Sculptor Capital Management Inc (SCU) 2016 Q1 法說會逐字稿

Good morning, everyone, and welcome to the Och-Ziff Capital Management Group's 2016 First Quarter Earnings Conference Call. My name is Gem and I will be your operator for today. At this time, all participants are in listen-only mode. (Operator Instructions)

I would now like to turn the call over to Tina Madon, Head of Investor Relations at Och-Ziff. Please proceed.

Thanks, Gem. Good morning, everybody and welcome to our call. Joining me 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 2015 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, 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.

Before we get started, I know you have questions about the status of the FCPA investigation. Joel will update you in his remarks and provide as much information as he can at this point. With that said, because we have entered into discussions with the government about resolution of this matter, we won't be able to take any questions on it today. We understand that reaching a settlement is as important to you as it is to us and we're doing everything we can to get closure as expeditiously as we can and in the best way possible for the business.

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

Thanks, Tina. Good morning, everyone. As you all know, global financial markets were volatile during the first quarter. The sharp declines experienced early on were to varying degrees across markets recouped towards the end of the quarter. However, that recovery was not uniform with equity market performance diverging substantially between major markets. The S&P 500 ended the quarter posting a modest gain, while the major indices In Europe, Japan and China experienced substantial declines.

Credit markets were also challenging early in the quarter, and liquidity conditions and a lack of market conviction contributed to volatility in securities prices that we believe was disproportionate to fundamental considerations. However, in March, the credit markets found renewed footing with positive performance from many corporate and securitized credit assets. Constructive developments in the energy markets and additional monetary stimulus from the ECB contributed to an improvement in overall credit market sentiment.

There is no question that recent market conditions have been challenging, particularly in equities. Although we have certainly seen periods like this in the past, the magnitude and duration of this one has been unexpected. We believe that our proven investment process, our global presence, our diversified product platform and our willingness to change and adapt to market will deliver attractive results for investors in our funds and our firm over time.

With that, let me recap our performance, beginning with our multi-strategy funds. Our returns were stronger than many in the industry, but we can do better in absolute terms. Overall, we believe that the current opportunities set will be word caution and excessive risk taking in this environment can lead to dramatic under-performance. As a result, we have positioned our multi-strategy funds to control risk and take advantage of dislocations as they arise.

The OZ Master Fund generated gross return of minus 3% and a net return of minus 3.4% till March 31. In the month of April, our estimated net return was plus 53 basis points, reflecting a solid month of performance.

Through the end of the first quarter, losses in equities more than offset gains in our credit strategies and in convertible and derivative arbitrage on a gross basis. While our core approach and philosophy in long/short equity is unchanged, we always look for ways in which we can improve our investment process and continue to manage the portfolio dynamically.

In light of acute volatility and consistent with our goal of preserving investor capital, we reduced gross exposures across the portfolio, especially in the US early in the quarter. We continue to balance concerns over the near-term environment against what we believe are highly attractive investments on both the long and short types. We firmly believe that focusing on return generation through disciplined security selection will yield strong results over time.

Merger arbitrage continues to perform well and this opportunity set remains attractive. Recent developments in this area serve as the solid reminder of the merits of deep analysis and selectivity. Merger arbitrage became a popular strategy at the end of 2015 as deal spreads widened. While we agreed with this view directionally, we made highly selective investments in individual positions, rather than taking on a broad basket of yield spreads.

Turning to credit, we were particularly active during the quarter, opportunistically adding to existing exposures and initiating certain new positions. In addition, we trimmed exposure to specific assets we believe to be fully valued, as markets rebounded and buyers returned.

In opportunistic credit, our Global Credit Opportunities Fund has generated strong gains year-to-date, and we continue to see significant opportunity in this space. Our closed-end opportunistic credit funds continue to successfully harvest investments, taking advantage of improved credit market conditions.

In the Institutional Credit Strategies, our performing credit platform, we are generating top quartile performance in our CLO business. Our performance and the quality of our products are differentiating us and creating additional opportunities. We anticipate that we will continue to grow this business in the US and then to the European CLO market over the course of the year.

In real estate, we remain cautious and disciplined in our approach to deploying capital in our third opportunistic fund given current valuations in major markets and property types. We continue to find interesting opportunities in both traditional and non-traditional real estate in both debt and equity. Our ability to analyze investments across a broad spectrum of real estate assets is central to the success we have achieved in delivering leading returns in our real estate funds.

Now turning to our assets under management. As of May 1, our AUM totaled $42 billion. Year-to-date, we've had net outflows of approximately $2.5 billion, distributions of $254 million and depreciation of $751 million. The net outflows were primarily from the OZ Master Fund, reflecting both cyclical and idiosyncratic headwinds.

The first quarter was challenging for the hedge fund industry. During the quarter, the industry experienced its worst net outflows since the second quarter of 2009, as weak performance and volatile market conditions caused investors to reduce their exposure to the industry. Additionally, as we said on our last call, some other identifiable factors affecting flows were investors rebalancing to maintain asset allocations or to achieve different risk-return profiles and uncertainty related to the FCPA investigation.

It goes without saying that this is a challenging environment for all investors and many are struggling to generate returns. We believe we are well positioned to meet these challenges. We don't believe it is appropriate to make strong directional calls on asset classes. As we see it, this is an environment in which disciplined security selection will be the major driver of performance.

Today, our investment teams are more capable and our senior leadership is broader and deeper than at any time in our history. We believe this depth of talent, combined with our rigorous risk management, our proven investment process and our ability to quickly address shifts in volatile markets will enable us to continue to generate attractive returns over time.

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

Thanks, Dan. This morning we reported a distributable earnings loss of $143 million for the first quarter, or $0.27 per Adjusted Class A share. This loss reflects a $200 million reserve that we have established in anticipation of a monetary settlement associated with our FCPA investigation. Excluding the effect of the reserve, our distributable earnings were $57 million or $0.11 per share.

Now for a quick recap of our Economic Income results, excluding the reserve. Our Economic Income revenues were $176 million, 24% lower year-over-year, with the majority of the decrease resulting from lower incentive income. Management fees were $144 million, 12% lower, as our average AUM declined. Our average management fee was also lower, reflecting a change in our asset mix.

Incentive income was $31 million, generated primarily by tax distributions on the incentive income that has been accrued on longer-term assets . These distributions are taken at year-end and in the first quarter of each year.

Our operating expenses totaled $91 million for the quarter, increasing 23% year-over-year. Comp and benefits were $34 million, essentially unchanged. Non-comp expenses were $57 million, reflecting an increase of $17 million or 42%, due mostly to higher legal expenses related to our ongoing FCPA investigation.

Again, excluding the reserve, our effective tax rate was 32% and we anticipate that our tax rate will be 30% to 35% in the second quarter, based on our estimates that our full-year economics for 2016.

We expect that the ratio of our operating expenses to management fees will be in the range of 60% to 64% in the second quarter. Of that range, we expect that salaries and benefits will be 21% to 23% and non-comp ratio will be 39% to 41%.

Now for an update on the investigation. Since our last call, we've entered into discussions with the government, and we are moving forward towards a resolution of this matter. As I mentioned earlier, we established a $200 million reserve this quarter. We believe it is probable that the final amount of the monetary settlement will be greater than the reserve, but at this point in time we're unable to reasonably estimate what that amount would be. In order to meet any final monetary settlement, we have retained the entire amount of our distributable earnings this quarter and we drew $120 million on our revolver at the end of last month. When we have further clarity on the final settlement figure, we will assess any additional sources of capital that may be needed.

While we remain hopeful that this matter can be resolved by mid-year, pinpointing the exact time of a resolution is difficult. It is possible that the timetable may take longer than we hope. We are doing everything we can to bring the process of closure in the best way possible for the business, our shareholders, our LPs, and our employees.

With that we will now take your questions. Again, as Tina mentioned, we won't be able to take questions related to the investigation, but we are happy to answer any other questions you have.

(Operator Instructions) Bill Katz, Citi.

So first question is, Joel maybe for yourself. I think your non-comp guidance is a little bit higher than what you had sort of guided to last quarter, for this quarter. I'm sort of if you could talk about maybe some of the drivers behind that? And then, if you look into the second half of the year, how you might see that ratio trending?

Most of the driver is really related to legal expense related to the FCPA investigation. It is really the big driver in terms of increases. And like always, Bill, I can't project, but I'll give you guidance each quarter in order to help you model what's going to happen going forward.

And then Dan for yourself perhaps. We are reading different views on hedge fund allocations and pricing dynamics overall, bunch of very large LPs have sort of come out and said that the 2 and 20 model is no longer alive, if you will. So can you talk a little bit about your separating away from -- I know you can't speak too much to the investigation, but could you talk a little bit more about what you're seeing here in terms of cyclical versus secular growth for the hedge fund business, and how you sort of see the long-term impact, if at all, on pricing?

We're not seeing any changes or discussions about changes in terms of pricing. I think about five or six years ago, we were a leader in the concept of -- for those institutions who are willing to commit larger amounts for longer, some level of flexibility on the management fee, no change on the incentive, and those structures remain in place as they've been for years. We're seeing no changes or discussions on that front.

In terms of the industry, overall, what we really prefer to focus on is Och-Ziff. Our view is that historically by adding value, by generating returns, by giving investors the opportunities to do what they want to do for their portfolios, we've generated growth. We are confident that our multi-strategy fund will continue to do that going forward. And we are also a strong believer that the new products that we've developed still have a lot of runway in front of them.

Just one last follow-up, and thanks for taking my questions this morning. As I look at your slide that sort of carries forward from the end of the year to now in terms of gross inflows and what have you, if I look at the non-multi-strat portfolio, it's still relatively nominal in the grand scheme of things. Some of your peers are putting up some very strong organic growth trends in these related buckets. What strategies do you see has the most near-term opportunity for growth, away from the multi-strat side?

Well, the two areas that we're most focused on are our credit and real estate. So on the credit side, if you look at our opportunistic credit funds, which have a long track record of extremely good performance, both in terms of executing when there were things to do, and at least, as importantly, for institutions tell them when there are not things to do. If you look at our Global Credit Fund performance, not only was strong two cycles, but continues to be strong this year. And on the institutional liquid side, we mentioned that our CLO performance, something at Och-Ziff -- do a lot of things well here, but performance will always be at the top of that list. And the fact that our CLOs over a multi-year period are performing at the top of the sector, winning is important, both to the growth there and to the European business that we mentioned we expect to roll out sometime later this year.

Dan Fannon, Jefferies.

This is actually Gerry O'Hara sitting here for Dan this morning. Joel, on the past you've mentioned or indicated there might be a bit of a trailer, I suppose, with respect to some of the legal fees on the expense side. Is there any potential update there or additional clarity, given today's announcement?

No, not at this point. I've really said more than I can already say. And in terms of expenses, I will give you guidance going forward.

And maybe one for you Dan as well. You mentioned sort of a next opportunity with respect to European CLO market, perhaps you could give us a little bit of color as to how the demand trends or opportunity set might differ there versus the US side of the equation? Thank you.

Well, the basic business is very similar in terms of what we're trying to accomplish, have a look at assets and liabilities, generating performance and how to structure the products. There are some technical differences, which we think create advantages for larger firms, such as ours that have scale. But most importantly, about five years ago, we launched the CLO business and we've got about $7 billion in assets under management. We've got top quartile performance and our goal is going to be to do something similar in Europe.

Ken Worthington, JP Morgan.

Was hoping you could talk about the fundraising pipeline outside of the multi-strat area. Looking mostly for color on sort of close-end credit funds, energy, the BDC or maybe even any other areas seem poised to potentially raise money this year. Thanks.

Yes. So, look, because we're in fundraising in a lot of these new products, we can't talk about specifics. But those opportunities are there and we're focused on all the products that you've mentioned and obviously if there is more opportunity to do other things, we'll do that as well.

If you kind of hit the targets that you're looking to make, about how much gross do you think you could raise this year, again if all went according to plan?

I can't project. Like I said, these are in fundraisings. It's not something that we can do at this point. But obviously, when we can, we'll give you information.

Steve Cohen expressed concern this morning about the challenge in finding talent in the hedge fund industry. How are you guys finding the hiring process as you continue to grow and expand?

We think finding talent has been -- finding, training and retaining talent has been a core part of Och-Ziff since inception 22 years ago. So the basic construct is the same as it's always been. Figure out the best sources of talent and make sure that people internally feel this is the best place to be. Our best advocates are the people who are here that want to stay here, that can demonstrate that they made the right decision coming here and tell people on the outside why they should be here as well.

So the core principles are the same. The tactics, as with every part of the business, become different as we evolve and as the business evolves. But we continue to focus, we have a human capital organization at the firm, we have a human capital committee that focuses on how to keep expanding. We are constantly looking at the best sources of talent for each of the different areas of the business. And then the key is a mentoring and training process for people when they get here, even senior people, so that we can incorporate them into the team and have them to develop even further.

So I would echo that, of course, it's challenging, it's always been challenging. I think focusing on our people and the internal culture has always been important at Och-Ziff and remains a competitive advantage.

And I'll add to that. We have a lot to offer here. Obviously, as a diversified manager, there is a lot to learn, there's a lot of interconnectivity between the asset classes and it's a group effort. So there is different aspects that you get to see at Och-Ziff that you might not elsewhere. So it's a cultural thing, but it's also how we're structuring the opportunities that we offer.

And then lastly on the reserve. I believe the reserve needs to be probable and achievable. If you think it's going to be higher than the $200 million, why didn't you reserve a higher number?

Look, I'm sorry, Ken, I can't say more than I have already said.

Michael Carrier, Bank of America.

This is [Mike Nearman] for Mike Carrier. Just kind of a two-part question on flows and the outlook. The fee rate ticked down again decently in the quarter 1.34% to 1.31%. Was it just the mix shifts, given the outflows from the Master Fund products? And should we -- I guess, looking at fund flows, [2Q] we can expect that pressure is going to continue? And then the second part, noticed (inaudible) pensions are 35% of your AUM versus 33% last quarter. So I guess, is it fair to imply that the pensions aren't driving your recent outflows? Thanks.

So let me take the first part of your question. Look, diversification of our business has created a broader asset mix with varying fee structures. The diversification allows us to offer additional opportunities for investors and generates growth in the business, and it will generate growth. I mean, all of the multi-strat assets have reduced over the last 12 months, which obviously has an effect on the mix in our average management fee. We're confident that we're going to have growth in all areas over time.

In terms of the percentages, I mean obviously that mix changes as investors come in and come out, you're going to see that mix change. I wouldn't conclude any specific thing on any individual sector. When people take distributions that is a broad-based thing. Obviously, most of it's in the multi-strat, but I wouldn't make a conclusion on slight changes in the numbers.

I think, last query. You alluded to earlier in the call, you gave those three reasons to clients. Maybe you're seeing some increased outflows from clients. Do you think in 1Q, was is it more environment-driven, given the outflows for the industry or it's kind of those same factors are in play? Thanks.

Same factors are in play.

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

Thanks, Gem. Thank you everyone for joining us today and for your interest in Och-Ziff. If you have questions, please don't hesitate to contact me at 212-719-7381. And media inquiries should be directed to Joe Snodgrass at 212-887-4821.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.