Sculptor Capital Management, Inc.
Q3 2015 Earnings Call Transcript

Published: 3 Nov 2015

[Operator:]

Good morning, everyone, and welcome to the Och-Ziff Capital Management Group's 2015 Third Quarter Earnings Conference Call. My name is Kathy, and I will be your operator for today. [Operator Instructions] I'd now like to turn the call over to Tina Madon, Head of Investor Relations at Och-Ziff. Please proceed.

[Tina Madon:]

Thanks, Kathy. Good morning, everyone. And welcome to our call. As usual, joining me today 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 2014 Annual Report and the press release we issued earlier today for a description of the risk factors that could affect our financial results and 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'll 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, I'll now turn the call over to Dan.

[Dan Och:]

Thanks, Tina. Good morning, everyone and thank you for joining our call today. The third quarter was challenging for financial markets globally. Volatility increased to levels not seen since 2011 and most major equity industries posted sharp declines in reaction to increased concerns on a number of fronts. The mark-to-market affects, these factors slowly hurt the recent performance of the OZ Master Fund. This was largely due to our equities portfolio which we believe is currently undervalued given the fundamentals. Despite challenging markets, we are confident in our investment process and optimistic about the prospects of our portfolio. We believe that the current environment plays to our strength as fundamental bottoms-up investors and would enable us to generate positive, absolute returns for our LPs. With few exceptions, we haven't changed our assessment of the embedded value for most of our strategies. We like what we own and have taken advantage of the recent market dislocation to increase many of the ideas we feel more strongly about. On the credit side, the increase in volatility and widening of credit spread has driven asset prices down which creates investment opportunities for us. This plays the investment mandate of OZ-CO, our global opportunistic credit fund. OZ-CO invests across the credit cycle taking advantage of dislocations and then the resulting deterioration in asset values. Turning to our new business initiatives, we recently launched a Long/Short Equity Usage Fund. Usage represents a very interesting opportunity for us and we are excited about its growth potential. The size of the alternative market is currently over $200 billion, with a typical incentive and management fee structure. The product structure and investor demand match up well with our ability to invest in liquid strategies across multiple assets classes and geographies which gives us a competitive edge. This new fund will target European institutional and retail investors and will be distributed in partnership with Lyxor Asset Management. A leader in the distribution of alternative investment products. We plan to launch complimentary usage funds in the future. In credit, in addition to growing OZ-CO and our other opportunistic funds, we continue to expand institutional credit strategies or performing credit platform. ICS represents an important source of long term AUM. When this platform reaches scale, we believe it can generate attractive pre-tax margins. This investment area is also accretive to our credit strategy overall because it enables us to participate in the credit markets across cycles and a following expanded universe of investment opportunities. We continue to make progress in our partnership with NorthStar Asset Management, a leading global provider or real estate related alternative investments. We are in the registration process for a non-listed BDC and a closing credit fund that we will sub-advice. We believe that combined these products can eventually grow to a substantial amount of AUM. Building on the success of our U.S. ICS business, we are expanding into performing credit in Europe, with an additional focus on European CLOs. With the typical duration of about seven years, this type of AUM is an attractive source of long-term capital, and is highly profitable as we reach scale. Overtime we believe that our U.S. performing credit platform which currently manages $7 billion of assets could grow to $20 billion plus. And our European platform could be another several billion in AUM. The North American Private Energy Sector is also an important focus. Overtime we believe that this can be a very large growth opportunity for us given the scale and capital intensity of this sector. We have built a successful private equity business over the past 10 years, investing capital primarily through our multi-strategy funds. Our energy team is focused on investing in North American middle market energy situations across the energy and power mid-stream and energy services sub-sectors. We have added senior investment professionals to the team over the past year to expand its capabilities, relationships and leadership; and we opened a Houston office this summer to increase our presence in the energy patch. These are just a few areas of potential growth for the firm and they represent very attractive incremental sources of earnings growth. We are always evaluating ways in which we can take advantage of our investment expertise in global scale to create value for our LPs. With that, let me know turn the call over to Joel.

[Joel Frank:]

Thanks, Dan. Let me start with a quick recap of our third quarter economic income results and our share repurchase. We $66 million in distributable earnings in the earning or $0.13 per adjusted Class A share and a dividend of $0.04. Our non-comp expenses came in slightly better than we had anticipated, so our pre-tax economic income of $112 million was essentially flat for the second quarter. However, our quarterly adjusted tax rate was 41%, a significant increase from the 17% rate in the second quarter. Our annual effective tax rate is affected by the amount of incentive income we earn for the year relative to the amount of management fees. Although we can't predict performance, our current expectation is that the annual incentive income will be lower for 2015 than it was in the prior year. This will result in a higher effective tax rate for the fourth quarter and we estimate that will be in the range of 24% to 28% on a full year basis. We repurchased approximately 4.6 million Class A units from two former partners of the firm at $5 per share which represents a 32% discount to our closing price yesterday. We are convinced our stock price doesn't reflect the current value of our business or the value of its future growth and forward earnings potential. We took advantage of an opportunity to repurchase shares at a discount to the current price and we will consider additional opportunities to repurchase shares in the future. Now few comments on fourth quarter expenses, our operating expenses which is comprised of salaries and benefits and non-compensation expenses were 51% of our management fees in the third quarter. Next quarter we are estimating they'll be in a range of approximately 52% to 56%. Our non-comp expenses will stay elevated in the 35% to 37% range because of the legal fees we are incurring in connection with our SCPA investigation. At this point we anticipate this increase normalizing in mid-2016. Our other major fourth quarter expense is bonuses. Over the past several years cash bonuses have ranged from 19% to 22% of total revenues. We especially feel as required to properly compensate are employees but expect cash bonuses be on the higher end of this range. For pursuing a number of new business initiatives that represent significant opportunities for us to grow over the long-term, high margin and expand our distribution. We are focused on substantial markets where we can leverage the competitive edge that comes from our ability to invest across multiple asset classes and geographies. Our new usage fund is a good example of this, our focus on North American private energy sector is another. Equally important is the contribution for our multi-strag credit and real estate funds which will continue to be important contributes to our future asset and earnings growth. We have a leading presence in the market for each of these products building on our 21-year track record of delivering significant value to our LPs. We are excited about our future growth in earnings prospects. We believe that our new products and other ideas we are working on be accretive to our existing business, drive strong net inflows overtime, and be highly profitable as we reach scale in these areas. This in turn will create significant value for shareholders. With that, we will take your questions.

[Operator:]

[Operator Instructions] The first question comes from the line of Dan Fannon of Jefferies.

[Dan Fannon:]

I guess if we could just talk about the buyback first and Jim, if you could give us a little bit of context behind the purchase in the quarter and I think you mentioned you've consider other buybacks going forward and -- just curious, how you're thinking about buying from employees versus the open market, and how we can think about balancing the dividend, your float., and other kind of factors you've talked about previously.

[Dan Och:]

Well, obviously all the factors that you talk about are something that we take into account but when we see there is an opportunity to buy back stock at a very good value, we're going to do and in this case there was some form of partners that were looking for a liquidity and we have the opportunity to do that whether we're going to -- if that opportunity comes up again, of course we will do it, if there are other opportunities, we will assess that but like anything along our dividend policy, we expect it to stay the same, the difference is as we find opportunities that we think are of real value to our investors as oppose to distributing the cash we're going to do it and this is one of those case.

[Dan Fannon:]

But I think you even said in the prepared remarks that you thought the stock was of good value even at these levels. So I guess the -- what your thought -- so open market purchase is not something you would be considering at this point?

[Dan Och:]

No, I wouldn't say that we wouldn't, it's going to depend on opportunity and availability, and it's something that we constantly discuss. So I can't say no and I can't say yes. If it's something that we think its real value, it's something we consider.

[Dan Fannon:]

Got it. And then further Joel, your comments about mid-2016 with the non-comp expenses being elevated, that's a push out, a little bit it seems from your previous comments. So timing around potential -- closure of the investigation, is that now pushed towards mid part next year?

[Joel Frank:]

Look, we are hopeful the investigation would be over by the end of the year and the non-comp expenses would be normalized by then. Although we're focused on resolving, this is a government moves that has its own pace and therefore specific timing isn't always predictable. At this point yes, like their best guess is mid-2016.

[Dan Fannon:]

Great, and then I guess just lastly, if you could give us some comments or specifics around gross sales trends. In the in the quarter we've seen the net number -- I think we skipped the gross numbers in your queue but is it still a gross sales issue or are you seeing redemption activity also. Picking up just some color there would be helpful.

[Joel Frank:]

Look, I think on an overall basis it adds inflows. It's hard to say exactly why people -- either they are outflows or inflows but each investor makes his own decision based on a number of factors. Like, across the Board we have a 20-year history of performance, periodic adds inflows, and we have a bunch of new products that people are interested and have good conversations with investors. So we're very comfortable that going forward things will continue to evolve. And with our new products we're very comfortable with the conversations and where we're going in terms of running those new products into distribution.

[Dan Fannon:]

Great, thank you.

[Operator:]

Thank you. The next question comes from Robert Lee of KBW.

[Robert Lee:]

I'm just curious Joel, maybe the big jump up in the tax rate in the fourth quarter -- just kind of curious what kind of drove that, it was in a sense was so much higher than it's generally a month?

[Joel Frank:]

Yes, basically – Rob, you know how the model works. If the incentive flows through differently than management fees on a lower tax basis, so the higher the incentive, basically the lower the tax rates going to be. We have to make a projection for the year in order to come back to our quarterly financials and so our projection is even though we can't predict performance and never can, that incentive for the year might be a little bit lower because of the volatility in the market that's going to affect the tax rates at all, in fact the third quarter tax rate which will affect the annual tax rate. Does that makes sense?

[Robert Lee:]

Yes. So I guess in that -- in fact it was kind of somewhat of a true-up exercise in the quarter…

[Joel Frank:]

Rob, what you're going to do based on -- exactly, what you're going to do based on how the things change, how performance is, how the markets are. So we're constantly doing that and we have to.

[Robert Lee:]

All right, great. I'm just curious as I look at real estate and credit, could you highlight what kind of dry part or maybe you want to call it shadow AUM, you've kind of have that to deploy of maybe -- is an earnings earning fees yet, if you have anything like that?

[Joel Frank:]

I mean look, we don't break out that kind of information but what we're doing in each of these sleeves is taking advantage of the opportunities that we see within credit, within real estate in order to expand those misses and expand what we do. And the CLO market is a good example of that, even the usage market which is not part of real estate or anything like that, and any of those particular sectors where we see opportunity and we can take advantage of it, that's what we're going to do. So this is not -- you could see from our press release it's like $280 million of unrecognized incentive, whether there is more inventive incentive down the road, of course they'll be because you'll -- hopefully, there will be earnings even though we can't predict that. So right now I think you have -- you kind of see what we have and if there is more information we needed down the road we'd be happy to.

[Robert Lee:]

Okay, those are actually my two questions. Thank you.

[Operator:]

Thank you. The next question comes from Bill Katz – Citi.

[Bill Katz:]

Thanks so much, appreciate taking the questions. Just coming back to the guidance on the non-comp being extended out to second half of next year, I would think that year-end of things would probably relatively static, you say the government is moving a glacial pace. Is it there been a worsening in the discussions that leads to the extension of the timeline?

[Dan Och:]

There is no change in what's going on, it's really more about how these things move along, the government taking its time to finish what it needs to do but no material change in anything. So again, it's not -- if we want to get it done, we're focused on getting it done; they have to complete what they need to do. So we think the best guess right now is mid-2016.

[Bill Katz:]

Okay. And just coming back to flows from a moment, can you just give us a sense of where you're seeing strength versus weakness; I don't know if you could do it on a gross sales level or net sales levels, if you can do it by distribution channel. Just trying to frame out if there is any visibility for an upturn in flows, particular in the Master Fund side?

[Dan Och:]

Look, I think in terms of Master Fund, it's hard to know exactly what affects flow, like I said before each investor makes his own decision based on many factors, so it's kind of hard to say. But look if we continue to perform we think that product along with our current products are going to do very well. And as I said, as Dan said and as I said earlier, we have a high level of interest in our new products and we're expanding our distribution channels which I think will be important in relation to flows going forward. So that takes some time and again, when that's actually going to hit we can't predict but we think -- we feel very positive, especially based on our conversations with investors and how we see these new things progressing.

[Bill Katz:]

I'm excited to press the point but is there any reason to think that the attrition trends in the Master Fund are going to abate, obviously you've disclosed October/November volumes or these imply in some cases, it's not really to point at any kind of stability, so I'm just trying to understand -- your footings are strong but your flows are not as robust. Where do I get the comments if this thing turns anytime soon?

[Dan Och:]

Bill, if you look over our 20-year history on the multi-strategy fund, master fund, we've consistently performed and the fund has consistently grown and if you look at the 20-year history you see that. As we discussed there are absent flows within that asset growth. We are very confident -- first of all, we feel very good about our portfolio. We would have liked better performance during the recent market cycle but we believe that what happened is that our equity portfolio underperformed its fundamentals. We think we've added conditions that we like, we film very good about going forward performance in the structure of the portfolio, and every time for the past 20 years that the Master Fund AUM has absent flows [ph], it has always returned to consistent steady growth. We are confident based on discussions with LPs and other factors that, that will that will resume.

[Bill Katz:]

Okay, thank you guys.

[Operator:]

Thank you for your question. The next question comes from Patrick Davitt of Autonomous.

[Patrick Davitt:]

Even if you include the diversion of cash to the payout, it looks like the payout ratio keeps kind of coming down, now to the 65% range. Could you talk a little bit about what is driving -- I guess the need to kind of keep a little bit more of that cash internally?

[Dan Och:]

Let me walk [Multiple Speakers] I'm sorry.

[Patrick Davitt:]

When you go back to say 2011 which was another year where the performance it was tracking low, it looks like you kept it at 90%. So what's different this year?

[Dan Och:]

Actually not much different and let me walk you down what we're doing in and the slight differences. So $0.02 which is basically what we've always done relates to either CapEx, RSU Holding and related taxes, that hasn't changed. About $0.03, we keep back for general corporate purposes which is funding new products, so that's something that we started due for the last couple of quarters, that's something we talked about on our last call. And then $0.04 sketch is related to the buyback. So that's kind of the walk down. And I think it's pretty much consistent because we don't plan on changing our dividend policy, we plan to distribute the majority of the distributed earnings but where we see opportunity, whether that's investing in new products, whether that's buying back shares, and we think that's more valued than distributing the cash we're going to do it. So it's not a change in distribution policy at all, it's a matter of where do we think there is opportunity for investors and if that's investing in new funds of other corporate purposes or we think the buyback in this case was of real value that's we're going to do.

[Patrick Davitt:]

Okay, that's all I've got. Thank you.

[Operator:]

Thank you. The next question comes from Mike Carrier - Bank of America Merrill Lynch.

[Michael Carrier:]

Thanks, guys. Just on the buyback, is there -- when you think about like the opportunity that came up in the quarter, are there other shares that are out there that will invest over the next one to two years where you could potentially have that opportunity -- I guess, I'm just wondering is there any way to gauge that potential opportunity?

[Dan Och:]

Not really, I mean it's very hard to gauge and it depends on each investor, each partner rather, and where the opportunities are, whether that's through partners or otherwise. It's a hard thing to gauge but if the opportunity presents itself we're going to take advantage of it because we think that's a real value to our investors.

[Michael Carrier:]

Okay. And then just on the quarterly -- I guess net outflows over the past couple quarters, I just wanted to get a sense of when we look at the overall performance across strategies it's still relatively good versus the benchmark to those strategies. So just wanted to get a sense, when you look at this string of outflows is there any concentration that you've had in certain clients that are reallocating certain geographies, anything that would make it different versus some of the industry trends that we're seeing from a flow perspective?

[Dan Och:]

I wouldn't say there is anything specific in terms -- investors obviously, we have bigger concentration with certain investors and like I said earlier, it's hard to know exactly why there the outflows; there are many variables that affected as each investor makes a decision. And I think -- again, our focus is having good conversations with them. As Dan said performance, continued performance, there will be abs and flows; there will be reasons why this stuff happens. We had a great year last year and there is a lot of market volatility, there is a lot of stuff going on, so I think that is going to vary but continued performance and our expectations is, our products will continue to grow and we have -- as we've said before, there is a lot of new offerings in new distribution channel, so we're fairly comfortable.

[Michael Carrier:]

Okay. And then last one, just on the performance of the Master Fund. And Dan you mentioned, you're still confident in the portfolio and you got the long-term track record. But just more curious, when you look at how the portfolio acted in August-September, anything that you've seen kind of the similar scenarios in past, market environments where you have a big spike in volatility or things there a little bit out of whack. Just wanted to get your perspective on -- like, generally the fund tends to do well when you've got either weak markets that holds up relatively well. So I just wanted to get your perspective on why it might have acted the way it did? And then, relative to the past you've seen certain environments where it's done this, and then obviously the long-term track record speaks for itself.

[Dan Och:]

Well, what happened was as -- as a fact of the matter, the long-term equity portfolio has overall underperformed. That is what happened. We've seen that happen before occasionally, in all of those cases, it's all right about the fundamentals, we have -- and almost in all those cases not only recouped out the mark-to-market but we generated out for going forward. We're confident this is another one of those periods, it's not -- we've seen this happen in periods the market goes up, in periods the market goes down. This was wider than some of the others but it's happened in the past and we feel very good about where we are.

[Joel Frank:]

Right, it creates opportunity for us and I think that stands point in terms of -- it creates opportunity to me, you can add on to the positions that you think are fundamentally sound. And to his point of mark-to-market that will turn around and there will be recovery, so we're really comfortable with our portfolio.

[Michael Carrier:]

Okay, thanks a lot.

[Operator:]

Thank you for your question. The next question comes from Craig Siegenthaler - Credit Suisse.

[Craig Siegenthaler:]

Thank you, good morning. I have a longer term question here for Dan. I'm just wondering, can you comment on what you're seeing in terms of pressure fee structure and what you expect in the industry? And do you think the two-twenty structure is at risk for a large part of the industry just given performance over the last few years?

[Dan Och:]

We're not saying pressure on our fee structure. I think you've seen that in our different products. The only change we're seeing all is product mix, we think that's going to continue to be the case. So I can't really comment on the industry because I'm not privy to others, we haven't seen anything in the industry but we wouldn't have a better look into that than the industry but you've seen -- you've seen different studies in different surveys that we believe show that -- first of all, there has been very little change in the industry established managers with long-term track records who are building their businesses and creating more and better opportunities for LPs along with institutional infrastructure continue to be in greater and greater demand, and we're not seeing anything on that front at all.

[Craig Siegenthaler:]

And then just a follow-up on flows, and you can relate this either to Och-Ziff specifically or the industry but there is likely to be some large outflows in the industry just given what performance has done and I'm wondering do you think most of that will be recaptured into a liquid ops [ph] like credit and real estate we have products that are growing?

[Dan Och:]

Difficult to say -- for us on the institutional side as a general matter, the people who make decisions, specific allocation decisions in credit and real estate are separate from those who make decisions in some of the hedge fund areas. Having said that with a lot of our large relationships they also view on overall Och-Ziff relationship but I think institutionally as a general matter, the areas you mentioned; credit, real estate and liquid hedge funds, the decisions are made in each of those sleeves by separate people, however, the CIO and the Board has an alternative structure. So I think we'll say, our view is, let's make sure that in each area we're offering the best product, the best team, and communicating that to clients and potential clients in the best fashion. So whatever does occur, we're in the best position to capture.

[Craig Siegenthaler:]

Thank you.

[Operator:]

The next question comes from Alex Flowstien [ph] of Goldman Sachs.

[Unidentified Analyst:]

Thank you, good morning. A question for you guys in some of your liquid strategies that you're pursuing, both in credit and real estate. I was wondering if you can give an update on, kind of the timing and potentially the magnitude of what the next generation fund could look like. Are you in the market fund raising anything or planning to be in the market fund raising anything and either one of those products over the next 12 to 18 months?

[Joel Frank:]

I mean look we are in the market in a couple places which I can't comment, we have a real estate credit fund I can't comment on details there, and we did talk about an energy fund but I can't go into a lot of details on that either. Also we are doing some work with NorthStar on a BDC close-end fund which we think will close sometime mid-2016, usage fund which is not a liquid-type thing. But the usage market as Dan mentioned is quite large, and we just closed on a new usage fund. So there is a lot going on, I can't give you a lot of detail in terms of timing and size but from what you've heard from Dan and from my sub, you can see there is a lot of activity, and what we're trying to do as I said earlier, is take advantage of all these different asset classes where we have expertise build on them because they are higher margin products, because you don't have to add a lot of investment professionals once it's build out, you know don't have to add a lot of infrastructure costs, and so they -- and once you get to scale and as you move up to scale, that would be higher margin products, and some of the stuff we're building obviously is not quite there yet but when it gets there it's a positive. And so I think that there is a lot going on and hopefully, we'll be able to tell you more in the future.

[Unidentified Analyst:]

Just to double check, I guess, on the payout overall and I get what said earlier just in terms of the timing and different sources of capital usage that you guys see. But it looks like even including the buyback overall payout this year-to-date is on the high 70% you guys are consistently well over 90%. So I'm just not exactly clear why it's striking meaningfully lower relative to last couple years?

[Joel Frank:]

Again, let me take you through it so we can -- so you can understand. We've always had around $0.02 which we kept for CapEx, for our issue with holding and related taxes. The $0.04 buyback is something that's unusual, that we did this quarter that we haven't done. And $0.03 for the last couple of quarters we've kept back to invest in new products and for general corporate purposes and so where we feel that it's of more value for us to take it and invest it or use it for other purposes, we're going to do it. So it's not a change in dividend policy, it's how we -- and I've talked about this in the past many times, we sit here and we always think about what's the best value for our investors; is it paying everything out, is it doing a buyback at $5 a share, and we'll make that decision and where we think there is real value to investors and we'll continue to do it. If we think that paying everything out is the right thing to do, that's what we're going to do. So we really haven't changed anything other than the fact that we're taking advantage of opportunities that we think will be of real value for the business and our investors.

[Unidentified Analyst:]

Okay. So I guess just taking the buyback and dividends as one item and maybe keeping CapEx and things for business expansion as a separate item. Given the opportunity said that you guys see for yourself for the next 12 to 18 months is that kind of; call it 80% total payout more reasonable between both dividends and buybacks?

[Joel Frank:]

Look, the thing I'm not going to do is project because like I said, every quarter we are going to figure out what's the best thing for our investors, and we'll figure it out. But the distribution policy has distributed the majority of this earnings unless we think there is more value elsewhere.

[Unidentified Analyst:]

Got it. All right, thanks.

[Operator:]

Thank you. The next question comes from Ken Worthington of JPMorgan.

[Ken Worthington:]

Hi, good morning. If you stripped out the regulatory and legal pause, what would G&A have been this quarter, it seems like you're expanding -- just wanted to kind of right size our expectation when the FCPA issue sort of come to an end?

[Dan Och:]

Ken, you know what we'd all do is when it does start to come to an end and we can normalize in numbers, I'll give you guidance. I think that's the better way to look at that rather than breaking down the numbers. So going forward as I always say I'll do, I'll give you guidance if I have expectations that the numbers will be coming down and come to more normalized level, I'll give you those numbers then.

[Ken Worthington:]

Okay. It does seem like you're still spending a good amount of money on legal costs in it and it would appear as we try to back into it that the spending has increased. So I respect that things are moving at a glacial pace but it seems like something is happening because you're definitely spending what seems to be a fair amount of money. Are there meeting still taking place or is it just background work that's being done? Can you share anything more than what you've done thus far with us on the topic.

[Dan Och:]

There is really not much more to say, the -- it's a process that just takes a good amount of time and if we get our business is growing too so that also affects non-comp expenses although not as materially as this. And there is not more detail I can give you, when there is more detail I can give you, we'd be happy to do it. But at this point it's just a process that we have to go through when it continues and there are costs associated with it. But the increase in non-comp, although a lot of it and the majority of it relates to that as not all relates to that, there is also some increases because it worsen the business.

[Ken Worthington:]

I believe you also mentioned that cash bonuses would be at the high end of the range this year. Why high end versus low end, what drives that?

[Dan Och:]

It's my expectation although I can't pinpoint because I don't know what performance it's going to be and we have to see where the firm is at the end of the year. I think I kind of aligned of back -- like if you look at 2011 kind of a similar year although I don't know where we're going to end up, so I'm trying to give you the best guidance I can. No way for me to predict it, no way for me to know where we're going to end up at year-end, what performance it's going to be. But I'm just trying to give you the best guide as I can in terms of what I expect based on where we are right now, and obviously that can change based on the economics of the firm.

[Ken Worthington:]

And I'll try to ask in terms of the expansion to energy, I think you alluded to -- actually dedicated products here as opposed to just contributions to existing. But as the focus on equity -- do you think it's equity and then maybe expanding into credit or the close-end structures, anything more in terms of kind of what you think that business will look like as it develops?

[Dan Och:]

All of the above, I mean energy is up, energy is similar in size to real estate. It's -- we're talking about hundreds and hundreds of billions of dollars of potential. We have capabilities in what would be called the private equity side, we mentioned we've been doing that in multi-strategy funds, we've got very strong capabilities on the credit side, we've got very strong capabilities on the equity side, we just added senior personnel in open-office in Houston. And just as in real estate, in real estate our primary focus was on the equity side with a private equity focus. But now that the world is offering opportunities on the credit side, we're well positioned to pursue it. On energy, we think it often -- that would be all of the above and it's a very substantial opportunity.

[Ken Worthington:]

Okay, thanks. And then last question, the enhanced Master Fund seems to be trailing the other suite of Master Funds, so maybe just discuss what in that investment is either not working or different than the big traditional Och-Ziff Master Fund? Thanks.

[Dan Och:]

The enhanced Master is effectively a more aggressive version, so as a general matter, when things are working more aggressive, it's going to outperform, when things are not working as well, the more aggressive is going to underperform. And so, we just had a recent period where things didn't work as well as we liked them to work, so the more aggressive underperformed.

[Ken Worthington:]

Okay, thank you very much.

[Operator:]

Thank you. The next question comes from Patrick Davitt of Autonomous.

[Patrick Davitt:]

Thank you for the follow-up. It occurred to me when you talked about the margins in the close-end business that surely given where your stock price is because I think most of you would agree that the liquid outside is probably the primary drag on the stock price. If you've thought about or if it's even possible to report the close end business separately from the hedge fund business at this point because it seems to me that that's part of the business the market would be looking to put a much higher multiple off?

[Dan Och:]

Look, as you've seen in the past we changed our disclosures all the time, it's a constant discussion. When we feel that's the right thing to do, I'm separating the business or segmenting them, obviously there is a lot of decision making going to them both on the accounting side and the business side, we'll do it. So it's something that's a constant discussion, it's something that has to be well thought out, and we'll figure out the point in time that -- what you're asking for, if that makes sense, and when it makes sense.

[Patrick Davitt:]

Thanks.

[Operator:]

Thank you for your question. That concludes the question-and-answer session today. I will now turn the call over to Ms. Madon.

[Tina Madon:]

Thanks, Kathy. We appreciate you joining us today. If you have additional questions please give me a call at 212-719-7381. Media inquiries should be directed to Jonathan Gasthalter at 212-687-8080.

[Operator:]

Thank you for your participation in today's conference. That concludes the presentation. You may now disconnect. Good day.