Sculptor Capital Management, Inc.
Q2 2016 Earnings Call Transcript

Published: 2 Aug 2016

[Operator:]

Good day, Ladies and gentlemen, and welcome to the Och-Ziff Capital Management Group's 2016 Second Quarter Earnings Conference Call. My name is Mark, and I will be your operator for today. At this time, all participants are in a listen-only mode. [Operator Instructions] I would now like to turn the conference over to Tina Madon, Head of Investor Relations at Och-Ziff. Please proceed.

[Tina Madon:]

Thanks Mark. Good morning, everyone and welcome to our call. Joining me are Dan Och, our Chairman and CEO; and Joel Frank, our CFO. As a reminder, today's call may include forward-looking statements, many of which are inherently uncertain and outside of our control. Och-Ziff's actual results may differ, possibly materially, from those indicated in these forward-looking statements. Please see our 2015 Annual Report and the press release we issued earlier today for a description of the risk factors that could affect our financial results, our business and other matters related to the forward-looking statements. The Company does not undertake any obligation to update publicly any forward-looking statements. During today's call, we will be referring to economic income, distributable earnings and other financial measures that are not prepared in accordance with U.S. GAAP. Information about and reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are available in our earnings release, which is posted on our website. No statements made during this call should be construed as an offer to purchase shares of the Company or an interest in any Och-Ziff fund or any other entity. This morning, Dan will address our business results and Joel will update you on the investigation and review our financial results. We’ve made significant progress forward but our discussions the government are ongoing and we don’t yet have a resolution to this matter. We therefore won’t be able to take any questions on it today. We understand that reaching a settlement is as important to you as it is to us and we will provide you with an update when we are able to. With that, let me now turn the call over to Dan.

[Daniel Och:]

Thanks, Tina. Good morning, everyone. During the second quarter and through July, risk assets generally continue their rally of the February lows, but this rally has not been uniform, while the S&P reach new highs a number of the major industries in Europe, Japan and China posted losses during the second quarter and first half. Overall, we believe that security prices in many asset classes are being distorted as investors such for returns in a world of low to negative interest rate. The mandate of our multi-strategy funds is to navigate through and generate returns in complex markets. We had done so successfully throughout our history which has differentiated us competitively and is the reason that LPs invest with us. While our multi-strategy performance improved during the second quarter and into July, we are still not satisfied with our year-to-date returns in this area. Performance in certain parts of the portfolio has been more challenging particularly in our U.S. equity long short strategy, which has negatively affected our year-to-date performance. As part of our ongoing review process, we’ve taken a number of steps with the objective of improving performance. We made adjustments at the portfolio level, at the position level and to our equities processed. While the core of our investment and risk processes are unchanged, we always strive to improve and adapt and these changes are a part of these ongoing evolutionary process. From a positioning standpoint, we further reduced gross exposures in the OZ Master Fund during the second quarter. We continue to run with low net exposure and remain focussed on generating returns through disciplined security selection, not through directional debts on the equity market. Year-to-date through July, the OZ Master Fund generated a net return of minus 1.7%. Losses in long/short equities more than offset gains in our credit strategies and in convertible and derivative arbitrage. Our convertible and derivative arbitrage, corporate credit, structured credit and merger arbitrage strategies are having solid years. Our allocation to merger arbitrage declined as a number of transactions that we are involved in closed. Our credit products which collectively represent about a third of our AUM continue to be a bright spot for us. In opportunistic credit, year-to-date performance has been distinctive on both an absolute basis and versus our peers. For example, our global credit opportunities fund has had strong performance with the year-to-date net return of 6.4% through July. We remain focussed on creating value by applying process driven strategies that produce specific realizations and are not a direct result of market movements. We have already had multiple realizations events this year and expect more to come. Overall, the credit markets remain attractive for our investing style as we seek to optimize our overall positioning and pursue catalyst driven outcomes. In institutional credit strategies our performing credit platform, our CLOs continue to generate market leading performance with cash on cash returns and equity averaging 22.6% through August 1st. Our fundamental credit selection continues to positively distinguish our performance from competitors, while our dynamic portfolio management style remains a key differentiator versus other managers. We believe our strong track record will allow us to raise significant additional capital in the U.S. and in Europe in the future. In real-estate we continue to remain cautious and disciplined in our approach to deploying capital in our third opportunistic fund, given the macro economic backdrop in the first half of the year along with current valuations for traditional real-estate property. That said, our opportunistic real estate pipeline is robust and largely focused on niche asset types in the U.S. and more traditional assets in Europe. We are also taking advantage of the strong capital flow in the real estate by actively monetizing investments from our earlier funds at attractive evaluations. In addition to our opportunistic funds we continue to expand our real estate credit platform, which focuses on current income and downside protection. We believe this strategy resonates with LPs in the current low interest rate environment. As of -- now let’s turn to assets under management. As of August 1, our assets under management totaled $39.1 billion. Year-to-date, we've had net outflows of approximately $5.5 billion, distributions of $492 million and depreciation of $370 million. The majority of our net outflows continue to be from a multi strategy funds which remain affected by both the cyclical and idiosyncratic headwinds we discussed on our last call. Since the end of 2009, we have experienced a reasonably consistent level of multi strategy gross outflows on a quarterly basis. We are currently experiencing some elevation in these outflows relative to this historical trend which we believe is due in part to pressures faced by the broader hedge fund industry. Our multi-strategy gross inflows which have had a similar historical trend have been substantially lower this year. We believe this is the result of a number of factors including the macro economic backdrop, individual LP allocation decisions and the effect of the investigation. In our other products such as credit and real-estate, AUM has remained steady. We believe the diversification of our platform benefits us and differentiate us from many managers as have various products that can raise capital in different environments regardless of what is in or out of favor at any given point of time. We have experienced many difficult market cycles throughout our history and have learnt that maintaining a strong investment discipline rather than making directional investor chasing markets leads to the best long term performance for LPs. We are fundamental investors and we typically [ph] make investments for 12 months or more. While security prices can be affected by many factors in the short term as we have certainly seen in the first half of this year. We firmly believe that fundamentals drive evaluation over the long term. Lastly, I would like to update you on two significant positive developments for our business. The first is that certain of our partners are in discussions to permit upto $500 million to the firm. Joel will provide more details on this. Second, I am pleased to announce that our Board of Directors has elected William Barr to our board effective August 9. Bill served as the 77th Attorney General of the United States and was most recently General Counsel of Verizon Communications. He is one of the most respected attorneys in the country and brings unmatched expertise in legal, compliance, risk management and governance. We are constantly focused on bringing world class talent to all aspects of our business and we are extremely pleased to be able to add someone of Bill’s calibre to our board. Over the last 22 years, we have built and enduring institutional business with the leading market position in an industry that has experienced extraordinary growth in evolution. A number of elements have contributed to our success and differentiate Och-Ziff from its peers. We have a proven investment process and a long history of generating superior performance. We have a high quality diverse phase of LPs that represent some of the most sophisticated institutional investors in the world and with whom we have built a strong partnership of many years. Our investment and client service and infrastructure teams bring incredible experience, creativity and skill to what they do each and every day. They have been with Och-Ziff for a long period of time and that continuity is invaluable. It is for these reasons that my partners and I together have such deep conviction about the future of this firm. With that let me now turn the call over to Joel.

[Joel Frank:]

Thanks, Dan. This morning we reported a GAAP net loss of $78.6 million or $0.43 per basis and $0.44 per diluted Class A share for the 2016 second quarter. You can find a full discussion of our GAAP results in our press release which is posted on our website. Now let me turn to our economic income result. For the 2016 second quarter, we reported a distributable earnings loss of $184 million, a $0.35 for adjusted Class A share. This loss reflects an additional $214.3 million reserve that we have taken in anticipation of the monetary settlement associated with our ongoing FCPA investigation bringing the total reserve recorded year-to-date to $414.3 million. While the settlement is still under discussion, we don’t expect it to be higher than the amount on the reserve we have taken. Since our last call, we have entered into advance settlement negotiations with the government, pinpointing the exact timing of the settlement remains difficult but we are hopeful that we will be able to resolve this matter in the near term. I want to emphasize that we are doing everything we can to bring this process to closure in the best way we can for the business, our shareholders, our LPs and our employee. As you saw in our press release, certain of our partners are discussing a potential financing transaction with a special committee of the firm’s board in which these partners would purchase upto 500 million of perpetual preferred unit. These units are initially expected to have a dividend rate of 0% for three years which would increase overtime and they would not be convertible into Class A shares. Execution of this financing is dependent on customary conditions including satisfactory resolution of the investigation. The capital commitment being discussed which strengthen our balance sheet and give us substantial financial flexibility. The proceeds will be used to fund the monetary settlement in connection with resolution of the investigation and for general corporate purpose. We will determine our uses of cash based on what we believe is the best interest of the firm and its shareholders as we move forward. Now for a quick recap of our second quarter economic income results excluding the reserve. Our distributable earnings for the quarter were $30 million or $0.06 for adjusted Class A share excluding the reserve. Taking into account the reserve and because we haven’t reached a final settlement we believe it’s prudent to retain this quarters distributable earnings. Looking forward, our dividend policy remains unchanged and we intend to continue to payout substantially for our distributable earnings. Our economic income revenues were $142 million, a 19% decline from the first quarter of this year due to a combination of lower management fees and incentive income. Management fees were $133 million, 8% lower sequentially as our average AUM declined by 6% and our average management fee was also lower at 128 basis point reflecting the affect of net outflows from a multi strategy fund. In the first quarter of this year, incentive income was $31 million, which included tax distribution on incentive incomes that had been accrued on a longer term asset. In the second quarter, incentive income was $8 million mostly reflecting realizations in our closed end credit and real-estate fund. Our operating expenses totaled $87 million for the quarter, 5% lower sequentially. Top end benefits were 36 million of which 29 million were salaries and benefits and the remainder was cash bonuses. Salaries and benefits declined at approximately 1 million by 3% quarter-over-quarter as our headcount declined. Non-compensation expenses were 51 million or 11% lower sequentially due primarily to a reduction in technology cost and certain consulting cost. We continually review our operating expenses with a view to ensuring that they are aligned with our revenues and are appropriately scaled to the needs of our business. We are also focussed on making sure that we are as operationally efficient as possible. Our headcount has come down by 10% since the beginning of the year and we don’t anticipate making many new hires per year end. We therefore expect that our salaries and benefit expense will trend down from here. We expect our non-compensation expense to decline in 2017 based on two factors, one the decrease will leave our cost associated with the investigation. Two, the savings identified through an ongoing review of our expense base. We expect the range of savings in 2017 to be $35 million to $50 million of the full year 2015 based of non-compensation expenses of $201 million. But of course this is just an estimate; I will continue to give you guidance as we move forward. Excluding the reserve our effective tax rate was 46% and we anticipate that our tax rate will be 45% to 50% in the third quarter based on our current estimate of the firm’s full year economics for 2016. With that we will now take your questions. Again, as Tina mentioned we won’t be able to take questions related to the investigation, but we will be happy to answer others you have.

[Operator:]

[Operator Instructions] Your first question comes from Michael Carrier, Bank of America. Please proceed.

[Michael Carrier:]

Joel maybe first question, just on the discussions with the managing directors on the commitment of the $500 million, I guess, I just wanted to understand, I know you gave for the first three years would be 0%. How do we look at it longer term, and then when I think about that type of financing and then also just the current debt that you have yet still having the policy of paying out the vast majority on the distribution, just want to get the outlook longer-term, in terms of having that balance sheet structure versus the payout?

[Joel Frank:]

So looking there for preferred as you said, its perpetual preferred units with a 0% dividend for three years not convertible to A units, it will strengthen the balance sheet, we think its customary, but we are not finalized on negotiations so once it’s finalized, once we have details, we can give you more information on that. In terms of the dividend policy, it’s like I said, we haven’t changed our dividend policy, we plan to pay out the majority of our distributable earnings as we move forward we’ll see the needs of the business to cash in each of the business and so on, but that’s our policy and we intend to stay with that policy going forward.

[Michael Carrier:]

Okay, that's helpful. And just as a follow up, in terms of the flow outlook you mentioned the two things that I guess have been weighing on the flows both on the industry side and on the investigation. When you separate the business on the multi strat [ph] and how the conversations are going with clients, I mean, you obviously still have the long-term performance track record and there could be consolidation, hedge fund industry. On the other side you know with credit you continue to do well. So when you think about the conversations given some of the industry challenges out there, just where has that been trending for Och-Ziff? Because like I say you have the performance but obviously you have this overhang, but has that been starting to moderate as you have been taking the reserves and pushing things out? You know or has it continued to be an overhang on the flow picture?

[Daniel Och:]

Well I think yes, yes two separate questions. One about the industry and one about us, specifically in terms of the industry in the credit and real estate we are -- our performance continues to be very strong and we don’t see industry issues and things are moving in the right direction. On the multi-strategy side, our gross outflows are somewhat higher than they have been historically, you get those numbers quarterly in the 10-Q. Our gross inflows this year have been substantially lower than they have been historically. We think that some combination of industry issues and some combination of our specification from the investigation that amongst the reason that we are so focussed on finalizing things and putting this behind us so that we can move forward as an organization.

[Michael Carrier:]

Okay, thanks a lot.

[Operator:]

Your next question comes from the line of Bill Katz from Citi. Please proceed.

[Bill Katz:]

Okay, thank you very much for taking the questions this morning. Just coming back to the $500 million, should we think about this as down the line of call-on capital such that the partners could extract the $500 million once you get to the transition period or is that now permanent capital in place?

[Joel Frank:]

Bill look, we are going to assess the cash needs of the business as we move forward, and will determine exactly what we are going to do in relation to calling down the preferred. But as I said you know obviously the details have be ironed out and we’ll give you more information, but the way I would look at it is the business needs a certain amount of cash and we’ll figure out what that is as we move forward.

[Bill Katz:]

Okay, second question is on the cost savings. Could you maybe spend a moment or two to talk about where you expect to get the savings or kind of timeline you get the savings and it sounds to me like talk coming in a non-comp line [ph]. How should we think about comp as we look out into 2017 as a result of some of these initiatives?

[Daniel Och:]

Well there are two things. First of all as I mentioned headcount is down about 10% so I think you’ll see most of the benefits in salaries and benefits starting in 2017. So that will be some reduction there. In terms of non-comp, we are constantly looking at it and seeing where we can save money and of course there are legal fees related to the investigation, so at some point that will reduce, so that will be savings you know obviously if this thing is over sooner than later, that I can give you better guidance going forward. You know I think it’s -- we are always like at the business in relation to economic efficiencies and what the business can do and what it should do and of course its needs, so we’ll evaluate it as we go forward. But you know, again in terms of what I said in 2017 in our expectation on overall expenses our non-comp expenses is $35 million to $50 million and you see some benefit from the headcount reduction starting in 2017. So this is 35-ish million next year could be more just the absence of the legal charges or is there actually deep infrastructure changes that are underway as well.

[Daniel Och:]

Not infrastructure changes, but because of efficiencies we'll say through technology, in other things we've done, we're able to save some money, so you'll see some efficiencies there beyond the legal fees.

[Bill Katz:]

Okay. And then just last question, you've obviously done very nice job and performance on some of the non-multi-strat initiatives. But if I look at your peers they seem to be gathering assets at a much higher rate than you are. How much of that holdback might be just investigation-related or is there an opportunity here to potentially ramp and leverage some of the good performance to really drive some meaningful fee-paying AUM growth?

[Joel Frank:]

Well, it's hard to determine exactly how different factors play in. As we just made clear that is one of the reasons why we are looking forward as an organization to putting this investigation behind us and moving forward. And we believe that in all our product areas our opportunities should improve.

[Bill Katz:]

Okay. Thank you very much.

[Operator:]

Your next question comes from Dan Fannon from Jefferies. Please proceed.

[Dan Fannon:]

Thanks. So another question on the preferred, I guess, does this have any impact on the existing notes that are outstanding? And could you remind us of what the covenants are against those today?

[Daniel Och:]

Well, the bonds we have outstanding, there are no covenants. The revolver, there are some covenants, but we're not going to tie the two together, meaning that, the preferred has being issued to pay the monitory settlement and for general corporate purposes. We'll decide what the best use of any excess cash we have in the business and how to apply it, but that we'll do as we move forward. You know, our focus obviously is to this investigation over. Come to some type of settlement. And then when we have details on the preferred, which you already know is perpetual with a 0% interest rate for three years and not convertible to A units, but if we may have more details we'll give it to you. And as we move forward we'll give you a better guidance on how the cash is going to use and we'll have better sense in terms of what the business needs as well.

[Dan Fannon:]

Okay. Thanks. And then, in terms of your LPs, and Dan, I was hoping if you just give a little bit of color on some of the conversations you guys are having today in terms of kind of longer term allocations. It does seem based on your breakdown that fund-to-funds seem to be the biggest source of redemptions here in the most recent period. But I guess, if you look at that subset of your breakdown, are there areas that you think would shrink more or faster than others and others that might be growing more over time?

[Daniel Och:]

Right now, there are some in the hedge fund industry. There are certainly some overall pressures that I think you're all aware of that have been discussed. Our view is that we've been in this business for 22 years. We always believe that investors will continue to go to the mangers who deliver what they're looking for. Returns risk management infrastructure, operations, consistency, etcetera for 22 years. That's allowed us to be at the leading edge of the industry. And that is our focus. We're going to make sure that we stay there. And as you point out, the fact that we're diversified, the fact that we have opportunistic credit products, institutional only credit products and real estate products give us the ability to grow even if one of our businesses on an industry basis is not fully in favor.

[Dan Fannon:]

Okay. Thank you.

[Operator:]

Your next question comes from Robert Lee, KBW. Please proceed.

[Robert Lee:]

Thanks. Good morning everyone. First question, I know that Joel you've got to go back and asses what your capital needs going to be post settlement and see how everything shakes up. But just maybe at a high level, is it fair to assume that once you pass the settlements that looking ahead whether it’s because of retention roles and CLOs or as you rollout new strategy in credit real estate and maybe elsewhere that you're capital retention needs may going to be somewhat higher than they have been historically? Whether it’s the fund your own commitment, the new strategies or again, CLO capital retention of things like that?

[Joel Frank:]

The answer to that is yes, and I think what you're pointing out is which is a benefit to our shareholders is where there is opportunity for us to invest in new products. Where there is opportunity to do that we're going to do that and we think that actually a huge positive for everybody. And it’s not just CLO retention type stuff. Its new products across the board whether it’s any type of product. And I think you're pointing out that exact point that that is something that this is only cash for and it's something that we might use when we describe general corporate purposes.

[Robert Lee:]

Okay. And I was just curious, I mean, understanding that, a lot of moving parts fundraising right now, not we're just getting the settlement behind you, but I'm just curious, I look at the opportunistic credit to you closed-end strategy, it looks like pretty much all the funds where performance has been good or at the end of through their kind of investing period so to speak? And looks like that's a place where there should be an opportunity for you to have a new fund out there and raising capital. So, is there one thing that you can comment on? Is there one currently? Is that kind of a place that we should look once you get a settlement that you could start fundraising pretty quickly?

[Daniel Och:]

Look, we think the key in opportunistic credit is to only go to raise the capital when you see an opportunity you feel strongly about. Deliver on the performance not just in terms IRR but in terms of a whole dollar return. And then, return the capital to investors when the opportunity has played out. As you pointed out, we think we've delivered at the very high end of all those expectations in all of our opportunistic credit funds, which positions us extremely well to be aggressive when we see the next opportunity. But we don’t by definition we don't raise an opportunistic credit funds because the other last opportunistic credit fund just return capital. We raised opportunistic credit funds when we see things for our clients to do that we feel very strongly about. So, there are a number of things that we're focused on that have the potential to play out. You do note that we are in focus on the real estate credit platform right now. We feel very strongly about that area. We feel strongly about other areas where banks aren't doing some other things that we use to do. We are focused on areas such as energy with the dislocations have created opportunities. And so we think that [Indiscernible] we're not going to raise opportunistic credit funds just because the timing of our last opportunistic credit fund return capital. We're going to do it when we see things that we feel strongly about where we think we can really deliver for our client.

[Dan Fannon:]

Hey, those were my questions. Thank you.

[Operator:]

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

[Alex Blostein:]

Hey, good morning, guys. Sorry, another one around those on the funding or the reserve. So, Joel, just to be clear, if you're saying 414 is the max and you won't expect to do more. You guys are doing little over 100 after-tat [ph] to year and you drew on the revolver I think $120 million, so why raise to 500 perhaps from the partners?

[Joel Frank:]

It’s all about flexibility in the balance sheet until we see resolution of this thing, and then just having that flexibility as we move forward to do different things with business, and we'll determine what we always do. If we have excess cash what the best thing to do with that excess cash for our shareholders, whether that's investing in products, whether that's doing other things, that we'll figure out, but it’s all about flexibility of the balance sheet until we have resolution of this bank.

[Alex Blostein:]

Got you. But the 400 in changes is kind of the final number we should be thinking about?

[Joel Frank:]

Look, as far as we think it's going to be the final number and maybe lower, but we think that's the math at this point.

[Alex Blostein:]

Got you. Great. And then a couple of questions, it's around the business. You guys have a fair amount of accrued but recognized incentive fees in the balance sheet particularly around both the real estate fund as well as the opportunistic credit. What's the environment I guess to exit right now? We've heard from a number of your peers that the exit environment has improved? So, as we think about the timing of recognition the incentive fees to the P&L? What's your latest view on timing?

[Joel Frank:]

Now look, we have about $215 million in accrued incentive. As the opportunities come up, we will exit those investments. And you know to Dan's point we do it to maximise value to our investors, so we can sell something at the right levels or if we think that it's going to go up any further than we'll make the decision. So you can see over time every quarter there is some of this, this quarter was our longer term assets real estate in credit and we'll continue to do that. I can't project exactly what is going to be and when it's going to be, but I think the type of the investors we're focused on maximizing value for those investments.

[Alex Blostein:]

Got you. And last a last cleanup question. As we think about the run rate management fee rate kind of exiting the quarter. Help us maybe given the mix shift in the business kind of thing through the rest of the year, what should the management fee rate be?

[Joel Frank:]

Well, you know the average rate is about 1.28%, you know, if assets come down and our multi-strat funds which are the higher fee-paying assets that may reduce a little bit, but it all depends on the mix, because obviously there – as Dan had mentioned there are not a lot of inflows at this point, but once those things is over I'm not saying it’s going to be the immediately inflow, there will be some overhang, but the mix of assets may change and some of the assets may grow. So it’s – we can't predict what flows are going to be. But at this point, it looks we're at 1.28%. It looks like the multi-strat is the one that's being more affected, so you can kind of make your projections from there.

[Alex Blostein:]

Got it. Great. Thanks guys.

[Operator:]

Your next question comes from Ken Worthington from JPMorgan. Please proceed.

[Ken Worthington:]

Hi. Good morning. Maybe first Dan, you mentioned that you're making some changes to the investment process. Maybe can you give us some more color on these changes that you're making?

[Daniel Och:]

Yes. That something that we constantly doing each of our investment areas, we constantly evaluate what's working, what's not working as well it could. Are there any new things we can be doing, in the multi-strategy fund, particularly in the long showed equity area, largely in the U.S. we've acknowledge that we went throughout the 12 period where our under performance was more than we thought it should be. So, we've been very clear with clients that we're not satisfied with that. We are not just saying it happened and there's nothing we can do. We focused on looking at position size, are there any sectors that particularly under performed. Are there any things that we look at and said, if we could have done it differently we would have. And then commonalities to that, we look at impacts that other markets, this world is constantly evolving and we're very focused both quantitatively and qualitatively on what other markets and other impacts globally are affecting things that they didn't use to impact and making those modifications. So, core investment process, fundamental analysis, methodology of hedging and reducing risk are unchanged. But we have acknowledged to our clients and to you on this call that we're not satisfied with that roughly 12 months period and so we focus deeply everyday on improving thing.

[Ken Worthington:]

Okay. So, have you made actually any changes to long shore U.S or is it just sort of evaluating what's going on?

[Daniel Och:]

The items that I've mentioned and to last question, I meant to be clear that those are types of things that we have changed and modified, yes.

[Ken Worthington:]

Okay. On CLOs you mentioned that the performance through August 1st is really, really good. There is – if I'm correct, no CLOs raised this year. I assume FCPA that is sort of what's holding back maybe additional launches here. And if that is the case once FCPA gets resolved, how quickly can you start to launch funds and raise funds again?

[Daniel Och:]

Look, I think that CLO issuance is dependent more on market conditions and opportunities. We do think that we'll be able to issue more this year. It's just a matter of our market conditions in the right place to do it more than anything else.

[Ken Worthington:]

Okay. Interesting, because what we've seen from your peers as they are still launching CLOs and in a reasonable amount of them? Can you flesh out maybe why you think market conditions aren't good for raising right now?

[Daniel Och:]

Look, it's all about us evaluating the best thing for our investors that include the CLOs. And at this point we are looking at the market. We'll make decisions as they move forward. When we launch the CLO business, we've made clear, our goal was not just raise assets and be as big as we can be. Our goal was to generate top performance and then hopes that that would lead to growth and becoming larger. And so, as Joel alluded, we setup a structure both in the U.S. and Europe where we have the ability to focus on the asset side, focused on the liability side, move in and out when we see opportunity. I think people would agree that 22.6% in today's interest rate environment and fixed income environment is extremely attractive and that's going to continue to be our focus.

[Ken Worthington:]

Okay, great. And maybe just lastly, Joel, how did you fund the reserve this quarter. I know you're planning on issuing the 0% preferred. What sort of bridges the financing that you're using?

[Joel Frank:]

Well, don't forget investigation isn't over yet, so there's no – it just an accrual not an actual payment. And so we think that obviously this preferred which we're in negotiations and discussions about will be able to more than pay that and give us some operating excess.

[Ken Worthington:]

Got it. Okay. Make sense. Thank you very much.

[Operator:]

Your next question comes from Bill Katz from Citi. Please proceed, sir.

[Bill Katz:]

Okay. Thanks. Just couple of follow-ups. Just coming back to the $500 million for a moment. Can you give the sense of what percentage of the partners kicked in or kicking in for this and what if any restrictions they may have in terms of staying with the franchise as a result of this?

[Daniel Och:]

No. We're not done. This is still under discussions and so when we have more details we'll be glad to give them to you.

[Bill Katz:]

Okay. And then just one last from me, and thanks for taking all this morning. On the hedge fund, can you breakdown the attrition between more typical institutional LPs and maybe on the high network side, where you've been selling the equity long short portfolio maybe size the standalone equity long short portfolio as of June 30th?

[Joel Frank:]

If you're talking about capital coming in and out for different types of investor, it's been across the board. Again, it’s the multi-strats, the liquidity in the multi-strats. I think if you look at the quarterly numbers that we put out, you can see the risk that can obviously – if you have any specific questions, just give Tina call, she will walk you through the difference.

[Bill Katz:]

That's right. Okay. Thank you very much, guys.

[Operator:]

Your next question comes from Robert Lee from KBW. Please proceed.

[Robert Lee:]

Actually my questions are asked. Thank you.

[Daniel Och:]

Thanks, Rob.

[Operator:]

Your next question comes from Michael Carrier from Bank of America.

[Michael Carrier:]

Hey, Joel, Just a quick follow-up on the expenses. I just want to make sure we understood. But you look at that $35 million to $50 million just from a timing I just want to make sure we got it in terms of being mostly in 2017, so no impact in the second half. And then, I know taxes are tougher the longer you go out. You gave the update for the second half of this year, but given that you had those synergies, our efficiencies coming in at 2017, any outlook or – preliminary outlook for tax in 2017?

[Joel Frank:]

So, just to be clear, there will be some benefit in the third quarter and fourth quarter, but not material and most of it as I disclosed will be 2017. In terms of – so for expenses most of it is 2017 including the effect of the headcount reduction which we'll see in salary benefit getting 2017. Sorry, what was the second part of your question?

[Michael Carrier:]

Just on the tax rate, you mentioned the second half being elevated, you just given the mix and where your accrued, just want to know if you had any preliminary on 2017, just given if that that was obviously more elevated that it had been?

[Daniel Och:]

Now look, it's too early to tell, obviously it's based on our projection for the year which is total revenue. You know the tax rate affected by the amount of revenue and how it flows through the model, so it's too early to say for 2017 [ph], but we'll give you guidance as we get closer.

[Michael Carrier:]

Got it. All right. Thanks a lot.

[Operator:]

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

[Tina Madon:]

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

[Operator:]

Ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a wonderful day.