Sculptor Capital Management Inc (SCU) 2018 Q1 法說會逐字稿

Good morning, everyone, and welcome to Oz Management's First Quarter 2018 Earnings Call. (Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Adam Willkomm, Head of Business Development and Shareholder Services at Oz Management.

Thanks, Emily. Good morning, everyone, and welcome to our call. Joining me today are Rob Shafir, our Chief Executive Officer; and Alesia Haas, our Chief Financial Officer.

Today's call may include forward-looking statement, many of which are inherently uncertain and outside of our control.

Before we get started, I need to remind you that Oz Management's actual results may differ, possibly materially, from those indicated in these forward-looking statements. Please refer to our most recent SEC filings for a description of the risk factors that could affect our financial results, our business and other matters related to these statements. The company does not undertake any obligation to publicly update any forward-looking statements.

During today's call, we will be referring to economic income, distributable earnings and other financial measures that are not prepared in accordance with U.S. 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 of our funds or any other entity.

Earlier this morning, we reported first quarter 2018 GAAP net income of $3 million or $0.02 per basic and diluted Class A share. As always, you can find a full review of our GAAP results in our press release, which is available on our website.

On an economic income basis, we reported first quarter 2018 distributable earnings of $45 million or $0.08 per adjusted Class A share. We declared a $0.02 dividend for the first quarter. If you have any questions about the information provided in our press release or on our call this morning, please feel free to follow up with me.

With that, let me turn the call over to Rob.

Thanks, Adam, good morning. I'm happy to join you today. We continue to be pleased with our investment performance as our funds have performed very well thus far in 2018 against the backdrop of increased market volatility.

The Oz Master Fund returned 2.1% net for the first quarter of 2018, outperforming global markets broadly. As we have previously discussed, 2017 was notable for the lack of volatility and consistent upward returns. This trend continued into this January, but quickly changed in February with a sharp increase in volatility that has remained elevated since. Our Portfolio Committee's cautious view on markets entering 2018 helped to protect the downside during this volatility, and our portfolio hedges positively impacted our performance. The Master Fund's return was broad-based with positive performance for the quarter in all our major strategies.

Oz CO, our largest credit fund, was up 2.8% net for the first quarter. Our credit strategies continue to perform well despite broader market underperformance. We believe our flexible mandate and ability to cast a wide net in search of unique investment ideas enables us to proactively create value in credit markets regardless of the overall market environment.

In real estate, we continue to deploy capital in our opportunistic and credit real estate funds while also realizing investments. In the first quarter, we invested over $195 million and had full or partial realizations of 2 investments. In total, we have committed approximately 2/3 of our most recent opportunistic real estate fund, generating a 22% net return for investors since inception.

Turning to flows. Our May 1 assets under management were $32.7 billion, a decrease of approximately $150 million from March 31, 2018. Part of my vision and strategy for Oz in the near term is to invest our resources in our scale funds within our core multi-strategy, credit and real estate businesses. To that point, certain smaller funds which have been less in favor with clients have been closed, such as Oz Europe Master Fund and Oz Asia Master Fund. The majority of distributions from both funds are reflected in our May 1 AUM. To be clear, we continue to have a significant local presence with major offices in Europe and Asia. Additionally, we have $6.6 billion and $2.4 billion invested in these regions, respectively. We are committed to being a global firm with global investment capabilities, which we believe gives us an edge in sourcing and executing the best ideas available for all of our clients.

Our CLO franchise continues to be an active issuer, having a positive impact on assets under management. In the first quarter, we closed new CLOs in the U.S. and Europe, adding approximately $1 billion in new assets. In April, we closed an approximately $500 million CLO and expect to close an approximately $465 million CLO in the next 2 weeks. Our view is that consistent investment performance should lead to inflows. The current market conditions are creating increased interest in multi-strategy funds generally, which we think bodes well for the Master Fund with its history of generating consistent, lower volatility returns. In addition, the regulatory and industry headwinds that led to a reduction in multi-strategy assets are now largely in the rearview mirror. Against that backdrop, we continue to build our sales pipeline and are in active communications across the investor community in an effort to grow our multi-strategy, credit and real estate businesses.

As we announced 2 weeks ago, I'm excited that Tom Sipp is joining Oz as its Chief Financial Officer. Tom and I worked together for over 8 years at Credit Suisse, where Tom served as CFO and COO of Credit Suisse Asset Management. Tom brings deep asset management industry experience with significant hands-on financial and operational expertise from previous roles at large institutional managers. I believe that Tom's experience will prove invaluable as we continue on our course of prudent financial management and continued cost discipline. Alesia Haas will be leaving Oz to pursue a different opportunity. She has been an asset to Oz in her time here, diligently cutting expenses, managing our balance sheet and setting us up for the future. I want to thank her for her contributions to Oz. Alesia will be working closely with Tom to ensure a smooth transition.

Looking forward to the remainder of 2018, we are focused on execution and continuing to deliver for our clients. I strongly believe that we have all the components we need to be successful, uniquely talented investment professionals, strong client relationships, solid global infrastructure and a brand that is known for delivering consistent performance over time.

Additionally, our recent term loan issuance and bond redemption continues the balance sheet strengthening that has been ongoing over the last number of quarters. I look forward to updating you on our progress next quarter.

With that, let me turn the call over to Alesia.

Thanks, Rob. In the first quarter of 2018, our revenues were $123 million, a decrease of 8% as compared to the first quarter of 2017, primarily due to a decrease in management fees. Management fees were $68 million for the first quarter, $13 million lower than a year ago. The management fee decrease was driven primarily by our lower multi-strategy assets, partially offset by an increase in CLO management fees.

We recognized $51 million of incentive income in the first quarter of 2018, effectively flat year-over-year. In addition to the incentive income recognized in the quarter, the company adopted the new GAAP revenue recognition standard, which resulted in recognition of $128 million of previously accrued but unrecognized incentive income, which was offset by $44 million of compensation associated when the incentive crystallized. This adjustment did not impact the economic income reported for the first quarter of 2018 as it was reflected as an adjustment to retained earnings. However, it did contribute to strengthening our balance sheet. As of March 31, these amounts were reflected in our cash balance of $609 million and had no offsetting unearned liability against them.

Other revenues were $5 million for the first quarter of 2018, up $4 million year-over-year, driven primarily by interest income on our CLO investments.

As of the quarter end, our accrued but unrecognized incentive balance was $308 million, down $129 million quarter-over-quarter. The quarter-over-quarter reduction was largely driven by the adoption of revenue recognition, as we just discussed. The balance, adjusted for the adoption of revenue recognition accounting guidance, remains relatively flat quarter-over-quarter as first quarter crystallization were largely offset by performance appreciation. As a reminder, with the exception of the balance associated with our real estate fund and energy fund, the remainder of this balance have no associated compensation expense as this was paid in earlier periods.

Now turning to our operating expenses. Our first quarter total expenses were $70 million, down 21% year-over-year. As we look at the components of our fixed operating expenses, salaries and benefits for the quarter totaled $24 million, down 6% from the first quarter of 2017. This decrease was primarily driven by lower headcount.

Our bonus expense for the first quarter of 2018 was $9 million, down 56% year-over-year. This decrease was driven primarily by reversal of previously accrued expenses due to deferred compensation forfeitures.

For the first quarter 2018, noncompensation expenses, excluding interest expense, were $31 million, down 15% year-over-year.

Our interest expense was $7 million in the first quarter, essentially flat year-over-year.

Our expectations for the remainder of 2018 are unchanged from our prior guidance. We expect full year 2018 salaries and benefits to be between $90 million and $95 million, and full year minimum annual bonus accrual to be between $80 million and $90 million.

We expect full year noncompensation expenses to be between $100 million and $110 million, excluding interest expense. If you annualize our first quarter noncompensation expense, excluding interest expense, this amount is greater than our annual noncompensation expense guidance. We have a number of seasonal expenses that result in an elevated first quarter expense. In addition, we continue to have a number of initiatives in place that we expect will reduce our noncompensation expenses in future quarters that we anticipate allowing us to achieve the guidance we provided.

Please note that our guidance does not include an allowance for items such as any expense associated with the extinguishment of our bond.

Our guidance for the full year tax receivable agreement and other payables remains unchanged at 10% to 15%. As a reminder, estimates are subject to many variables that won't be finalized until the fourth quarter of the year, and therefore, could vary materially from the estimates provided. Our guidance reflects our best estimates at this time. As these are estimates, we intend to update these amounts quarterly as we move forward.

Now an update on the balance sheet. As discussed earlier, our cash balance as of March 31, 2018 was $609 million, an increase of $140 million since year-end 2017. On April 5, we announced the issuance of a $250 million senior secured term loan. In addition, we announced the redemption of the existing $400 million of senior notes. Using proceeds from the term loan issuance and cash on hand, yesterday, we voluntarily prepaid $50 million of the term loan balance.

The combination of these actions reduces corporate debt, excluding our CLO risk retention financing by $200 million or 50%. This is part of our plan to strengthen our balance sheet by reducing debt.

We believe our cash position, accrued but unrecognized incentive balance and extended maturity on our corporate debt obligation positions the company well to focus on the near-term strategic priorities that Rob discussed earlier.

We believe we have the resources to continue to invest in our fund, to drive growth in AUM and reduce our debt obligations while at the same time allowing us to return capital to shareholders and drive long-term shareholder value.

With that, we will open the line up for questions.

Your first question comes from Rob Lee from KBW.

Can you maybe talk a little bit about fundraising. First, you mentioned that the real estate fund, I guess, is 2/3 invested. I mean, that's usually close to the point where you'd start raising the follow-on fund. So I know there's a limit to what you could say, but would you envision that process starting and would you just generally be targeting kind of a next-generation fund of a size larger than the last one?

Rob, thanks for your question. So as you rightly point out, we can't speak to any specific fund that we may be in the process of evaluating, but we are optimistic about our ability to continue to grow our real estate and credit platforms as well as we are looking to raise additional funds in our multi-strategy product. So the answer broadly is, we continue to see investor appetite and are optimistic that we'll be able to see growth in those areas.

Yes. Maybe I can chime in here and just talk about the flow picture, in general, starting with the multi-strat. If you look at where we are on the multi-strat, which is an area we're very focused on growing here, I think the good news is that it feels like we are in the process of really bottoming out in terms of the outflows in those product areas. If you look at the April 1 number, on the one hand it's an $850 million outflow number. Within that number, though, about $300 million is for the closure of the European fund. So as I talked about on the call earlier, we are going to close smaller, nonstrategic funds. So if you net out the distributions from that, it's about $550 million. Now no one's declaring victory from a $550 million outflow. But if you contrast that to where we were a year ago, April 1 number last year was $1.9 billion in outflows in multi-strategy. The January 1 number in 2017 was $3.8 billion. So as you can see, it feels -- certainly, it looks like a bottoming trend here.

Now that being said, no one is declaring victory there. And obviously, we're focused on getting positive flows into that product area. And on that note, I think I would say the following. As we said in the call, we are seeing more interest in multi-strategy products in the context of what feels to be a changing market environment. We have a good performance story for now. And I think that between our performance, what looks like industry demand and the passage of time, we feel like we are restoring the confidence of our clients. And are hopeful -- and frankly, more than hopeful, I'd say, confident that we will begin to turn that. It's difficult to say exactly when that will happen, but it certainly feels like we're heading in the right direction there. The client conversations I've had across Asia, Europe and the U.S. have been certainly very positive about what's going on here and the consistency in the performance. I think in terms of real estate, as Alesia said, we can't comment on any specific product raises, but suffice to say that we had stellar performance and a lot of client interest in our real estate business. And certainly, our CLO pipeline, as you can see, has been robust and continues to be very robust.

Great. Maybe as a follow-up, I mean, clearly, performance has been good. And as you point out, the flow picture's been improving. But I guess, unfortunately, at least the stock has continued to be buffeted by some headlines. So can you update us on where things stand with, I guess, there's still kind of the settlement approval that has to take place kind of -- and there was some news on that. Can you maybe update us on that? And then also, there's been -- I know you kind of revamped some key employee compensation and lock-ups. Can you maybe just update us like -- with some of that, is there -- what maybe some of the lock-ups are on some employees. So I think one concern out there is that you may lose some key employees with the changes. Are they -- how long are they locked up for and committed for?

I'm not sure I really understand the question. I mean, maybe I'll start. And Alesia, maybe you can jump in here. Certainly, in terms of the stock price, as the new CEO, nobody likes to watch their stock price trade down, particularly when it's on light volume and it feels like these are somewhat idiosyncratic moves that really don't feel fundamental in nature to me. That being said, we can't manage the business on behalf of short-term stock moves. We have to manage and play for the long game and building longer-term shareholder value. So from my perspective, we have all the pieces that we need to be successful. We have very good products. We have performance. We have talented investment professionals. We have a client franchise. We have infrastructure. So I believe all the components are there. And if we execute the plans of focusing on our core business, I believe we're going to create longer-term shareholder value.

In terms of suits -- settlements and so forth, the settlement's already been reached here. In terms of any outstanding suits that have been -- potentially in the papers as of late, suffice to say, we don't think any of those suits have any merit. And we are confident that the courts will see things that way. Regarding Africo specifically, we don't believe that any of the victims -- that this suit has nothing to do with any of the victims that were part of that settlement. And the DOJ has seen it the same way we do. And as I said, we're confident the courts will rule in what we believe will be the right way there. So again, that may be addresses the stock price and settlements.

In terms of key employees being locked up, we have longer-term contracts around our partners and so forth. So I'm not exactly sure of what you're asking about there specifically.

Yes. Well, I apologize. I probably was being too cryptic. But I guess Mr. Levin had been a heavy seller of the stock. And so I think there was a lot of concern given some of the -- what had been the news before that about his commitment, I guess, I would say. So that's what I was really driving at.

Let me specifically address the stock sales that we reported recently on the Form 4s. Those shares were sold pursuant to a 10b5-1 plan. These represented shares that Jimmy had earned in compensation from over 5 years ago and represent less than 10% of his overall equity holdings in Oz. He has a significant equity interest. He is very committed to the platform. And I think you see evidence of that in the performance that we've been able to post year-to-date. And I would note to you that given the company's recent history, executives were locked out of selling any shares because we had material, nonpublic information. And this had been one of the recent windows that we have the ability. And that is what you're seeing coming into the market at this time. We do not believe it has any significance or anything that you should look into further.

Yes. Sorry, I guess maybe I misunderstood where you were going with that question. Again, I guess I would just add to Alesia's comments. Jimmy's working very hard. He is fully engaged along with the rest of the investment professionals. And you can see it in the performance of the firm. So when you think about this thing, let's just focus on the facts here. This is a fraction of his holdings. It's a 10b5-1 plan from an award that was over 5 -- granted over 5 years ago. I mean, those are the facts, nothing more, nothing less. There's really no story there.

Your next question comes from the line of Gerry O'Hara from Jefferies.

Perhaps just a follow-up on the prepared remarks. Obviously, you mentioned a number of initiatives in place to continue driving down expenses. I believe this is noncomp-related. But perhaps you could elaborate a little bit on that, be helpful.

Sure. There's not big initiative here, Gerry. We've just taken a very disciplined approach to evaluating our procurement. And as I mentioned on the call, we do have some elevated, seasonal expenses that arise in the first quarter, both on the compensation and noncompensation side. You see concentration of audit fees and tax compliance fees in the first quarter. And then you also see a little bit of higher benefits in the first quarter. So some of it seasonal, and some of it is just continuing long-term expense saving initiatives that we put in place that you'll see small amounts coming through all of our noncomp line items as we continue to evaluate ways to be more efficient in our services.

Okay. Great. And perhaps just a follow-up on some of the CLO commentary, clearly, a strong and growing business. With the change in the risk retention rules, can you maybe just address how that maybe impacts you all and how you might be able to take advantage of it?

Sure. So you're correct that we will no longer be holding risk retention for U.S. CLOs. We'll continue to have risk retention requirement on our European or our dual-compliant CLOs. And so later this year, we will be evaluating selling the existing investments that we have and then paying down some of those financings associated with those investment loans. It will not have a material impact on our management fees or our management company's economics.

Your next question comes from the line of Patrick Davitt from Autonomous Research.

Going back to the commentary on the multi-strategy fundraising. I think you said the word pipeline. And I think we sometimes take that to mean there are actual wins that have unfunded. Is that what you meant by that? If you can't answer that, I think, more broadly, it would be helpful for us to kind of get an idea of when you started marketing the fund aggressively again. And from your historical experience, when that -- when would that process normally lead to traction with new mandates?

Yes. I can only speak for the 3 months that I've been here. We certainly have been marketing that fund over that period of time. And my sense is, obviously, given the fact that we have several clients in that fund, that's been an ongoing thing. I can't speak to any specifically unfunded mandates, but I guess I would say, when I talk about pipeline, there are several that we think to be very interesting, potential opportunities out there that are in different stages of development here. And as I said earlier, as time moves on and you get some time and distance away from last year, along with performance, we think that really restores confidence and starts to bring investors back into the fund. I do think, as I said also, that the industry demand feels like it's there. Our performance is there. So I think there's just a little bit of time-in-grade here and validation to restore our investors' confidence and start seeing those flows again. It's very difficult to pinpoint exactly when that will happen. So I don't want to sit here and be in the overpromise and underdeliver mode. But suffice to say, I think those conversations are certainly trending in the right direction.

And to that point, are you comfortable that the aforementioned negative news flow isn't causing money that you thought maybe was safe to get a little bit less safe?

I'm not sure what you're referring to there.

Just the press reports, like I think it was the previous question, had obviously been kind of fast and furious on the negative end of things. Like you said, it's probably not fair. But has that impacted client conversations at all and/or redemption rate?

Again, I think it's very hard to speculate on exactly what impacts what in terms of any specific client. All we can do is focus on the fundamentals here, which are our performance, our clients. And obviously, being in front of them and giving them value propositions that we think makes sense for them. And in my experience, over time fundamentals prevail. So we can't control newspaper articles on any given day, but we believe that, as I said, industry -- market's changing the way they feel like they have, which does feel more -- sort of constructive for multi-strategy asset managers, our story being a lower volatility, consistently performing product does feel like a more attractive proposition. And as I said earlier, that the more time-in-grade we have and the more distance we have from some of those newspaper articles, I think the better off we will ultimately be, but it's hard to speculate on specific articles.

Your next question comes from the line of Mike Carrier from Bank of America Merrill Lynch.

Maybe the first question, just on the balance sheet. Given that you guys are delevering in this quarter, just wanted to get maybe some update on how you're thinking about like the payout, the distribution going forward. And then the longer term in terms of the preferreds that are out there. Obviously, not an impact now, given that you'll have to pay for it, but just how that kind of maybe goes into your thinking over the next few years.

Sure. Well, let me start very short term and then we'll talk about broader trend. As we shared last quarter, as most of our incentive income is not earned until the fourth quarter, we don't have a sense of our overall economic performance until later in the year. And as such, in these intervening quarters, our dividends will be fairly modest. As we said at the end of last year, our top priority has been to use distributable earnings to continue to strengthen our balance sheet by retaining cash. And as you noted this quarter, we did use some of that cash to delever and pay down some of our debt obligations. We will continue to evaluate increased dividends and share repurchases based on what we believe is in the best and long-term interest of our shareholders. And likely, those will be fourth quarter activities and conversations. And then on a longer-term basis, as you know, with regards to the preferred, at this time, as we are not paying a coupon on it, it is not a near-term focus of ours. And I think we'll have better information for you over time.

Okay. And then just one maybe, Alesia, just on the share count. I just wanted to make sure that we're thinking about this. In terms of the current quarter, I think last quarter you guys mentioned that Dan forfeited maybe 30 million shares and if that was coming through. And then maybe just an update on, if that had any impact on the future, like the performance units that you guys had. I think there was like 72 million like initially, but if that's been taken down given those forfeitures.

Sure. So as we shared with you last quarter, we gave you a projection of what end-of-period share count we estimated to be. What we published this quarter is our weighted average share account of 549 million. Our end-of-period share count as of March 31 was 539 million units roughly. The combination of the new employment agreement that we entered into with Jimmy and then the relinquishment of 30 million units with Dan brought down that share count from the year-end 12/31 number to this March 31 number that I mentioned. In connection with Jimmy's new employment agreement, he also forfeited certain P Unit. So the 71 million number that we had as of 12/31/2017 is now down to 42 million P Unit. And then in addition, we have issued 10 million PSUs, which for all intents and purposes are the same unit. They both have performance thresholds as well as a service condition. One was just issued at a later time and have a different reference price. So we do have now 20 million approximately less performance unit that could come into the share count over time. But as a reminder, these are not included today as they have not met any of their condition for that.

Your next question comes from the line of Bill Katz from Citigroup.

Just coming back to the balance sheet, again. Of the $609 million, how much of that do you need for working capital? And as you do think out over the next 12 to 24 months, how are you thinking about the residual debt exposure? And then even though you're not paying a coupon right now, what's sort of the time line in your mind of the milestones needed to potentially redeem the preferred?

So as you may have observed in our new term loan issuance, it is an amortizing term loan. And we have 15% amortization per year. So we anticipate paying down that 15% at a minimum, which is $37.5 million per year of the term loan. If you look over long periods of time, the company has always had around $250 million of cash sort of at a minimum if I look back in the recent years of 2014, '15. So I do think that, that is a number that you would continue to see us hold on balance sheet. I think you will also note if you read through our term loan that one of our covenant does say that if we hold more than $200 million in cash that, that allows us to make restricted payments. And so I think the company will continue to be in compliance with that covenant during the life of the term loan. So I would say, $200 million are the minimum, $250 million is probably more likely as the balance sheet cash number. With regard to the preferred, again, today, it's 0 coupon. It steps up to a 6% coupon. The term loan that we just issued was LIBOR plus 4.75%. I think that what we do with that preferred will largely depend on interest rate environment and the company's cash position and growth going forward. And it's too early to call what we will do with it at that time.

Okay. And just as a tactical question, your other income that you mentioned as sort of interest on the CLOs, is there anything unusual in there? Is that just a function of where rates are now? Can you give sort of the underlying cash component of the CLOs or maybe just the yield component?

So that interest income is largely offset by interest expense that you see down in our interest expense line item. So when I think about the net impact on our management company non-GAAP economics, I think of them largely as a wash. And so that's when I made the comment that we consider selling our investment in our CLO risk retention loans on the U.S. CLOs and paying down those liabilities. I don't anticipate it having a material impact on the management company economic income. It will, though, free up some equity and create more available cash for the company to use.

Great. Just one final thing. Rob, maybe in your conversations you've been having with investors around maybe increased -- potentially increased appetite for the hedge fund platform, where do you think you stand on pricing today? Are things firm or is there any sort of further pressure on the economics to sort of get those assets in the door?

Look, I'd say, in general, there's always some element of pressure from clients, obviously, looking to get greater fees. But I think the broad focus in our conversations have been much more just about sort of the broader value proposition of the multi-strat. What we're doing and what the performance is in light of what appears to be certainly a very much -- an environment that's changing a fair amount here. Certainly, for larger clients, where you have larger size and larger lock-ups, the possibility -- price discounting is always something that -- that's a consideration. So I think there'll be ongoing pressure. And I think that'll be offset by the propositions and the performance that we can deliver for our clients as well as the potential demand. Let's not forget that a lot of our multi-strat competitors are closed.

Your next question comes from the line of Alex Blostein from Goldman Sachs.

Stick with follow-up around the Master Fund. So Rob, I think you mentioned the $300 million number in terms of distributions from, I think, largely Europe. Now that you guys are folding Asia into the main fund as well, I think combined Europe and Asia was about $800 million. I guess what's the outlook on retaining the remaining assets? And I guess bigger picture, there are a couple of other sleeves, whether it's the enhanced fund that you guys show us or all the funds. Any plans, I guess, around that or you're largely done with kind of reshaping the Master Fund lineup?

Let me start. I believe at this time that we don't have any intentions to close down any other of our multi-strategy funds. And we're very pleased with the performance of the enhanced as well as the Master Fund and expect to see -- and are optimistic that we can grow both of those products. With regards to your question, I can't speak to any specific client and the ability to roll, but I would share that we believe the majority of the distributions are reflected in our May 1 AUM number that we posted this morning. But we do anticipate a few hundred million of additional distributions coming out of the Asia and Europe platform over time.

Got it. Any expense relief associated with the wind-down on those funds?

There will be some modest operational savings.

Got you. And then my second question is around the incentives, the accruals. Still a significant number, I think over $300 million as of the end of the quarter. Just given where we are in the cycle and the vintaging and kind of the aging of the closed funds, can you walk us through kind of the timing of potential exits and kind of how that will be recognized in the income statement over the next couple of years?

Sure. You're right. I believe the majority of this accrued but unrecognized incentive will be crystallized into our P&L within the next 3 years. Some of it is going to be a little lumpy. And some of it because it is in closed-end funds where we can harvest the investment in the best interest of our clients could be more near term or less predictable. So within the next 3 years, though, I do see the majority of it coming in.

Your next question comes from the line of Ken Worthington from JPMorgan.

This is Will Cuddy filling in for Ken. So another question on the balance sheet. Could you remind us if you have a target debt level? And after paying down the senior notes, what could be your debt capacity?

So we do not post a target debt level. And after paying down the senior notes, we have a $100 million undrawn, revolving credit facility. And we, today, have a $200 million term loan. And that represents what I consider the corporate operating debt. In addition, we have financing related to our CLO investment loans that we hold for risk retention purposes.

Okay. Great. And secondly, for -- I'll try another approach on real estate. For prior real estate funds, what has been the typical fundraising period of time? Just for the prior vintages so we don't have to address what's currently in the -- currently potential in the market at some point.

Can you maybe just clarify your question? Are you asking how long does it take us to raise a fund?

Or when do you start?

From launch to close for your prior real estate funds.

Approximately 12 months, but it could vary depending on market conditions.

You may have more than one close, too.

Correct.

Your next question comes from the line of Patrick Davitt from Autonomous Research.

On the share count point, I think most analysts had kind of gotten used to putting a fair amount of share creep in their models for Och-Ziff. Do you think this is kind of a good base now or should we still expect it to kind of creep up every year with annual awards and whatnot?

We do issue equity in our compensation arrangement to our employees. So there is going to continue to be an element of compensation that is paid in noncash comp. However, as I mentioned earlier, the board as well as management is focused on the overall shareholder value story and may use tools such as share repurchases to help offset that. And that will be evaluated in the fourth quarter along with potential increased distributions once the company has a better understanding of the overall economic condition of the company based on the 2018 total earnings.

I'm not showing any further questions. I will now turn the call over to Mr. Willkomm.

Thanks, Emily. Thank you, everyone, for joining us today and for your interest in Oz Management. If you have questions, please don't hesitate to contact me at (212) 719-7381. Media inquiries should be directed to Jonathan Gasthalter at (212) 257-4170. Thanks very much.

This concludes today's conference call. You may now disconnect.