Sculptor Capital Management, Inc.
Q3 2016 Earnings Call Transcript

Published: 2 Nov 2016

[Operator:]

Good morning, everyone and welcome to the Och-Ziff Capital Management Group's 2016 Third Quarter Earnings Conference Call. My name is Lisa and I will be your operator for today. Today’s conference is being recorded. At this time, all participants are in a listen-only mode. [Operator Instructions] I would now like to turn the call over to Ms. Tina Madon, Head of Investor Relations at Och-Ziff. Please proceed, Tina. Thank you.

[Tina Madon:]

Thanks Lisa. Good morning, everyone and thanks for joining our call today. With 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 this morning. For a description of these risk factors that could materially 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. With that, let me now turn the call over to Dan.

[Dan Och:]

Thanks, Tina. Good morning, everyone. The third quarter was an important one for the firm. We saw strong performance across our products and strategies which I will discuss more detail in a moment. Let me start by addressing our FCPA investigation. As you all know on September 29, we announced settlements with the DOJ and SEC. These settlements ended the investigation of the firm, without restricting our ability to invest on behalf of our clients. This is a deeply disappointing episode but we have learned from this experience and have taken significant steps to strengthen the firm. We’ve made meaningful enhancements to our anti-corruption program and controls and a substantial investment to enhance our compliance, personnel and infrastructure. We’re now well positioned to move ahead and focus on the future. In connection with the settlements we paid $412 million in penalties and disgorgement which is financed through cash on hand and investment of up to $400 million by certain of the firms partners who are preferred equity issuance. The first $250 million of this investment was completed at the beginning of October and the balance of $250 million will be completed in January, 2017. The size of this investment reflects the deep commitment my partners and I have to this firm. We have a broad bench of senior talent committed to our business. We have a high quality diverse client base with whom we built a strong partnership over many years. We have a longstanding track record of generating strong risk-adjusted returns and a time tested approach to finding compelling investment opportunities. These elements are integral to the success we have achieved over the last 22 years and differentiate us within the industry. Now for a brief update on our quarterly business results, starting with our investment performance. In multi-strategy, the OZ Master Fund had a good quarter and that positive momentum carried into October. The OZ Master Fund generated net return of 3.3% in the third quarter which is strong performance in both absolute and relative terms. Each of our investment strategies and regions generated positive returns during the quarter. Merger arbitrage, convertible and derivative arbitrage, corporate credit and structured credit all continue to build on the strong year-to-date gains. Year-to-date through October 31, the OZ Master Fund was up and estimated 1.7% net. As we discussed on prior calls, the major detractor to our year-to-date performance had been our long/short equity strategy in the U.S. which has obscured the strong returns that our four other strategies have generated. To improve U.S. long/short performance, we have made changes to our portfolio composition, enhancements to our investment process and adjustments to the structure of our equities team. Additionally, over the last few months performance has improved as solid fundamental stock-picking has delivered strong results. Our net exposure within equities has been and remains low as we are not inclined to take significant directional risk with the S&P 500 at nearly 17 times forward earnings. Instead, the bulk of our equities exposure is in situations where we believe uncertainty and complexity, secured the value of the respective stocks. Between the fund’s long-term performance records, the strength in much of the portfolio this year and the enhancements we have made to our equities investment process, we remain highly confident in our ability to drive compelling performance over the long run. Our performance and opportunistic credit is exceptionally strong on both an absolute and relative basis. Year-to-date through October 31, our global credit opportunities fund generated an estimated net return of 14%. And as a top-performing credit fund in its base since its inception nearly five years ago, OZ Co. was generated an estimated average annualized net return of nearly 13%. It is also our second largest commingled fund and a core area of focus for growth. In structured credit, we believe we have an exceptionally strong platform. Our team continues to seek creative ways to extract value from existing asset-backed structures in our portfolio and we have generated high returns from the work out of these types of assets. Additionally, we believe the pullback in the broker dealer community and other traditional sources of capital and structured credit is creating a multi-year opportunity to make excellent risk-adjusted returns. This manifest itself in the secondary markets, during periods of dislocation, as we saw during the first quarter of this year as well as the ongoing market for highly complex assets for which we have become a logical buyer. We believe our ability to extract value from prices at our assets to take advantage of mispriced securities in choppily traded secondary markets and to provide creative solutions for complex credit assets is a major differentiator of our credit platform. In corporate credit, we selectively increased exposure early in the year as credit spreads widened. Given current valuations in much of the asset class we have been selective in adding exposures although we continue to seek out mispriced process driven investments. While we cannot predict the course or timing of the next return to credit markets, we are confident there will be further dislocations both big and small. We believe the excesses of this cycle are most pronounced in corporate credit. Thus the opportunity set when it changes will be large and we intend to capitalize on it when that occurs. We have a demonstrated history of many years in credit of putting capital to work at the right point in the cycle. We believe this track record will differentiate us in the future. In the institutional credit strategies our performance of credit platform, our CLO business continues to generate top quartile performance. After a bit of a break from the issuance market, the strength of our performance has enabled us to successfully get back into the market with new transactions in both the U.S. and Europe. Most market receptivity to our CLO product has been strong. In October, we completed a $500 million refinancing of our second U.S. CLO which was originally completed in 2012. We are currently working on both the European and U.S. CLO that we expect to close will raise approximately $1 billion in the aggregate. We anticipate that we will continue to be active in both the U.S. and European CLO markets. In real estate, the consistency of our long-term track record across market cycles has differentiated our business. We take a broad approach to investing and continue to spend the areas within real estate that we will invest in. For example, our team recently purchased a $300 million senior loan portfolio that encompasses over 500 first mortgage loans back to our retail properties, primarily convenience stores and gas stations which is a new area of focus for us. We also continue to opportunistically harvest investments in certain of our real estate funds, which was the primary contributor to the incentive income we crystallized this quarter. Our energy business is performing well and putting money to work. In early October, one of our portfolio company’s extraction oil and gas went public in oversubscribed IPO and was the first U.S. upstream company to successfully close an IPO since the collapse in oil and natural gas prices in 2015. Now for a quick update on capital flows and our assets under management. Since we announced the investigation settlement late September, we've had a significant number of conversations with our LPs to explain the settlement, walk through the steps we've taken to strengthen the firm and lay out our vision for the road ahead. We believe this communication strategy has worked well and these conversations have been productive. Two factors have been helpful to our discussions. First, many of the details of the settlement had been well publicized in the press. So the actual settlement was not a surprise. And second, we have very long relationships with a number of our clients who know our firm and our values. While we expect fourth quarter redemptions to remain somewhat elevated it is too early to tell what they will do with any specificity because our final notice period for the quarter expires on December 1. There are several factors that will likely influence redemptions beyond just the investigation. As you all know the hedge fund industry is in the midst of a redemption cycle and there was also seasonality which can cause year-end redemptions to be higher as investors rebound of allocation. Lastly, while we've had discussions with a lot of our LPs about the settlement these are by no means completed. We are in the process of having follow-up conversations and answering questions which will take time to work through and reach conclusion. I think it's fair to say that 2016 has been a difficult year. But in the most recent quarter we put one of the most challenging episodes in the firm's history behind us and we saw a significant improvement in performance. We are pleased to see that the performance trend has continued to improve into the fourth quarter. And I'm looking forward to the road ahead. With that, let me now turn the call over to Joel.

[Joel Frank:]

Thanks, Dan. Today we reported GAAP net income of $14 million or $0.08 per basic and $0.05 per diluted Class A share for the 2016 third quarter. You can find a full review of our GAAP results in our press release which is available on our website. Now let me turn to our economic income results. Our third quarter distributable earnings were $198 million or $0.38 for adjusted Class A share. This amount included $144 million reversal of accruals for payments owed under our tax receivable agreement, which I will review in more detail later on. And a $2 million reduction in our FCPA settlement related reserve. Excluding these two items, distributable earnings were $52 million or $0.10 per adjusted Class A share. Our revenues were $139 million down slightly from the second quarter. Of this amount management fees were $120 million, 10% lower sequentially due primarily to the redemptions from OZ Master Fund. Our average management fee for the third quarter was 1.23%. Effective October 1, we reduced our management fee rates for existing investors and virtually all of our multi-strategy assets under management. We began the fourth quarter with an average management fee of 1.01% which is also reflective of the change in the asset mix due to the redemptions in the OZ Master from last quarter. We made this change to further strengthen the relationships we have with our clients with whom we built the strong partnership over many years. We also want to ensure that we remain competitive on management fees which have been gradually trending down for the hedge fund industry. We did not adjust our incentive income rate which remains unchanged at 20%. Please take a look at our third quarter 10-Q, which we’ll file later today for expanded disclosures on the management fee rates. We believe that these will be helpful in understanding our average management fee going forward. Our incentive income was $19 million in the third quarter. The majority of the $11 million sequential increase was due to incentive we crystallized on real estate assets. Now turning to our operating expenses. Our third quarter operating expenses totaled $84 million and continued to trend lower sequentially reflecting reductions in both our comp and non-comp expenses. We will continue to evaluate these expenses to ensure they are aligned with the economics of our business. Comp and benefits was $36 million of which $27 million were salaries and benefits. The remaining amount was bonus expense, which included severance payments. Salaries and benefits declined approximately 6% from the second quarter, reflecting a further reduction in our headcount through a combination of attrition and select position eliminations. Year-to-date through the end of the third quarter, our headcount was declined by approximately 17% and we anticipated small additional decrease due attrition in the fourth quarter. We expect fourth quarter salaries and benefits to be between $25 million and $27 million. The full effect of the 2016 changes in our headcount will be reflected in 2017 which we believe will result in a range for salaries and benefits of between $95 million and $105 million for the full year. Cash bonuses have historically comprised our largest operating expense are based on the total economics of our business over the course of the year. And so we reached the end of the fourth quarter and know what our annual revenues will be we cannot accurately predict the amount of our bonus expense. As always we will assess what you feel is required to properly compensate our employees in light of the competitive environment and other factors. Third quarter non-compensation expenses were $48 million, 6% lower than the second quarter, excluding the settlement-related accrual of $214.3 million we took last quarter. This reduction was primarily due to a decline in professional fees resulting from lower legal and recruiting costs, as well as the effect of additional cost savings incentives that we implemented throughout the year. We expect fourth quarter non-compensation expenses to be between $44 million and $46 million. We continue to anticipate that our non-compensation expenses will decline in 2017 by $35 million to $50 million of our full year 2015 base of $201 million due to lower expenses related to cost saving initiatives and also to the winding down of legal fees related to the investigation. We will update this estimate as we move forward. Our third quarter effective tax rate reflected the impact of the amendment to our tax receivable agreement or TRA that I mentioned earlier, as well as other customary taxes. As we previously disclosed the TRA was amended to waive recipients’ rights to receive payments for the 2015 and 2016 tax years. This created an economic benefit to the firm as TRA recipients gave up rights to approximately $52 million of previously accrued but unpaid liabilities under the TRA. Importantly the firm has no requirements to ever repay the $52 million. This contribution is in addition to the investment of up to $400 million by certain partners in the forms of a preferred issuance that Dan described, the terms of which were also designed to provide substantial economic benefits to the firm. Our third quarter adjusted income taxes reflected the reversal of $144 million tax liability which is previously accrued in order to fund the foregone payments under the TRA for the 2015 tax year and the first two quarters of 2016 tax year. For the fourth quarter, since we will not accrue for TRA payments, we anticipate our tax rate will be nominal. Please see Exhibit 2 in our press release for reconciliations will help you understand the effect of the TRA accrual reversal on our distributable earnings. Although we now have the investigation behind this and have paid the full amount of $412 million monetary settlement, we’ve elected not to pay a dividend in the third quarter. As we begin to move forward after settling the investigation, we believe it’s prudent to retain earnings this quarter to maintain balance sheet flexibility for general corporate purposes, which may include the repayment of our debt obligations, business development and the sealing of new investment opportunities. That said, our intention is to resume paying a dividend in the future. With that, we’ll now open the line for questions.

[Operator:]

Certainly, thank you. [Operator Instructions] Your first question comes from the line of Dan Fannon of Jefferies. Please go ahead.

[Dan Fannon:]

Thanks, good morning. I guess first just the 1.01% I think you highlighted is the management fee for the mix as a result of – I’m sorry, as a result of the changes in terms of the management fees. Is that a function and you also mentioned mix, also just curious as to what the price cuts were – and I know we'll get more disclosures in the 10-Q, but just want to make sure that what that 1.01% referenced?

[Dan Och:]

So the 1.01% reference is the fee cuts which started October 1, but it's also affected by the asset mix. So as the higher fee assets let's say in OZ Master Fund come down the average rate will actually drop as well. Credit assets and other assets have a little bit lower pay.

[Dan Fannon:]

So, pro forma for the price cut was effective for the full quarter that in essence it would be lower?

[Dan Och:]

Yes, the price cut affects it, but also the mix of asset affects it as well. So it's really a mixture of both.

[Dan Fannon:]

Got it. And I get the redemptions or are you kind of a net flow picture is hard to predict. But I guess a little more color on the conversations and kind of how those are going, obviously the price cut is one factor that you guys have control to help kind of keep assets or retain assets. But I guess if you could talk a bit about how those conversations are evolving, some of the concerns and/or also some of the remedies in more detail that you guys have put in place to give comfort to your clients that things are different going forward.

[Dan Och:]

As a general matter, the conversations are productive. You have to remember that we're in constant communication with our clients. You have to remember that much – many of the details of the settlement had been telegraphed. So some parts of the settlement were known before they were announced. And our discussion at the time as you just said, there are about going through some of the details of the settlement, there are about some of the changes that we’ve made at the firm. They’ll also talk about pro forma incentive investment opportunities. So there are different conversations with different clients but as a general matter productive and continuations of the long-term dialog we always have with clients.

[Joel Frank:]

And in terms of some of the things that we've done, just to give you some idea, resources and personnel, we've added to our legal and compliance department selective world-class attorneys, we’ve invested more heavily in compliance, policies and procedures, we've enhanced procedures for due diligence, risk assessment, post transaction monitoring. We’ve created a business risk committee to consider non-investment risks in transactions. We have Board oversight, we've hired, Bill Barr who used to be a former U.S. AG and he's now chair of our corporate responsibility and compliance section of the Board. So we've done a various amount of things just to make sure that we actually drill down and look at everything and have the additional risk assessments.

[Dan Fannon:]

Great. Thank you.

[Operator:]

Thank you for your question. Our next question is from the line of William Katz of Citigroup. Please go ahead.

[William Katz:]

Okay, thank you very much for taking my questions. I appreciated it. Maybe we shall start with the – the distribution policy. So I was thinking about some of your guidance dynamics. Is this just a function of how you thinking about earnings power compensation needs versus cash flow year trends and it sounds like it's on hold for a bit of time, I’m just trying to get a sense of what it might come back in?

[Joel Frank:]

Now look, we’ve just gotten through an extraordinary period of time. We want to make sure that we have some time to assess the needs of the business. And as I said earlier it could – we may need cash for business development, we may need cash, we may want to pay down our debt obligations. Nothing’s been decided. But I also said that, we’ll reassess this in the future. So each quarter, when we get into the first quarter, we’ll reassess what the business needs are and if we feel the right thing is to pay a dividend, we're going to do it, but we need some breathing time before we can actually move ahead and do that. So I think the first quarter we’ll reassess it and at that point we can discuss it again.

[William Katz:]

Okay. Thank you. And Dan you'd mentioned conversations well to be constructed, but the attrition could be somewhat elevated in the fourth quarter. We know sort of October, November already, is there anyway to potentially frame out the magnitude of that elevation and you think that we will be sort of final push of attrition beyond maybe more macro-oriented dynamics?

[Dan Och:]

We don’t have a way to frame it out at this time. As I think our final notice period is December 1. And there are a number of different things going on obviously there are some industry issues that we discussed are seasonal but the conversations with clients, they are productive, they are constructive and we had a very well thought out plan to communicate both during the course of 2016 as well as on the announcement after the settlement. And we think that the – all the time and effort that people put into that planning and the attempts to be as transparent as possible with clients both before the investigation and after was also important.

[William Katz:]

And just one final one, thanks for taking the question this morning. I heard you on the guidance for the full the CLOs as I look at that table. We have a bunch of these things that started back in 2012. How should be thinking about the sort of duration of some of the old advantages and when they might start rolling off, but maybe the net growth dynamic looking ahead.

[Joel Frank:]

Look, I think on an overall basis just related to CLOs, the opportunity is there we’re going to continue to do it. We already told you that some of the dynamics of doing this – we’re already doing something in Europe and obviously doing something in the U.S. So, I think the duration that seven to 10 years on some of those longer term assets especially that so I think we have some time, but we're reflective on continuing to grow in those areas as well.

[Dan Och:]

The other thing – couple of things I'd point out. As I said, as a general matter, these are seven to 10 year duration. We did as we said on the call in October, we refinanced one of our 2012, which was one of our earlier CLOs. We intend to launch a new CLO both in the U.S. and Europe for a total of about $1 billion. So we're definitely in growth mode in the CLO and institutional credit business.

[William Katz:]

Okay, thank you for taking my questions.

[Operator:]

Thank you for your question. Our next question is from the line of Michael Carrier, Bank of America. Please go ahead.

[Michael Carrier:]

Hi, thanks guys. Hey, Joel just another one on the distribution policy. I understand I think this quarter a lot going on and you need to kind of figure things out in terms of reinstating that or paying that out. But I guess is there any way for us to think about maybe how much cash you want to have on hand before you get comfortable its reinstating that because it is obviously for the industry. I think the distribution in the high payouts is something that attracts investors. So I just want to try to figure out what would get you guys more comfortable to get to a position where you can start getting back to the legacy distribution policy.

[Joel Frank:]

I think Mike, I think it’s a little bit less about cash on hand, meaning sure, you obviously you want cash. It's more about the dynamics of the business and what our needs are going to be through the next couple of quarters. And then like I said in the first quarter we’ll be able to reevaluate. So it’s not an absolute number that we’re focused on, it’s more about getting some breathing room, see what the business actually need and then as we move forward then being able to make decisions on what makes sense for our investors across the board. So I think through the next two quarters, we will be evaluating and I think we can reevaluate in the first quarter and see where we are.

[Michael Carrier:]

Okay. And then as a follow-up, just given the shift on the fees, I know in the first half of the year, you did a lot on the expense side to lower kind of the run rate heading into 2017. But has anything else changed or are there any other further steps given the step down in the fee rate? And I think you gave the tax outlook for the fourth quarter, just also wanted to get any sense in 2017, does anything change given some of these changes that took place this quarter?

[Joel Frank:]

Look in terms of the tax rate, my expectation would be that it will normalize in the first quarter, but we'll see, but that would be my expectation on tax rate going forward. And I'm sorry what was the first part of your question again?

[Michael Carrier:]

Just given the lower fee rate in terms of the expense base. In the first half you made a lot of cost changes to lower the run rate heading into 2017. I just wanted to get a sense, is that mostly done or is there other things that can be done given the lower management fee rate going forward?

[Joel Frank:]

Well, it's not even just the lower management fee rate, we have to obviously evaluate total revenues, but what we'll always do, we're always focused on are the economics of the business. So of course, we are always going to look for cost initiatives and if we need to make other changes, we'll do it. We have nothing specific right now, but as we move forward and evaluate where we are and where the business is, of course, we will adjust it accordingly. So that's something we're always focused on. We're constantly evaluating it and economic business is obviously important. So we will be focused on that. And again, we'll continue with any cost initiatives that we can do and any adjustments that we need we'll do going forward and obviously we'll talk to you about them.

[Michael Carrier:]

Okay. Thanks a lot.

[Operator:]

Thank you for your question. Our next question is from the line of Robert Lee of KBW. Please go ahead.

[Robert Lee:]

Thank you. Good morning. Just couple of questions. First one, are there any other regulatory things you need to go through, maybe at the state level before you can fully start marketing different entities release across the countries, are there any other kind of interim hurdles you have to kind of clear in the next couple of months?

[Joel Frank:]

Well look, the answer is no. We are going to offer our offshore funds under Reg S. We offer the domestic funds under Section 482 of the 43 Act, and our lawyers are looking through them, and obviously if we come – if there are any issues, we would let you know, but right now, we are marketing the way we normally would and again, if there are any issues, we'll come up with it, but we don't see anything at this point.

[Robert Lee:]

Okay and maybe follow-up question on fundraising. You obviously mentioned the CLOs, they are in process and clearly have very good credit performance. So are there any current plans or maybe starting marketing for any news – closed end credit strategies, whether it's opportunistic or anything else?

[Joel Frank:]

Well, we don't have anything to discuss around at this time, but credit is an area – we're in growth mode in credit and our performance in credit has been extremely good both on the opportunistic side. We've done really well on opportunistic funds both in terms of timing – capital, the ultimate performance and then returning capital. I mentioned OZ Co., our credit hedge fund has a terrific five-year record as well as a one and three-year record and the institutional long only is also a top-performing. So we're in growth mode. When we see opportunities, we're going to focus on them. I think you know we've talked about the real estate credit fund, which is what we're currently focused on, but as we see things, we're going to do them.

[Robert Lee:]

Okay, thanks. And maybe one – another question on capital management. So, hearing your comments about how you think the liquidity and capital retention for business needs, but can you maybe frame for us where debt reduction stands within that – obviously you have grew some cash down the line of credit, earlier I mean you do have some addition to partners preferred, you have – I think the $400 million of the outstanding debt comes due in a few years. So just thinking that kind of want to tackle the line of credit, maybe build cash next couple years, that when – that comes to due, you can kind of take care of that before you have to start dealing with the partners firm?

[Joel Frank:]

So, look we have no specific plans, but as I said earlier on the line of credit, it's something that we don't plan to have outstanding for a long period of time. Of course, we're focused on the balance sheet and what we need to do. We have no plans to retain cash in order to pay that down, but we'll evaluate what we can and what we should do over time and we'll be well prepared by the time we get to the point of maturity on the notes.

[Robert Lee:]

Great. Thanks for taking my question.

[Operator:]

Thank you for your question. Our next question is from the line of Patrick Davitt [Autonomous Research USA]. Please go ahead.

[Patrick Davitt:]

Thanks for the time. Obviously been a lot of chatter from the rating agencies. I'm just curious where your commitment stands on staying investment grade? And second, how important that is from the standpoint of your LP, remaining committed to the funds?

[Joel Frank:]

Well look, in terms of the credit agencies, we're talking to them all the time. We know what the dynamics are and we're focused on making sure that we properly manage the balance sheet. In terms of the LPs, in terms of the credit rating, never had a discussion with them about the credit rating. They're obviously focused on performance and what we do and how and what we do in terms of the dynamics of the firm.

[Dan Och:]

You have to remember that as we said, the partners just invested $400 million into the firm. The terms both in terms of the interest rate and the fact that it's a perpetual design to be very Company-friendly were designed to make a very strong statement both to the partners and employees as well as to the LPs, credit rating agencies, all of you on this call about our belief in the firm, about the stability of the firm, about our long-term view of the firm and we think that's been impactful.

[Patrick Davitt:]

Thank you.

[Operator:]

Thank you for your question. Our next question is from the line of Ken Worthington of JPMorgan. Please go ahead.

[Ken Worthington:]

Hi, good morning, and thank you for answering my questions. Maybe for Daniel, now that the settlement is out and the SEC is released its findings, which I guess arguably one sided. I wanted to ask you about what your side of the story is more generally in the settlement. And then specifically the SEC indicated that there was certain approvals dealing with certain people with – reputations maybe against the advice of counsel, again, what is your side of the story there?

[Dan Och:]

Well, I hope you appreciate that we're not really in a position to comment publicly our statements. We've got a press release that we put out. We have some other comments. I hope you understand that as a matter of procedure, we really just have to stick to those comments.

[Ken Worthington:]

Okay. Okay. My other questions were asked and answered. Thank you very much.

[Dan Och:]

Thank you.

[Operator:]

Thank you for your question. Our next question is from the line of Alex Blostein of Goldman Sachs. Please go ahead.

[Alex Blostein:]

Thanks good morning, guys. Thanks for taking the question. So just a follow-up around the preferred. I don't think I was 100% clear on your guidance expectations longer term with respect to the cap structure, so should we expect you guys to try to repay this down before the interest rate kicks in, is the rate on the pref adjustable rather. So I think there is a stop function up in a couple years. So as we think about the uses of cash over the next several years, is ultimately taking down the prefs a priority for you guys before the interest goes up.

[Joel Frank:]

Well, the interest rate doesn't step up for about three years and it steps up to 6% and we'll evaluate it when the time comes. Don't forget this is a partner-friendly contribution to the firm. It's structured in a preferred, but remember the partners actually providing the money to the firm and we'll see where we are three years down the road from it, but I know the question is in terms of capital, are we going to paying cash on the balance sheet to pay down all this stuff or whatever. We're in the process of deciding. We have no plans to retain capital on the balance sheet. I told you we're going to evaluate our dividend policy in the first quarter, but we're focused on all the stuff. We understand people are looking for specific plans in all the stuff. As we move forward over time we'll figure out what we need to do and we'll let you know, but right now, that's where we are, we're going to have some breathing room for the next couple of quarters. First quarter, we'll re-eval our dividend policy and as we move forward, we'll be able to give you more information on what we're going to do and how we're going to approach it.

[Tina Madon:]

And Alex, its Tina. Just one thing to add to that, I mean here is – for the firm, they have the use of $400 million that is zero percent interest rate for three years. So the option of redemption feature in there doesn't make sense to take advantage of if you have free capital for three years unless circumstances change materially. So just keep that in mind. I mean and even when the step up happens, right, the rate is still very Company-friendly at that point in time. So you should be looking at it in that context.

[Alex Blostein:]

Yes I understood, just trying to think through the longer-term capital structure of the business. The second question I had just around the response on the management fee reduction, obviously you guys been close conversation with clients, so just curious what the response has been to the reduction and then ultimately do you think this partially help stabilize the assets or is that ultimately a performance issue and just the hedge fund industry broader issue. So unless you do something significantly more drastic the management fee rate, it sort of unlikely to move the needle from a AUM cash perspective?

[Joel Frank:]

The adjustments were well received by clients particularly the fact that we were proactive and it was our acknowledgment that there are things going on in the industry and it's appropriate to adjust. The second part of your question is something that's very important that I wanted to highlight and its something that we focus on internally and I think even focus on externally. Och-Ziff is and has always been a performance organization. That is where it begins and ends. We've got a 20-year history of performing for clients. It's what's enabled us to grow, its what's enabled us to create new businesses and everything you've asked about that's important, whether it's flows, dividend policy, expenses, capital structure, performance that right. When we perform, obviously that has positive impact on flows. When we perform, we generate incentive, which has very, very positive impacts on cash flow, capital structure et cetera. So everything we've talked about on this call is of course very important, but I do want to remind everyone that we know internally that Och-Ziff is a performance-driven organization. We believe we have performance in the right direction. We are intensely focused on it and we believe that is going to move things in the right direction.

[Alex Blostein:]

Got it. Thanks so much.

[Operator:]

Thanks for your question. Ladies and gentlemen, that concludes the question-and-answer session today. I’ll now turn the call over to Ms. Madon, please go ahead.

[Tina Madon:]

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

[Operator:]

Thank you. Ladies and gentlemen, that concludes today’s conference call. You may now disconnect your lines. Have a great day. Thank you.