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EX-31.1 - EXHIBIT 31.1 - Sculptor Capital Management, Inc.ozm-10xqx1q2015xex311.htm
EX-10.1 - EXHIBIT 10.1 - Sculptor Capital Management, Inc.ozm-10xqx1q2015xex101.htm


 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2015
Commission File Number 001-33805
 
 
OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
(Exact Name of Registrant as Specified in its Charter)
 
 
 
Delaware
 
26-0354783
(State of Incorporation)
 
(I.R.S. Employer Identification Number)
 
9 West 57th Street, New York, New York 10019
(Address of Principal Executive Offices)
Registrant’s telephone number: (212) 790-0041
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  þ    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  þ    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer
 
þ
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨ (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨   No þ
As of May 1, 2015, there were 176,193,990 Class A Shares and 301,874,006 Class B Shares outstanding.
 
 





OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
TABLE OF CONTENTS
 
 
 
Page
PART I — FINANCIAL INFORMATION
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
PART II — OTHER INFORMATION
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 


i



Defined Terms
2007 Offerings
 
Refers collectively to our IPO and the concurrent private offering of approximately 38.1 million Class A Shares to DIC Sahir Limited, a wholly owned indirect subsidiary of Dubai Holding LLC
 
 
 
2011 Offering
 
Our public offering of 33.3 million Class A Shares in November 2011
 
 
 
active executive managing directors
 
Executive managing directors who remain active in our business
 
 
 
Annual Report
 
Our annual report on Form 10-K for the year ended December 31, 2014, dated February 23, 2015 and filed with the SEC
 
 
 
Class A Shares
 
Our Class A Shares, representing Class A limited liability company interests of Och-Ziff Capital Management Group LLC, which are publicly traded and listed on the NYSE
 
 
 
Class B Shares
 
Class B Shares of Och-Ziff Capital Management Group LLC, which are not publicly traded, are currently held solely by our executive managing directors and have no economic rights but entitle the holders thereof to one vote per share together with the holders of our Class A Shares
 
 
 
CLOs
 
Collateralized loan obligations
 
 
 
Exchange Act
 
Securities Exchange Act of 1934, as amended
 
 
 
executive managing directors
 
The current limited partners of the Och-Ziff Operating Group entities other than our intermediate holding companies, including our founder, Daniel S. Och, and, except where the context requires otherwise, include certain limited partners who are no longer active in the business of the Company
 
 
 
GAAP
 
U.S. generally accepted accounting principles
 
 
 
intermediate holding companies
 
Refers collectively to Och-Ziff Corp and Och-Ziff Holding, both of which are wholly owned subsidiaries of Och-Ziff Capital Management Group LLC
 
 
 
Institutional Credit Strategies
 
Our asset management platform that invests in performing credits, including leveraged loans, high-yield bonds, private credit/bespoke financing and investment grade credit via CLOs and other customized solutions
 
 
 
IPO
 
Our initial public offering of 36.0 million Class A Shares that occurred in November 2007
 
 
 
NYSE
 
New York Stock Exchange
 
 
 
Och-Ziff, the Company, the firm, we, us, our
 
Refers, unless the context requires otherwise, to Och-Ziff Capital Management Group LLC, a Delaware limited liability company, and its consolidated subsidiaries, including the Och-Ziff Operating Group
 
 
 
Och-Ziff Corp
 
Och-Ziff Holding Corporation, a Delaware corporation
 
 
 
Och-Ziff funds, funds
 
The multi-strategy, opportunistic credit, real estate and equity funds, Institutional Credit Strategies products and other alternative investment vehicles for which we provide asset management services
 
 
 
Och-Ziff Holding
 
Och-Ziff Holding LLC, a Delaware limited liability company
 
 
 

1



Och-Ziff Operating Group
 
Refers collectively to OZ Management, OZ Advisors I and OZ Advisors II, and their consolidated subsidiaries
 
 
 
OZ Advisors I
 
OZ Advisors LP, a Delaware limited partnership
 
 
 
OZ Advisors II
 
OZ Advisors II LP, a Delaware limited partnership
 
 
 
OZ Management
 
OZ Management LP, a Delaware limited partnership
 
 
 
Registrant
 
Och-Ziff Capital Management Group LLC, a Delaware limited liability company
 
 
 
Reorganization
 
The reorganization of our business that took place prior to the 2007 Offerings
 
 
 
SEC
 
U.S. Securities and Exchange Commission
 
 
 
Securities Act
 
Securities Act of 1933, as amended
 
 
 
Special Investments
 
Investments that we, as investment manager, believe lack a readily ascertainable market value, are illiquid or should be held until the resolution of a special event or circumstance
 
 
 
Ziffs
 
Refers collectively to Ziff Investors Partnership, L.P. II and certain of its affiliates and control persons

2



Available Information
Och-Ziff Capital Management Group LLC files annual, quarterly and current reports, proxy statements and other information required by the Exchange Act with the SEC. We make available free of charge on our website (www.ozcap.com) our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and any amendments to those filings as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. Also posted on our website in the “Public Investors – Corporate Governance” section are charters for our Audit Committee; Compensation Committee; and Nominating, Corporate Governance and Conflicts Committee, as well as our Corporate Governance Guidelines and Code of Business Conduct and Ethics governing our directors, officers and employees. Information on, or accessible through, our website is not a part of, and is not incorporated into, this report or any other SEC filing. Copies of our SEC filings or corporate governance materials are available without charge upon written request to Och-Ziff Capital Management Group LLC, 9 West 57th Street, New York, New York 10019, Attention: Office of the Secretary.
Any materials we file with the SEC are also publicly available through the SEC’s website (www.sec.gov) or may be read and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.


3



Forward-Looking Statements
Some of the statements under “Part I — Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which we refer to as the “MD&A,” “Part I — Item 3. Quantitative and Qualitative Disclosures About Market Risk,” and “Part II — Item 1A. Risk Factors” and elsewhere in this quarterly report may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, which we refer to as the “Securities Act,” and Section 21E of the Securities Exchange Act of 1934, as amended, which we refer to as the “Exchange Act,” that reflect our current views with respect to, among other things, future events and financial performance. We generally identify forward-looking statements by terminology such as “outlook,” “believe,” “expect,” “potential,” “continue,” “may,” “will,” “should,” “could,” “seek,” “approximately,” “predict,” “intend,” “plan,” “estimate,” “anticipate,” “opportunity,” “comfortable,” “assume,” “remain,” “maintain,” “sustain,” “achieve,” “see,” “think,” “position” or the negative version of those words or other comparable words.
Any forward-looking statements contained herein are based upon historical information and on our current plans, estimates and expectations. The inclusion of this or other forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved.
We caution that forward-looking statements are subject to numerous assumptions, estimates, risks and uncertainties, including but not limited to the following: global economic, business, market and geopolitical conditions; U.S. and foreign regulatory developments relating to, among other things, financial institutions and markets, government oversight, fiscal and tax policy; conditions impacting the alternative asset management industry; our ability to retain existing investor capital; our ability to successfully compete for fund investors, assets, professional talent and investment opportunities; our ability to retain our active executive managing directors, managing directors and other investment professionals; our successful formulation and execution of our business and growth strategies; our ability to appropriately manage conflicts of interest and tax and other regulatory factors relevant to our business; and assumptions relating to our operations, investment performance, financial results, financial condition, business prospects, growth strategy and liquidity.
If one or more of these or other risks or uncertainties materialize, or if our assumptions or estimates prove to be incorrect, our actual results may vary materially from those indicated in these statements. These factors are not and should not be construed as exhaustive and should be read in conjunction with the other cautionary statements and risks that are included in our filings with the SEC, including but not limited to our Annual Report.
There may be additional risks, uncertainties and factors that we do not currently view as material or that are not known. The forward-looking statements contained in this report are made only as of the date of this report. We do not undertake to update any forward-looking statement because of new information, future developments or otherwise.

4



PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
CONSOLIDATED BALANCE SHEETS — UNAUDITED
 
March 31, 2015
 
December 31, 2014
 
 
 
 
 
(dollars in thousands)
Assets
 

 
 
Cash and cash equivalents
$
283,211

 
$
250,603

Income and fees receivable
74,527

 
440,327

Due from related parties
2,237

 
4,963

Deferred income tax assets
815,695

 
835,385

Other assets, net (includes assets measured at fair value of $36,982 and $36,969 as of March 31, 2015 and December 31, 2014, respectively)
214,189

 
212,428

Assets of consolidated Och-Ziff funds:
 

 
 
Investments, at fair value
8,087,919

 
7,456,134

Other assets of Och-Ziff funds
198,639

 
103,046

Total Assets
$
9,676,417

 
$
9,302,886

 
 
 
 
Liabilities and Shareholders' Equity
 

 
 
Liabilities
 

 
 
Due to related parties
$
702,932

 
$
702,905

Debt obligations
451,187

 
447,887

Compensation payable
20,760

 
238,489

Other liabilities
91,223

 
95,747

Liabilities of consolidated Och-Ziff funds:
 

 
 
Notes payable of consolidated CLOs, at fair value
5,767,296

 
5,227,411

Securities sold under agreements to repurchase
274,250

 
302,266

Other liabilities of Och-Ziff funds
42,158

 
50,333

Total Liabilities
7,349,806

 
7,065,038

 
 
 
 
Commitments and Contingencies (Note 14)


 


 
 
 
 
Redeemable Noncontrolling Interests (Note 3)
708,813

 
545,771

 
 
 
 
Shareholders' Equity
 

 
 

Class A Shares, no par value, 1,000,000,000 shares authorized, 176,191,916 and 175,946,555 shares issued and outstanding as of March 31, 2015 and December 31, 2014, respectively

 

Class B Shares, no par value, 750,000,000 shares authorized, 301,874,006 and 301,884,116 shares issued and outstanding as of March 31, 2015 and December 31, 2014, respectively

 

Paid-in capital
3,017,689

 
3,004,881

Appropriated retained deficit
(2,321
)
 
(31,336
)
Accumulated deficit
(3,323,376
)
 
(3,264,304
)
Shareholders' deficit attributable to Class A Shareholders
(308,008
)
 
(290,759
)
Shareholders' equity attributable to noncontrolling interests
1,925,806

 
1,982,836

Total Shareholders' Equity
1,617,798

 
1,692,077

Total Liabilities, Redeemable Noncontrolling Interests and Shareholders' Equity
$
9,676,417

 
$
9,302,886

See notes to consolidated financial statements.

5



OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME — UNAUDITED
 
Three Months Ended March 31,
 
2015
 
2014
 
 
 
 
 
(dollars in thousands)
Revenues
 
 
 
Management fees
$
165,943

 
$
158,770

Incentive income
57,110

 
52,093

Other revenues
461

 
446

Income of consolidated Och-Ziff funds
109,337

 
74,171

Total Revenues
332,851

 
285,480


 
 
 
Expenses
 
 
 
Compensation and benefits
69,918

 
65,855

Reorganization expenses
4,017

 
4,021

Interest expense
5,245

 
1,666

General, administrative and other
49,835

 
35,912

Expenses of consolidated Och-Ziff funds
59,888

 
38,677

Total Expenses
188,903

 
146,131


 
 
 
Other Income
 
 
 
Net gains on investments in Och-Ziff funds and joint ventures
117

 
5,483

Net gains of consolidated Och-Ziff funds
45,885

 
54,499

Total Other Income
46,002

 
59,982


 
 
 
Income Before Income Taxes
189,950

 
199,331

Income taxes
25,160

 
33,591

Consolidated and Comprehensive Net Income
$
164,790

 
$
165,740

 
 
 
 
Allocation of Consolidated and Comprehensive Net Income
 
 
 
Class A Shareholders
$
25,871

 
$
23,852

Noncontrolling interests
133,353

 
132,065

Redeemable noncontrolling interests
5,566

 
9,823

 
$
164,790

 
$
165,740

 
 
 
 
Earnings Per Class A Share
 
 
 
Basic
$
0.15

 
$
0.14

Diluted
$
0.14

 
$
0.14


 
 
 
Weighted-Average Class A Shares Outstanding
 
 
 
Basic
177,634,861

 
171,920,763

Diluted
180,156,745

 
175,925,367

 
 
 
 
Dividends Paid per Class A Share
$
0.47

 
$
1.12

See notes to consolidated financial statements.

6



OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY — UNAUDITED
 
Och-Ziff Capital Management Group LLC Shareholders
 
 
 
 
 
Number of
Class A
Shares
 
Number of
Class B
Shares
 
Paid-in
Capital
 
Appropriated
Retained Deficit
 
Accumulated
Deficit
 
Shareholders' Deficit
Attributable to Class A
Shareholders
 
Shareholders' Equity
Attributable to
Noncontrolling Interests
 
Total
Shareholders'
Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(dollars in thousands)
As of December 31, 2014
175,946,555

 
301,884,116

 
$
3,004,881

 
$
(31,336
)
 
$
(3,264,304
)
 
$
(290,759
)
 
$
1,982,836

 
$
1,692,077

Capital contributions

 

 

 

 

 

 
107,231

 
107,231

Capital distributions

 

 

 

 

 

 
(279,428
)
 
(279,428
)
Cash dividends declared on Class A Shares

 

 

 

 
(82,774
)
 
(82,774
)
 

 
(82,774
)
Dividend equivalents on Class A restricted share units

 

 
2,169

 

 
(2,169
)
 

 

 

Equity-based compensation
245,361

 
(10,110
)
 
9,119

 

 

 
9,119

 
15,300

 
24,419

Impact of changes in Och-Ziff Operating Group ownership (See Note 3)

 

 
39

 

 

 
39

 
(39
)
 

Initial consolidation of CLOs

 

 

 
(6,968
)
 

 
(6,968
)
 

 
(6,968
)
Allocation of income of consolidated CLOs

 

 

 
35,983

 

 
35,983

 
(35,983
)
 

Impact of amortization of Reorganization charges on capital

 

 
1,481

 

 

 
1,481

 
2,536

 
4,017

Total comprehensive net income, excluding amounts allocated to redeemable noncontrolling interests

 

 

 

 
25,871

 
25,871

 
133,353

 
159,224

As of March 31, 2015
176,191,916

 
301,874,006

 
$
3,017,689

 
$
(2,321
)
 
$
(3,323,376
)
 
$
(308,008
)
 
$
1,925,806

 
$
1,617,798

See notes to consolidated financial statements.


7


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED

 
Three Months Ended March 31,
 
2015
 
2014
 
 
 
 
 
(dollars in thousands)
Cash Flows from Operating Activities
 
 
 
Consolidated net income
$
164,790

 
$
165,740

Adjustments to reconcile consolidated net income to net cash provided by operating activities:
 
 
 
Reorganization expenses
4,017

 
4,021

Amortization of equity-based compensation
28,796

 
27,130

Depreciation and amortization
2,149

 
1,828

Deferred income taxes
20,014

 
21,350

Operating cash flows due to changes in:
 
 
 
Income and fees receivable
365,800

 
878,093

Due from related parties
2,726

 
2,581

Other assets, net
11,336

 
(9,673
)
Due to related parties
27

 
(4,282
)
Compensation payable
(220,204
)
 
(292,383
)
Other liabilities
468

 
14,067

Consolidated Och-Ziff funds related items:
 
 
 
Net gains of consolidated Och-Ziff funds
(45,885
)
 
(54,499
)
Purchases of investments
(1,078,440
)
 
(1,232,039
)
Proceeds from sale of investments
979,132

 
1,082,074

Other assets of consolidated Och-Ziff funds
(48,585
)
 
(10,324
)
Securities sold under agreements to repurchase
(28,016
)
 
13,067

Other liabilities of consolidated Och-Ziff funds
(8,857
)
 
(648
)
Net Cash Provided by Operating Activities
149,268

 
606,103

 
 
 
 
Cash Flows from Investing Activities
 
 
 
Purchases of fixed assets
(20,315
)
 
(16,000
)
Investment in Och-Ziff funds
(264
)
 
(15,193
)
Other, net
94

 
(2,167
)
Net Cash Used in Investing Activities
(20,485
)
 
(33,360
)
 
 
 
 

8


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED — (continued)


 
Three Months Ended March 31,
 
2015
 
2014
 
 
 
 
 
(dollars in thousands)
Cash Flows from Financing Activities
 
 
 
Contributions from noncontrolling and redeemable noncontrolling interests
264,707

 
264,801

Distributions to noncontrolling and redeemable noncontrolling interests
(279,428
)
 
(537,661
)
Dividends on Class A Shares
(82,774
)
 
(190,210
)
Proceeds from debt obligations
3,606

 
16,000

Other, net
(2,286
)
 
(4,466
)
Net Cash Used in Financing Activities
(96,175
)
 
(451,536
)
Net Change in Cash and Cash Equivalents
32,608

 
121,207

Cash and Cash Equivalents, Beginning of Period
250,603

 
189,974

Cash and Cash Equivalents, End of Period
$
283,211

 
$
311,181

 
 
 
 
 
 
 
 
Supplemental Disclosure of Cash Flow Information
 

 
 
Cash paid during the period:
 

 
 
Interest
$
299

 
$
1,615

Income taxes
$
1,789

 
$
3,110

Non-cash transactions:
 
 
 
Assets related to the initial consolidation of CLOs
$
497,579

 
$

Liabilities related to the initial consolidation of CLOs
$
504,547

 
$

See notes to consolidated financial statements.

9


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
MARCH 31, 2015



1. OVERVIEW
Och-Ziff Capital Management Group LLC (the “Registrant”), a Delaware limited liability company, together with its consolidated subsidiaries (collectively, the “Company”), is a global alternative asset management firm with offices in New York, London, Hong Kong, Mumbai, Beijing, Dubai and Shanghai. The Company provides asset management services to its investment funds (the “Och-Ziff funds” or the “funds”), which pursue a broad range of global investment opportunities. The Company currently manages multi-strategy funds, dedicated credit funds, including opportunistic credit funds and Institutional Credit Strategies (as described below), real estate funds and other alternative investment vehicles.
The Company’s primary sources of revenues are management fees, which are based on the amount of the Company’s assets under management, and incentive income, which is based on the investment performance of its funds. Accordingly, for any given period, the Company’s revenues will be driven by the combination of assets under management and the investment performance of the Och-Ziff funds.
The Company currently has two operating segments: the Och-Ziff Funds segment and the Company's real estate business. The Och-Ziff Funds segment is currently the Company’s only reportable segment under U.S. generally accepted accounting principles (“GAAP”) and provides asset management services to the Company’s multi-strategy funds, dedicated credit funds and other alternative investment vehicles. Through Institutional Credit Strategies, the Company's asset management platform that invests in performing credits, the Och-Ziff Funds segment manages collateralized loan obligations (“CLOs”) and other customized solutions for clients. The Company’s real estate business, which provides asset management services to its real estate funds, is included within Other Operations as it does not meet the threshold of a reportable business segment under GAAP.
The Company generates substantially all of its revenues in the United States. The liability of the Company’s Class A Shareholders is limited to the extent of their capital contributions.
The Company conducts substantially all of its operations through OZ Management LP (“OZ Management”), OZ Advisors LP (“OZ Advisors I”) and OZ Advisors II LP (“OZ Advisors II”) and their consolidated subsidiaries (collectively, the “Och-Ziff Operating Group”). References to the Company’s “executive managing directors” refer to the current limited partners of OZ Management, OZ Advisors and OZ Advisors II other than the Company’s intermediate holding companies, including the Company’s founder, Daniel S. Och, and, except where the context requires otherwise, include certain limited partners who are no longer active in the business of the Company. References to the Company’s “active executive managing directors” refer to executive managing directors who remain active in the Company’s business. References to the “Ziffs” refer collectively to Ziff Investors Partnership, L.P. II and certain of its affiliates and control persons. References to the Company’s “intermediate holding companies” refer, collectively, to Och-Ziff Holding Corporation (“Och-Ziff Corp”) and Och-Ziff Holding LLC, both of which are wholly owned subsidiaries of the Registrant.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
These unaudited, interim, consolidated financial statements are prepared in accordance with GAAP as set forth in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”), and should be read in conjunction with the audited consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2014 (the “Annual Report”). In the opinion of management, all adjustments considered necessary for a fair presentation of the Company’s unaudited, interim, consolidated financial statements have been included and are of a normal and recurring nature. The results of operations presented for the interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year, primarily because of the majority of incentive income and discretionary cash bonuses being recorded in the fourth quarter each year. All significant intercompany transactions and balances have been eliminated in consolidation.

10


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
MARCH 31, 2015


Recently Adopted Accounting Pronouncements
None of the changes to GAAP that went into effect in the three months ended March 31, 2015 has had a material effect on the Company’s consolidated financial statements.
Future Adoption of Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers. ASU 2014-09 supersedes the revenue recognition requirements in ASC 605—Revenue Recognition and most industry-specific revenue recognition guidance throughout the Codification. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Entities are permitted to apply the guidance in ASU 2014-09 using one of the following methods: (1) full retrospective application to each prior period presented, or (2) modified retrospective application with a cumulative effect adjustment to opening retained earnings in the annual reporting period that includes that date of initial application. The requirements of ASU 2014-09 are effective for the Company beginning in the first quarter of 2017; however, the FASB in April 2015 issued a proposed ASU that would defer the effective date for the Company to the first quarter of 2018. The Company is currently evaluating the impact, if any, that this update will have on its consolidated financial statements.
In June 2014, the FASB issued ASU 2014-11, Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. ASU 2014-11 amends ASC 860—Transfers and Servicing to address the accounting for certain secured financing transactions. ASU 2014-11 also requires additional disclosures about certain transferred financial assets accounted for as sales, as well as those accounted for as secured financing transactions. The impact of ASU 2014-11 to the Company’s consolidated financial statements is expected to be limited to the additional disclosures for transferred financial assets accounted for as financing transactions, which will be effective for the Company beginning in the second quarter of 2015.
In August 2014, the FASB issued ASU 2014-13, Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity. ASU 2014-13 amends ASC 810—Consolidation to address the measurement difference that may occur between the fair value, as determined under GAAP, of the financial assets and financial liabilities of a consolidated collateralized financing entity, such as a CLO. The new guidance provides a measurement alternative which allows entities to measure both the financial assets and financial liabilities of the consolidated collateralized financing entity using the more observable of the fair value of the financial assets and the fair value of the financial liabilities. The requirements of ASU 2014-13 are effective for the Company beginning in the first quarter of 2016 using a full retrospective or modified retrospective approach at adoption. The Company is currently evaluating the impact that this update will have on its consolidated financial statements.
In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis. ASU 2015-02 significantly changes the consolidation analysis required under GAAP. Key changes include the following:
The indefinite deferral from ASU 2010-10, Amendments to Statement 167 for Certain Investment Funds is eliminated.
The presumption that a general partner should consolidate a limited partnership is eliminated. Limited partners other than interests held by the Company and its related parties must now have either substantive kick-out or participating rights in order for a limited partnership to qualify as a voting interest entity.
Management fees and incentive income earned by the Company will no longer be considered variable interests where such fees are customary and commensurate with the level of effort required for services provided and where the Company and its related parties do not hold other interests in the variable interest entity (“VIE”) that would absorb more than an insignificant amount of the variability of the VIE.
The requirement that fees paid to the Company that are both customary and commensurate with the level of effort required for services provided be included in the determination of whether the Company absorbs variability of a VIE when the Company also has a separate variable interest in that VIE is also eliminated.
When determining the primary beneficiary of a VIE, the Company will only need to consider its share of the economic exposure in the VIE held by related parties, unless the related party is under common control, in which case the variable interest held by the related party will be considered in its entirety.

11


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
MARCH 31, 2015


Entities are permitted to apply the guidance in ASU 2015-02 using one of the following methods: (1) full retrospective application to each prior period presented, or (2) modified retrospective application with a cumulative effect adjustment to opening retained earnings in the annual reporting period that includes that date of initial application. The requirements of ASU 2015-02 are effective for the Company beginning in the first quarter of 2016, with early adoption permitted in any interim period of 2015. The Company is currently evaluating the impact that this update will have on its consolidated financial statements.
ASU 2015-03, Simplifying the Presentation of Debt Issuance costs. ASU 2015-03 simplifies the presentation of debt issuance costs by requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The requirements of ASU 2015-03 are effective for the Company beginning in first quarter of 2016, with early adoption permitted. The impact on the Company will be limited to a reclassification of debt issuance costs from other assets to debt obligations in the Company’s consolidated balance sheet. As of March 31, 2015, the amount of debt issuance costs within the scope of ASU 2015-03 and currently presented within other assets, net was $6.9 million.
In May 2015, the FASB issued ASU 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). ASU 2015-07 removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. ASU 2015-07 will be effective for the Company beginning in the first quarter of 2016, with early adoption permitted, and will be applied retrospectively. The impact of ASU 2015-07 will be limited to disclosure of the level in the fair value hierarchy of investments held by the Company that are measured using net asset value per share during the periods presented.
None of the other changes to GAAP that are not yet effective are expected to have a material effect on the Company's consolidated financial statements.
3. NONCONTROLLING INTERESTS
Noncontrolling interests represent ownership interests in the Company’s subsidiaries held by parties other than the Company, and primarily relate to the Och-Ziff Operating Group A Units held by the Company’s executive managing directors and the Ziffs (until they exchanged their remaining interests during the 2014 second quarter) as well as fund investors’ interests in the consolidated Och-Ziff funds. Net income allocated to the Och-Ziff Operating Group A Units is driven by the earnings of the Och-Ziff Operating Group. Net income allocated to fund investors’ interests in consolidated Och-Ziff funds is driven by the earnings of those funds, including the net difference in the fair value of CLO assets and liabilities that are subsequently reclassified to appropriated retained earnings on the consolidated balance sheets.
The following table presents the components of the net income allocated to noncontrolling interests:
 
Three Months Ended March 31,
 
2015
 
2014
 
 
 
 
 
(dollars in thousands)
Och-Ziff Operating Group A Units
$
80,932

 
$
73,581

Consolidated Och-Ziff funds
52,352

 
58,241

Other
69

 
243

 
$
133,353

 
$
132,065


12


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
MARCH 31, 2015


The following table presents the components of the shareholders’ equity attributable to noncontrolling interests:
 
March 31, 2015
 
December 31, 2014
 
 
 
 
 
(dollars in thousands)
Och-Ziff Operating Group A Units
$
509,092

 
$
579,417

Consolidated Och-Ziff funds
1,413,502

 
1,401,495

Other
3,212

 
1,924

 
$
1,925,806

 
$
1,982,836

The following table presents the activity in redeemable noncontrolling interests as presented in the consolidated balance sheets:
 
Three Months Ended March 31, 2015
 
 
 
(dollars in thousands)
Beginning balance
$
545,771

Capital contributions
157,476

Total net income
5,566

Ending Balance
$
708,813

Och-Ziff Operating Group Ownership
The Company’s interest in the Och-Ziff Operating Group increased to 36.9% as of March 31, 2015, from 36.8% as of December 31, 2014. Increases in the Company’s interest in the Och-Ziff Operating Group are generally driven by the following: (i) the exchange of Och-Ziff Operating Group A Units for an equal number of Class A Shares, at which time the related Class B Shares are also canceled; (ii) the issuance of Class A Shares under the Company’s Amended and Restated 2007 Equity Incentive Plan and 2013 Incentive Plan, primarily related to the vesting of Class A restricted share units (“RSUs”); and (iii) the forfeiture of Och-Ziff Operating Group A Units and related Class B Shares by a departing executive managing director. The Company’s interest in the Och-Ziff Operating Group is expected to continue to increase over time as additional Class A Shares are issued upon the exchange of Och-Ziff Operating Group A Units and vesting of RSUs. These increases will be offset upon any conversion by an executive managing director of Och-Ziff Operating Group D Units, which are not considered equity for GAAP purposes, into Och-Ziff Operating Group A Units, at which time an equal number of Class B Shares is also issued to the executive managing director.
4. FAIR VALUE DISCLOSURES
Fair value represents the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date (i.e., an exit price). Due to the inherent uncertainty of valuations of investments that are determined to be illiquid or do not have readily ascertainable fair values, the estimates of fair value may differ from the values ultimately realized, and those differences can be material.
GAAP prioritizes the level of market price observability used in measuring assets and liabilities at fair value. Market price observability is impacted by a number of factors, including the type of assets and liabilities and the specific characteristics of the assets and liabilities. Assets and liabilities with readily available, actively quoted prices or for which fair value can be measured from actively-quoted prices generally will have a higher degree of market price observability and lesser degree of judgment used in measuring fair value.
Assets and liabilities measured at fair value are classified into one of the following categories:
Level I – Fair value is determined using quoted prices that are available in active markets for identical assets or liabilities. The types of assets and liabilities that would generally be included in this category are certain listed equities, U.S. Treasury obligations and certain listed derivatives.

13


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
MARCH 31, 2015


Level II – Fair value is determined using quotations received from dealers making a market for these assets or liabilities (“broker quotes”), valuations obtained from independent third-party pricing services, the use of models or other valuation methodologies based on pricing inputs that are either directly or indirectly market observable as of the measurement date. The types of assets and liabilities that would generally be included in this category are certain corporate bonds, certain credit default swap contracts, certain bank debt securities, certain commercial real estate debt, less liquid equity securities, forward contracts and certain over the-counter (“OTC”) derivatives.
Level III – Fair value is determined using pricing inputs that are unobservable in the market and includes situations where there is little, if any, market activity for the asset or liability. The fair value of assets and liabilities in this category may require significant judgment or estimation in determining fair value of the assets or liabilities. The fair value of these assets and liabilities may be estimated using a combination of observed transaction prices, independent pricing services, relevant broker quotes, models or other valuation methodologies based on pricing inputs that are neither directly or indirectly market observable. The types of assets and liabilities that would generally be included in this category include real estate investments, equity and debt securities issued by private entities, limited partnerships, certain corporate bonds, certain credit default swap contracts, certain bank debt securities, certain commercial real estate debt, certain OTC derivatives, residential and commercial mortgage-backed securities, asset-backed securities, collateralized debt obligations, as well as the notes payable of consolidated CLOs.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an asset or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
Fair Value Measurements Categorized within the Fair Value Hierarchy
The following table summarizes the Company’s assets and liabilities (excluding the assets and liabilities of the consolidated funds) measured at fair value on a recurring basis within the fair value hierarchy as of March 31, 2015 and December 31, 2014:
 
Fair Value
 
 
 
March 31, 2015
 
December 31, 2014
 
Fair Value Hierarchy
 
 
 
 
 
 
 
(dollars in thousands)
 
 
United States government obligations
$
36,982

 
$
36,969

 
Level 1
Financial Assets, at Fair Value, Included Within Other Assets, Net
$
36,982

 
$
36,969

 
 

14


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
MARCH 31, 2015


Consolidated Funds
The assets and liabilities presented in the tables below belong to the investors in the consolidated funds. The Company has a minimal, if any, investment in these funds.
The following table summarizes the Company’s assets and liabilities measured at fair value on a recurring basis within the fair value hierarchy as of March 31, 2015:
 
As of March 31, 2015
 
Level I

Level II

Level III

Counterparty Netting
of Derivative Contracts

Total










 
(dollars in thousands)
Bank debt
$


$
3,786,040


$
1,916,114


$


$
5,702,154

Real estate investments




720,550




720,550

Investments in affiliated opportunistic credit funds

 

 
764,993

 

 
764,993

Residential mortgage-backed securities

 

 
434,975

 

 
434,975

Collateralized debt obligations

 

 
150,963

 

 
150,963

Energy and natural resources limited partnerships

 

 
162,717

 

 
162,717

Commercial real estate debt

 

 
30,969

 

 
30,969

Corporate bonds

 
73,369

 
698

 

 
74,067

United States government obligations
17,687

 

 

 

 
17,687

Asset-backed securities

 

 
22,545

 

 
22,545

Commercial mortgage-backed securities

 

 
2,996

 

 
2,996

Other investments

 
1,134

 
2,218

 
(49
)
 
3,303

Financial Assets, at Fair Value, Included Within Investments, at Fair Value
$
17,687

 
$
3,860,543

 
$
4,209,738

 
$
(49
)
 
$
8,087,919

 
 
 
 
 
 
 
 
 
 
Senior secured notes payable of consolidated CLOs
$

 
$

 
$
5,298,366

 
$

 
$
5,298,366

Subordinated notes payable of consolidated CLOs

 

 
468,930

 

 
468,930

Notes payable of consolidated CLOs, at fair value

 

 
5,767,296

 

 
5,767,296

Other liabilities, included within other liabilities of Och-Ziff funds
7,561

 

 
98

 
(49
)
 
7,610

Financial Liabilities, at Fair Value
$
7,561

 
$

 
$
5,767,394

 
$
(49
)
 
$
5,774,906


15


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
MARCH 31, 2015


The following table summarizes the Company’s assets and liabilities measured at fair value on a recurring basis within the fair value hierarchy as of December 31, 2014:
 
As of December 31, 2014
 
Level I
 
Level II
 
Level III
 
Counterparty Netting
of Derivative Contracts
 
Total
 
 
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Bank debt
$

 
$
3,022,441

 
$
2,224,032

 
$

 
$
5,246,473

Real estate investments

 

 
645,916

 

 
645,916

Investments in affiliated opportunistic credit funds

 

 
628,913

 

 
628,913

Residential mortgage-backed securities

 

 
462,927

 

 
462,927

Collateralized debt obligations

 

 
173,746

 

 
173,746

Energy and natural resources limited partnerships

 

 
154,782

 

 
154,782

Commercial real estate debt

 

 
29,815

 

 
29,815

Corporate bonds

 
70,398

 
656

 

 
71,054

United States government obligations
15,000

 

 

 

 
15,000

Asset-backed securities

 

 
21,368

 

 
21,368

Commercial mortgage-backed securities

 

 
3,287

 

 
3,287

Other investments
2

 
705

 
2,151

 
(5
)
 
2,853

Financial Assets, at Fair Value, Included Within Investments, at Fair Value
$
15,002

 
$
3,093,544

 
$
4,347,593

 
$
(5
)
 
$
7,456,134

 
 
 
 
 
 
 
 
 
 
Senior secured notes payable of consolidated CLOs
$

 
$

 
$
4,784,134

 
$

 
$
4,784,134

Subordinated notes payable of consolidated CLOs

 

 
443,277

 

 
443,277

Notes payable of consolidated CLOs, at fair value

 

 
5,227,411

 

 
5,227,411

Other liabilities, included within other liabilities of Och-Ziff funds
5,716

 

 
7

 
(5
)
 
5,718

Financial Liabilities, at Fair Value
$
5,716

 
$

 
$
5,227,418

 
$
(5
)
 
$
5,233,129


16


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
MARCH 31, 2015


Reconciliation of Fair Value Measurements Categorized within Level III
The Company assumes that any transfers between Level I, Level II or Level III occur at the beginning of the reporting period presented. Amounts related to the initial consolidation of the Company’s CLOs are included within investment purchases in the tables below.
The following table summarizes the changes in the Company’s Level III assets and liabilities (excluding notes payable of consolidated CLOs) for the three months ended March 31, 2015:
 
December 31, 2014
 
Transfers
In
 
Transfers
Out
 
Investment
Purchases
 
Investment
Sales
 
Derivative Settlements
 
Net Gains
(Losses)
of
Consolidated
Och-Ziff
Funds
 
March 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Bank debt
$
2,224,032

 
$
207,339

 
$
(655,198
)
 
$
365,750

 
$
(250,120
)
 
$

 
$
24,311

 
$
1,916,114

Real estate investments
645,916

 

 

 
91,906

 
(34,310
)
 

 
17,038

 
720,550

Investments in affiliated opportunistic credit funds
628,913

 

 

 
172,887

 
(47,653
)
 

 
10,846

 
764,993

Residential mortgage-backed securities
462,927

 

 

 
11,791

 
(41,269
)
 

 
1,526

 
434,975

Collateralized debt obligations
173,746

 

 

 
4,319

 
(35,454
)
 

 
8,352

 
150,963

Energy and natural resources limited partnerships
154,782

 

 

 
9,697

 
(767
)
 

 
(995
)
 
162,717

Commercial real estate debt
29,815

 

 

 
1,232

 
(7
)
 

 
(71
)
 
30,969

Corporate bonds
656

 

 

 
146

 

 

 
(104
)
 
698

Asset-backed securities
21,368

 

 

 
2,290

 
(974
)
 

 
(139
)
 
22,545

Commercial mortgage-backed securities
3,287

 

 

 

 
(302
)
 

 
11

 
2,996

Other investments (including derivatives, net)
2,144

 

 

 

 

 
(161
)
 
137

 
2,120

 
$
4,347,586

 
$
207,339

 
$
(655,198
)
 
$
660,018

 
$
(410,856
)
 
$
(161
)
 
$
60,912

 
$
4,209,640


17


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
MARCH 31, 2015


The following table summarizes the changes in the Company’s Level III assets and liabilities (excluding notes payable of consolidated CLOs) for the three months ended March 31, 2014

December 31, 2013
 
Transfers
In
 
Transfers
Out
 
Investment
Purchases
 
Investment
Sales
 
Derivative Settlements
 
Net Gains (Losses)
of
Consolidated
Och-Ziff
Funds
 
March 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Bank debt
$
1,180,831

 
$
222,419

 
$
(196,218
)
 
$
445,713

 
$
(332,171
)
 
$

 
$
2,867

 
$
1,323,441

Real estate investments
633,311

 

 

 
15,314

 
(48,588
)
 

 
19,999

 
620,036

Investments in affiliated opportunistic credit funds
188,454

 

 

 
240,105

 
(12,045
)
 

 
14,594

 
431,108

Residential mortgage-backed securities
400,510

 

 

 
86,365

 
(104,866
)
 

 
17,782

 
399,791

Collateralized debt obligations
205,026

 

 

 
51,306

 
(57,972
)
 

 
12,463

 
210,823

Energy and natural resources limited partnerships
158,759

 

 

 
3,153

 
(14,191
)
 

 
(1,212
)
 
146,509

Commercial real estate debt
93,445

 

 

 
40,286

 
(1,493
)
 

 
299

 
132,537

Corporate bonds
817

 

 

 

 

 

 
32

 
849

Asset-backed securities
34,627

 

 

 

 
(8,207
)
 

 
(912
)
 
25,508

Commercial mortgage-backed securities
20,530

 

 

 

 
(13,321
)
 

 
2,617

 
9,826

Other investments (including derivatives, net)
2,492

 
69

 

 
1,455

 
(566
)
 
433

 
306

 
4,189

 
$
2,918,802

 
$
222,488

 
$
(196,218
)
 
$
883,697

 
$
(593,420
)
 
$
433

 
$
68,835

 
$
3,304,617

Transfers out of Level III presented in the tables above resulted from the fair values of certain securities becoming market observable, with fair value determined using independent pricing services. Transfers into Level III presented in the table above resulted from the valuation of certain investments with decreased market observability, with fair values determined using broker quotes or independent pricing services. There were no transfers between Levels I and II during the period presented above.

18


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
MARCH 31, 2015


The table below summarizes the net change in unrealized gains and losses on the Company’s Level III assets and liabilities (excluding notes payable of consolidated CLOs) held as of the reporting date. These gains and losses are included within net gains of consolidated Och-Ziff funds in the Company’s consolidated statements of comprehensive income:
 
Three Months Ended March 31,
 
2015
 
2014
 
 
 
 
 
(dollars in thousands)
Bank debt
$
22,484

 
$
1,847

Real estate investments
8,786

 
16,883

Investments in affiliated opportunistic credit funds
(21,404
)
 
3,735

Residential mortgage-backed securities
(547
)
 
9,950

Collateralized debt obligations
3,852

 
7,046

Energy and natural resources limited partnerships
(995
)
 
(1,391
)
Commercial real estate debt
(71
)
 
226

Corporate bonds
(109
)
 
27

Asset-backed securities
(55
)
 
(1,090
)
Commercial mortgage-backed securities
(50
)
 
(35
)
Other investments (including derivatives, net)
(33
)
 
653

 
$
11,858

 
$
37,851

 The tables below summarize the changes in the notes payable of consolidated CLOs for the three months ended March 31, 2015 and 2014. The amounts presented within net gains (losses) of consolidated Och-Ziff funds represent the net change in unrealized gains (losses) on the notes payable of consolidated CLOs, as none of these notes have been repaid as of March 31, 2015. These amounts all relate to liabilities still in existence as of each respective balance sheet date. Amounts related to the initial consolidation of the Company’s CLOs are included within issuances in the tables below.
 
December 31, 2014
 
Issuances
 
Net (Gains) Losses
of Consolidated
Och-Ziff Funds
 
March 31, 2015
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Senior secured notes payable of consolidated CLOs
$
4,784,134

 
$
464,377

 
$
49,855

 
$
5,298,366

Subordinated notes payable of consolidated CLOs
443,277

 
39,487

 
(13,834
)
 
468,930

 
$
5,227,411

 
$
503,864

 
$
36,021

 
$
5,767,296


December 31, 2013
 
Issuances
 
Net Losses
of Consolidated
Och-Ziff Funds
 
March 31, 2014
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Senior secured notes payable of consolidated CLOs
$
2,508,338

 
$

 
$
7,535

 
$
2,515,873

Subordinated notes payable of consolidated CLOs
255,639

 

 
943

 
256,582

 
$
2,763,977

 
$

 
$
8,478

 
$
2,772,455

Valuation Methodologies for Fair Value Measurements Categorized within Levels II and III
Real Estate Investments
Real estate investments are generally structured as equity, preferred equity, mezzanine debt, and participating debt in entities domiciled primarily in the United States and include investments in lodging, gaming, multifamily properties, retail, healthcare, distressed residential, senior housing, golf, parking, office buildings and land. The fair values of these investments are

19


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
MARCH 31, 2015


generally based upon discounting the expected cash flows from the investment or a cash flow multiple. In reaching the determination of fair value for investments, the Company considers many factors including, but not limited to: the operating cash flows and financial performance of the real estate investments relative to budgets or projections; property types; geographic locations; the physical condition of the asset; prevailing market capitalization rates; prevailing market discount rates; general economic conditions; economic conditions specific to the market in which the assets are located; the prevailing interest rate environment; the prevailing state of the debt markets; comparable public company trading multiples; independent third-party appraisals; available pricing data on comparable properties in the specific market in which the asset is located; expected exit timing and strategy; and any specific rights or terms associated with the investment.
The significant unobservable inputs used in the fair value measurement of the Company’s real estate investments are discount rates, cash flow growth rates, capitalization rates, the price per square foot, the absorption percentage per year and exit multiples. Significant increases (decreases) in the discount rates and capitalization rates in isolation would be expected to result in a significantly lower (higher) fair value measurement. Significant increases (decreases) in the cash flow growth rates, the price per square foot, the absorption percentage per year and exit multiples in isolation would be expected to result in a significantly higher (lower) fair value measurement. A change in the assumption used for price per square foot is generally accompanied by a directionally inverse change in the absorption percentage per year.
Bank Debt; Residential and Commercial Mortgage-Backed Securities; Collateralized Debt Obligations; Commercial Real Estate Debt; Corporate Bonds; Asset-Backed Securities; Notes Payable of Consolidated CLOs
The fair value of investments in bank debt, residential and commercial mortgage-backed securities, collateralized debt obligations, commercial real estate debt, corporate bonds, asset-backed securities and notes payable of consolidated CLOs that do not have readily ascertainable fair values is generally determined using broker quotes or independent pricing services. For month-end valuations, the Company generally receives one to four broker quotes for each security, depending on the type of security being valued. These broker quotes are generally non-binding or indicative in nature. The Company verifies that these broker quotes are reflective of fair value as defined in GAAP generally through procedures such as comparison to independent pricing services, back testing procedures, review of stale pricing reports and performance of other due diligence procedures as may be deemed necessary. Historically, the Company has only adjusted a small number of broker quotes when used in determining final valuations for securities as a result of these procedures.
To the extent broker quotes are not available or deemed unreliable, the methods and procedures to value these investments may include, but are not limited to: obtaining and using other additional broker quotes deemed reliable; using independent pricing services; performing comparisons with prices of comparable or similar securities; obtaining valuation-related information from the issuers; calculating the present value of future cash flows; assessing other analytical data and information relating to these investments that is an indication of their value; obtaining information provided by third parties; reviewing the amounts invested in these investments; and evaluating financial information provided by the management of these investments. Market data is used to the extent that it is observable and considered reliable.
The significant unobservable inputs used in the fair value measurement of the Company’s bank debt, residential and commercial mortgage-backed securities, commercial real estate debt, corporate bonds and asset-backed securities that are not valued using broker quotes or independent pricing services are discount rates, credit spreads and yields. Significant increases (decreases) in the discount rates, credit spreads and yields in isolation would be expected to result in a significantly lower (higher) fair value measurement.
Energy and Natural Resources Limited Partnerships
The fair value of energy and natural resources limited partnerships is generally determined using discounted cash flows when assets are producing oil or gas, or when it is reasonably certain that an asset will be capable of producing oil or gas, or using recent financing for certain investments. Acreage with proven undeveloped, probable or possible reserves are valued using prevailing prices of comparable properties, and may include adjustments for other assets or liabilities such as seismic data, equipment, and cash held by the investee. Certain natural resource assets may also be valued using scenario analyses and sum of the parts analyses.

20


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
MARCH 31, 2015


The fair value for certain energy and natural resources limited partnership investments is based on the net asset value of the underlying fund. This amount represents a certain consolidated fund’s investment into another fund managed by the Company. The investee invests primarily in energy and natural resource investments. The fund may not redeem its investment into the investee prior to liquidation. The fund will receive distributions from the investee as investments are sold, the timing of which cannot be estimated. The consolidated fund has $43.7 million of unfunded commitments that will be funded by capital contributions from investors in the fund, as the Company is not an investor in the fund.
The significant unobservable inputs used in the fair value measurement of the Company’s energy and natural resources limited partnerships that are not measured using net asset value are discount rates, EBITDA multiples, price per acre, and production multiples. Significant increases (decreases) in the discount rates in isolation would be expected to result in a lower (higher) fair value measurement. Significant increases (decreases) in the EBITDA multiples, price per acre, and production multiples in isolation would be expected to result in a significantly higher (lower) fair value measurement.
Investments in Affiliated Opportunistic Credit Funds
The fair value of investments in affiliated opportunistic credit funds relates to consolidated feeder funds’ investments into their related master funds. The Company is not an investor of these feeder funds or master funds. The fair value of these investments is based on the consolidated feeder funds’ proportionate share of the respective master funds’ net asset value. These master funds invest primarily in credit-related strategies. Approximately 86% of these investments can be redeemed and paid to investors in the feeder fund after an initial lock-up period of one to three years, after which the feeder fund may redeem its investment on a quarterly basis upon 90 days’ prior written notice. The Company, as investment manager of the master fund, has the option (not exercised to date) to suspend redemptions in certain situations. The remaining 14% relates to a feeder fund that is not able to redeem its investment in the master fund prior to liquidation, the timing of which cannot be estimated. The feeder fund will receive distributions from the master fund as investments are sold, the timing of which cannot be estimated due to the illiquid nature of the investments held by the master fund. The consolidated feeder funds have $52.4 million of unfunded commitments that will be funded by capital contributions from investors in the feeder funds, as the Company is not an investor in the feeder funds or master funds.
Information about Significant Inputs Used in Fair Value Measurements Categorized within Level III
The table below summarizes information about the significant unobservable inputs used in determining the fair value of the Level III assets and liabilities held by the consolidated funds as of March 31, 2015.
Type of Investment or Liability
 
Fair Value at
March 31, 2015
 
Valuation Technique
 
Unobservable Input
 
Range
(Weighted-Average)
 
(in thousands)
 
 
 
Bank debt
 
$
1,861,566

 
Independent pricing services
 
n/a
 
 

 
 
51,870

 
Yield analysis
 
Yield
 
11% to 16%  (12%)

 
 
2,678

 
Broker quotes
 
n/a
 
 

Real estate investments
 
$
720,550

 
Discounted cash flow
 
Discount rate
 
5% to 30%  (20%)

 
 
 
 
 
 
Cash flow growth rate
 
-48% to 47% (1%)

 
 
 
 
 
 
Capitalization rate
 
5% to 13%  (8%)

 
 
 
 
 
 
Price per square foot
 
$52.96 to $170.00  ($147.97)

 
 
 
 
 
 
Absorption rate per year
 
0.3% to 57.5%  (11%)

 
 
 
 
 
 
Exit multiple
 
6.4x

Investments in affiliated opportunistic credit funds
 
$
764,993

 
Net asset value
 
n/a
 
 

Residential mortgage-backed securities
 
$
419,268

 
Broker quotes
 
n/a
 
 

 
 
10,726

 
Independent pricing services
 
n/a
 
 
 
 
4,981

 
Discounted cash flow
 
Discount rate
 
20
%
 
 
 
 
 
 
Credit spread
 
1225 bps


21


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
MARCH 31, 2015


Type of Investment or Liability
 
Fair Value at
March 31, 2015
 
Valuation Technique
 
Unobservable Input
 
Range
(Weighted-Average)
 
(in thousands)
 
 
 
Collateralized debt obligations
 
$
132,279

 
Broker quotes
 
n/a
 
 

 
 
18,684

 
Independent pricing services
 
n/a
 
 
Energy and natural resources limited partnerships
 
$
90,661

 
Net asset value
 
n/a
 
 

 
 
46,935

 
Scenario analysis
 
Discount rate
 
10% to 25% (19%)

 
 
 
 
 
 
EBITDA multiple
 
5.0x to 6.0x (5.5x)

 
 
 
 
 
 
Price per acre
 
$1,750
 
 
 
 
 
 
Production multiple (price per thousand cubic feet equivalent per day)
 
$6,500 to $11,667 ($9,122)

 
 
21,358

 
Sum of the parts
 
Discount rate
 
15
%
 
 
 
 
 
 
Price per acre
 
$432
 
 
3,760

 
Discounted cash flow
 
Discount rate
 
15
%
 
 
3

 
Broker quotes
 
n/a
 
 

Commercial real estate debt
 
$
30,969

 
Yield analysis
 
Yield
 
13% to 19%  (14%)

Corporate bonds
 
$
360

 
Yield analysis
 
Yield
 
11
%
 
 
338

 
Broker quotes
 
n/a
 
 

Asset-backed securities
 
$
20,549

 
Broker quotes
 
n/a
 
 

 
 
1,996

 
Discounted cash flow
 
Discount rate
 
13
%
Commercial mortgaged-backed securities
 
$
2,996

 
Broker quotes
 
n/a
 
 

Senior secured notes payable of consolidated CLOs
 
$
5,298,366

 
Broker quotes
 
n/a
 
 

Subordinated notes payable of consolidated CLOs
 
$
468,930

 
Broker quotes
 
n/a
 
 
The table below summarizes information about the significant unobservable inputs used in determining the fair value of the Level III assets and liabilities held by the consolidated funds as of December 31, 2014.
Type of Investment or Liability
 
Fair Value at
December 31, 2014
 
Valuation Technique
 
Unobservable Input
 
Range
(Weighted-Average)
 
(in thousands)
 
 
 
Bank debt
 
$
2,165,152

 
Independent pricing services
 
n/a
 
 

 
 
52,107

 
Yield analysis
 
Yield
 
11% to 15%  (12%)

 
 
6,773

 
Broker quotes
 
n/a
 
 

Real estate investments
 
$
638,896

 
Discounted cash flow
 
Discount rate
 
10% to 30%  (20%)

 
 
 
 
 
 
Cash flow growth rate
 
-48% to 39%  (1%)

 
 
 
 
 
 
Capitalization rate
 
5% to 13%  (8%)

 
 
 
 
 
 
Price per square foot
 
$55.22 to $400.00  ($151.33)

 
 
 
 
 
 
Absorption rate per year
 
1% to 58%  (13%)

 
 
 
 
 
 
Exit multiple
 
6.4x

 
 
7,020

 
Broker quotes
 
n/a
 


Investments in affiliated opportunistic credit funds
 
$
628,913

 
Net asset value
 
n/a
 
 
Residential mortgage-backed securities
 
$
456,815

 
Broker quotes
 
n/a
 
 

 
 
6,112

 
Discounted cash flow
 
Discount rate
 
20
%
 
 
 
 
 
 
Credit spread
 
1225 bps

Collateralized debt obligations
 
$
173,746

 
Broker quotes
 
n/a
 
 


22


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
MARCH 31, 2015


Type of Investment or Liability
 
Fair Value at
December 31, 2014
 
Valuation Technique
 
Unobservable Input
 
Range
(Weighted-Average)
 
(in thousands)
 
 
 
Energy and natural resources limited partnerships
 
$
88,873

 
Net asset value
 
n/a
 
 

 
 
40,350

 
Scenario analysis
 
Discount rate
 
10% to 25% (18%)

 
 
 
 
 
 
EBITDA multiple
 
5.0x to 6.3x (5.6x)

 
 
 
 
 
 
Price per acre
 
$1,750
 
 
 
 
 
 
Production multiple (price per thousand cubic feet equivalent per day)
 
$6,500 to $10,000 ($8,252)

 
 
20,925

 
Sum of the parts
 
Discount rate
 
15
%
 
 
 
 
 
 
Price per acre
 
$425
 
 
4,632

 
Discounted cash flow
 
Discount rate
 
15
%
 
 
2

 
Broker quotes
 
n/a
 
 
Commercial real estate debt
 
$
29,815

 
Yield analysis
 
Yield
 
13% to 18%  (14%)

Corporate bonds
 
$
403

 
Yield analysis
 
Yield
 
13
%
 
 
253

 
Broker quotes