-year revenues were $849 million, 30% lower year over year. While management fees were essentially unchanged, at $642 million, our incentive income declined 63%, to $205 million. Although the master fund represented the majority of the incentive income we earned in 2015, the mix of our incentive is diversifying as we grow our credit, real estate, and other platforms. Collectively, these platforms generated approximately 30% of our total incentive last year.

Our credit funds, including our CLOs and our real estate funds, can earn incentive at the end of a longer-term lockup, or after the investment period of the fund that they are in has been completed. We anticipate that their contribution to incentive will continue to increase and be substantial. But recognition will be over time as we build these platforms to scale.

Full-year operating expenses were $504 million, a 4% increase over the prior year. Of this amount, costs and benefits expense was $303 million, 16% lower than the prior year. Salaries and benefits expense increased by 10%, as our headcount grew by a comparable percentage, while cash bonus expense declined 26%, as a result of a decline in our incentive income.

The ratio of cash bonuses to total annual revenue was 22%. This level of bonuses was a driver of our fourth-quarter loss. We take a long-term view to building our business and our competitive positioning. Our employees are essential to that. We believe that we have the strongest, deepest bench of talent that we haven't had since the Firm's inception. This is true across the board, from our investor professionals to our fund client relations team to our global infrastructure teams. While the level of cash bonuses reflected the substantial decline in our incentive income last year, it also reflected the need to maintain a sufficiently competitive compensation structure, so that we can continue to attract and retain top talent.

Non-comp expenses were $201 million, 60% higher than the prior year. This increase is primarily due to higher legal fees related to our ongoing FCPA investigation and the full-year effect of higher interest expense in the bonds we issued in late 2014.

Our full-year effective tax rate was 27%, which reflected the lower level of incentive income we earned relative to management fees. We believe our 2016 effective tax rate will be in the range of 25% to 30%.

For the first quarter of this year, we estimate the ratio of our operating expenses to management fees will be in the range of 56% to 60%. For salaries and benefits, we estimate that ratio will be 20% to 22%, and non-comp expenses will be 36% to 38%.

We anticipate that there will be some normalization of our non-comp expenses from the fourth-quarter levels once the investigation is resolved. However, the exact timing and magnitude of this normalization is difficult to predict. While it's certainly still our hope the investigation is concluded by the middle of this year, we may see some heightened level of legal expenses for a period of time after that. Additionally, we continue to make investments in our infrastructure to position our business for future growth.

In 2015, we paid out 82% of our annual distributable earnings in the form of dividends. As we think about 2016, we don't anticipate any change in our policy of paying out substantially all of our distributable earnings. However, as always we'll evaluate the use of earnings with a view to optimizing total return to our shareholders.

Before closing, let me just add that we know the investigation has raised questions and created uncertainty. Unfortunately, because it's ongoing, we can't provide any further information at this point, or speculate on the potential outcomes. We recognize that this is not ideal, but we want to assure you that we'll provide further details when we can. We know that the resolution of this issue as is important to you as it is to us.

In closing, although 2015 was a challenging year for us and for many in the industry, the fundamentals of our business are very strong. We are a leading alternative asset manager with an exceptional long-term performance track record. We have made great progress in diversifying our business and taking advantage of our competitive strength in the markets for multi-strategy, credit, real estate, and energy products. We have an extraordinary talented team in place across our business and we are well positioned to capitalize on numerous opportunities that we see globally. We believe that, over the long term, the combination of these elements will deliver superior value to our LPs, shareholders, and employees.

With that, we'll now take your questions.

(Operator Instructions)

We'll pause momentarily to compile a list of questions. Our first comes from the line of Mike Carrier, Bank of America Merrill Lynch Please proceed.

Hi. Good morning. This is Mike Needham in for Mike Carrier.

First, you mentioned a few reasons for the out-flows and multi--strategy, reducing exposure, reallocating and then the FPCA investigation. How do you think about market share in that product? Do you think people still like the multi-strategy broadly and which of those factors that you mentioned do you think has been the most important for clients?

We absolutely feel good about market share and about the going forward prospects. The multi-strategy fund has a very long term track record. The team is stronger than it has ever been. The depth of our resources is stronger than it's ever been.

Our strategic plan to become a multi-product alternative asset manager provides substantial benefit to multi-strategy fund investors. We have a much larger and more global credit team. Our private real estate and private energy teams are very relevant to the investing in those areas and multi-strategy investors benefit from that.

We have been through tough periods in markets in the industry before. We've been doing it for 22 years. Most of you went through this in 2008, and you know that during these difficult periods, it just seems difficult. But if we continue to do what we have always done, and continue to do little things that strengthen the firm and provide clarity and confidence to investors, it's always led to substantial growth and higher market share and we're confident that will be the case again.

Yes. I think just to add to that, Dan's points are on key and I think it's important to understand, multi-strategy is an important product and one opportunity. But because of our expertise in diversification, all our products, we give people the ability to invest in different exposures and different structures, so that is not the just the multi-strategy. However, across the board because of the value and the expertise that we have, we have, not only in the past offered a lot to people but we have a lot more to offer now.

Okay. Thank you very much. Could you just walk through the bonus expense decision for 4Q, just balancing retaining people versus the weaker performance in the year and the negative DE number.

Yes. Look, our view in terms of resources is obviously continuity in the business. We have the deepest and strongest bench of employees we've ever had, we think the highest quality employees. And although we did adjust bonuses down, we felt there was a certain level that we had to pay people in order to be competitive as and to compensate them properly and we thought the use of resources to do that was in the best interest of all our investors, LPs and public investors, as well.

Okay. Thanks for taking my questions.

Thank you. The next question is from Bill Katz, Citigroup. Please proceed.

Thank you very much. Good morning, everyone. Just a couple of questions.

The first one on the master fund, certainly appreciate your strategic position but the flow story there continues to be disappointing. What incremental strategy can you do to possibly off-set some of the run-off to try and drive growth? And here I'm thinking about your thoughts on pricing, new distribution, opportunities set, or maybe something else you might be thinking about to grow this part of the business again?

We have been focused on new distribution opportunities. We talked about the fact that private banks were one of those initiatives going back several years ago. We have other strategic initiatives in place.

No discussions or considerations on pricing. We don't think that's the relevant issue at all.

Okay. And then I know you are not going to talk about the investigation itself, but, Joel, I'm curious, you mentioned that you expect the non-comp numbers which I think are a lot higher than people anticipated, even from here, so lingering on the other side of this, can you talk about why that might be?

Is there some kind of structural change that might be coming here or is it just sort of some built-in overhead that just takes time to sort of work itself off the system once you get on the other side of any kind of resolution?

I think it's more the latter than the former, meaning obviously there's legal expenses related to the actual investigation, and as you go through the process of settlements and everything else, my expectation would be that you are going to -- there's going to be elevated level of expense beyond that.

That's why it's -- the best thing I can do for you is give as much information as I can and guidance as we can as with we go through the process and as the process finalizes and moves forward.

Just one last thing. The tax rate, is that an earnings mix issue, sort of where you are on performance year to date and sort of thinking about management fee versus incentive income?

If you are talking about the projection for 2016, yes, and for 2015, obviously it's the results of the mix of income and how it flows through the model as you already understand.

All right. Thank you very much, guys.

Thank you. The next question is from Patrick Davitt, Autonomous. Please proceed.

Good morning. Thanks for taking my question. You mentioned the 30% of incentives coming from the more closed-end strategies. I know it's difficult, but if you think about the seasoning of those positions and how you get a broad idea from where we're sitting now, particularly after the sell off we've had, do you feel like that could be about the same this year, higher or lower or are you even willing to go there?

Look, I think you are making the right point. It's hard to tell because it depends on market conditions and opportunities.

Obviously we're going to try to realize whatever incentive we can over time. It's very hard to predict and again it will depend on the markets and opportunities, but obviously we have a focus on generating incentive from those investments and we'll do them as soon as we can.

Okay. And then do you have visibility yet on a tax related incentive distribution in the first quarter?

I'm sorry. Could you repeat that? I didn't hear you.

Do you have visibility on a tax related incentive distribution in the first quarter?

No.

Thank you very much. Our next question comes from Gerald O'Hara, Jefferies. Please proceed.

Great. Just a couple from us. I guess to start, increasingly we have been hearing about sovereign wealth funds need to raise liquidity, given the energy backdrop and whatnot. Can you provide a sense of how discussions have been tracking with respect to allocations or potential implications going forward with respect to that?

No major implications. In terms of what you have been reading about other funds, we don't have those issues and generally don't have big exposure to sovereign wealth funds. Although where we do have conversations with sovereign wealth funds, they have generally been positive.

Fair enough. And then one for Joel, with respect to the balance sheet, can you size what amount of the cash and the balance sheet is basically free and clear or not subject to regulatory holding or what have you?

Well, look, we're very little in terms of regulatory holding. We don't have a big balance sheet, obviously a small amount of cash that we've retained for new products or general corporate purposes, but it's not material at this point in time.

And then just one last one. Can you remind us, any specific kind of covenants or maturity on outstanding debt coming up in the near term?

No. No covenants.

Thank you very much.

Our next question is from Robert Lee, KBW. Please proceed.

Thank you. Good morning. Maybe back to the fundraising, I'm just curious, in looking through some of the tables I was curious where you are with maybe raising some closed end opportunistic funds? I think the last credit fund you had was probably a couple of years old, I mean closed end fund, kind of a couple years old at this point.

Can you maybe just talk about some of the capital raising initiatives underway in closed end structures and in the past, if memory serves me, you talked about -- and maybe there was some real estate debt or energy opportunities, and I'm curious where some of those initiatives stand?

Sure. We talked about some of them. We talked about the NorthStar closed end funds. We've talked about our real estate credit fund but I think the point that you highlight is very important.

We have a proven track record and we went out in 2010 and 2011 and we told investors don't invest in opportunistic credit yet. Then when we thought it was time, we told them it was time and here is how we think you should invest and where we think you should invest. We very successfully compounded returns on that capital and then returned large amounts of capital to them.

So we think we're one of a small number of branded alternative managers who have shown the ability to tell people where not to invest and when to invest, made money for them, and then returned the capital to them when it was the right time. So as we now see the opportunities develop in the credit markets, we think there'll be more for us to do and we think we'll have a lot of credibility. As we commented during the call, approximately $700 million of the recent commitments we got were a five-year commitment in the credit space, so we see a lot of growth potential for us in that area.

Great. That was all I had. Thank you.

Thank you.

The next question is from Ken Worthington, JPMorgan. Please proceed.

Good morning. This is Will [Putty], standing in for Ken. Thanks for taking our questions.

You mentioned launching new products. What type of investors are you targeting for these new products, particularly with NorthStar, I'm thinking?

We think -- we talked about our growth opportunities, one of them is the potential for not only to penetrate our current investor base and cross-sell new products to our current investors, but to expand the investor base and distribution potential. We're focused on doing that, we're focused on doing that through products such as the NorthStar closed end fund and other potential distribution relationships, UCITS and others. We're focused on doing that by taking the new product areas we've developed and making sure they have the investor relation and client services capabilities that they need, so we think that broad opportunity exists.

One thing we do make sure to point out, there's some discussion about the loss this quarter and about the decision on the bonus side in terms of the employees. Over the last five years, we think we have been very successful in the strategic plan to move from being a leading multi-strategy hedge fund manager to being a leading multi-strategy alternative asset manager.

You see that in terms of $12 billion in credit asset and $16 billion in long-term assets and what we have done in real estate and what we have planned in energy, et cetera. We have over 650 people at the firm.

We believe we have the pieces in place to be substantially larger in many asset classes and to be substantially larger as a firm. And while the decision this quarter was difficult, we believe it's the right long-term decision for the firm and we feel very good moving forward.

I'll add to what Dan said in relation to what we're doing with NorthStar. We already are very -- have great exposure into private banks but in the retail space that's where NorthStar closed end funds and so on. So when you talk about different distribution channels and going different levels of investors, increasing our retail exposure and increasing our exposure to other types of investors, we'll generate normally from products such as what we're doing with NorthStar.

Great. That's helpful. And tying into that, there's the DOL best interest proposal that seems likely reviewed by the office of management and budget. Do you see a risk from that proposal if it comes out in a similar form to what the most recent proposal was?

Look, I don't necessarily see it as risk. I think it may change the types of funds and opportunities that we'll pursue, as an example, with NorthStar, but that's I think all it's going to be because there's other ways of doing this though. I don't see it as a risk, I see it as an adjustment, the types of opportunities and structures we may pursue.

Thank you very much for taking my question.

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

Thank you very much, and thanks everybody for joining us today and for your interest in Och-Ziff. If you have any questions, don't hesitate to call me, at 212-719-7381. Media inquiries should be directed to Joe Snodgrass at 212-887-4821.