Item
2
. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and the related notes included in Item 1 of this
quarterly report
and with our audited consolidated financial statements and the related notes included in our Annual Report. In addition, this discussion and analysis contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described under “Forward-Looking Statements” in this report, in our Annual Report, including the disclosures under “Item 1A. Risk Factors” therein, and in other reports we file with the SEC, that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. An investment in our Class A Shares is not an investment in any of our funds.
Overview
Recapitalization
As discussed in Note
3
, on February 7, 2019, we completed the Recapitalization, which included a series of transactions that involved the reallocation of certain ownership interests in the Oz Operating Group to existing members of senior management, a “Distribution Holiday” on interests held by active and former executive managing directors, an amendment to the tax receivable agreement, a “Cash Sweep” to pay down the 2018 Term Loan and 2019 Preferred Units, and various other related transactions.
As part of the Recapitalization, we restructured the previously outstanding $400.0 million of 2016 Preferred Units into $200.0 million of 2019 Preferred Units and $200.0 million of Debt Securities. Additionally, we repaid $100.0 million of the debt outstanding under the 2018 Term Loan and terminated the $100.0 million of undrawn commitments under the 2018 Revolving Credit Facility. In accordance with the Cash Sweep, we repaid an additional
$45.0 million
during the
first half of
2019 and another
$5.0 million
on
August 1, 2019
. See Note
8
for additional details.
Reverse Share Split
In January 2019, we completed the 1-for-10 Reverse Share Split. Corresponding adjustments were made to the Group A Units, Group B Units, Group D Units, Group P Units and PSIs. All prior period share, unit, per share and per unit amounts have been restated to give retroactive effect to the Reverse Share Split.
Corporate Classification Change
The Registrant changed its tax classification from a partnership to a corporation effective April 1, 2019 (the “Corporate Classification Change”), and subsequently converted from a Delaware limited liability company into a Delaware corporation effective May 9, 2019.
Effects of Adoption of Lease Accounting Standard
We adopted ASU No. 2016-02,
Leases (Topic 842)
, as amended, as of January 1, 2019 (“ASC 842”), and applied ASC 842 to lease arrangements outstanding as of the date of adoption. Adoption of ASC 842 resulted in the recognition of
$126.0 million
and
$135.9 million
of operating lease assets and liabilities, respectively, with the net of these amounts offsetting the deferred rent credit liability in existence immediately prior to adoption.
Overview of Our Financial Results
We reported GAAP net
loss
attributable to class A shareholders of $
8.6 million
for the
second
quarter of
2019
, compared to
loss
of $
12.3 million
for the
second
quarter of
2018
, and GAAP net
income
of $
28.5 million
for the
first half of
2019
, compared to net
loss
of $
8.8 million
for the
first half of
2018.
The
increase
s in net income attributable to Class A Shareholders year-over-year
were primarily due to the loss recognized on early retirement of debt in the prior year period, a settlements expense accrual taken in the prior year period, as well as reductions across various operating expense categories. These improvements were partially offset by higher compensation and benefits expense driven primarily by the Recapitalization-related equity-based compensation grants, as well as lower management
fees. Additionally, the net income was reduced by higher income tax expense, partially offset by a change in tax receivable agreement liability.
Economic Income was
$32.4 million
for the
second
quarter of
2019
, compared to
$8.2 million
for the
second
quarter of
2018
.
This improvement was primarily due to a decrease in interest expense, a decrease in compensation and benefits expenses, as well as reductions across various operating expense categories. These decreases in expenses were partially offset by lower management fees.
Economic Income was
$70.2 million
for the
first half of
2019
, compared to
$60.9 million
for the first half of
2018
.
This improvement was primarily due to a decrease in interest expense, a decrease in salaries and benefits, as well as reductions across various operating expense categories. These decreases in expenses were partially offset by lower management fees and higher bonus expense.
Economic Income is a non-GAAP measure. For additional information regarding non-GAAP measures, as well as for a discussion of the drivers of the year-over-year change in Economic Income, please see “—Economic Income Analysis.”
Overview of Assets Under Management and Fund Performance
Assets under management totaled
$33.7 billion
as of
June 30, 2019
. Longer-dated assets under management, which are those subject to initial commitment periods of three years or longer, were
$22.0 billion
, comprising
65%
of our total assets under management as of
June 30, 2019
. Assets under management in our dedicated credit, real estate and other strategy-specific funds were
$23.9 billion
, comprising
71%
of assets under management as of
June 30, 2019
.
Assets under management in our multi-strategy funds totaled
$9.8 billion
as of
June 30, 2019
,
decreasing
$2.9 billion
, or
23%
, year-over-year. This change was driven by net capital
outflows
of
$3.2 billion
, primarily in the Oz Master Fund, our largest multi-strategy fund; and
$83.1 million
of distributions to investors in certain smaller funds that we have decided to close. These decreases were partially offset by performance-related
appreciation
of
$371.8 million
.
Oz Master Fund generated a gross return of
14.8%
and a net return of
11.7%
year-to-date through
June 30, 2019
.
Oz Master Fund delivered positive returns across all major strategies in the period with performance driven primarily by global equities, merger arbitrage and corporate credit.
Please see “—Assets Under Management and Fund Performance—Multi-Strategy Funds” for additional information regarding the returns of the Oz Master Fund.
Assets under management in our dedicated credit products totaled
$20.7 billion
as of
June 30, 2019
,
increasing
$2.5 billion
, or
14%
, year-over-year. This change was driven by capital net
inflows
of
$2.9 billion
, partially offset by
$387.4 million
of distributions and other reductions, and performance-related
depreciation
of
$22.8 million
.
Assets under management in our opportunistic credit funds totaled
$6.0 billion
as of
June 30, 2019
,
increasing
$506.5 million
, or
9%
, year-over-year. This change was driven by
$441.0 million
of net inflows, and
$149.8 million
of performance-related
appreciation
. These increases were partially offset by
$84.2 million
of distributions in our closed-end opportunistic credit funds.
Oz Credit Opportunities Master Fund, our global opportunistic credit fund, generated a gross return of
4.4%
and a net return of
3.3%
year-to-date through
June 30, 2019
.
Performance was broad-based with gains across both the corporate and structured credit strategies, and geographies.
Assets under management for the fund were
$1.7 billion
as of
June 30, 2019
.
Assets under management in Institutional Credit Strategies totaled
$14.7 billion
as of
June 30, 2019
,
increasing
$2.0 billion
, or
15%
, year-over-year. The increase was
driven primarily by the closing of additional CLOs and our second aircraft securitization.
Assets under management in our real estate funds totaled
$2.9 billion
as of
June 30, 2019
,
increasing
$382.2 million
, or
15%
, year-over-year. Since inception through
June 30, 2019
, the gross internal rate of return (“IRR”) was
32.9%
and
21.5%
net for Och-Ziff Real Estate Fund II (for which the investment period ended in 2014), and
25.4%
gross and
16.0%
net for Och-Ziff Real Estate Fund I (for which the investment period ended in 2010).
Assets Under Management and Fund Performance
Our financial results are primarily driven by the combination of our assets under management and the investment performance of our funds. Both of these factors directly affect the revenues we earn from management fees and incentive income. Growth in assets under management due to capital placed with us by investors in our funds and positive investment performance of our funds drive growth in our revenues and earnings. Conversely, poor investment performance slows our growth by decreasing our assets under management and increasing the potential for redemptions from our funds, which would have a negative effect on our revenues and earnings.
We typically accept capital from new and existing investors in our funds on a monthly basis on the first day of each month. Investors in our multi-strategy and our open-end opportunistic credit funds (other than with respect to capital invested in Special Investments) typically have the right to redeem their interests in a fund following an initial lock-up period of one to three years. Following the expiration of these lock-up periods, subject to certain limitations, investors may redeem capital generally on a quarterly or annual basis upon giving 30 to 90 days’ prior written notice. However, upon the payment of a redemption fee to the applicable fund and upon giving 30 days’ prior written notice, certain investors may redeem capital during the lock-up period. The lock-up requirements for our funds may generally be waived or modified at the sole discretion of each fund’s general partner or board of directors, as applicable.
With respect to investors with quarterly redemption rights, requests for redemptions submitted during a quarter generally reduce assets under management on the first day of the following quarter. Accordingly, quarterly redemptions generally will have no impact on management fees during the quarter in which they are submitted. Instead, these redemptions will reduce management fees in the following quarter. With respect to investors with annual redemption rights, redemptions paid prior to the end of a quarter impact assets under management in the quarter in which they are paid, and therefore impact management fees for that quarter.
Investors in our closed-end credit funds, CLOs, real estate and certain other funds are not able to redeem their investments. In those funds, investors generally make a commitment that is funded over an investment period (or at launch for our CLOs). Upon the expiration of the investment period, the investments are then sold or realized over time, and distributions are made to the investors in the fund.
In a declining market, during periods when the hedge fund industry generally experiences outflows, or in response to specific company events (including the Recapitalization and the Corporate Classification Change), we could experience increased redemptions and a consequent reduction in our assets under management. Over the past few years, our assets under management have declined and this trend may continue to some extent for some period of time in light of the 2016 settlements. However, throughout the latter part of 2017 and 2018, net outflows from our multi-strategy funds began to normalize and were partially offset by growth in our CLOs business, as well as positive fund performance. We believe that strong fund performance should translate to inflows, although we cannot pinpoint the timing.
Information with respect to our assets under management throughout this report, including the tables set forth below, includes investments by us, our executive managing directors, employees and certain other related parties. As of
June 30, 2019
, approximately
3%
of our assets under management represented investments by us, our executive managing directors, employees and certain other related parties in our funds. As of that date, approximately
30%
of these affiliated assets under management are not charged management fees and are not subject to an incentive income calculation. Additionally, to the extent that a fund is an investor in another fund, we waive or rebate a corresponding portion of the management fees charged to the fund.
As further discussed below in “—Understanding Our Results—Revenues—Management Fees,” we generally calculate management fees based on assets under management as of the beginning of each quarter. The assets under management in the tables below are presented net of management fees and incentive income as of the end of the period. Accordingly, the assets under management presented in the tables below are not the amounts used to calculate management fees for the respective periods.
Appreciation (depreciation) in the tables below reflects the aggregate net capital appreciation (depreciation) for the entire period and is presented on a total return basis, net of all fees and expenses (except incentive income on Special Investments), and includes the reinvestment of all dividends and other income. Management fees and incentive income vary by product.
Appreciation (depreciation) within Institutional Credit Strategies includes the effects of changes in the par value of the underlying collateral of the CLOs, foreign currency translation changes in the measurement of assets under management of our European CLOs and changes in the portfolio appraisal values for aircraft securitizations.
Summary of Changes in Assets Under Management
The tables below present the changes to our assets under management for the respective periods based on the type of funds or investment vehicles we manage.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2019
|
|
|
March 31, 2019
|
|
Inflows / (Outflows)
|
|
Distributions / Other Reductions
|
|
Appreciation / (Depreciation)
|
|
June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Multi-strategy funds
|
$
|
10,292,551
|
|
|
$
|
(848,872
|
)
|
|
$
|
(5,699
|
)
|
|
$
|
337,415
|
|
|
$
|
9,775,395
|
|
|
Credit
|
|
|
|
|
|
|
|
|
|
|
Opportunistic credit funds
|
5,787,118
|
|
|
188,858
|
|
|
(5,204
|
)
|
|
55,183
|
|
|
6,025,955
|
|
|
Institutional Credit Strategies
|
13,365,643
|
|
|
1,460,664
|
|
|
(1,986
|
)
|
|
(105,580
|
)
|
|
14,718,741
|
|
|
Real estate funds
|
2,652,488
|
|
|
279,085
|
|
|
(10,048
|
)
|
|
—
|
|
|
2,921,525
|
|
|
Other
|
224,146
|
|
|
—
|
|
|
(6,296
|
)
|
|
—
|
|
|
217,850
|
|
|
Total
|
$
|
32,321,946
|
|
|
$
|
1,079,735
|
|
|
$
|
(29,233
|
)
|
|
$
|
287,018
|
|
|
$
|
33,659,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2018
|
|
|
March 31, 2018
|
|
Inflows / (Outflows)
|
|
Distributions / Other Reductions
|
|
Appreciation / (Depreciation)
|
|
June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Multi-strategy funds
|
$
|
13,325,230
|
|
|
$
|
(366,710
|
)
|
|
$
|
(491,023
|
)
|
|
$
|
235,571
|
|
|
$
|
12,703,068
|
|
|
Credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Opportunistic credit funds
|
5,424,991
|
|
|
(51,237
|
)
|
|
(2,801
|
)
|
|
148,468
|
|
|
5,519,421
|
|
|
Institutional Credit Strategies
|
11,176,106
|
|
|
1,621,887
|
|
|
—
|
|
|
(50,666
|
)
|
|
12,747,327
|
|
|
Real estate funds
|
2,471,498
|
|
|
77,804
|
|
|
(9,917
|
)
|
|
(33
|
)
|
|
2,539,352
|
|
|
Other
|
438,734
|
|
|
(34,599
|
)
|
|
(5,087
|
)
|
|
169
|
|
|
399,217
|
|
|
Total
|
$
|
32,836,559
|
|
|
$
|
1,247,145
|
|
|
$
|
(508,828
|
)
|
|
$
|
333,509
|
|
|
$
|
33,908,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2019
|
|
|
December 31, 2018
|
|
Inflows / (Outflows)
|
|
Distributions / Other Reductions
|
|
Appreciation / (Depreciation)
|
|
June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Multi-strategy funds
|
$
|
10,420,858
|
|
|
$
|
(1,735,225
|
)
|
|
$
|
(26,977
|
)
|
|
$
|
1,116,739
|
|
|
$
|
9,775,395
|
|
|
Credit
|
|
|
|
|
|
|
|
|
|
|
|
Opportunistic credit funds
|
5,751,411
|
|
|
125,328
|
|
|
(32,176
|
)
|
|
181,392
|
|
|
6,025,955
|
|
|
Institutional Credit Strategies
|
13,491,734
|
|
|
1,474,170
|
|
|
(109,133
|
)
|
|
(138,030
|
)
|
|
14,718,741
|
|
|
Real estate funds
|
2,577,040
|
|
|
354,555
|
|
|
(10,048
|
)
|
|
(22
|
)
|
|
2,921,525
|
|
|
Other
|
286,635
|
|
|
(62,868
|
)
|
|
(6,296
|
)
|
|
379
|
|
|
217,850
|
|
|
Total
|
$
|
32,527,678
|
|
|
$
|
155,960
|
|
|
$
|
(184,630
|
)
|
|
$
|
1,160,458
|
|
|
$
|
33,659,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2018
|
|
|
December 31, 2017
|
|
Inflows / (Outflows)
|
|
Distributions / Other Reductions
|
|
Appreciation / (Depreciation)
|
|
June 30, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Multi-strategy funds
|
$
|
13,695,040
|
|
|
$
|
(918,380
|
)
|
|
$
|
(594,991
|
)
|
|
$
|
521,399
|
|
|
$
|
12,703,068
|
|
|
Credit
|
|
|
|
|
|
|
|
|
|
|
Opportunistic credit funds
|
5,513,618
|
|
|
(150,077
|
)
|
|
(118,786
|
)
|
|
274,666
|
|
|
5,519,421
|
|
|
Institutional Credit Strategies
|
10,136,991
|
|
|
2,653,517
|
|
|
—
|
|
|
(43,181
|
)
|
|
12,747,327
|
|
|
Real estate funds
|
2,495,190
|
|
|
77,804
|
|
|
(33,593
|
)
|
|
(49
|
)
|
|
2,539,352
|
|
|
Other
|
587,723
|
|
|
(35,169
|
)
|
|
(159,258
|
)
|
|
5,921
|
|
|
399,217
|
|
|
Total
|
$
|
32,428,562
|
|
|
$
|
1,627,695
|
|
|
$
|
(906,628
|
)
|
|
$
|
758,756
|
|
|
$
|
33,908,385
|
|
In the
six months ended
June 30, 2019
, our funds experienced performance-related
appreciation
of
$1.2 billion
and net
inflows
of
$156.0 million
. The net
inflows
were comprised of
$2.3 billion
of gross inflows and
$2.1 billion
of gross outflows due to redemptions, primarily in our multi-strategy funds. In
2019
, excluding securitization vehicles within Institutional Credit Strategies, our largest sources of gross inflows were from corporate, institutional and other, fund-of-funds, and pensions, while related parties were the largest source of gross outflows. The net outflows include approximately $885.9 million of redemptions to former executive managing directors, the majority of which were driven by the anticipated Liquidity Redemption discussed in Note
3
. Since
June 30, 2019
, estimated assets under management
decreased
to
$33.2 billion
as of
August 1, 2019
, which includes approximately $89 million of affiliate redemptions, the majority of which relates to the Liquidity Redemption.
In the
six months ended
June 30, 2018
, our funds experienced performance-related appreciation of
$758.8 million
and net inflows of
$1.6 billion
. The net inflows were comprised of
$3.5 billion
of gross inflows, primarily due to launches of new CLOs, and
$1.9 billion
of gross outflows due to redemptions. We also had
$906.6 million
in distributions and other reductions related to closed-end funds that are in the process of realizing investments and making distributions to investors in those funds, as well as to certain smaller funds that we have decided to close. Our outflows in the first half of 2018 started to normalize. In the first half of 2018, excluding Institutional Credit Strategies products, our largest sources of gross inflows were from corporations, institutional and other, fund-of-funds and pensions, while related parties were the largest sources of gross outflows.
Weighted-Average Assets Under Management and Average Management Fee Rates
The table below presents our weighted-average assets under management and average management fee rates. Weighted-average assets under management exclude the impact of
second
quarter investment performance for the periods presented, as these amounts generally do not impact management fees calculated for those periods. The average management fee rates presented below take into account the effect of non-fee paying assets under management. Please see the respective sections below for average management fee rates by fund type.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Weighted-average assets under management
|
$
|
32,125,578
|
|
|
$
|
32,680,905
|
|
|
$
|
31,858,459
|
|
|
$
|
32,515,304
|
|
|
Average management fee rates
|
0.72
|
%
|
|
0.80
|
%
|
|
0.74
|
%
|
|
0.83
|
%
|
The decline in our average management fee rate for the periods presented occurred primarily because of a change in the mix of products that comprise our assets under management. Our average management fee will vary from period to period based on the mix of products that comprise our assets under management.
Fund Performance Information
The tables below present performance information for the funds we manage. All of our funds are managed by the Oz Funds segment with the exception of our real estate funds, which are managed by the real estate management business included within the Real Estate segment.
The performance information presented in this report is not indicative of the performance of our Class A Shares and is not necessarily indicative of the future results of any particular fund, including the accrued unrecognized amounts of incentive income. An investment in our Class A Shares is not an investment in any of our funds. There can be no assurance that any of our existing or future funds will achieve similar results. The timing and amount of incentive income generated from our funds are inherently uncertain. Incentive income is a function of investment performance and realizations of investments, which vary period-to-period based on market conditions and other factors. We cannot predict when, or if, any realization of investments will occur. Incentive income recognized for any particular period is not a reliable indicator of incentive income that may be earned in subsequent periods.
The return information presented in this report represents, where applicable, the composite performance of all feeder funds that comprise each of the master funds presented. Gross return information is generally calculated using the total return of all feeder funds, net of all fees and expenses except management fees and incentive income of such feeder funds and master funds and the returns of each feeder fund include the reinvestment of all dividends and other income. Net return information is generally calculated as the gross returns less management fees and incentive income (except incentive income on unrealized gains attributable to Special Investments in certain funds that could reduce returns on these investments at the time of realization). Return information also includes realized and unrealized gains and losses attributable to Special Investments and initial public offering investments that are not allocated to all investors in the feeder funds. Investors that were not allocated Special Investments and initial public offering investments may experience materially different returns.
Multi-Strategy Funds
The table below presents assets under management and investment performance for our multi-strategy funds. Assets under management are generally based on the net asset value of these products. Management fees generally range from
0.95%
to
2.25%
annually of assets under management. For the
second
quarter of
2019
, our multi-strategy funds had an average management fee rate of
1.30%
.
We generally crystallize incentive income from the majority of our multi-strategy funds on an annual basis. Incentive income is generally equal to 20% of the realized and unrealized profits attributable to each investor. A portion of the assets under management in each of the Oz Master Fund and our other multi-strategy funds is subject to initial commitment periods of three years, and for certain of these assets, we only earn incentive income once profits attributable to an investor exceed a preferential return, or “hurdle rate,” which is generally equal to the 3-month T-bill or LIBOR rate for our multi-strategy funds. Once the investment performance has exceeded the hurdle rate for these assets, we may receive a “catch-up” allocation, resulting in a potential recognition by us of a full 20% of the net profits attributable to investors in these assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets Under Management as of June 30,
|
|
Returns for the Six Months Ended June 30,
|
|
Annualized Returns Since Inception Through June 30, 2019
|
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
Gross
|
|
Net
|
|
Gross
|
|
Net
|
|
Gross
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fund
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oz Master Fund
(1)
|
$
|
8,886,655
|
|
|
$
|
11,104,223
|
|
|
14.8
|
%
|
|
11.7
|
%
|
|
6.2
|
%
|
|
4.4
|
%
|
|
16.3
|
%
|
(1)
|
11.4
|
%
|
(1)
|
|
Oz Enhanced Master Fund
|
693,290
|
|
|
683,444
|
|
|
24.6
|
%
|
|
19.8
|
%
|
|
9.2
|
%
|
|
6.7
|
%
|
|
14.9
|
%
|
|
10.2
|
%
|
|
|
Other funds
|
195,450
|
|
|
915,401
|
|
|
n/m
|
|
|
n/m
|
|
|
n/m
|
|
|
n/m
|
|
|
n/m
|
|
|
n/m
|
|
|
|
|
$
|
9,775,395
|
|
|
$
|
12,703,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
_______________
n/m not meaningful
|
|
|
|
(1)
|
The annualized returns since inception are those of the Oz Multi-Strategy Composite, which represents the composite performance of all accounts that were managed in accordance with our broad multi-strategy mandate that were not subject to portfolio investment restrictions or other factors that limited our investment discretion since inception on April 1, 1994. Performance is calculated using the total return of all such accounts net of all investment fees and expenses of such accounts, except incentive income on unrealized gains attributable to Special Investments that could reduce returns in these investments at the time of realization, and the returns include the reinvestment of all dividends and other income. The performance calculation for the Oz Master Fund excludes realized and unrealized gains and losses attributable to currency hedging specific to certain investors investing in Oz Master Fund in currencies other than the U.S. Dollar. For the period from April 1, 1994 through December 31, 1997, the returns are gross of certain overhead expenses that were reimbursed by the accounts. Such reimbursement arrangements were terminated at the inception of the Oz Master Fund on January 1, 1998. The size of the accounts comprising the composite during the time period shown vary materially. Such differences impacted our investment decisions and the diversity of the investment strategies followed. Furthermore, the composition of the investment strategies we follow is subject to our discretion, has varied materially since inception and is expected to vary materially in the future. As of
June 30, 2019
, the gross and net annualized returns since the Oz Master Fund’s inception on January 1, 1998 were
12.8%
and
8.7%
, respectively.
|
The
$2.9 billion
, or
23%
, year-over-year
decrease
in assets under management in our multi-strategy funds was primarily due to capital net
outflows
of
$3.2 billion
, primarily from the Oz Master Fund, our largest multi-strategy fund, and distributions of
$83.1 million
in certain other multi-strategy funds that we have decided to close. These decreases were partially offset by performance-related
appreciation
of
$371.8 million
. In
2019
, the largest sources of gross outflows from our multi-strategy funds were attributable to pensions and related parties.
For the
first half of
2019
, the Oz Master Fund generated a gross return of
14.8%
and a net return of
11.7%
.
Oz Master Fund delivered positive returns across all major strategies in the period with performance driven primarily by global equities, merger arbitrage and corporate credit.
For the
first half of
2018, the Oz Master Fund generated a gross return of 6.2% and a net return of 4.4%. Oz Master Fund’s return was broad based, with positive performance for the quarter in all of its major strategies.
Credit
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets Under Management as of June 30,
|
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Opportunistic credit funds
|
$
|
6,025,955
|
|
|
$
|
5,519,421
|
|
|
Institutional Credit Strategies
|
14,718,741
|
|
|
12,747,327
|
|
|
|
$
|
20,744,696
|
|
|
$
|
18,266,748
|
|
Opportunistic Credit Funds
Our opportunistic credit funds seek to generate risk-adjusted returns by capturing value in mispriced investments across disrupted, dislocated and distressed corporate, structured and private credit markets globally.
Certain of our opportunistic credit funds are open-end and allow for contributions and redemptions (subject to initial lock-up and notice periods) on a periodic basis similar to our multi-strategy funds. Our remaining opportunistic credit funds are closed-end, whereby investors make a commitment that is funded over an investment period. Upon the expiration of an investment period, the investments are then sold or realized over a period of time, and distributions are made to the investors in the fund.
Assets under management for our opportunistic credit funds are generally based on the net asset value of those funds plus any unfunded commitments. Management fees for our opportunistic credit funds generally range from
0.50%
to
2.00%
annually of the net asset value of these funds. For the
second
quarter of
2019
, our opportunistic credit funds had an average management fee rate of
0.73%
.
The table below presents assets under management and investment performance information for certain of our opportunistic credit funds. Incentive income related to these funds (excluding the closed-end opportunistic fund, which is explained further below) is generally equal to 20% of realized and unrealized profits attributable to each investor, and a portion of these assets under management is subject to hurdle rates, which are generally
5%
to
8%
for our open-end opportunistic credit funds. Once the cumulative investment performance has exceeded the hurdle rate, we may receive a “catch-up” allocation, resulting in a potential recognition by us of a full 20% of the net profits attributable to investors in these funds. The measurement periods for these assets under management generally range from one to five years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets Under Management as of June 30,
|
|
Returns for the Six Months Ended June 30,
|
Annualized Returns Since Inception Through June 30, 2019
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
Gross
|
|
Net
|
|
Gross
|
|
Net
|
|
Gross
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fund
|
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oz Credit Opportunities Master Fund
|
$
|
1,691,379
|
|
|
$
|
1,764,733
|
|
|
4.4
|
%
|
|
3.3
|
%
|
|
8.9
|
%
|
|
6.2
|
%
|
|
15.8
|
%
|
|
11.5
|
%
|
|
Customized Credit Focused Platform
|
3,239,374
|
|
|
3,081,947
|
|
|
6.9
|
%
|
|
5.2
|
%
|
|
7.5
|
%
|
|
5.6
|
%
|
|
17.6
|
%
|
|
13.3
|
%
|
|
Closed-end opportunistic credit funds
|
550,079
|
|
|
224,081
|
|
|
See below for return information on our closed-end opportunistic credit funds.
|
|
Other funds
|
545,123
|
|
|
448,660
|
|
|
n/m
|
|
|
n/m
|
|
|
n/m
|
|
|
n/m
|
|
|
n/m
|
|
|
n/m
|
|
|
|
$
|
6,025,955
|
|
|
$
|
5,519,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
_______________
n/m not meaningful
Assets under management in our opportunistic credit funds
increase
d by
$506.5 million
, or
9%
, year-over-year. This change was driven by
$441.0 million
of net
inflows
and
$149.8 million
of performance-related
appreciation
, partially offset by
$84.2 million
of distributions in our closed-end opportunistic credit funds.
For the
first half of
2019
, the Oz Credit Opportunities Master Fund, our global opportunistic credit fund, generated a gross return of
4.4%
and a net return of
3.3%
.
Performance was broad-based with gains across both the corporate and structured credit strategies, and geographies.
For the first half of 2018, the Oz Credit Opportunities Master Fund, our global opportunistic credit fund, generated a gross return of
8.9%
and a net return of
6.2%
. Performance was broad-based with gains across both the corporate and structured credit strategies.
The table below presents assets under management, investment performance and other information for our closed-end opportunistic credit funds. Our closed-end opportunistic credit funds follow a European-style waterfall, whereby incentive income may be paid to us only after a fund investor receives distributions in excess of their total contributed capital and a preferential return, which is generally
6%
to
8%
. Incentive income related to these funds is generally equal to 20% of the cumulative realized profits in excess of the preferential return attributable to each investor over the life of the fund. Once the investment performance has exceeded the preferential return, we may receive a “catch-up” allocation, resulting in a potential recognition by us of a full 20% of the net profits attributable to investors in these funds. These funds have concluded their investment periods, and therefore we expect assets under management for these funds to decrease as investments are sold and the related proceeds are distributed to the investors in these funds.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets Under Management as of June 30,
|
Inception to Date as of June 30, 2019
|
|
|
|
|
|
|
|
|
|
|
IRR
|
|
|
|
|
2019
|
|
2018
|
|
Total Commitments
|
|
Total Invested Capital
(1)
|
|
Gross
(2)
|
|
Net
(3)
|
|
Gross MOIC
(4)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fund (Investment Period)
|
(dollars in thousands)
|
|
|
|
|
|
|
|
Oz European Credit Opportunities Fund (2012-2015)
|
$
|
1,240
|
|
|
$
|
46,090
|
|
|
$
|
459,600
|
|
|
$
|
305,487
|
|
|
15.7
|
%
|
|
11.8
|
%
|
|
1.5x
|
|
Oz Structured Products Domestic Fund II (2011-2014)
|
61,228
|
|
|
82,023
|
|
|
326,850
|
|
|
326,850
|
|
|
19.8
|
%
|
|
15.6
|
%
|
|
2.1x
|
|
Oz Structured Products Offshore Fund II (2011-2014)
|
64,860
|
|
|
84,196
|
|
|
304,531
|
|
|
304,531
|
|
|
17.3
|
%
|
|
13.5
|
%
|
|
1.9x
|
|
Oz Structured Products Offshore Fund I (2010-2013)
|
4,580
|
|
|
6,109
|
|
|
155,098
|
|
|
155,098
|
|
|
23.9
|
%
|
|
19.1
|
%
|
|
2.1x
|
|
Oz Structured Products Domestic Fund I (2010-2013)
|
4,260
|
|
|
5,486
|
|
|
99,986
|
|
|
99,986
|
|
|
22.7
|
%
|
|
18.1
|
%
|
|
2.0x
|
|
Other funds
|
413,911
|
|
|
177
|
|
|
414,750
|
|
|
11,127
|
|
|
n/m
|
|
|
n/m
|
|
|
n/m
|
|
|
$
|
550,079
|
|
|
$
|
224,081
|
|
|
$
|
1,760,815
|
|
|
$
|
1,203,079
|
|
|
|
|
|
|
|
_______________
n/m not meaningful
|
|
|
|
(1)
|
Represents funded capital commitments net of recallable distributions to investors.
|
|
|
|
|
(2)
|
Gross IRR for our closed-end opportunistic credit funds represents the estimated, unaudited, annualized return based on the timing of cash inflows and outflows for the fund as of
June 30, 2019
, including the fair value of unrealized investments as of such date, together with any appreciation or depreciation from related hedging activity. Gross IRR does not include the effects of management fees or incentive income, which would reduce the return, and includes the reinvestment of all fund income.
|
|
|
|
|
(3)
|
Net IRR is calculated as described in footnote (2), but is reduced by all management fees, as well as paid incentive and accrued incentive income that will be payable upon the distribution of each fund’s capital in accordance with the terms of the relevant fund. Accrued incentive income may be higher or lower at such time. The net IRR represents a composite rate of return for a fund and does not reflect the net IRR specific to any individual investor.
|
|
|
|
|
(4)
|
Gross MOIC for our closed-end opportunistic credit funds is calculated by dividing the sum of the net asset value of the fund, accrued incentive income, life-to-date incentive income and management fees paid and any non-recallable distributions made from the fund by the invested capital.
|
Institutional Credit Strategies
Institutional Credit Strategies is our asset management platform that invests in performing credits, including leveraged loans, high-yield bonds, private credit/bespoke financing and investment grade credit via CLOs and other customized solutions for clients.
Assets under management for Institutional Credit Strategies, which are primarily comprised of our CLOs, are generally based on the par value of the collateral and cash held in the CLOs. However, assets under management are reduced for any investments in our CLOs held by our other funds in order to avoid double counting these assets. Management fees for Institutional Credit Strategies, which includes our CLOs and aircraft securitization vehicles, generally range from
0.35%
to
0.50%
annually of assets under management. For the
second
quarter of
2019
, Institutional Credit Strategies had an average management fee rate of
0.47%
gross of rebates on cross-investments from other funds we manage (
0.39%
net of such rebates).
Incentive income from our CLOs is generally equal to 20% of the excess cash flows due to the holders of the subordinated notes issued by the CLOs, and is generally subject to a
12%
hurdle rate. Because of the hurdle rate and structure of our CLOs, we do not expect to earn a meaningful amount of incentive income from these entities, and therefore no return information is presented for these vehicles.
The OZLM CLOs presented below are our U.S. CLOs, whereas the OZLME CLOs are our European CLOs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets Under Management as of June 30,
|
|
|
Initial Closing Date (Most Recent Refinance Date)
|
|
Deal Size
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
CLOs
|
|
|
|
|
|
|
|
|
OZLM I
|
July 19, 2012 (July 24, 2017)
|
|
$
|
523,550
|
|
|
$
|
495,746
|
|
|
$
|
496,421
|
|
|
OZLM II
|
November 1, 2012 (August 29, 2018)
|
|
567,100
|
|
|
507,940
|
|
|
508,227
|
|
|
OZLM III
|
February 20, 2013 (December 15, 2016)
|
|
653,250
|
|
|
605,880
|
|
|
607,892
|
|
|
OZLM IV
|
June 27, 2013 (September 15, 2017)
|
|
615,500
|
|
|
536,821
|
|
|
539,585
|
|
|
OZLM VI
|
April 16, 2014 (April 17, 2018)
|
|
621,250
|
|
|
593,369
|
|
|
594,290
|
|
|
OZLM VII
|
June 26, 2014 (July 17, 2018)
|
|
636,775
|
|
|
593,286
|
|
|
792,034
|
|
|
OZLM VIII
|
September 9, 2014 (November 15, 2018)
|
|
622,250
|
|
|
594,877
|
|
|
593,984
|
|
|
OZLM IX
|
December 22, 2014 (November 8, 2018)
|
|
510,208
|
|
|
498,227
|
|
|
498,264
|
|
|
OZLM XI
|
March 12, 2015 (August 18, 2017)
|
|
541,532
|
|
|
513,735
|
|
|
515,151
|
|
|
OZLM XII
|
May 28, 2015 (September 18, 2018)
|
|
565,650
|
|
|
546,049
|
|
|
548,200
|
|
|
OZLM XIII
|
August 6, 2015 (September 18, 2018)
|
|
511,600
|
|
|
491,357
|
|
|
494,418
|
|
|
OZLM XIV
|
December 21, 2015 (June 4, 2018)
|
|
507,420
|
|
|
499,878
|
|
|
500,992
|
|
|
OZLM XV
|
December 20, 2016
|
|
409,250
|
|
|
394,957
|
|
|
395,505
|
|
|
OZLME I
|
December 15, 2016
|
|
430,490
|
|
|
453,403
|
|
|
465,059
|
|
|
OZLM XVI
|
June 8, 2017
|
|
410,250
|
|
|
399,548
|
|
|
400,021
|
|
|
OZLM XVII
|
August 3, 2017
|
|
512,000
|
|
|
497,587
|
|
|
497,830
|
|
|
OZLME II
|
September 14, 2017
|
|
494,708
|
|
|
450,598
|
|
|
462,407
|
|
|
OZLM XIX
|
November 21, 2017
|
|
610,800
|
|
|
600,122
|
|
|
600,329
|
|
|
OZLM XXI
|
January 26, 2018
|
|
510,600
|
|
|
500,299
|
|
|
500,956
|
|
|
OZLME III
|
January 31, 2018
|
|
509,118
|
|
|
453,221
|
|
|
466,138
|
|
|
OZLM XXII
|
February 22, 2018
|
|
509,200
|
|
|
463,338
|
|
|
466,967
|
|
|
OZLM XVIII
|
April 4, 2018
|
|
508,000
|
|
|
498,260
|
|
|
499,622
|
|
|
OZLM XX
|
May 11, 2018
|
|
464,150
|
|
|
446,739
|
|
|
447,813
|
|
|
OZLME IV
|
August 1, 2018
|
|
479,385
|
|
|
456,193
|
|
|
—
|
|
|
OZLME V
|
December 11, 2018
|
|
471,987
|
|
|
456,353
|
|
|
—
|
|
|
OZLM XXIII
|
May 2, 2019
|
|
505,425
|
|
|
483,975
|
|
|
—
|
|
|
OZLME VI
|
June 20, 2019
|
|
462,146
|
|
|
456,363
|
|
|
—
|
|
|
|
|
|
14,163,594
|
|
|
13,488,121
|
|
|
11,892,105
|
|
|
STARR 2018-1
|
June 27, 2018
|
|
696,000
|
|
|
497,611
|
|
|
680,231
|
|
|
STARR 2019-1
|
April 18, 2019
|
|
589,000
|
|
|
542,822
|
|
|
—
|
|
|
Other funds
|
n/a
|
|
n/a
|
|
|
190,187
|
|
|
174,991
|
|
|
|
|
|
$
|
15,448,594
|
|
|
$
|
14,718,741
|
|
|
$
|
12,747,327
|
|
Assets under management in Institutional Credit Strategies totaled
$14.7 billion
as of
June 30, 2019
, increasing
$2.0 billion
, or
15%
, year-over-year. The year-over-year increase in assets under management in Institutional Credit Strategies was
driven primarily by the closing of additional CLOs and our second aircraft securitization.
Real Estate Funds
Our real estate funds generally make investments in commercial and residential real estate, including real property, multi-property portfolios, real estate-related joint ventures, real estate operating companies and other real estate-related assets.
Assets under management for our real estate funds are generally based on the amount of capital committed by our fund investors during the investment period and the amount of actual capital invested for periods following the investment period. However, assets under management are reduced for unfunded commitments by our executive managing directors that will be funded through transfers from other funds in order to avoid double counting these assets. Management fees for our real estate funds generally range from
0.50%
to
1.50%
annually of assets under management; however, management fees for Och-Ziff Real Estate Credit Fund I are based on invested capital. For the
second
quarter of
2019
, our real estate funds had an average management fee rate of
0.36%
. The decline in the average rate from the first quarter of 2019 was primarily due to Och-Ziff Real Estate Fund III, as this fund stepped down the basis on which fees are charged from committed capital to invested capital on April 1, 2019. The investment period for Och-Ziff Real Estate Fund III ends on September 30, 2019.
The table below presents assets under management, investment performance and other information for our real estate funds. Our real estate funds generally follow an American-style waterfall, whereby incentive income may be paid to us after a fund investment is realized if a fund investor receives distributions in excess of the capital contributed for such investment, as well as a preferential return on such investment, which is generally
6%
to
10%
. Upon each subsequent realization, incentive income, which is generally 20% of realized profits, is recalculated based on the cumulative realized profits in excess of the preferential return attributable to each investor over the life of the fund. Once the investment performance has exceeded the hurdle rate, we may receive a “catch-up” allocation, resulting in a potential recognition by us of a full 20% of the realized net profits attributable to investors in these funds.
Due to the recalculation of cumulative realized profits upon each realization, the fund may clawback incentive income previously paid to us. As a result, we record incentive income paid to us by the real estate funds as unearned revenue in our consolidated balance sheets until the criteria for revenue recognition has been met.
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets Under Management as of June 30,
|
|
|
2019
|
|
2018
|
|
|
|
|
|
|
Fund
|
(dollars in thousands)
|
|
Och-Ziff Real Estate Fund I
|
$
|
13,578
|
|
|
$
|
13,478
|
|
|
Och-Ziff Real Estate Fund II
|
92,234
|
|
|
143,803
|
|
|
Och-Ziff Real Estate Fund III
|
1,487,960
|
|
|
1,462,161
|
|
|
Och-Ziff Real Estate Credit Fund I
|
724,854
|
|
|
697,704
|
|
|
Other funds
|
602,899
|
|
|
222,206
|
|
|
|
$
|
2,921,525
|
|
|
$
|
2,539,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inception to Date as of June 30, 2019
|
|
|
|
|
Total Investments
|
|
Realized/Partially Realized Investments
(1)
|
|
|
Total Commitments
|
|
Invested Capital
(2)
|
|
Total
Value
(3)
|
|
Gross IRR
(4)
|
|
Net IRR
(5)
|
|
Gross MOIC
(6)
|
|
Invested Capital
|
|
Total
Value
|
|
Gross IRR
(4)
|
|
Gross MOIC
(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fund (Investment Period)
|
(dollars in thousands)
|
|
|
|
|
|
Och-Ziff Real Estate Fund I
(7)
(2005-2010)
|
$
|
408,081
|
|
|
$
|
386,298
|
|
|
$
|
837,573
|
|
|
25.4
|
%
|
|
16.0
|
%
|
|
2.2x
|
|
$
|
372,720
|
|
|
$
|
837,262
|
|
|
26.8
|
%
|
|
2.2x
|
|
Och-Ziff Real Estate Fund II
(7)
(2011-2014)
|
839,508
|
|
|
762,588
|
|
|
1,523,027
|
|
|
32.9
|
%
|
|
21.5
|
%
|
|
2.0x
|
|
718,888
|
|
|
1,437,600
|
|
|
33.0
|
%
|
|
2.0x
|
|
Och-Ziff Real Estate Fund III
(2014-2019)
|
1,500,000
|
|
|
1,006,086
|
|
|
1,596,343
|
|
|
31.1
|
%
|
|
20.5
|
%
|
|
1.6x
|
|
526,695
|
|
|
990,332
|
|
|
37.6
|
%
|
|
1.9x
|
|
Och-Ziff Real Estate Credit Fund I
(8)
(2015-2020)
|
736,225
|
|
|
171,080
|
|
|
209,349
|
|
|
n/m
|
|
|
n/m
|
|
|
n/m
|
|
87,921
|
|
|
113,630
|
|
|
n/m
|
|
|
n/m
|
|
Other funds
|
742,221
|
|
|
229,546
|
|
|
317,365
|
|
|
n/m
|
|
|
n/m
|
|
|
n/m
|
|
60,438
|
|
|
110,832
|
|
|
n/m
|
|
|
n/m
|
|
|
$
|
4,226,035
|
|
|
$
|
2,555,598
|
|
|
$
|
4,483,657
|
|
|
|
|
|
|
|
|
$
|
1,766,662
|
|
|
$
|
3,489,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Investments as of June 30, 2019
|
|
|
Invested Capital
|
|
Total
Value
|
|
Gross
MOIC
(6)
|
|
|
|
|
|
|
|
|
Fund (Investment Period)
|
(dollars in thousands)
|
|
|
|
Och-Ziff Real Estate Fund I (2005-2010)
(7)
|
$
|
13,578
|
|
|
$
|
311
|
|
|
0.0x
|
|
Och-Ziff Real Estate Fund II (2011-2014)
(7)
|
43,700
|
|
|
85,427
|
|
|
2.0x
|
|
Och-Ziff Real Estate Fund III (2014-2019)
|
479,391
|
|
|
606,011
|
|
|
1.3x
|
|
Och-Ziff Real Estate Credit Fund I (2015-2020)
(8)
|
83,159
|
|
|
95,719
|
|
|
n/m
|
|
Other funds
|
169,108
|
|
|
206,533
|
|
|
n/m
|
|
|
$
|
788,936
|
|
|
$
|
994,001
|
|
|
|
_______________
n/m not meaningful
|
|
|
|
(1)
|
An investment is considered partially realized when the total amount of proceeds received, including dividends, interest or other distributions of income and return of capital, represents at least 50% of invested capital.
|
|
|
|
|
(2)
|
Invested capital represents total aggregate contributions made for investments by the fund.
|
|
|
|
|
(3)
|
Total value represents the sum of realized distributions and the fair value of unrealized and partially realized investments as of
June 30, 2019
. Total value will be impacted (either positively or negatively) by future economic and other factors. Accordingly, the total value ultimately realized will likely be higher or lower than the amounts presented as of
June 30, 2019
.
|
|
|
|
|
(4)
|
Gross IRR for our real estate funds represents the estimated, unaudited, annualized return based on the timing of cash inflows and outflows for the aggregated investments as of
June 30, 2019
, including the fair value of unrealized and partially realized investments as of such date, together with any unrealized appreciation or depreciation from related hedging activity. Gross IRR is not adjusted for estimated management fees, incentive income or other fees or expenses to be paid by the fund, which would reduce the return.
|
|
|
|
|
(5)
|
Net IRR is calculated as described in footnote (4), but is reduced by all management fees and other fund-level fees and expenses not adjusted for in the calculation of gross IRR. Net IRR is further reduced by paid incentive and accrued incentive income that will be payable upon the distribution of each fund’s capital in accordance with the terms of the relevant fund. Accrued incentive income may be higher or lower at such time. The net IRR represents a composite rate of return for a fund and does not reflect the net IRR specific to any individual investor.
|
|
|
|
|
(6)
|
Gross MOIC for our real estate funds is calculated by dividing the value of a fund’s investments by the invested capital, prior to adjustments for incentive income, management fees or other expenses to be paid by the fund.
|
|
|
|
|
(7)
|
These funds have concluded their investment periods, and therefore we expect assets under management for these funds to decrease as investments are sold and the related proceeds are distributed to the investors in these funds.
|
|
|
|
|
(8)
|
This fund has invested less than half of its committed capital; therefore, IRR and MOIC information is not presented, as it is not meaningful.
|
Assets under management in our real estate funds
increased
$382.2 million
, or
15%
, year-over-year. Our real estate franchise continues to deploy capital and generate strong returns with a
20.5%
annualized net return in our current opportunistic fund. We look to continue to grow this business by expanding our product offering and through raising successor funds.
Other
Management fees for these funds range from
1.00%
to
1.50%
annually of assets under management, generally based on the amount of capital committed to these platforms by our fund investors. For the
second
quarter of
2019
, our other funds had an average management fee rate of
0.38%
.
Incentive income for these funds is generally 20% of realized and unrealized annual profits or of cumulative profits attributable to each investor. Incentive income for these funds is subject to hurdle rates generally
3%
to
8%
.
Longer-Term Assets Under Management
As of
June 30, 2019
, approximately
65%
of our assets under management were subject to initial commitment periods of three years or longer. Incentive income on these assets, if any, is based on the cumulative investment performance generated over this commitment period. The table below presents the amount of these assets under management, as well as the amount of incentive income accrued at the fund level but that has not yet been recognized in our revenues. Further, these amounts may ultimately not be recognized as revenue by us in the event of future losses in the respective funds. See “—Understanding Our Results—Revenues—Incentive Income” for additional information.
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
|
Longer-Term Assets Under Management
|
|
Accrued Unrecognized Incentive Income
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Multi-strategy funds
|
$
|
324,361
|
|
|
$
|
11,268
|
|
|
Credit
|
|
|
|
|
|
|
Opportunistic credit funds
|
3,972,886
|
|
|
158,470
|
|
|
Institutional Credit Strategies
|
14,561,052
|
|
|
—
|
|
|
Real estate funds
|
2,921,524
|
|
|
105,443
|
|
|
Other
|
217,851
|
|
|
—
|
|
|
|
$
|
21,997,674
|
|
|
$
|
275,181
|
|
We generally recognize incentive income on our longer-term assets under management in multi-strategy funds and open-end opportunistic credit funds at or near the end of their respective commitment periods, which are generally three to five years, when such amounts are probable of not significantly reversing. We may begin recognizing incentive income related to assets under management in our closed-end opportunistic credit funds and real estate funds after the conclusion of their respective investment period, when such amounts are probable of not significantly reversing. However, these investment periods may generally be extended for an additional one to two years.
Understanding Our Results
Revenues
Our operations historically have been financed primarily by cash flows generated by our business. Our principal sources of revenues are management fees and incentive income. For any given period, our revenues are influenced by the amount of our assets under management, the investment performance of our funds and the timing of when we recognize incentive income for certain assets under management as discussed below.
The ability of investors to contribute capital to and redeem capital from our funds causes our assets under management to fluctuate from period to period. Fluctuations in assets under management also result from our funds’ investment performance. Both of these factors directly impact the revenues we earn from management fees and incentive income. For example, a $1.0 billion increase or decrease in assets under management subject to a 1% management fee would generally increase or decrease annual management fees by $10.0 million. If profits, net of management fees, attributable to a fee-paying fund investor were $10.0 million in a given year, we generally would earn incentive income equal to $2.0 million, assuming a 20% incentive income rate, a one-year commitment period, no hurdle rate and no high-water marks from prior years.
For any given quarter, our revenues are influenced by the combination of assets under management and the investment performance of our funds. For example, incentive income for the majority of our multi-strategy assets under management is recognized in the fourth quarter each year, based on full year investment performance.
Management Fees.
Management fees are generally calculated and paid to us on a quarterly basis in advance, based on the amount of assets under management at the beginning of the quarter. Management fees are prorated for capital inflows and redemptions during the quarter. Accordingly, changes in our management fee revenues from quarter to quarter are driven by changes in the quarterly opening balances of assets under management, the relative magnitude and timing of inflows and redemptions during the respective quarter, as well as the impact of differing management fee rates charged on those inflows and
redemptions. See “—Weighted-Average Assets Under Management and Average Management Fee Rates” for information on our average management fee rate and Note
13
to our consolidated financial statements for additional information regarding management fees.
Incentive Income.
We earn incentive income based on the cumulative performance of our funds over a commitment period. We recognize incentive income when such amounts are probable of not significantly reversing.
Other Revenues.
Other revenues consist primarily of interest income on investments in CLOs and cash and cash equivalents, as well as subrental income. Interest income is recognized on an effective yield basis. Subrental income is recognized on a straight-line basis over the lease term.
Income of Consolidated Funds.
Revenues recorded as income of consolidated funds consist of interest income, dividend income and other miscellaneous items.
Expenses
Compensation and Benefits.
Compensation and benefits consist of salaries, benefits, payroll taxes, and discretionary and guaranteed cash bonus expenses. We generally recognize compensation and benefits expenses over the related service period.
On an annual basis, compensation and benefits comprise a significant portion of total expenses, with discretionary cash bonuses generally comprising a significant portion of total compensation and benefits. We accrue minimum annual discretionary cash bonuses on a straight-line basis during the year. The total amount of discretionary cash bonuses ultimately recognized for the full year, which is determined in the fourth quarter of each year, could differ materially from the minimum amount accrued, as the total discretionary cash bonus is dependent upon a variety of factors, including fund performance for the year.
Compensation and benefits also include equity-based compensation expense, which is primarily in the form of RSUs granted to our independent board members, employees and executive managing directors, as well as PSUs and Partner Equity Units granted to executive managing directors.
Prior to 2019, we also issued Group D Units to executive managing directors. Group D Units were not considered equity under GAAP, and therefore no equity-based compensation expense was recognized for these units when they were granted. Distributions to holders of Group D Units were included within compensation and benefits in the consolidated statements of comprehensive income (loss). Prior to the Distribution Holiday, these distributions were accrued in the quarter in which the related income was earned and were paid out the following quarter at the same time distributions on the Group A Units and dividends on our Class A Shares were paid. Upon the conversion of Group D Units into Group A Units in connection with the Recapitalization, we recognized a one-time charge for the grant-date fair value of the vested units and begin to amortize the grant-date fair value of the unvested units over the service period.
We also have profit-sharing arrangements whereby certain employees or executive managing directors are entitled to a share of incentive income that were earn from certain funds. This incentive income is typically paid to us and then we pay a portion to the profit-sharing participant as investments held by these funds are realized. To the extent that the payments to the employees or executive managing directors are probable and reasonably estimable, we accrue these payments as compensation expense for GAAP purposes, which may occur prior to the recognition of the related incentive income.
Deferred Cash Interests (“DCIs”) are also granted to certain employees and executive managing directors as a form of compensation. DCIs reflect notional fund investments made by us on behalf of an employee or executive managing director. DCIs generally vest over a three-year period, subject to an employee’s or executive managing director’s continued service. Upon vesting, we pay the employee or executive managing director an amount in cash equal to the notional investment represented by the DCIs, as adjusted for notional fund performance. Except as otherwise provided in the relevant DCI plan or in an award agreement, in the event of a termination of the employee’s or executive managing director’s service, any portion of the DCIs that is unvested as of the date of termination will be forfeited.
Interest Expense.
Amounts included within interest expense relate primarily to indebtedness outstanding. See “—Liquidity and Capital Resources—Debt Obligations” and “—Liquidity and Capital Resources—Securities Sold Under Agreements to Repurchase” for additional information.
General, Administrative and Other.
General, administrative and other expenses are comprised of professional services, occupancy and equipment, information processing and communications, recurring placement and related service fees, business development, insurance, foreign exchange gains and losses, and other miscellaneous expenses.
Expenses of Consolidated Funds.
Expenses recorded as expenses of consolidated funds consist of interest expense and other miscellaneous expenses.
Other Income (Loss)
Changes in Tax Receivable Agreement Liability.
Changes in tax receivable agreement liability consists of changes in our estimate of the future payments related to the tax receivable agreement that result from changes in future income tax savings due to changes in tax rates. See Note
19
to our consolidated financial statements included in this report for additional information.
Net Losses on Early Retirement of Debt.
Net losses on early retirement of debt consist of net losses realized upon the early retirement of any indebtedness outstanding, and include the write-off of unamortized debt discounts and issuance costs, as well as other fees incurred in connection with the early retirement of debt.
Net Gains (Losses) on Investments
.
Net gains (losses) on investments
primarily consist of net gains and losses on investments in our funds, including investments in U.S. government obligations, CLOs and other funds we manage.
Net Gains (Losses) of Consolidated Funds
.
Net gains (losses) of consolidated funds
consist of net realized and unrealized gains and losses on investments held by the consolidated funds.
Income Taxes
Income taxes consist of our provision for federal, state and local income taxes in the United States and foreign income taxes, including provisions for deferred income taxes resulting from temporary differences between the tax and GAAP bases. The computation of the provision requires certain estimates and significant judgment, including, but not limited to, the expected taxable income for the year, projections of the proportion of income earned and taxed in foreign jurisdictions, permanent differences between the tax and GAAP bases and the likelihood of being able to fully utilize deferred income tax assets existing as of the end of the period.
The Oz Operating Partnerships are partnerships for U.S. federal income tax purposes. The Registrant was a partnership for U.S. federal income tax purposes until the Corporate Classification Change on April 1, 2019. Prior to the Corporate Classification Change, only a portion of the income we earned was subject to corporate-level income taxes in the United States and foreign jurisdictions. The amount of incentive income we earn in a given year, the resultant flow of revenues and expenses through our legal entity structure, the effect that changes in our Class A Share price may have on the ultimate deduction we are able to take related to the settlement of RSUs, and any changes in future enacted income tax rates may have a significant impact on our income tax provision and effective income tax rate. Following the Corporate Classification Change, generally all of the income allocated to the Registrant from the Oz Operating Group will be subject to corporate-level income taxes in the United States.
Net Loss Attributable to Noncontrolling Interests
Noncontrolling interests represent ownership interests in our subsidiaries held by parties other than us and are primarily made up of Group
A Units. Increases or decreases in net (loss) income attributable to the Group
A Units are driven by the earnings of the Oz
Operating Group. See Note
4
for additional information regarding our ownership interest in the Oz
Operating Group.
We also consolidate certain of our opportunistic credit funds, wherein investors are able to redeem their interests after an initial lock-up period of up to three years. Allocations of earnings to these interests are reflected within net income attributable to redeemable noncontrolling interests in the consolidated statements of comprehensive income (loss). Increases or decreases in the net income (loss) attributable to fund investors’ interests in consolidated funds are driven by the earnings of those funds as allocated under the contractual terms of the relevant fund agreements.
Results of Operations
Three and
Six Months Ended
June 30, 2019
Compared to Three and
Six Months Ended
June 30, 2018
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Management fees
|
$
|
61,400
|
|
|
$
|
70,593
|
|
|
$
|
125,023
|
|
|
$
|
143,043
|
|
|
Incentive income
|
34,757
|
|
|
34,656
|
|
|
87,955
|
|
|
85,490
|
|
|
Other revenues
|
5,043
|
|
|
3,867
|
|
|
8,812
|
|
|
8,409
|
|
|
Income of consolidated funds
|
2,308
|
|
|
650
|
|
|
4,912
|
|
|
1,234
|
|
|
Total Revenues
|
$
|
103,508
|
|
|
$
|
109,766
|
|
|
$
|
226,702
|
|
|
$
|
238,176
|
|
Total revenues for the quarter-to-date period
decreased
$6.3 million
, primarily due to the following:
|
|
|
|
•
|
A
$9.2 million
decrease
in management fees, driven primarily by a $10.2 million decrease in multi-strategy funds due to lower average assets under management and a $2.7 million decrease in real estate funds, primarily due to a step down in the management fee basis from committed capital to invested capital effective April 1, 2019, for Och-Ziff Real Estate Fund III. These decreases were partially offset by (i) a $2.7 million increase in opportunistic credit funds due to higher average assets under management; and (ii) a $1.3 million increase in Institutional Credit Strategies, primarily due to launches of additional CLOs and an aircraft securitization. See “—Assets Under Management and Fund Performance—Weighted-Average Assets Under Management and Average Management Fee Rates” above for information regarding our average management fee rate.
|
|
|
|
|
•
|
Incentive income remained relatively flat, primarily due to the following:
|
|
|
|
|
◦
|
Multi-strategy funds.
A $702 thousand increase in incentive income from our multi-strategy funds, primarily due to a $4.0 million increase related to fund investor redemptions, partially offset by a $3.1 million decrease from longer-term assets under management.
|
|
|
|
|
◦
|
Opportunistic credit funds.
A $5.8 million increase in incentive income from our opportunistic credit funds, primarily due to (i) a $7.1 million increase due to a contract modification that resulted in an offset to previously recognized incentive income in the prior year period; and (ii) a $1.2 million increase from longer-term assets under management. These increases were partially offset by (i) a $1.8 million decrease from assets under management subject to a one-year measurement period; and (ii) a $723 thousand decrease related to fund investor redemptions.
|
|
|
|
|
◦
|
Real estate funds.
A $4.4 million decrease
in incentive income from our real estate funds primarily due to lower realizations.
|
|
|
|
|
◦
|
Other funds.
A $1.9 million decrease primarily due to incentive income received in the prior year related to funds that have since been closed.
|
|
|
|
|
•
|
A
$1.2 million
increase
in other revenues primarily due to $1.6 million of certain transaction fees recognized in the current year period related to Institutional Credit Strategies. Partially offsetting this increase was lower interest income earned on our investments in CLOs due to the sale of a majority of our U.S. CLO risk retention investments in 2018.
|
|
|
|
|
•
|
A
$1.7 million
increase
in income of consolidated funds primarily due to higher interest income period-over-period.
|
Total revenues for the year-to-date period
decreased
$11.5 million
, primarily due to the following:
|
|
|
|
•
|
An
$18.0 million
decrease
in management fees, driven primarily by a $20.2 million decrease in multi-strategy funds due to lower average assets under management and a $2.6 million decrease in real estate funds, primarily due to a step down in the management fee basis from committed capital to invested capital effective April 1, 2019, for Och-Ziff Real Estate Fund III. These decreases were partially offset by (i) a $2.0 million increase in opportunistic credit funds due to higher average assets under management; and (ii) a $3.8 million increase in Institutional Credit Strategies, primarily due to launches of additional CLOs and an aircraft securitization. See “—Assets Under Management and Fund Performance—Weighted-Average Assets Under Management and Average Management Fee Rates” above for information regarding our average management fee rate.
|
|
|
|
|
•
|
A
$2.5 million
increase
in incentive income, primarily due to the following:
|
|
|
|
|
◦
|
Multi-strategy funds.
A $2.9 million increase in incentive income from our multi-strategy funds, primarily due to an $8.6 million increase related to fund investor redemptions, which was partially offset by (i) a $3.0 million decrease from assets under management subject to a one-year measurement period; and (ii) a $2.1 million decrease from longer-term assets under management.
|
|
|
|
|
◦
|
Opportunistic credit funds.
A $2.5 million increase in incentive income from our opportunistic credit funds, primarily due to (i) a $7.8 million increase in tax distributions taken to cover tax liabilities on incentive income that has been accrued on certain longer-term assets under management; (ii) a $6.2 million increase due to a contract modification that resulted in an offset to previously recognized incentive income in the prior year period; and (iii) a $1.8 million increase from assets under management subject to a one-year measurement period. These increases were partially offset by a $13.4 million decrease from longer-term assets under management.
|
|
|
|
|
◦
|
Real estate funds.
A $1.9 million decrease in incentive income from our real estate funds, primarily due to a $2.2 million decrease in tax distributions.
|
|
|
|
|
◦
|
Other funds.
A $941 thousand decrease in incentive income, primarily due to a $1.9 million decrease in incentive income received in the prior year related to funds that have since been closed, partially offset by a $1.0 million increase from assets under management subject to a one-year measurement period in certain strategy-specific funds.
|
|
|
|
|
•
|
A
$3.7 million
increase
in income of consolidated funds primarily due to higher interest income year-over-year.
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Compensation and benefits
|
$
|
80,709
|
|
|
$
|
74,502
|
|
|
$
|
166,424
|
|
|
$
|
143,426
|
|
|
Interest expense
|
6,523
|
|
|
7,505
|
|
|
12,731
|
|
|
14,103
|
|
|
General, administrative and other
|
28,427
|
|
|
48,509
|
|
|
66,215
|
|
|
86,359
|
|
|
Expenses of consolidated funds
|
84
|
|
|
24
|
|
|
139
|
|
|
108
|
|
|
Total Expenses
|
$
|
115,743
|
|
|
$
|
130,540
|
|
|
$
|
245,509
|
|
|
$
|
243,996
|
|
Total expenses for the quarter-to-date period
decreased
$14.8 million
, primarily due to the following:
|
|
|
|
•
|
A
$20.1 million
decrease
in general, administrative and other expenses primarily driven by (i) a $13.0 million legal provision accrual in the prior year period related to certain legal matters; and (ii) a $2.3 million decrease in professional services primarily driven by lower legal expenses incurred period-over-period.
|
|
|
|
|
•
|
A
$1.0 million
decrease
in interest expense,
which was primarily driven by lower average debt outstanding balance, offset by a
$4.1 million
increase related to non-cash interest expense accretion on Debt Securities issued in exchange for Preferred Units in connection with the Recapitalization. Upon exchange, Debt Securities were recognized at fair value and are being accreted to par value over time through interest expense for GAAP
.
|
|
|
|
|
•
|
An offsetting
$6.2 million
increase
in compensation and benefits expenses driven by a $13.7 million increase in equity-based compensation expense, primarily driven by the Recapitalization-related equity-based compensation grants. This increase was partially offset by (i) a $3.3 million decrease
in bonus expense, primarily due to lower minimum bonus accruals
; and (ii) a $3.3 million decrease in salary and benefits, as our worldwide headcount decreased to
394
as of
June 30, 2019
, from
442
as of
June 30, 2018
.
|
Total expenses for the year-to-date period
increased
$1.5 million
, remaining relatively flat, primarily due to the following:
|
|
|
|
•
|
A
$23.0 million
increase
in compensation and benefits expenses driven by (i) a $28.8 million increase in equity-based compensation expense, primarily driven by the Recapitalization-related equity-based compensation grants; and (ii) a$2.8 million increase in bonus expense due to certain reversals in the prior year period. These increases were partially offset by (i) a $6.3 million
decrease
in salaries and benefits due to a lower headcount, as described above; and (ii) a $2.3 million
decrease in expenses related to distributions accrued on Group D Units, as no amounts were accrued in the current-year period as there were no Group D Units outstanding at
June 30, 2019
.
|
|
|
|
|
•
|
An offsetting
$20.1 million
decrease
in general, administrative, and other expenses primarily due to (i) a $13.0 million legal provision accrual in the prior year period related to certain legal matters; (ii) a $2.9 million decrease in foreign exchange losses; and (iii) a $2.6 million decrease in information processing and communications expenses, as well as reductions across various other operating expense categories.
|
|
|
|
|
•
|
An offsetting
$1.4 million
decrease
in interest expense
,
which was primarily driven by lower average debt outstanding balance, offset by a
$6.4 million
increase related to non-cash interest expense accretion on Debt Securities issued in exchange for Preferred Units in connection with the Recapitalization. Upon exchange, Debt Securities were recognized at fair value and are being accreted to par value over time through interest expense for GAAP
.
|
Other Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Changes in tax receivable agreement liability
|
$
|
5,362
|
|
|
$
|
—
|
|
|
$
|
5,362
|
|
|
$
|
—
|
|
|
Net losses on early retirement of debt
|
(595
|
)
|
|
(14,303
|
)
|
|
(6,053
|
)
|
|
(14,303
|
)
|
|
Net gains (losses) on investments
|
3,148
|
|
|
(785
|
)
|
|
5,837
|
|
|
(473
|
)
|
|
Net gains of consolidated funds
|
482
|
|
|
(26
|
)
|
|
4,228
|
|
|
466
|
|
|
Total Other Income (Loss)
|
$
|
8,397
|
|
|
$
|
(15,114
|
)
|
|
$
|
9,374
|
|
|
$
|
(14,310
|
)
|
Total
other income increased for both the quarter-to-date and year-to-date
periods primarily due to the $14.3 million loss recognized on early retirement of our Senior Notes and certain CLO Investments Loans in the second quarter of 2018. Further contributing to improvements were changes in tax receivable agreement liability as a result of conversion to a C-corporation; higher net gains on investments, which primarily relate to our investments in funds, including our CLO retention investments, and net gains on investments held by the consolidated funds. These increases were partially offset by losses recognized on early retirement of debt during the current year period, which primarily relate to the write-off of a portion of the discount and deferred financing costs on our 2018 Term Loan.
Income Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Income taxes
|
$
|
10,134
|
|
|
$
|
(2,524
|
)
|
|
$
|
13,520
|
|
|
$
|
488
|
|
Income tax expense for the quarter-to-date period
increased
by
$12.7 million
. This was primarily due to the tax impacts of the Corporate Classification Change, namely, an increase in deferred income tax expense of $5.6 million due to a decrease in our state apportionment factor, and an increase in tax expense of $1.1 million from tax on income not subject to entity level tax in the comparative period, combined with a general increase in profitability. Our effective income tax rate for the three months ended June 30, 2019, was impacted by the Corporate Classification Change as well as by Recapitalization-related expenses incurred during the three months ended June 30, 2019, including Group E Unit grants and transaction-related expenses, not deductible for tax purposes.
Income tax expense for the year-to-date period
increased
by
$13.0 million
. This was primarily due to the tax impacts of the Corporate Classification Change, namely, an increase in deferred income tax expense of $5.6 million resulting from a decrease in our state apportionment factor, as well as a $1.1 million write-off of excess deferred income tax assets upon the vesting of RSUs, along with higher profitability for the period. Our effective income tax rate for the six months ended June 30, 2019, was impacted by the Corporate Classification Change as well as by Recapitalization-related expenses incurred during the period, including Group E Units grants and transaction-related expenses, not deductible for tax purposes.
Please see Note
15
for additional information on the drivers of our effective income tax rate.
Net (Loss) Income Attributable to Noncontrolling Interests
The following table presents the components of the net (loss) income attributable to noncontrolling interests and to redeemable noncontrolling interests:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Group A Units
|
$
|
(8,148
|
)
|
|
$
|
(21,915
|
)
|
|
$
|
(15,517
|
)
|
|
$
|
(13,545
|
)
|
|
Other
|
164
|
|
|
475
|
|
|
299
|
|
|
740
|
|
|
Total
|
$
|
(7,984
|
)
|
|
$
|
(21,440
|
)
|
|
$
|
(15,218
|
)
|
|
$
|
(12,805
|
)
|
|
|
|
|
|
|
|
|
|
|
Redeemable noncontrolling interests
|
$
|
2,637
|
|
|
$
|
332
|
|
|
$
|
8,171
|
|
|
$
|
953
|
|
Net loss allocated to noncontrolling interests decreased by
$13.5 million
and
increased
by
$2.4 million
for the quarter-to-date and year-to-date periods, respectively. The improvement for the quarter-to-date period and the increase in loss for the year-to-date period were primarily driven by amounts attributable to the Group A Units due to profitability drivers discussed above. For the calculation of noncontrolling interests related to Group A Units see Note
4
.
Net (Loss) Income Attributable to Class A Shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Net (Loss) Income Attributable to Class A Shareholders
|
$
|
(8,625
|
)
|
|
$
|
(12,256
|
)
|
|
$
|
28,458
|
|
|
$
|
(8,766
|
)
|
Net loss attributable to Class A Shareholders decreased by
$3.6 million
for the quarter-to-date period and net
income
attributable to Class A Shareholders increased by
$37.2 million
for the year-to-date period. The improvements in net income attributable to Class A Shareholders year-over-year
were primarily due to the loss recognized on early retirement of debt in the prior year period, a settlements expense accrual taken in the prior year period, as well as reductions across various operating expense categories. These improvements were partially offset by higher compensation and benefits expense driven primarily by the Recapitalization-related equity-based compensation grants, as well as lower management fees. Additionally, the net income was reduced by higher income tax expense, partially offset by a change in tax receivable agreement liability.
Economic Income Analysis
In addition to analyzing our results on a GAAP basis, management also reviews our results on an “Economic Income” basis. Economic Income excludes the adjustments described below that are required for presentation of our results on a GAAP basis, but that management does not consider when evaluating operating segment performance in any given period. Management uses Economic Income as the basis on which it evaluates our financial performance and makes resource allocation and other operating decisions. Management considers it important that investors review the same operating information that it uses.
Economic Income is a measure of pre-tax operating performance that excludes the following from our results on a GAAP basis:
|
|
|
|
•
|
Income allocations to our executive managing directors on their direct interests in the Oz Operating Group. Management reviews operating performance at the Oz Operating Group level, where our operations are performed, prior to making any income allocations.
|
|
|
|
|
•
|
Equity-based compensation expenses, depreciation and amortization expenses, changes in the tax receivable agreement liability, net losses on early retirement of debt, gains and losses on fixed assets, and gains and losses on investments in funds, as management does not consider these items to be reflective of operating performance. However, the fair value of RSUs that are settled in cash to employees or executive managing directors is included as an expense at the time of settlement.
|
|
|
|
|
•
|
Amounts related to non-cash interest expense accretion on Debt Securities issued in exchange for 2016 Preferred Units in connection with the Recapitalization. Upon exchange, Debt Securities were recognized at fair value and are being accreted to par value over time through interest expense for GAAP; however, management does not consider this interest accretion to be reflective of our operating performance.
|
|
|
|
|
•
|
Amounts related to the consolidated funds, including the related eliminations of management fees and incentive income, as management reviews the total amount of management fees and incentive income earned in relation to total assets under management and fund performance.
|
In addition, expenses related to incentive income profit-sharing arrangements are generally recognized at the same time the related incentive income revenue is recognized, as management reviews the total compensation expense related to these arrangements in relation to any incentive income earned by the relevant fund. Further, deferred cash compensation is expensed in full in the year granted for Economic Income, rather than over the service period for GAAP.
As a result of the adjustments described above, as well as an adjustment to present management fees net of recurring placement and related service fees (rather than considering these fees an expense), management fees, incentive income, other revenues, compensation and benefits, general, administrative and other expenses and net income (loss) attributable to noncontrolling interests as presented on an Economic Income basis are also non-GAAP measures.
For reconciliations of our non-GAAP measures to the respective GAAP measures, please see “—Economic Income Reconciliations” at the end of this MD&A.
Our non-GAAP financial measures should not be considered as alternatives to our GAAP net income allocated to Class A Shareholders or cash flow from operations, or as indicative of liquidity or the cash available to fund operations. Our non-GAAP measures may not be comparable to similarly titled measures used by other companies.
We currently have two operating segments: Oz Funds and Real Estate. The Oz Funds segment provides asset management services to our multi-strategy funds, dedicated credit funds and other alternative investment vehicles. The Real Estate segment provides asset management services to our real estate funds.
Three and
Six Months Ended
June 30, 2019
Compared to Three and
Six Months Ended
June 30, 2018
Economic Income Revenues (Non-GAAP)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2019
|
|
Three Months Ended June 30, 2018
|
|
|
Oz Funds
|
|
Real Estate
|
|
Total
Company
|
|
Oz Funds
|
|
Real Estate
|
|
Total
Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Economic Income Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
Management fees
|
$
|
55,233
|
|
|
$
|
2,402
|
|
|
$
|
57,635
|
|
|
$
|
61,067
|
|
|
$
|
5,049
|
|
|
$
|
66,116
|
|
|
Incentive income
|
33,249
|
|
|
1,508
|
|
|
34,757
|
|
|
28,921
|
|
|
5,735
|
|
|
34,656
|
|
|
Other revenues
|
4,837
|
|
|
206
|
|
|
5,043
|
|
|
3,750
|
|
|
117
|
|
|
3,867
|
|
|
Total Economic Income Revenues
|
$
|
93,319
|
|
|
$
|
4,116
|
|
|
$
|
97,435
|
|
|
$
|
93,738
|
|
|
$
|
10,901
|
|
|
$
|
104,639
|
|
Oz Funds Segment
Economic Income revenues for the Oz Funds segment for the quarter-to-date period
decreased
$419 thousand
, primarily due to the following:
|
|
|
|
•
|
A
$5.8 million
decrease
in management fees, driven primarily by a $9.5 million decrease in multi-strategy funds due to lower average assets under management, partially offset by (i) a $2.7 million increase in opportunistic credit funds due to higher average assets under management; and (ii) a $1.3 million increase in Institutional Credit Strategies, primarily due to launches of additional CLOs and an aircraft securitization. See “—Assets Under Management and Fund Performance—Weighted-Average Assets Under Management and Average Management Fee Rates” above for information regarding our average management fee rate.
|
|
|
|
|
•
|
A
$4.3 million
increase
in incentive income primarily due to the following:
|
|
|
|
|
◦
|
Multi-strategy funds.
A $702 thousand increase in incentive income from our multi-strategy funds, primarily due to a $4.0 million increase related to fund investor redemptions, partially offset by a $3.1 million decrease from longer-term assets under management.
|
|
|
|
|
◦
|
Opportunistic credit funds.
A $5.8 million increase in incentive income from our opportunistic credit funds, primarily due to (i) a $7.1 million increase due to a contract modification that resulted in an offset to previously recognized incentive income in the prior year period; and (ii) a $1.2 million increase from longer-term assets under management. These increases were partially offset by (i) a $1.8 million decrease from assets under management subject to a one-year measurement period; and (ii) a $723 thousand decrease related to fund investor redemptions.
|
|
|
|
|
◦
|
Other funds.
A $1.9 million decrease primarily due to incentive income received in the prior year related to funds that have since been closed.
|
|
|
|
|
•
|
A
$1.2 million
increase
in other revenues primarily due to $1.6 million of certain transaction fees recognized in the current year period related to Institutional Credit Strategies. Partially offsetting this increase was lower interest income earned on our investments in CLOs due to the sale of a majority of our U.S. CLO risk retention investments in 2018.
|
Real Estate Segment
Economic Income revenues for the Real Estate segment for the quarter-to-date period
decreased
$6.8 million
, primarily due to the following:
|
|
|
|
•
|
A
$2.6 million
decrease
in management fees from our real estate funds, primarily due to a step down in the management fee basis from committed capital to invested capital effective April 1, 2019, for Och-Ziff Real Estate Fund III.
|
|
|
|
|
•
|
A
$4.2 million
decrease
in incentive income from our real estate funds driven primarily by lower realizations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2019
|
|
Six Months Ended June 30, 2018
|
|
|
Oz Funds
|
|
Real Estate
|
|
Total
Company
|
|
Oz Funds
|
|
Real Estate
|
|
Total
Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Economic Income Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
Management fees
|
$
|
110,430
|
|
|
$
|
7,220
|
|
|
$
|
117,650
|
|
|
$
|
124,042
|
|
|
$
|
9,783
|
|
|
$
|
133,825
|
|
|
Incentive income
|
79,539
|
|
|
8,416
|
|
|
87,955
|
|
|
75,160
|
|
|
10,330
|
|
|
85,490
|
|
|
Other revenues
|
8,414
|
|
|
398
|
|
|
8,812
|
|
|
8,183
|
|
|
187
|
|
|
8,370
|
|
|
Total Economic Income Revenues
|
$
|
198,383
|
|
|
$
|
16,034
|
|
|
$
|
214,417
|
|
|
$
|
207,385
|
|
|
$
|
20,300
|
|
|
$
|
227,685
|
|
Oz Funds Segment
Economic Income revenues for the Oz Funds segment for the year-to-date period
decreased
$9.0 million
, primarily due to the following:
|
|
|
|
•
|
A
$13.6 million
decrease
in management fees, driven primarily by a $18.5 million decrease in multi-strategy funds due to lower average assets under management, partially offset by (i) a $2.0 million increase in opportunistic credit funds due to higher average assets under management; and (ii) a $4.0 million increase in Institutional Credit Strategies, primarily due to launches of additional CLOs and an aircraft securitization. See “—Assets Under Management and Fund Performance—Weighted-Average Assets Under Management and Average Management Fee Rates” above for information regarding our average management fee rate.
|
|
|
|
|
•
|
A
$4.4 million
increase
in incentive income primarily due to the following
:
|
|
|
|
|
◦
|
Multi-strategy funds.
A $2.9 million increase in incentive income from our multi-strategy funds, primarily due to an $8.6 million increase related to fund investor redemptions, which was partially offset by (i) a $3.0 million decrease from assets under management subject to a one-year measurement period; and (ii) a $2.1 million decrease from longer-term assets under management.
|
|
|
|
|
◦
|
Opportunistic credit funds.
A $2.5 million increase in incentive income from our opportunistic credit funds, primarily due to (i) a $7.8 million increase in tax distributions taken to cover tax liabilities on incentive income that has been accrued on certain longer-term assets under management; (ii) a $6.2 million increase due to a contract modification that resulted in an offset to previously recognized incentive income in the prior year period; and (iii) a $1.8 million increase from assets under management subject to a one-year measurement period. These increases were partially offset by a $13.4 million decrease from longer-term assets under management.
|
|
|
|
|
◦
|
Other funds.
A $941 thousand decrease in incentive income, primarily due to a $1.9 million decrease in incentive income received in the prior year related to funds that have since been closed, partially offset by a $1.0 million increase from assets under management subject to a one-year measurement period in certain strategy-specific funds.
|
Real Estate Segment
Economic Income revenues for the Real Estate segment for the year-to-date period
decreased
$4.3 million
, primarily due to the following:
|
|
|
|
•
|
A
$2.6 million
decrease in management fees from our real estate funds, primarily due to a step down in the management fee basis from committed capital to invested capital effective April 1, 2019, for Och-Ziff Real Estate Fund III.
|
|
|
|
|
•
|
A $1.9 million decrease in incentive income from our real estate funds, primarily due to a $2.2 million decrease in tax distributions.
|
Economic Income Expenses (Non-GAAP)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2019
|
|
Three Months Ended June 30, 2018
|
|
|
Oz Funds
|
|
Real Estate
|
|
Total
Company
|
|
Oz Funds
|
|
Real Estate
|
|
Total
Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Economic Income Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
$
|
35,260
|
|
|
$
|
5,056
|
|
|
$
|
40,316
|
|
|
$
|
39,890
|
|
|
$
|
7,832
|
|
|
$
|
47,722
|
|
|
Interest expense
|
2,419
|
|
|
—
|
|
|
2,419
|
|
|
7,505
|
|
|
—
|
|
|
7,505
|
|
|
General, administrative and other expenses
|
21,599
|
|
|
691
|
|
|
22,290
|
|
|
40,727
|
|
|
493
|
|
|
41,220
|
|
|
Total Economic Income Expenses
|
$
|
59,278
|
|
|
$
|
5,747
|
|
|
$
|
65,025
|
|
|
$
|
88,122
|
|
|
$
|
8,325
|
|
|
$
|
96,447
|
|
Oz Funds Segment
Economic Income expenses for the quarter-to-date period for the Oz Funds segment
decreased
by
$28.8 million
, primarily due to the following:
|
|
|
|
•
|
A
$19.1 million
decrease
in general, administrative and other expenses. This was primarily driven by (i) a $13.0 million legal provision accrual in the prior year period; and (ii) a $2.4 million decrease in professional services primarily driven by lower legal expenses incurred year-over-year; as well as reductions across various other operating expense categories.
|
|
|
|
|
•
|
A
$5.1 million
decrease
in interest expense, driven primarily by lower average debt outstanding balance.
|
|
|
|
|
•
|
A
$4.6 million
decrease
in compensation and benefits expenses driven primarily by (i) a $3.2 million
decrease
in salaries and benefits; and (ii) a $1.4 million decrease in bonus expense, each of which is driven by lower headcount year-over-year.
|
Real Estate Segment
Economic Income expenses for the quarter-to-date period for the Real Estate segment
decreased
by
$2.6 million
, primarily due to lower incentive income profit-sharing expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2019
|
|
Six Months Ended June 30, 2018
|
|
|
Oz Funds
|
|
Real Estate
|
|
Total
Company
|
|
Oz Funds
|
|
Real Estate
|
|
Total
Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Economic Income Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits
|
$
|
72,021
|
|
|
$
|
11,841
|
|
|
$
|
83,862
|
|
|
$
|
65,688
|
|
|
$
|
15,053
|
|
|
$
|
80,741
|
|
|
Interest expense
|
6,316
|
|
|
—
|
|
|
6,316
|
|
|
14,103
|
|
|
—
|
|
|
14,103
|
|
|
General, administrative and other expenses
|
52,715
|
|
|
1,337
|
|
|
54,052
|
|
|
70,714
|
|
|
1,204
|
|
|
71,918
|
|
|
Total Economic Income Expenses
|
$
|
131,052
|
|
|
$
|
13,178
|
|
|
$
|
144,230
|
|
|
$
|
150,505
|
|
|
$
|
16,257
|
|
|
$
|
166,762
|
|
Oz Funds Segment
Economic Income expenses for the year-to-date period for the Oz Funds segment
decreased
by
$19.5 million
, primarily due to the following:
|
|
|
|
•
|
General, administrative and other expenses
decreased
by
$18.0 million
period-over-period. This was primarily due to (i) a $13.0 million legal provision accrual in the prior year period; (ii) a $3.0 million decrease in foreign exchange loss; and (iii) a $2.3 million decrease in information, processing and communications expenses incurred period-over-period. During the first half of 2019, we incurred $10.2 million of expenses related to the Recapitalization, which were offset by decreases across various operating expenses categories.
|
|
|
|
|
•
|
A
$7.8 million
decrease
in interest expense, driven primarily by lower average debt outstanding balance.
|
|
|
|
|
•
|
An offsetting
$6.3 million
increase
in compensation and benefits expenses driven by a $12.8 million in
crease
in bonus expense, primarily due to $12.6 million of deferred cash compensation forfeiture reversals in the prior year period. This increase was partially offset by a $6.5 million
decrease
in salaries and benefits due to lower headcount.
|
Real Estate Segment
Economic Income expenses for the year-to-date period for the Real Estate segment
decreased
by
$3.1 million
, primarily due to lower incentive income profit-sharing expense.
Other Economic Items (Non-GAAP)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2019
|
|
Three Months Ended June 30, 2018
|
|
|
Oz Funds
|
|
Real Estate
|
|
Total
Company
|
|
Oz Funds
|
|
Real Estate
|
|
Total
Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Economic Income Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to noncontrolling interests
|
$
|
(2
|
)
|
|
$
|
—
|
|
|
$
|
(2
|
)
|
|
$
|
(2
|
)
|
|
$
|
—
|
|
|
$
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2019
|
|
Six Months Ended June 30, 2018
|
|
|
Oz Funds
|
|
Real Estate
|
|
Total
Company
|
|
Oz Funds
|
|
Real Estate
|
|
Total
Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Economic Income Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to noncontrolling interests
|
$
|
(2
|
)
|
|
$
|
—
|
|
|
$
|
(2
|
)
|
|
$
|
(13
|
)
|
|
$
|
—
|
|
|
$
|
(13
|
)
|
Net loss attributable to noncontrolling interests
represent the amount of
loss
that was reduced from Economic Income and attributed to residual interests in certain businesses not owned by us.
Economic Income (Non-GAAP)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Economic Income:
|
|
|
|
|
|
|
|
|
Oz Funds
|
$
|
34,043
|
|
|
$
|
5,618
|
|
|
$
|
67,333
|
|
|
$
|
56,893
|
|
|
Real Estate
|
(1,631
|
)
|
|
2,576
|
|
|
2,856
|
|
|
4,043
|
|
|
Total Company
|
$
|
32,412
|
|
|
$
|
8,194
|
|
|
$
|
70,189
|
|
|
$
|
60,936
|
|
Oz Funds Segment
Economic Income was
$34.0 million
for the
second
quarter of 2019, compared to
$5.6 million
for the
second
quarter of 2018.
This improvement was primarily due to a decrease in interest expense, a decrease in compensation and benefits expenses, as well as reductions across various operating expense categories. These decreases in expenses were partially offset by lower management fees.
Economic Income was
$67.3 million
for the
first half of
2019, compared to
$56.9 million
for the first half of 2018.
This improvement was primarily due to a decrease in interest expense, a decrease in salaries and benefits, as well as reductions across various operating expense categories. These decreases in expenses were partially offset by lower management fees and higher bonus expense.
Real Estate Segment
Economic Income was a loss of
$1.6 million
for the
second
quarter of 2019, compared to income of
$2.6 million
for the
second
quarter of 2018. This decrease was primarily due to lower management fees and incentive income, partially offset by lower incentive income profit sharing expense. Economic Income was
$2.9 million
for the
first half of
2019, compared to
$4.0 million
for the
first half of
2018, remaining relatively flat year-over-year as lower management fees were offset by lower incentive income profit-sharing expense.
Liquidity and Capital Resources
The working capital needs of our business have historically been met, and we anticipate will continue to be met, through cash generated from management fees and incentive income earned by the Oz Operating Group from our funds, as well as other sources of liquidity noted above and below.
Over the next 12 months, we expect that our primary liquidity needs will be to:
|
|
|
|
•
|
Pay our operating expenses.
|
|
|
|
|
•
|
Pay interest and principal, as applicable, on our debt obligations, repurchase agreements and 2019 Preferred Units.
|
|
|
|
|
•
|
Provide capital to facilitate the growth of our business, including making risk retention investments in CLOs managed by us that are subject to EU risk retention rules.
|
|
|
|
|
•
|
Pay income taxes as well as compensation-related tax withholding obligations.
|
|
|
|
|
•
|
Make cash distributions in accordance with our distribution policy as discussed below under “—Dividends and Distributions.”
|
Historically, management fees have been sufficient to cover all of our “fixed” operating expenses, which we define as salaries, benefits, a minimum discretionary bonus and our general, administrative and other expenses incurred in the ordinary course of business. Rate reductions in our multi-strategy funds combined with year-over-year net capital outflows have resulted in lower management fees, and while we are making every effort to scale our operations so that management fees are sufficient to cover our fixed operating expenses, our current management fees do not cover our current fixed operating expenses. No assurances can be given that our management fees ultimately will be sufficient for these purposes in future periods.
In the event that management fees do not cover fixed operating expenses, we would rely on cash on hand and incentive income to cover any shortfall, as well as to fund any other liabilities. We cannot predict the amount of incentive income, if any, that we may earn in any given year. Total annual revenues, which are heavily influenced by the amount of incentive income we earn, historically have been sufficient to fund both our fixed operating expenses and all of our other working capital needs, including annual discretionary cash bonuses. These cash bonuses, which historically have comprised our largest cash operating expense, are variable such that in any year where total annual revenues are greater or less than the prior year, cash bonuses may be adjusted accordingly. Our ability to scale our largest cash operating expense to our total annual revenues helps us manage our cash flow and liquidity position from year to year.
Based on our past results, management’s experience and our current level of assets under management, we believe that our existing cash resources, together with the cash generated from management fees will be sufficient to meet our anticipated fixed operating expenses and other working capital needs for at least the next 12 months.
Historically, we have determined the amount of discretionary cash bonuses during the fourth quarter of each year, based on our total annual revenues. We have historically funded these amounts through fourth quarter management fees and incentive income crystallized on December 31, which represents the majority of the incentive income we typically earn each year. To the extent our funds generate incentive income in the fourth quarter, we may elect to increase the amount of cash bonuses paid to employees over the amount already accrued throughout the year, with any incremental amounts recognized as expense in the fourth quarter. Although we cannot predict the amount, if any, of incentive income we may earn, we are able to regularly monitor expected management fees and we believe that we will be able to adjust our expense infrastructure, including discretionary cash bonuses, as needed to meet the requirements of our business and in order to maintain positive operating cash flows. Nevertheless, if we generate insufficient cash flows from operations to meet our short-term liquidity needs, we may have to borrow funds or sell assets, subject to existing contractual arrangements.
We may use cash on hand to repay all or a portion of our indebtedness outstanding or any other liabilities prior to their respective maturity or due dates, which would reduce amounts available to distribute to our Class A Shareholders. Additionally, we may refinance all or a portion of our outstanding indebtedness prior to their respective maturity dates. For any amounts unpaid as of a maturity or due date, we will be required to repay the remaining balance by using cash on hand, refinancing the remaining balance by issuing new notes or entering into new credit facilities, which could result in higher borrowing costs, or by issuing equity or other securities, which would dilute existing shareholders. No assurance can be given that we will be able to issue new notes, enter into new credit facilities or issue equity or other securities in the future on attractive terms or at all. Any new notes or new credit facilities that we may be able to issue or enter into may have covenants that impose additional limitations on us, including with respect to making distributions, entering into business transactions or other matters, and may result in increased interest expense. If we are unable to meet our debt obligations on terms that are favorable to us, our business may be adversely impacted.
On July 27, 2017, the UK Financial Conduct Authority announced that it would phase out LIBOR as a benchmark by the end of 2021. To address a potential transition away from LIBOR, the Senior Subordinated Credit Agreement and Senior Credit Agreement each provide for an agreed upon methodology to calculate the new floating rate reference plus new applicable spreads. See “Part I, Item 1A. Risk Factors—Risks Related to Our Business—Changes in the method of determining LIBOR, or
the replacement of LIBOR with an alternative reference rate, may adversely affect our credit arrangements and our collateralized loan obligation transactions” in our Annual Report for additional information.
In order to meet risk retention requirements for certain of the CLOs we manage, we use a combination of cash on hand, as well as financing under the CLO Investments Loans and repurchase agreements to fund our 5% risk retention investments. We expect to continue relying on a combination of cash on hand and financing to fund future CLO risk retention investments.
For our other longer-term liquidity requirements, we expect to continue to fund our fixed operating expenses through management fees and to fund discretionary cash bonuses and the repayment of our debt obligations through a combination of management fees and incentive income. We may also decide to meet these requirements by issuing additional debt, equity or other securities.
Over the long term, we believe we will be able to grow our assets under management and generate positive investment performance in our funds, which we expect will allow us to grow our management fees and incentive income in amounts sufficient to cover our long-term liquidity requirements.
To maintain maximum flexibility to meet demands and opportunities both in the short and long term, and subject to existing contractual arrangements, we may want to retain cash, issue additional equity or borrow additional funds to:
|
|
|
|
•
|
Support the future growth in our business.
|
|
|
|
|
•
|
Create new or enhance existing products and investment platforms.
|
|
|
|
|
•
|
Pursue new investment opportunities.
|
|
|
|
|
•
|
Develop new distribution channels.
|
|
|
|
|
•
|
Cover potential costs incurred in connection with the legal and regulatory matters described in the notes to our consolidated financial statements included in this report.
|
Market conditions and other factors may make it more difficult or costly to raise or borrow additional funds. Excessive costs or other significant market barriers may limit or prevent us from maximizing our growth potential and flexibility.
Cash Sweep
As part of the Recapitalization, we also instituted the Cash Sweep with regards to the paydowns of the 2018 Term Loan and the 2019 Preferred Units. See Note
3
for detailed information regarding how the Cash Sweep amount is determined.
Debt Obligations
2018 Term Loan
In February 2019, we repaid $100.0 million of the 2018 Term Loan and terminated the 2018 Revolving Credit Facility. As of
June 30, 2019
,
$55.0 million
remained outstanding under the 2018 Term Loan. In accordance with the Cash Sweep, we repaid an additional
$45.0 million
during the
first half of
2019 and another
$5.0 million
on
August 1, 2019
. See Note
8
for additional details.
Preferred Units Restructuring
In connection with the Recapitalization, $200.0 million of the 2016 Preferred Units was restructured into the Debt Securities and the remaining $200.0 million of the 2016 Preferred Units was restructured into the 2019 Preferred Units. As of
June 30, 2019
, both the Debt Securities and the 2019 Preferred Units remain outstanding. See Notes
8
and
10
for additional information.
CLO Investments Loans
We enter into loans to finance portions of our investments in CLOs (collectively “the CLO Investments Loans”). In general, we will make interest and principal payments on the loans at such time interest payments are received on our investments in the CLOs, and will make principal payments on the loans to the extent principal payments are received on its investments in the CLOs. See Note
9
to our consolidated financial statements for additional details.
Securities Sold Under Agreements to Repurchase
See Note
11
to our consolidated financial statements included in this report for a description of securities sold under agreements to repurchase, which we use to finance risk retention investments in certain of our European CLOs.
Tax Receivable Agreement
We have made, and may in the future be required to make, payments under the tax receivable agreement that we entered into with our executive managing directors and Ziff Investors Partnership, L.P. II and certain of its affiliates and control persons (the “Ziffs”). As of
June 30, 2019
, assuming no material changes in the relevant tax law and that we generate sufficient taxable income to realize the full tax benefit of the increased amortization resulting from the increase in tax basis of our assets, we expected to pay our executive managing directors and the Ziffs approximately
$206.1 million
. Future cash savings and related payments to our executive managing directors under the tax receivable agreement in respect of subsequent exchanges would be in addition to these amounts. See Note
19
to our consolidated financial statements for additional details.
Payments under the tax receivable agreement are anticipated to increase the tax basis adjustment of intangible assets resulting from a prior exchange, with such increase being amortized over the remainder of the amortization period applicable to the original basis adjustment of such intangible assets resulting from such prior exchange. It is anticipated that this will result in increasing annual amortization deductions in the taxable years of and after such increases to the original basis adjustments, and potentially will give rise to increasing tax savings with respect to such years and correspondingly increasing payments under the tax receivable agreement.
The obligation to make payments under the tax receivable agreement is an obligation of Oz Corp, and any other corporate taxpaying entities that hold Group B Units, and not of the Oz Operating Group. We may need to incur debt to finance payments under the tax receivable agreement to the extent the Oz Operating Group does not distribute cash to Oz Corp in an amount sufficient to meet our obligations under the tax receivable agreement.
The actual increase in tax basis of the Oz Operating Group assets resulting from an exchange or from payments under the tax receivable agreement, as well as the amortization thereof and the timing and amount of payments under the tax receivable agreement, will vary based upon a number of factors, including the following:
|
|
|
|
•
|
The amount and timing of our income will impact the payments to be made under the tax receivable agreement. To the extent that we do not have sufficient taxable income to utilize the amortization deductions available as a result of the increased tax basis in the Oz Operating Partnerships’ assets, payments required under the tax receivable agreement would be reduced.
|
|
|
|
|
•
|
The price of our Class A Shares at the time of any exchange will determine the actual increase in tax basis of the Oz Operating Partnerships’ assets resulting from such exchange; payments under the tax receivable agreement resulting from future exchanges, if any, will be dependent in part upon such actual increase in tax basis.
|
|
|
|
|
•
|
The composition of the Oz Operating Group assets at the time of any exchange will determine the extent to which we may benefit from amortizing the increased tax basis in such assets and thus will impact the amount of future payments under the tax receivable agreement resulting from any future exchanges.
|
|
|
|
|
•
|
The extent to which future exchanges are taxable will impact the extent to which we will receive an increase in tax basis of the Oz Operating Group assets as a result of such exchanges, and thus will impact the benefit derived by us and the resulting payments, if any, to be made under the tax receivable agreement.
|
|
|
|
|
•
|
The tax rates in effect at the time any potential tax savings are realized, which would affect the amount of any future payments under the tax receivable agreement.
|
Depending upon the outcome of these factors, payments that we may be obligated to make to our executive managing directors and the Ziffs under the tax receivable agreement in respect of exchanges could be substantial. In light of the numerous factors affecting our obligation to make payments under the tax receivable agreement, the timing and amounts of any such actual payments are not reasonably ascertainable.
Dividends and Distributions
The table below presents the cash dividends paid on our Class A Shares in 2019, and the related cash distributions to our executive managing directors on their Group A Units and Group D Units.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Class A Shares
|
|
|
|
Payment Date
|
|
Record Date
|
|
Dividend
per Share
|
|
Related Distributions
to Executive Managing
Directors
(dollars in thousands)
|
|
May 28, 2019
|
|
May 20, 2019
|
|
$
|
0.37
|
|
|
$
|
—
|
|
|
March 29, 2019
|
|
March 22, 2019
|
|
$
|
0.23
|
|
|
$
|
—
|
|
As discussed in Note
3
, in connection with the Recapitalization, and pursuant to the Cash Sweep, we and our executive managing directors agreed to a “Distribution Holiday” on the Group A Units, Group D Units, Group E Units, Group P Units and certain RSUs that will terminate on the earlier of (x) 45 days after the last day of the first calendar quarter as of which the achievement of $600.0 million of Economic Income adjusted for certain items described in the Oz Operating Partnership limited partnership agreements is realized and (y) April 1, 2026. During the Distribution Holiday, dividends may continue to be paid on our Class A Shares.
As agreed to as part of the Recapitalization, during the Distribution Holiday, pursuant to the Cash Sweep, we expect to pay dividends on our Class A Shares annually in an aggregate amount equal to not less than 20% of our annual Economic Income less an estimate of payments under the tax receivable agreement and income taxes related to the earnings for the periods (“Distributable Earnings”) or more than 30% of Distributable Earnings; provided, that, if the minimum amount of dividends eligible to be made hereunder would be $1.00 or less per Class A Share, then up to $1.00 per Class A Share (subject to appropriate adjustment in the event of any equity dividend, equity split, combination or other similar recapitalization with respect to the Class A Shares).
The declaration and payment of any distribution may be subject to legal, contractual or other restrictions. For example, as a Delaware corporation, the Registrant is not permitted to make distributions if and to the extent that after giving effect to such distributions, its liabilities plus the par value of its common shares would exceed the fair value of its assets. Our cash needs and payment obligations may fluctuate significantly from quarter to quarter, and we may have material unexpected expenses in any period. This may cause amounts available for distribution to significantly fluctuate from quarter to quarter or may reduce or eliminate such amounts.
Additionally, RSUs outstanding accrue dividend equivalents equal to the dividend amounts paid on our Class A Shares. To date, these dividend equivalents have been awarded in the form of additional RSUs, which accrue additional dividend equivalents. The dividend equivalents will only be paid if the related RSUs vest and will be settled at the same time as the underlying RSUs. Our Board of Directors has the right to determine whether the RSUs and any related dividend equivalents will be settled in Class A Shares or in cash. We currently withhold shares to satisfy the tax withholding obligations related to vested RSUs and dividend equivalents held by our employees, which results in the use of cash from operations or borrowings to satisfy these tax-withholding payments.
Historically, when we have paid dividends on our Class A Shares, we also made distributions to our executive managing directors on their interests in the Oz Operating Group, subject to the terms of the limited partnership agreements of the Oz Operating Partnerships; however, as part of the Recapitalization, the Oz Operating Partnerships initiated the Distribution Holiday. See Note 3 to our consolidated financial statements in this report for additional information regarding the Distribution Holiday.
Our cash distribution policy has certain risks and limitations, particularly with respect to our liquidity. Although we expect to pay distributions according to our policy, we may not make distributions according to our policy, or at all, if, among other things, we do not have the cash necessary to pay the distribution. Furthermore, by paying cash distributions rather than investing that cash in our businesses, we might risk slowing the pace of our growth, or not having a sufficient amount of cash to fund our obligations, operations, new investments or unanticipated capital expenditures, should the need arise. In such event, we may not be able to execute our business and growth strategy to the extent intended.
Our Funds’ Liquidity and Capital Resources
Our funds have access to liquidity from our prime brokers and other counterparties. Additionally, our funds may have committed facilities in addition to regular financing from our counterparties. These sources of liquidity provide our funds with additional financing resources, allowing them to take advantage of opportunities in the global marketplace.
Our funds’ current liquidity position could be adversely impacted by any substantial, unanticipated investor redemptions from our funds that are made within a short time period. As discussed above in “—Assets Under Management and Fund Performance,” capital contributions from investors in our multi-strategy and open-end opportunistic credit funds generally are subject to initial lock-up periods of one to three years. Following the expiration of these lock-up periods, subject to certain limitations, investors may redeem capital generally on a quarterly or annual basis upon giving 30 to 90 days’ prior written notice. These lock-ups and redemption notice periods help us to manage our liquidity position. However, upon the payment of a redemption fee to the applicable fund and upon giving 30 days’ prior written notice, certain investors may redeem capital during the lock-up period. Investors in our other funds are generally not allowed to redeem until the end of the life of the fund.
We also follow a rigorous risk management process and regularly monitor the liquidity of our funds’ portfolios in relation to economic and market factors and the timing of potential investor redemptions. As a result of this process, we may determine to reduce exposure or increase the liquidity of our funds’ portfolios at any time, whether in response to global economic and market conditions, redemption requests or otherwise. For these reasons, we believe we will be well prepared to address market conditions and redemption requests, as well as any other events, with limited impact on our funds’ liquidity position. Nevertheless, significant redemptions made during a single quarter could adversely affect our funds’ liquidity position, as we may meet redemptions by using our funds’ available cash or selling assets (possibly at a loss). Such actions would result in lower assets under management, which would reduce the amount of management fees and incentive income we may earn. Our funds could also meet redemption requests by increasing leverage, provided we are able to obtain financing on reasonable terms, if at all. We believe our funds have sufficient liquidity to meet any anticipated redemptions for the foreseeable future.
Cash Flows Analysis
Operating Activities.
Net cash from operating activities for the
six months ended
June 30, 2019
and
2018
was
$43.1 million
and
$208.5 million
, respectively. Our net cash flows from operating activities are generally comprised of current-year management fees, the collection of incentive income earned during the fourth quarter of the previous year, interest income collected on our investments in CLO’s, less cash used for operating expenses, including interest paid on our debt obligations. Additionally, net cash from operating activities also includes the investment activities of the funds we consolidate.
Net cash flows from operating activities for the
six months ended
June 30, 2019
decreased from the prior year period due to lower incentive income earned in 2018, a large portion of which was collected in the beginning of 2019, as compared to incentive earned in 2017, a large portion of which was collected in the beginning of 2018. The decrease in operating cash flow was partially offset by lower discretionary bonuses paid in 2019 as compared to 2018. The majority of our cash bonus expenses are paid out during the first quarter of the following year. Also contributing to the decrease in operating cash in 2019 were lower management fees and costs related to the Recapitalization, which were offset by decreases across various operating expenses categories. The decreases in operating cash were partially offset by the increase in cash inflows in 2019 from the investment activities of the funds we consolidate. These investment-related cash flows are of the consolidated funds and do not directly impact the cash flows related to our Class A Shareholders.
Investing Activities.
Net cash from investing activities for the
six months ended
June 30, 2019
and
2018
was
$(10.2) million
, and
$(200.8) million
respectively. Investing cash outflows in
2019
primarily related to purchases of U.S. government obligations and investments in funds, partially offset by return of investments of U.S. government obligations and
investments in funds. Investing cash outflows in
2018
primarily related to sales of investments. Investment-related cash flows of the consolidated funds are classified within operating activities.
Financing Activities.
Net cash from financing activities for the
six months ended
June 30, 2019
and
2018
was
$(176.6) million
and
$(293.2) million
, respectively. Net cash from financing activities is generally comprised of dividends paid to our Class A Shareholders, borrowings and repayments related to our debt obligations, and proceeds from repurchase agreements used to finance risk retention investments in our European CLOs. Contributions from noncontrolling interests, which primarily relate to fund investor contributions into the consolidated funds, and distributions to noncontrolling interests, which primarily relate to fund investor redemptions from the consolidated funds and distributions to our executive managing directors on their Group A Units, prior to the Distribution Holiday, are also included in net cash from financing activities.
In the
six months ended
June 30, 2019
, we repaid
$145.0 million
of the 2018 Term Loan and a $21.1 million CLO Investment Loan. In the
six months ended
June 30, 2019
, we entered into a
$16.3 million
repurchase agreement to finance risk retention investment in a European CLO.
In the second quarter of 2018, we repaid our
$400.0 million
Senior Notes and entered into our 2018 Term Loan borrowing
$250.0 million
and repaying
$50.0 million
of the balance in the period.
We paid dividends of
$12.3 million
to our Class A Shareholders in the
six months ended
June 30, 2019
, compared to dividends of
$17.2
million to our Class A Shareholders and $23.6 million of distributions to our executive managing directors on their Group A Units in the
first
six months ended
June 30, 2018
.
Contractual Obligations
The table below summarizes our contractual cash obligations as of
June 30, 2019
, and the effect such obligations are expected to have on our liquidity and cash flows in future periods.
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 1, 2019-December 31, 2019
|
|
2020 - 2021
|
|
2022 - 2023
|
|
2024 - Thereafter
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Long-term debt
(1)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
152,239
|
|
|
$
|
177,758
|
|
|
$
|
329,997
|
|
|
Estimated interest on long-term debt
(2)
|
2,022
|
|
|
36,624
|
|
|
29,731
|
|
|
32,731
|
|
|
101,108
|
|
|
Securities sold under agreements to repurchase
(3)
|
—
|
|
|
—
|
|
|
—
|
|
|
79,357
|
|
|
79,357
|
|
|
Operating leases
(4)
|
11,230
|
|
|
43,438
|
|
|
38,865
|
|
|
97,587
|
|
|
191,120
|
|
|
Tax receivable agreement
(5)
|
—
|
|
|
55,408
|
|
|
68,173
|
|
|
82,510
|
|
|
206,091
|
|
|
Unrecognized tax benefits
(6)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Incentive income subject to clawback
(7)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total Contractual Obligations
|
$
|
13,252
|
|
|
$
|
135,470
|
|
|
$
|
289,008
|
|
|
$
|
469,943
|
|
|
$
|
907,673
|
|
_______________
|
|
|
|
(1)
|
Represents indebtedness outstanding under the Debt Securities, 2018 Term Loan and the CLO Investments Loans. In relation to CLO Investments Loans, the amounts present our best estimate of the timing of expected payments on investments in CLOs, as the timing of payments on CLO Investments Loans is contingent on principal payments made to us on our investments in CLOs. Amounts presented represent expected cash payments, and have not been reduced for any discounts or deferred debt issuance costs that are netted against these balances for presentation in our consolidated balance sheet.
|
|
|
|
|
(2)
|
Represents expected future interest payments on long-term debt based on the LIBOR and EURIBOR rates that were in effect as of
June 30, 2019
.
|
|
|
|
|
(3)
|
Represents payments on securities sold under agreements to repurchase in accordance with the set scheduled maturity date that corresponds to the maturities of the securities sold under such transaction and exclude any interest payments as such amounts cannot be reasonably estimated. Interest payments on securities sold under agreements are based on the weighted average effective interest rate of each class of securities that have been sold, plus a spread to be agreed upon by the parties
|
|
|
|
|
(4)
|
Represents the payments required under our various operating leases for office space and data centers.
|
|
|
|
|
(5)
|
Represents the maximum amounts that would be payable to our executive managing directors and the Ziffs under the tax receivable agreement assuming that we will have sufficient taxable income each year to fully realize the expected tax savings resulting from the purchase by the Oz Operating Group of
|
Group A Units with proceeds from the 2007 Offerings, as well as subsequent exchanges as discussed above under the heading “—Liquidity and Capital Resources—Tax Receivable Agreement.” In light of the numerous factors affecting our obligation to make such payments, the timing and amounts of any such actual payments may differ materially from those presented in the table above.
|
|
|
|
(6)
|
We are not currently able to make a reasonable estimate of the timing of payments in individual years in connection with our unrecognized tax benefits of $7.0 million, and therefore these amounts are not included in the table above.
|
|
|
|
|
(7)
|
As of
June 30, 2019
, we had incentive income collected from certain of our funds that is subject to clawback in the event of future losses in the respective fund. We are not currently able to make a reasonable estimate of the timing of payments, if any, as the payments are contingent on future realizations of investments in the respective fund, the timing of which is uncertain.
|
Off-Balance Sheet Arrangements
In the normal course of business, we enter into various off-balance sheet arrangements including sponsoring and owning general partner interests in our funds and retained interests in a CLO we manage. We also have ongoing capital commitment arrangements with certain of our funds. None of our off-balance sheet arrangements require us to fund losses or guarantee target returns to investors in any of our other investment funds. See Notes
5
and
6
of our consolidated financial statements included in this report for information on our retained and variable interests in our funds and CLOs.
Critical Accounting Policies and Estimates
Critical accounting policies are those that require us to make significant judgments, estimates or assumptions that affect amounts reported in our financial statements or the notes thereto. We base our judgments, estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable and prudent. Actual results may differ materially from these estimates. See Note
2
to our consolidated financial statements included in this report for a description of our accounting policies. Set forth below is a summary of what we believe to be our most critical accounting policies and estimates.
Fair Value of Investments
The valuation of investments held by our funds is the most critical estimate made by management impacting our results. Pursuant to specialized accounting for investment companies under GAAP, investments held by the funds are carried at their estimated fair values. The valuation of investments held by our funds has a significant impact on our results, as our management fees and incentive income are generally determined based on the fair value of these investments.
GAAP prioritizes the level of market price observability used in measuring assets and liabilities at fair value. Market price observability is impacted by a number of factors, including the type of assets and liabilities and the specific characteristics of the assets and liabilities. Assets and liabilities with readily available, actively quoted prices (Level I) or for which fair value can be measured from actively quoted prices (Level II) generally will have a higher degree of market price observability and lesser degree of judgment used in measuring fair value than those measured using pricing inputs that are unobservable in the market (Level III). See Note
5
to our consolidated financial statements included in this report for additional information regarding fair value measurements.
As of
June 30, 2019
, the absolute values of our funds’ invested assets and liabilities (excluding the notes and loans payable of our CLOs) were classified within the fair value hierarchy as follows: approximately
35%
within Level I; approximately
45%
within Level II; and approximately
20%
within Level III. As of
December 31, 2018
, the absolute values of our funds’ invested assets and liabilities (excluding the notes and loans payable of our CLOs) were classified within the fair value hierarchy as follows: approximately
36%
within Level I; approximately
41%
within Level II; and approximately
23%
within Level III. The percentage of our funds’ assets and liabilities within the fair value hierarchy will fluctuate based on the investments made at any given time and such fluctuations could be significant. A portion of our funds’ Level III assets relate to Special Investments or other investments on which we do not earn any incentive income until such investments are sold or otherwise realized. Upon the sale or realization event of these assets, any realized profits are included in the calculation of incentive income for such year. Accordingly, the estimated fair value of our funds’ Level III assets may not have any relation to the amount of incentive income actually earned with respect to such assets.
Valuation of Investments.
Fair value represents the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants as of the measurement date. The fair value of our
funds’ investments is based on observable market prices when available. We, as the investment manager of our funds, determine the fair value of investments that are not actively traded on a recognized securities exchange or otherwise lack a readily ascertainable market value. The methods and procedures to value these investments may include the following: performing comparisons with prices of comparable or similar securities; obtaining valuation-related information from the issuers; calculating the present value of future cash flows; assessing other analytical data and information relating to the investment that is an indication of value; obtaining information provided by third parties; and evaluating financial information provided by the management of these investments.
Significant judgment and estimation go into the assumptions that drive our valuation methodologies and procedures for assets that are not actively traded on a recognized securities exchange or otherwise lack a readily ascertainable market value. The actual amounts ultimately realized could differ materially from the values estimated based on the use of these methodologies. Realizations at values significantly lower than the values at which investments have been reflected could result in losses at the fund level and a decline in future management fees and incentive income. Such situations may also negatively impact fund investor perception of our valuation policies and procedures, which could result in redemptions and difficulties in raising additional capital.
We have established an internal control infrastructure over the valuation of financial instruments that includes ongoing oversight by our Valuation Controls Group and Valuation Committee, as well as periodic audits by our Internal Audit Group. These management control functions are segregated from the trading and investing functions.
The Valuation Committee is responsible for establishing the valuation policy and monitors compliance with the policy, ensuring that all of the funds’ investments reflect fair value, as well as providing oversight of the valuation process. The valuation policy includes, but is not limited to the following: determining the pricing sources used to value specific investment classes; the selection of independent pricing services; performing due diligence of independent pricing services; and the classification of investments within the fair value hierarchy. The Valuation Committee reviews a variety of reports on a monthly basis, which include the following: summaries of the sources used to determine the value of the funds’ investments; summaries of the fair value hierarchy of the funds’ investments; methodology changes and variance reports that compare the values of investments to independent pricing services. The Valuation Committee is independent from the investment professionals and may obtain input from investment professionals for consideration in carrying out its responsibilities.
The Valuation Committee has assigned the responsibility of performing price verification and related quality controls in accordance with the valuation policy to the Valuation Controls Group. The Valuation Controls Group’s other responsibilities include the following: overseeing the collection and evaluation of counterparty prices, broker-dealer quotations, exchange prices and pricing information provided by independent pricing services. Additionally, the Valuation Controls Group is responsible for performing back testing by comparing prices observed in executed transactions to valuations and valuations provided by independent pricing service providers on a bi-weekly and monthly basis; performing stale pricing analysis on a monthly basis; performing due diligence reviews on independent pricing services on an annual basis; and recommending changes in valuation policies to the Valuation Committee. The Valuation Controls Group also verifies that indicative broker quotations used to value certain investments are representative of fair value through procedures such as comparison to independent pricing services, back testing procedures, review of stale pricing reports and performance of other due diligence procedures as may be deemed necessary.
Investment professionals and members of the Valuation Controls Group review a daily profit and loss report, as well as other periodic reports that analyze the profit and loss and related asset class exposure of the funds’ investments.
The Internal Audit Group employs a risk-based program of audit coverage that is designed to provide an assessment of the design and effectiveness of controls over our operations, regulatory compliance, valuation of financial instruments and reporting. Additionally, the Internal Audit Group meets periodically with management and the Audit Committee of our Board of Directors to evaluate and provide guidance on the existing risk framework and control environment assessments.
For information regarding the impact that the fair value measurement of assets under management has on our results, please see “
Part I—Item 3. Quantitative and Qualitative Disclosures About Market Risk
.”
Recognition of Incentive Income
The determination of whether to recognize incentive income under GAAP requires a significant amount of judgment regarding whether it is probable that a significant revenue reversal of incentive income that we are potentially entitled to as of a point in time will not occur in future periods, which would preclude the recognition of such amounts as incentive income. Management considers a variety of factors when evaluating whether the recognition of incentive income is appropriate, including: the performance of the fund, whether the we have received or are entitled to receive incentive income distributions and whether such amounts are restricted, the investment period and expected term of the fund, where the fund is in its life-cycle, the volatility and liquidity of investments held by the fund, our team’s experience with similar investments and potential sales of investments within the fund. Management continuously evaluates whether there are additional considerations that could potentially impact the recognition of incentive income and notes that the recognition, and potential reversal, of incentive income is subject to potentially significant variability due to changes to the aforementioned considerations.
Variable Interest Entities
The determination of whether or not to consolidate a variable interest entity under GAAP requires a significant amount of judgment concerning the degree of control over an entity by its holders of variable interests. To make these judgments, management has conducted an analysis, on a case-by-case basis, of whether we are the primary beneficiary and are therefore required to consolidate the entity. Management continually reconsiders whether we should consolidate a variable interest entity. Upon the occurrence of certain events, such as investor redemptions or modifications to fund organizational documents and investment management agreements, management will reconsider its conclusion regarding the status of an entity as a variable interest entity.
Income Taxes
We use the asset and liability method of accounting for deferred income taxes. Under this method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the carrying amounts of existing assets and liabilities and their respective tax bases. A valuation allowance is established when management believes it is more likely than not that a deferred income tax asset will not be realized.
Substantially all of our deferred income tax assets relate to the goodwill and other intangible assets deductible for tax purposes by Oz Corp that arose in connection with the purchase of Group A Units from our executive managing directors and the Ziffs with proceeds from the 2007 Offerings, subsequent exchanges of Group A Units for Class A Shares and subsequent payments to our executive managing directors and the Ziffs made under the tax receivable agreement, in addition to any related net operating loss carryforward. In accordance with relevant provisions of the Internal Revenue Code, we expect to take these goodwill and other intangible deductions over the 15-year period following the 2007 Offerings and subsequent exchanges, as well as an additional 20-year loss carryforward period available to us for net operating losses generated prior to 2018 and indefinite carryforward period for net operating losses generated beginning 2018, in order to fully realize the deferred income tax assets. Our analysis of whether we expect to have sufficient future taxable income to realize these deductions is based solely on estimates over this period.
Oz Corp generated taxable income of
$40.0 million
for the
six months ended
June 30, 2019
, before taking into account deductions related to the amortization of the goodwill and other intangible assets. We determined that we would need to generate taxable income of at least
$1.2 billion
over the remaining
five
-year weighted-average amortization period, as well as an additional 20-year loss carryforward period available, in order to fully realize the deferred income tax assets. Using the estimates and assumptions discussed below, we expect to generate sufficient taxable income over the remaining amortization and loss carryforward periods available to us in order to fully realize these deferred income tax assets.
To generate
$1.2 billion
in taxable income over the remaining amortization and loss carryforward periods available to us, we estimated that, based on estimated assets under management of
$33.3 billion
as of
July 1, 2019
, we would need to generate a minimum compound annual growth rate in assets under management of
less than 3%
over the period for which the taxable income estimate relates to fully realize the deferred income tax assets, assuming no performance-related growth, and therefore no incentive income. The assumed nature and amount of this estimated growth rate are not based on historical results or current expectations of future growth; however, the other assumptions underlying the taxable income estimate, such as general
maintenance of current expense ratios and cost allocation percentages among the Oz Operating Partnerships, which impact the amount of taxable income flowing through our legal structure, are based on our near-term operating budget. If our actual growth rate in assets under management falls below this minimum threshold for any extended time during the period for which these estimates relate and we do not otherwise experience offsetting growth rates in other periods, we may not generate taxable income sufficient to realize the deferred income tax assets and may need to record a valuation allowance.
Management regularly reviews the model used to generate the estimates, including the underlying assumptions. If it determines that a valuation allowance is required for any reason, the amount would be determined based on the relevant circumstances at that time. To the extent we record a valuation allowance against our deferred income tax assets related to the goodwill and other intangible assets, we would record a corresponding decrease in the liability to our executive managing directors and the Ziffs under the tax receivable agreement equal to approximately
69%
of such amount; therefore, our net income (loss) allocated to Class A Shareholders would only be impacted by
31%
of any valuation allowance recorded against the deferred income tax assets.
Actual taxable income may differ from the estimate described above, which was prepared solely for determining whether we currently expect to have sufficient future taxable income to realize the deferred income tax assets. Furthermore, actual or estimated future taxable income may be materially impacted by significant changes in assets under management, whether as a result of fund investment performance or fund investor contributions or redemptions, significant changes to the assumptions underlying our estimates, future changes in income tax law, state income tax apportionment or other factors.
As of
June 30, 2019
, we had
$196.0 million
of net operating losses available to offset future taxable income for federal income tax purposes that will expire between
2030
and
2037
, and
$122.1 million
of net operating losses available to be carried forward without expiration. Additionally,
$156.5 million
of net operating losses are available to offset future taxable income for state income tax purposes and
$152.7 million
for local income tax purposes that will expire between
2035
and
2039
. Based on the analysis set forth above, as of
June 30, 2019
, we have determined that it is not necessary to record a valuation allowance with respect to our deferred income tax assets related to the goodwill and other intangible assets deductible for tax purposes, and any related net operating loss carryforward. However, we have determined that we may not realize certain foreign income tax credits and accordingly, a valuation allowance of
$11.9 million
has been established for these items.
Impact of Recently Adopted Accounting Pronouncements on Recent and Future Trends
The Financial Accounting Standards Board (the “FASB”) has issued various Accounting Standards Updates (“ASUs”) that could impact our future trends. For additional details regarding these ASUs, including methods of adoption, see Note
2
to our consolidated financial statements included in this report for additional information.
We adopted ASC No. 2016-02,
Leases (Topic 842)
, as amended, as of January 1, 2019 (“ASC 842”). Adoption of ASC 842 resulted in the recognition of
$126.0 million
and
$135.9 million
of operating lease assets and liabilities, respectively, with the net of these amounts offsetting the deferred rent credit liability in existence immediately prior to adoption. Operating lease-related expense recognition is generally in line with the accounting guidance in effect prior to the adoption of ASC 842, and therefore we do not expect ASC 842 to have a material impact on our future operating expense trends.
None of the other changes to GAAP that went into effect during the
six months ended
June 30, 2019
are expected to impact our future trends.
Expected Impact of Future Adoption of New Accounting Pronouncements on Future Trends
None of the changes to GAAP that have been issued but that we have not yet adopted are expected to impact our future trends.
Economic Income Reconciliations
The tables below present the reconciliations of total segments Economic Income and its components to the respective GAAP measures for the periods presented in this MD&A.
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|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Net Loss Attributable to Class A Shareholders—GAAP
|
$
|
(8,625
|
)
|
|
$
|
(12,256
|
)
|
|
Change in redemption value of Preferred Units
|
—
|
|
|
—
|
|
|
Net Loss Allocated to Och-Ziff Capital Management Group Inc—GAAP
|
(8,625
|
)
|
|
(12,256
|
)
|
|
Net loss allocated to Group A Units
|
(8,148
|
)
|
|
(21,915
|
)
|
|
Equity-based compensation, net of RSUs settled in cash
|
37,095
|
|
|
23,366
|
|
|
Adjustment to recognize deferred cash compensation in the period of grant
|
2,017
|
|
|
1,974
|
|
|
Recapitalization-related non-cash interest expense accretion
|
4,104
|
|
|
—
|
|
|
Income taxes
|
10,134
|
|
|
(2,524
|
)
|
|
Net losses on early retirement of debt
|
595
|
|
|
14,303
|
|
|
Adjustment for expenses related to compensation and profit-sharing arrangements based on fund investment performance
|
1,282
|
|
|
555
|
|
|
Changes in tax receivable agreement liability
|
(5,362
|
)
|
|
—
|
|
|
Depreciation, amortization and net gains and losses on fixed assets
|
2,364
|
|
|
2,794
|
|
|
Other adjustments
|
(3,044
|
)
|
|
1,897
|
|
|
Economic Income
|
$
|
32,412
|
|
|
$
|
8,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Net Income (Loss) Attributable to Class A Shareholders—GAAP
|
$
|
28,458
|
|
|
$
|
(8,766
|
)
|
|
Change in redemption value of Preferred Units
|
(44,364
|
)
|
|
—
|
|
|
Net Loss Allocated to Och-Ziff Capital Management Group Inc—GAAP
|
(15,906
|
)
|
|
(8,766
|
)
|
|
Net loss allocated to Group A Units
|
(15,517
|
)
|
|
(13,545
|
)
|
|
Equity-based compensation, net of RSUs settled in cash
|
74,318
|
|
|
45,261
|
|
|
Adjustment to recognize deferred cash compensation in the period of grant
|
4,585
|
|
|
14,757
|
|
|
Recapitalization-related non-cash interest expense accretion
|
6,415
|
|
|
—
|
|
|
Income taxes
|
13,520
|
|
|
488
|
|
|
Net losses on early retirement of debt
|
6,053
|
|
|
14,303
|
|
|
Adjustment for expenses related to compensation and profit-sharing arrangements based on fund investment performance
|
3,659
|
|
|
393
|
|
|
Changes in tax receivable agreement liability
|
(5,362
|
)
|
|
—
|
|
|
Depreciation, amortization and net gains and losses on fixed assets
|
4,775
|
|
|
5,166
|
|
|
Other adjustments
|
(6,351
|
)
|
|
2,879
|
|
|
Economic Income
|
$
|
70,189
|
|
|
$
|
60,936
|
|
Economic Income Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Management fees—GAAP
|
$
|
61,400
|
|
|
$
|
70,593
|
|
|
$
|
125,023
|
|
|
$
|
143,043
|
|
|
Adjustment to management fees
(1)
|
(3,765
|
)
|
|
(4,477
|
)
|
|
(7,373
|
)
|
|
(9,218
|
)
|
|
Management Fees—Economic Income Basis—Non-GAAP
|
57,635
|
|
|
66,116
|
|
|
117,650
|
|
|
133,825
|
|
|
|
|
|
|
|
|
|
|
|
Incentive Income—Economic Income Basis—GAAP and Non-GAAP
|
34,757
|
|
|
34,656
|
|
|
87,955
|
|
|
85,490
|
|
|
|
|
|
|
|
|
|
|
|
Other revenues—GAAP
|
5,043
|
|
|
3,867
|
|
|
8,812
|
|
|
8,409
|
|
|
Adjustment to other revenues
(2)
|
—
|
|
|
—
|
|
|
—
|
|
|
(39
|
)
|
|
Other Revenues—Economic Income Basis—Non-GAAP
|
5,043
|
|
|
3,867
|
|
|
8,812
|
|
|
8,370
|
|
|
Total Revenues—Economic Income Basis—Non-GAAP
|
$
|
97,435
|
|
|
$
|
104,639
|
|
|
$
|
214,417
|
|
|
$
|
227,685
|
|
_______________
|
|
|
|
(1)
|
Adjustment to present management fees net of recurring placement and related service fees, as management considers these fees a reduction in management fees, not an expense. The impact of eliminations related to the consolidated funds is also removed.
|
|
|
|
|
(2)
|
Adjustment to exclude gains on fixed assets.
|
Economic Income Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Compensation and benefits—GAAP
|
$
|
80,709
|
|
|
$
|
74,502
|
|
|
$
|
166,424
|
|
|
$
|
143,426
|
|
|
Adjustment to compensation and benefits
(1)
|
(40,393
|
)
|
|
(26,780
|
)
|
|
(82,562
|
)
|
|
(62,685
|
)
|
|
Compensation and Benefits—Economic Income Basis—Non-GAAP
|
$
|
40,316
|
|
|
$
|
47,722
|
|
|
$
|
83,862
|
|
|
$
|
80,741
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense—GAAP
|
$
|
6,523
|
|
|
$
|
7,505
|
|
|
$
|
12,731
|
|
|
$
|
14,103
|
|
|
Adjustment to interest expense
(2)
|
(4,104
|
)
|
|
—
|
|
|
(6,415
|
)
|
|
—
|
|
|
Interest Expense—Economic Income Basis—Non-GAAP
|
$
|
2,419
|
|
|
$
|
7,505
|
|
|
$
|
6,316
|
|
|
$
|
14,103
|
|
|
|
|
|
|
|
|
|
|
|
General, administrative and other expenses—GAAP
|
$
|
28,427
|
|
|
$
|
48,509
|
|
|
$
|
66,215
|
|
|
$
|
86,359
|
|
|
Adjustment to general, administrative and other expenses
(3)
|
(6,137
|
)
|
|
(7,289
|
)
|
|
(12,163
|
)
|
|
(14,441
|
)
|
|
General, Administrative and Other Expenses—Economic Income Basis—Non-GAAP
|
$
|
22,290
|
|
|
$
|
41,220
|
|
|
$
|
54,052
|
|
|
$
|
71,918
|
|
_______________
|
|
|
|
(1)
|
Adjustment to exclude equity-based compensation, as management does not consider these non-cash expenses to be reflective of our operating performance. However, the fair value of RSUs that are settled in cash to employees or executive managing directors is included as an expense at the time of settlement. In addition, expenses related to incentive income profit-sharing arrangements are generally recognized at the same time the related incentive income revenue is recognized, as management reviews the total compensation expense related to these arrangements in relation to any incentive income earned by the relevant fund. Further, deferred cash compensation is expensed in full in the year granted for Economic Income, rather than over the service period for GAAP. Distributions to the Group D Units are also excluded, as management reviews operating performance at the Oz Operating Group level, where substantially all of our operations are performed, prior to making any income allocations.
|
|
|
|
|
(2)
|
Adjustment to exclude non-cash interest expense accretion on Debt Securities issued in exchange for 2016 Preferred Units in connection with the Recapitalization. Upon exchange, Debt Securities were recognized at fair value and are being accreted to par value over time through interest expense for GAAP; however, management does not consider this interest accretion to be reflective of the operating performance of the Company.
|
|
|
|
|
(3)
|
Adjustment to exclude depreciation, amortization and losses on fixed assets as management does not consider these items to be reflective of our operating performance. Additionally, recurring placement and related service fees are excluded, as management considers these fees a reduction in management fees, not an expense.
|
Other Economic Income Items
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
(dollars in thousands)
|
|
Net loss attributable to noncontrolling interests—GAAP
|
$
|
(7,984
|
)
|
|
$
|
(21,440
|
)
|
|
$
|
(15,218
|
)
|
|
$
|
(12,805
|
)
|
|
Adjustment to net loss attributable to noncontrolling interests
(1)
|
7,982
|
|
|
21,438
|
|
|
15,216
|
|
|
12,792
|
|
|
Net Loss Attributable to Noncontrolling Interests—Economic Income Basis—Non-GAAP
|
$
|
(2
|
)
|
|
$
|
(2
|
)
|
|
$
|
(2
|
)
|
|
$
|
(13
|
)
|
_______________
|
|
|
|
(1)
|
Adjustment to exclude amounts allocated to our executive managing directors on their interests in the Oz Operating Group, as management reviews operating performance at the Oz Operating Group level. We conduct substantially all of our activities through the Oz Operating Group.
|