Friday, January 10, 2014

Exit strategy

When I learned that China was being overlooked by Wall Street, I wanted a piece of the action.  This was late 1990s.  So first I built positions in all of the China funds on the NYSE.  I learned Mark Mobius was the man to watch, he taught me to let the manager do whatever he wants without limits.  

This led me to a global fund which out performed the S&P enough to pay for my Porsche.  During one of his seminars, this one was in New Zealand, he let slip that he was getting much higher returns on private capital.

In the US only the rich are allowed to get richer using private capital.  It is still that way, three million dollars will not get you in.  Which is why I became interested in a private capital management company that I owned in my Insider portfolio?  

While we cannot Invest in the companies investment properties directly, we can own the management company and earn fees from those very same funds.  They tell me the same thing.  Not to restrict them to any ideas or countries and let them do their own thing too bring us higher risk-risk-adjusted absolute returns.   

Och-Ziff makes investments on a global basis with headquarters in New York City and offices in London, Hong Kong, Mumbai, Och-Ziff Consulting (Beijing) Company Limited, and Dubai.  So with one investment we get a global reach, diversification and a team investing along side of us.

With a pipeline we have solid assets in the ground paying out cash.  But  a management company is a service company.  Our returns come from assets under management (Aum).  

As long as Aum increases we should see greater growth, currently $40.6 billion in assets under management.  When those assets begin to shrink we should not hesitate to bail out.

Sunday, January 5, 2014

Och-Ziff history

Dan Och working for Goldman Sac (11 years), took the Ziff Bros (Car and Driver) clients off and started a hedge fund (1994).   They are now one of the oldest and largest Wall Street Hedge Funds.  They always had to worry that the Brothers would take off and the whole thing would fall apart.  About 13 years in, the Partners had a lot of equity in the firm and wanted to go try their own ideas in other countries.

They sold their economic interest to public investors at twice todays prices.  In a sense they cashed-in.  The funds that they received they put into the current and new Oz funds that they had ideas to run.  As investors in the funds they made out as fund owners.  Carry from the other investors funds, went up to OZm which covered the back-end costs and distributed profits to shareholders which as you can see from insider acquisitions included the partners and employees, as well as public shareholders.  

When Rockefeller created a standard oil company he did not want any of the parts making profits.  They all joined the octopus, upstream, midstream and downstream.  All of profits went to the top and everyone with Standard oil shares got the same dividend.  So here the partners took the money from the public offering and ran separate funds.  All of the management fees go to the top which they share with public shareholders who put up the capital to get them free.  The funds that they run bring in more capital, fees from this capital also goes to the top.

If you read the history of Hedge funds that I posted earlier you can see how it evolved from a long/short theory, to managing A. W. Jones’s own funds.  Later he was managing money managers in house, then it evolved into managing other funds.  His deal became a fund of funds.  One big fund made up of smaller funds, managing the risk between them based on the suspected view of the future.   

We see the same thing here.  The original partners took their money out and were given B-shares that had voting rights but no economic rights.  They took their own funds, invested in their own funds under the Ozm umbrella.  The funds have to have a billion dollars under management to cover cost of running a fund and its offices, regulatory responsibilities, etc.  The management company decides where the new cash flows from incoming funds go.

Saturday, January 4, 2014

$40.6 billion AUM

The estimated unaudited amount of assets under management is approximately $40.6 billion, which reflects a net increase of approximately $1.4 billion last month.
  December 2013
Estimate (1)(2)
    December  2013

OZ Master Fund
OZ Europe Master Fund
OZ Asia Master Fund

Buy owner-managers who want their stock to go up for solid reasons. The firm went public in 2007, and these insiders have a five-year lockup. That means they can’t sell until late 2012. I would expect the partners to cash out some of their stake at that time. They have every incentive to the get the stock price up before then. 

Moreover, they eat their own cooking. Of the $30 billion in assets under management, about 9% is money the partners and employees invested themselves. They have every incentive to do well in their funds because a good chunk of it is their own money. Plus, the partners take no salary or bonus. They get paid the way shareholders get paid through distributions. 

The distributions reflect the performance of the year prior. The big dividend is always the last dividend, declared at the end of the year and paid in February. It’s also a simple business. Gather assets, get paid. Invest well, get paid. There is little mystery here. It generates a lot of cash and has little need to reinvest that cash in the business.

Commentary on prospectus summery.

• 0zm

Hedge Funds went public to go closed-end, to give themselves a pool of “permanent capital.” The money investors paid the partners for the shares was used by the Partners to invest in Oz’s Hedge funds, to monetize equity interest. This they could take out later like any Investor in the Funds.

You understand now how the partners are compensated with restrictions. They might give you a $hundred million, but it is spread out across four years, and you can’t go anywhere. That new guy probably had to sell half, just to pay his taxes on the distribution.

The stock originally crashed because the Summer of 2007 was not the best time to go public. The collapse of the Bear Stearns hedge funds and worries about higher taxes depressed valuations in the whole alternative investment sector. 

July 2007: New-York based Och-Ziff Capital Management Group announced it was planning an IPO on NYSE that could raise around $2 billion, saying it planned to use the IPO proceeds to expand abroad in search of new strategies and investors. As the group planned to sell shares to the public as a partnership, it would not be subject to federal income tax, and also will not have to provide the same level of disclosure as most other publicly traded companies.

The media reflected that the IPO would allow investors to profit from its investment advisory fees and incentive compensation rather than its funds. Moreover, these public offerings can also benefit investors by offering them yet a different way of getting a piece of the “hedge fund action.” Investors who wish to share in some of the gains (as well as losses) of publicly offered hedge fund managers would be able to do so without the high minimums, fees, and long lock-up periods that would typically be required to invest in the manager’s hedge funds.

The hedge fund industry has continued to see increased asset flows in recent years, capital inflows have been concentrated largely into funds with more than $1 billion under management. As a benchmark a lot of them were being valued at 30% of AUM when they went public.

Prospectus Summary

This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our Class A shares. You should read this entire prospectus carefully, especially the risks of investing in our Class A shares discussed under “Risk Factors” beginning on page 27, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included elsewhere in this prospectus before making an investment decision.

We are a leading international, institutional alternative asset management firm and one of the largest alternative asset managers in the world, with approximately $26.8 billion of assets under management for over 700 fund investors as of April 30, 2007. We have a strong track record spanning over 13 years, which places us among the longest standing alternative asset managers globally.

We were founded in 1994 by Daniel Och, together with the Ziffs, with the goal of building a world class investment management business. Prior to founding our company, Mr. Och spent over 11 years at Goldman, Sachs & Co. Mr. Och instilled the team-based culture he experienced at Goldman Sachs into our firm, and this approach has helped us become a leader in the alternative asset management industry. Today, we have over 300 personnel, with over 125 investment professionals, including 18 partners, located in our New York headquarters and offices in London, Hong Kong, Tokyo and Bangalore. We have been a leader in international expansion in our industry and expect to further expand by opening an office in Beijing later this year.

We seek to deliver consistent positive, risk-adjusted returns throughout market cycles, with a focus on risk management and capital preservation. Our diversified, multi-strategy approach combines global investment strategies, including merger arbitrage, convertible arbitrage, equity restructuring, credit and distressed credit investments, private equity and real estate. We base our investment decisions on detailed, research-based, bottom-up analysis, and our investment philosophy focuses on opportunities for long-term value. Our investment processes are designed to incorporate risk management into every investment decision: our portfolio managers meet with analysts daily to review the risks related to their positions and the inherent risks associated with these positions, and we have a risk management committee that conducts regular oversight of portfolio risk. Risk management has been a core foundation of our business since inception and remains a critical part of our investment process today.

We manage and operate our business with a global perspective, looking to take advantage of investment opportunities wherever they arise. We have been among the pioneers in building out a global alternative investment platform, enabling our teams in the United States, Europe and Asia to share ideas and analysis across geographic regions and investment strategies.

We believe our deeply embedded, team-based culture differentiates us from our competitors. We currently have 18 partners and 27 managing directors, all of whom derive virtually all of their income payments from participation in the profits of our entire business. Our compensation system helps minimize the potential for asymmetric risk profiles between fund investors and our partners and employees and fosters a strong culture of internal cooperation and sharing of ideas. Additionally, all of our professional employees have the opportunity to eventually become managing directors and partners, providing a compelling incentive and retention mechanism. We have historically experienced very little employee turnover, and believe that, as a result of this culture, we have been particularly successful in attracting and retaining some of the leading investment and business talent in the industry.

Wednesday, January 1, 2014

Assets Under Management (AUM) .Estimate as of January 1, 2014.

Founded in 1994 by Daniel S. Och, Och-Ziff Capital Management Group is one of the largest institutional alternative asset managers in the world, with approximately $40.6 billion in assets under management as of January 1, 2014.

OZ the business

What they did in 2008 honoring all withdrawals when others wouldn’t, is what gives OZM the edge now in attracting more money.

With the insiders carrying that much interest in the performance, I can easily see it taking out the next two highs.  The driving force is the increasing AUM.  Most of the new big money coming in is going to the biggest firms as can be heard from the conferences, and backed up online.  Aum goes up, profits go up, relative costs go down, and the evaluation of what those payouts are worth goes up.  

I just don’t want to left out of something I suspected many years ago.  I could hear it between the lines when Mark Mobius taught us, most clearly on that seminar he did in New Zealand a few years ago.  How his private clients has access to things that small investors could not play.

More clearly when congress attacked carried interest, which is the same advantage Kmr has,  carrying the gains forward free of ordinary tax. Pushing the capital gain ahead.

We know why it bottomed in 08, it was probably the Emerging Markets that pulled it up in 09.  In theory the way these LLC pay out all the profit every quarter you would think they could make Investors happy just going sideways.  But something gave Oz a shove in 2013.  Smaller funds may gain market share from the new loosening of restraints on advertising.  But it does not matter for the big players.  Big players have to use big funds to be prudent in an unprudent world.

As the Banks are being kicked out of the game by the Volker rule, Hedge funds, the big Hedge funds will pick up the slack.  Private clients going through Private banks and Pension funds.  Hedge funds that invest in hedge funds (Fund of funds).  China using Ozm as a porthole.

Trillions of dollars are coming this way and we stand to get a percent of that.  Congress threw in the towel on harassing carried interest because Law firms do it and they are all Lawyers.

Simple business, easy to understand, moat around it.  May not be around as long as pipelines, but is having its day now.