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EX-32.1 - EXHIBIT 32.1 - Sculptor Capital Management, Inc.ozm-10xqx3q2016xex321.htm
EX-31.2 - EXHIBIT 31.2 - Sculptor Capital Management, Inc.ozm-10xqx3q2016xex312.htm
EX-31.1 - EXHIBIT 31.1 - Sculptor Capital Management, Inc.ozm-10xqx3q2016xex311.htm
EX-10.5 - EXHIBIT 10.5 - Sculptor Capital Management, Inc.exhibit105.htm
EX-10.4 - EXHIBIT 10.4 - Sculptor Capital Management, Inc.exhibit104.htm
EX-10.3 - EXHIBIT 10.3 - Sculptor Capital Management, Inc.exhibit103.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 September 30, 2016
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) 790-0000
 
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 October 28, 2016, there were 181,706,272 Class A Shares and 297,317,019 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, 2015, dated February 11, 2016 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
 
 
 


1



Och-Ziff Holding
 
Och-Ziff Holding LLC, a Delaware limited liability company
 
 
 
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.
No statements herein, available on our website or in any of the materials we file with the SEC under the Exchange Act constitute, or should be viewed as constituting, an offer of any Och-Ziff fund.
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,” “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 and Section 21E of 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; the outcome of third-party litigation involving us; the consequences of the Foreign Corrupt Practices Act (the "FCPA") settlements with the SEC and the U.S. Department of Justice (the "DOJ"); conditions impacting the alternative asset management industry; our ability to retain existing fund 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.


3



PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
CONSOLIDATED BALANCE SHEETS — UNAUDITED

 
September 30, 2016
 
December 31, 2015
 
 
 
 
 
(dollars in thousands)
Assets
 

 
 
Cash and cash equivalents
$
430,470

 
$
254,070

Income and fees receivable
24,801

 
93,846

Due from related parties
19,880

 
8,096

Deferred income tax assets
669,691

 
719,954

Other assets, net (includes assets measured at fair value of $29,994 and $18,501 as of September 30, 2016 and December 31, 2015, respectively)
203,952

 
192,975

Assets of consolidated Och-Ziff funds:
 

 
 
Investments, at fair value
36,830

 
9,071,933

Other assets of Och-Ziff funds
2,633

 
344,769

Total Assets
$
1,388,257

 
$
10,685,643

 
 
 
 
Liabilities and Shareholders' (Deficit) Equity
 

 
 
Liabilities
 

 
 
Due to related parties
$
490,249

 
$
593,390

Debt obligations
561,757

 
443,069

Compensation payable
22,716

 
176,602

Other liabilities
564,214

 
83,813

Liabilities of consolidated Och-Ziff funds:
 

 
 
Notes and loans payable of consolidated CLOs, at fair value

 
7,077,679

Securities sold under agreements to repurchase

 
190,751

Other liabilities of Och-Ziff funds
653

 
47,487

Total Liabilities
1,639,589

 
8,612,791

 
 
 
 
Commitments and Contingencies (Note 15)


 


 
 
 
 
Redeemable Noncontrolling Interests (Note 4)
20,973

 
832,284

 
 
 
 
Shareholders' (Deficit) Equity
 

 
 

Class A Shares, no par value, 1,000,000,000 shares authorized, 181,544,024 and 181,026,455 shares issued and outstanding as of September 30, 2016 and December 31, 2015, respectively

 

Class B Shares, no par value, 750,000,000 shares authorized, 297,317,019 and 297,317,400 shares issued and outstanding as of September 30, 2016 and December 31, 2015, respectively

 

Paid-in capital
3,118,479

 
3,040,655

Appropriated retained deficit

 
(59,663
)
Accumulated deficit
(3,569,970
)
 
(3,396,822
)
Shareholders' deficit attributable to Class A Shareholders
(451,491
)
 
(415,830
)
Shareholders' equity attributable to noncontrolling interests
179,186

 
1,656,398

Total Shareholders' (Deficit) Equity
(272,305
)
 
1,240,568

Total Liabilities, Redeemable Noncontrolling Interests and Shareholders' (Deficit) Equity
$
1,388,257

 
$
10,685,643

See notes to consolidated financial statements.


4


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) — UNAUDITED



 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Revenues
 
 
 
 
 
 
 
Management fees
$
128,513

 
$
162,778

 
$
428,822

 
$
496,207

Incentive income
18,754

 
35,615

 
57,477

 
121,262

Other revenues
380

 
579

 
1,544

 
1,548

Income of consolidated Och-Ziff funds
458

 
126,931

 
1,262

 
361,136

Total Revenues
148,105

 
325,903

 
489,105

 
980,153


 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
Compensation and benefits
57,758

 
70,602

 
169,762

 
211,895

Reorganization expenses

 
4,018

 

 
12,052

Interest expense
6,129

 
5,383

 
17,452

 
16,033

General, administrative and other
44,306

 
65,484

 
584,331

 
127,332

Expenses of consolidated Och-Ziff funds
17

 
82,576

 
316

 
220,847

Total Expenses
108,210

 
228,063

 
771,861

 
588,159


 
 
 
 
 
 
 
Other Income (Loss)
 
 
 
 
 
 
 
Net gains (losses) on investments in Och-Ziff funds and joint ventures
803

 
(146
)
 
1,302

 
43

Net gains (losses) of consolidated Och-Ziff funds
821

 
(20,627
)
 
2,182

 
21,859

Total Other Income (Loss)
1,624

 
(20,773
)
 
3,484

 
21,902


 
 
 
 
 
 
 
Income (Loss) Before Income Taxes
41,519

 
77,067

 
(279,272
)
 
413,896

Income taxes
9,986

 
12,422

 
39,436

 
119,607

Consolidated and Comprehensive Net Income (Loss)
$
31,533

 
$
64,645

 
$
(318,708
)
 
$
294,289

 
 
 
 
 
 
 
 
Allocation of Consolidated and Comprehensive Net Income (Loss)
 
 
 
 
 
 
 
Class A Shareholders
$
14,285

 
$
17,417

 
$
(133,642
)
 
$
48,048

Noncontrolling interests
16,570

 
78,971

 
(186,867
)
 
270,346

Redeemable noncontrolling interests
678

 
(31,743
)
 
1,801

 
(24,105
)
 
$
31,533

 
$
64,645

 
$
(318,708
)
 
$
294,289

 
 
 
 
 
 
 
 
Earnings (Loss) Per Class A Share
 
 
 
 
 
 
 
Basic
$
0.08

 
$
0.10

 
$
(0.73
)
 
$
0.27

Diluted
$
0.05

 
$
0.06

 
$
(0.75
)
 
$
0.26


 
 
 
 
 
 
 
Weighted-Average Class A Shares Outstanding
 
 
 
 
 
 
 
Basic
182,521,225

 
177,805,122

 
182,508,296

 
177,711,669

Diluted
479,838,244

 
484,171,524

 
479,825,416

 
181,517,750

 
 
 
 
 
 
 
 
Dividends Paid per Class A Share
$

 
$
0.14

 
$

 
$
0.83

See notes to consolidated financial statements.


5



OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ (DEFICIT) 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'
(Deficit) Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(dollars in thousands)
As of December 31, 2015
181,026,455

 
297,317,400

 
$
3,040,655

 
$
(59,663
)
 
$
(3,396,822
)
 
$
(415,830
)
 
$
1,656,398

 
$
1,240,568

Deconsolidation of Och-Ziff funds on adoption of ASU 2015-02 (See Note 3)

 

 

 
59,663

 
(39,887
)
 
19,776

 
(1,321,488
)
 
(1,301,712
)
Capital contributions

 

 

 

 

 

 
2,547

 
2,547

Capital distributions

 

 

 

 

 

 
(225
)
 
(225
)
Dividend equivalents on Class A restricted share units

 

 
(381
)
 

 
381

 

 

 

Equity-based compensation
517,569

 
(381
)
 
19,469

 

 

 
19,469

 
33,445

 
52,914

Impact of changes in Och-Ziff Operating Group ownership (See Note 4)

 

 
(182
)
 

 

 
(182
)
 
182

 

Waiver of payments under tax receivable agreement (Note 15)

 

 
58,918

 

 

 
58,918

 
(4,806
)
 
54,112

Comprehensive net loss, excluding amounts allocated to redeemable noncontrolling interests

 

 

 

 
(133,642
)
 
(133,642
)
 
(186,867
)
 
(320,509
)
As of September 30, 2016
181,544,024

 
297,317,019

 
$
3,118,479

 
$

 
$
(3,569,970
)
 
$
(451,491
)
 
$
179,186

 
$
(272,305
)
See notes to consolidated financial statements.



6


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

 
Nine Months Ended September 30,
 
2016
 
2015
 
 
 
 
 
(dollars in thousands)
Cash Flows from Operating Activities
 
 
 
Consolidated net (loss) income
$
(318,708
)
 
$
294,289

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

 
12,052

Amortization of equity-based compensation
56,311

 
86,590

Depreciation, amortization and loss on asset held for sale
14,947

 
8,135

Deferred income taxes
31,038

 
105,263

Operating cash flows due to changes in:
 
 
 
Income and fees receivable
77,760

 
388,350

Due from related parties
(9,888
)
 
(2,771
)
Other assets, net
8,460

 
37,211

Due to related parties
(12,133
)
 
(48,059
)
Compensation payable
(153,875
)
 
(211,617
)
Other liabilities
398,686

 
(9,514
)
Consolidated Och-Ziff funds related items:
 
 
 
Net gains of consolidated Och-Ziff funds
(2,182
)
 
(21,859
)
Purchases of investments
(185,940
)
 
(3,273,867
)
Proceeds from sale of investments
175,131

 
3,241,032

Other assets of consolidated Och-Ziff funds
9,078

 
(119,007
)
Securities sold under agreements to repurchase

 
(71,716
)
Other liabilities of consolidated Och-Ziff funds
558

 
(2,313
)
Net Cash Provided by Operating Activities
89,243

 
412,199

 
 
 
 
Cash Flows from Investing Activities
 
 
 
Purchases of fixed assets
(7,559
)
 
(36,118
)
Purchases of United States government obligations
(29,915
)
 

Maturities of United States government obligations
18,500

 

Investment in Och-Ziff funds
(12,734
)
 
(2,777
)
Return of investment in Och-Ziff funds
1,493

 
296

Other, net
(17
)
 

Net Cash Used in Investing Activities
(30,232
)
 
(38,599
)
 
 
 
 


7


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


 
Nine Months Ended September 30,
 
2016
 
2015
 
 
 
 
 
(dollars in thousands)
Cash Flows from Financing Activities
 
 
 
Contributions from noncontrolling and redeemable noncontrolling interests
2,551

 
580,080

Distributions to noncontrolling and redeemable noncontrolling interests
(225
)
 
(743,887
)
Dividends on Class A Shares

 
(146,346
)
Proceeds from debt obligations
120,000

 
3,606

Repayment of debt obligations
(2,738
)
 
(2,192
)
Withholding taxes paid on vested RSUs
(2,340
)
 
(5,341
)
Other, net
141

 
1,222

Net Cash Provided (Used) by Financing Activities
117,389

 
(312,858
)
Net Change in Cash and Cash Equivalents
176,400

 
60,742

Cash and Cash Equivalents, Beginning of Period
254,070

 
250,603

Cash and Cash Equivalents, End of Period
$
430,470

 
$
311,345

 
 
 
 
 
 
 
 
Supplemental Disclosure of Cash Flow Information
 

 
 
Cash paid during the period:
 

 
 
Interest
$
10,374

 
$
10,019

Income taxes
$
10,563

 
$
17,003

Non-cash transactions:
 
 
 
Increase in paid in capital as a result of waiver of payments under tax receivable agreement (Note 15)
$
54,112

 
$

Assets related to the initial consolidation of CLOs
$

 
$
1,551,028

Liabilities related to the initial consolidation of CLOs
$

 
$
1,572,801

See Note 3 for non-cash impact of the deconsolidation of Och-Ziff funds upon the adoption of ASU 2015-02.
See notes to consolidated financial statements.


8


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
SEPTEMBER 30, 2016




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, Shanghai and Houston. 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 products, real estate funds and other alternative investment vehicles. Through Institutional Credit Strategies, the Company’s asset management platform that invests in performing credits, the Company manages collateralized loan obligations (“CLOs”) and other customized solutions for its clients.
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 Companys real estate business. The Och-Ziff Funds segment is currently the Company’s only reportable operating 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. 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 operating 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 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.
During the first quarter of 2016, the Company adopted Accounting Standards Update (“ASU”) 2015-02, Amendments to the Consolidation Analysis. As a result of this update, the Company no longer consolidates the majority of the previously consolidated Och-Ziff funds. See Notes 2 and 3 for additional information.
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, 2015 (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


9


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
SEPTEMBER 30, 2016



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.
The Company adopted ASU 2015-02 as of January 1, 2016 using the modified retrospective method of transition, which resulted in a cumulative effect adjustment to opening equity. The Company did not restate prior-period results. The impact to the Company’s opening retained earnings was driven by the cumulative effect of a change in incentive income recognition for the funds no longer consolidated, net of deferred income tax effects. As described in Note 2 of the Company’s Annual Report, incentive income from funds not consolidated is recognized at the end of the applicable commitment period when the amounts are contractually payable and when no longer subject to clawback. Prior to deconsolidation, incentive income from these previously consolidated funds was recognized by allocating a portion of the net income of these funds to the Company rather than to the fund investors (noncontrolling interests) based on the contractual terms of the relevant fund agreements. This resulted in incentive income being recognized that was subject to clawback in the event of future losses in the respective funds.
The deconsolidation of the majority of its previously consolidated funds resulted in a substantial decrease in assets of consolidated Och-Ziff funds, liabilities of consolidated Och-Ziff funds, redeemable noncontrolling interests, appropriated retained deficit and shareholders’ equity attributable to non-controlling interests in the Company’s consolidated balance sheet. Additionally, the deconsolidation has caused a significant decrease in the amount of income of consolidated Och-Ziff funds, expenses of consolidated Och-Ziff funds, and net gains of consolidated Och-Ziff funds in the Company’s consolidated statements of comprehensive income (loss).
As a result of the adoption of ASU 2015-02, the Company modified its consolidation policies, resulting in the deconsolidation of the majority of the previously consolidated Och-Ziff funds. The Company’s updated consolidation policies are presented below.
Consolidation Policies
The Company’s funds are typically organized using a “master-feeder” structure. Fund investors, including the Company’s executive managing directors, employees and other related parties to the extent they invest in a given fund, generally invest directly into the feeder funds. These feeder funds are typically limited partnerships or limited companies that hold direct or indirect interests in a master fund. The master fund, together with its subsidiaries, is the primary investment vehicle for its feeder funds. The Company generally collects its management fees and incentive income from the feeder funds or subsidiaries of the feeder funds (“intermediate funds”), and does not collect any management fees or incentive income directly from the master funds. However, the Company also organizes certain funds (e.g., its real estate funds and certain opportunistic credit funds) without the use of a master-feeder structure. These are typically organized as limited partnerships, in which the Company is the general partner and collects management fees and incentive income directly from these entities; however, in the case of the real estate funds, the Company collects management fees directly from the funds’ investors. The Company generally directs the activities of its funds through its role as general partner or as the investment or CLO collateral manager with decision-making rights.
The consolidated financial statements include the accounts of the Registrant and entities in which it, directly or indirectly, is determined to have a controlling financial interest under the following set of guidelines:
Variable Interest Entities (“VIEs”)—The Company determines whether, if by design, an entity has any of the following characteristics: (i) equity investors who lack the characteristics of a controlling financial interest; (ii) the entity does not have sufficient equity at risk to finance its expected activities without additional subordinated financial support from other parties; or (iii) substantially all of the activities of the entity are performed on behalf of a party with disproportionately few voting rights. An entity with any one of these characteristics is a VIE. Partnerships, and similarly structured entities, will be considered as VIEs where a simple majority of third party investors with equity at risk are not able to exercise substantive kick-out or participating rights over the general partner.
Voting Interest Entities (“VOEs”)—Where an entity does not have the characteristics of a VIE, it will be a VOE.


10


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
SEPTEMBER 30, 2016



The determination of whether a fund is a VIE or a VOE is based on the facts and circumstances for each individual fund in accordance with the guidelines described below. Classification of such entities is reassessed where there is a substantive change in the governing documents or contractual arrangements of the entity, to the capital structure of the entity or in the activities of the entity. The Company continuously reassesses whether it should consolidate a VIE or VOE.
Prior to the Adoption of ASU 2015-02
Prior to the adoption of ASU 2015-02, the Company used two models for determining whether it was the primary beneficiary of a VIE depending on the nature and characteristics of the entity.
In the case of fund vehicles classified as VIEs that qualified for the deferral under ASU 2010-10, Amendments to Statement 167 for Certain Investment Funds, the primary beneficiary was the party that absorbed a majority of a VIEs’ expected losses or received a majority of the expected residual returns as a result of holding variable interests. The Company was identified as the primary beneficiary of a fund where the Company’s related party group absorbed a majority of the variability of the fund, and where the Company was determined to be most closely associated to the fund within that related party group.
In the case of the Company’s CLOs and a certain joint venture that were classified as VIEs and did not qualify for the deferral under ASU 2010-10, the primary beneficiary was the party that had both (i) the power to direct the activities of the entity that most significantly impact the entity’s economic performance; and (ii) the obligation to absorb losses or the right to receive benefits from the entity that could potentially be significant to the entity. The Company was identified as the primary beneficiary of the CLOs because it directed the investment activities of the CLOs and had the right to receive benefits from the CLOs that could potentially be significant as a result of its fee arrangements.
Finally, certain partnerships that were not determined to be VIEs in which the Company held a substantive equity investment and was determined to be the controlling general partner were classified as voting interest entities (“VOEs”) and consolidated by the Company because the limited partners did not have substantive rights to participate in the ongoing governance and operating activities of the partnership.
Upon the Adoption of ASU 2015-02
Where the Company holds a variable interest in an entity, it is required to determine whether it should consolidate the entity. Under ASU 2015-02, fee arrangements are no longer considered variable interests when they are commensurate with the level of effort required to provide services and include only terms, conditions, or amounts that are customarily present in arrangements for similar services negotiated at arm’s length, and where the Company does not hold other interests in the entity that would absorb more than an insignificant amount of the variability of the entity.
Where the Company does not have a variable interest in the entity, it will not consolidate the entity. Where the Company has a variable interest, it is required to determine whether the entity will be considered as a VIE or VOE, the classification of which will determine the analysis that the Company is required to perform when determining whether it should consolidate the entity.
Funds that are VIEs
Funds that the Company has determined to be VIEs are generally VIEs because fund investors are deemed to lack the characteristics of a controlling financial interest or the entity does not have sufficient equity.
The party identified as the primary beneficiary of a VIE is required to consolidate the entity. The Company is the primary beneficiary of a VIE where it has a controlling financial interest in the entity, which is defined as (i) the power to direct the activities of the entity that most significantly impact the entity’s economic performance; and (ii) the obligation to absorb losses or the right to receive benefits from the entity that could potentially be significant to the entity. Where the Company does not have a controlling financial interest, but is part of a related party group under common control that collectively has power and


11


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
SEPTEMBER 30, 2016



benefits, an assessment as to which party within the related party group is more closely associated with the VIE and would therefore consolidate a VIE. This assessment would also be performed where power is shared within the related party group.
The types of funds that are VIEs and not consolidated are generally (i) master funds and intermediate fund vehicles for the Company’s multi-strategy funds, as well as credit, real estate and similar fund vehicles, as third party investors in these entities have not been granted substantive removal rights and (ii) CLOs, as they lack sufficient equity at risk to finance their expected activities without additional subordinated financial support from other parties. The Company does not consolidate VIEs where it does not have a controlling financial interest.
The types of funds that are VIEs consolidated by the Company are certain new funds that the Company has seeded and generally expects to deconsolidate when the fund has a certain level of additional third party capital.
Funds that are VOEs
Funds that are corporations, or similarly structured entities that are not VIEs, are consolidated by the Company where the Company has an equity investment of greater than 50% and has control over significant operating, financial and investing decisions of the entity. The Company will consolidate partnerships, or similarly structured entities that are not VIEs, where a single investor or simple majority of third party investors with equity cannot exercise substantive kick-out or participating rights over the entity.
The types of funds that are VOEs and not consolidated by the Company are generally feeder funds of the Company’s multi-strategy funds, as third party fund investors in these entities have been granted substantive removal rights.
Recently Adopted Accounting Pronouncements
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. The impact of adoption and the Company’s revised consolidation policies incorporating the changes made by ASU 2015-02 are presented above.
In April 2015, the FASB issued 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 were effective for the Company beginning in first quarter of 2016. The Company reclassified $5.8 million of debt issuance costs in its December 31, 2015 balance sheet from other assets to debt obligations upon the adoption of ASU 2015-03.
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. The requirements of ASU 2015-07 were effective for the Company beginning in the first quarter of 2016, and are applied retrospectively. The impact of ASU 2015-07 was 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 went into effect in the nine months ended September 30, 2016 has had a material effect on the Company’s consolidated financial statements.
Future Adoption of Accounting Pronouncements
In May 2014, the FASB issued 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 ASC. 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


12


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
SEPTEMBER 30, 2016



goods or services. The requirements of ASU 2014-09 are effective for the Company beginning in the first quarter of 2018. Entities are permitted to apply the guidance in ASU 2014-09 using one of the following methods: (i) full retrospective application to each prior period presented, or (ii) 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 Company is currently evaluating the impact, if any, that this update will have on its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases.  ASU 2016-02 significantly changes accounting for lease arrangements, in particular from the perspective of the lessee. The Company is not currently a lessor in any significant lease arrangements, but is a lessee in several lease arrangements that would be impacted by the ASU. Upon adoption of the ASU, where the Company is lessee, the Company will likely be required to recognize certain lease arrangements on its balance sheet for the first time, but will continue to recognize associated expenses on its statement of comprehensive income in a manner similar to existing accounting principles. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. The requirements of ASU 2016-02 are effective for the Company beginning in the first quarter of 2019.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 will change how companies account for certain aspects of share-based payments to employees. Specifically, the ASU will require companies to recognize the income tax effects of awards in the statement of comprehensive income when the awards vest or are settled, increases the amount companies can withhold to cover income taxes on awards and still qualify for the exception to liability classification for shares used to satisfy the employer’s statutory income tax withholding obligation, and will require companies to elect whether to account for forfeitures of share-based payments by either recognizing forfeitures of awards as they occur or by estimating the number of awards expected to be forfeited and adjusting the estimate when it is likely to change, as is currently required. Entities are required to apply amendments related to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements, and forfeitures using a modified retrospective transition method, while amendments related to the recognition of excess tax benefits and tax deficiencies in the statement of comprehensive income should be applied prospectively. The requirements of ASU 2016-09 are effective for the Company beginning in the first quarter of 2017 with early adoption permitted. The Company is currently evaluating the impact that this update will have on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows and should be applied retrospectively. ASU 2016-15 is effective for the Company in the first quarter of 2018 with earlier adoption permitted. The Company is currently in the process of evaluating the impact of adoption on its consolidated financial statements.
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.


13


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
SEPTEMBER 30, 2016



3. DECONSOLIDATION OF CERTAIN OCH-ZIFF FUNDS
As a result of the adoption of ASU 2015-02 on January 1, 2016, the Company is no longer required to consolidate the majority of the Och-Ziff funds previously consolidated. The table below presents the non-cash adjustments to the Company’s balance sheet as a result of the deconsolidation upon the adoption of ASU 2015-02.
 
(dollars in thousands)
Assets
 
Income and fees receivable
$
8,715

Due from related parties
1,896

Deferred income tax assets
18,532

Other assets, net
3,331

Assets of consolidated Och-Ziff funds:
 
Investments, at fair value
(9,036,433
)
Other assets of Och-Ziff funds
(344,719
)
Total Assets
$
(9,348,678
)
 
 
Liabilities and Shareholders' Equity
 
Liabilities
 
Other liabilities
$
81,972

Liabilities of consolidated Och-Ziff funds:
 
Notes and loans payable of consolidated CLOs, at fair value
(7,077,679
)
Securities sold under agreements to repurchase
(190,751
)
Other liabilities of Och-Ziff funds
(47,392
)
Total Liabilities
(7,233,850
)
 
 
Redeemable Noncontrolling Interests
(813,116
)
 
 
Shareholders' Equity
 
Appropriated retained deficit
59,663

Accumulated deficit
(39,887
)
Shareholders' deficit attributable to Class A Shareholders
19,776

Shareholders' equity attributable to noncontrolling interests
(1,321,488
)
Total Shareholders' Equity
(1,301,712
)
Total Liabilities, Redeemable Noncontrolling Interests and Shareholders' Equity
$
(9,348,678
)
4. 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, as well as fund investors’ interests in the consolidated Och-Ziff funds. Net income (loss) allocated to the Och-Ziff Operating Group A Units is driven by the earnings (losses) 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.


14


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
SEPTEMBER 30, 2016



As discussed in Notes 2 and 3, the Company deconsolidated the majority of the previously consolidated Och-Ziff funds, including all of the CLOs. As a result, noncontrolling interests and redeemable noncontrolling interests related to fund investors presented in the tables below decreased substantially from the prior year.
The following table presents the components of the net income (loss) allocated to noncontrolling interests:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Och-Ziff Operating Group A Units
$
16,313

 
$
43,505

 
$
(187,338
)
 
$
175,239

Consolidated Och-Ziff funds

 
35,266

 
262

 
94,723

Other
257

 
200

 
209

 
384

 
$
16,570

 
$
78,971

 
$
(186,867
)
 
$
270,346

The following table presents the components of the shareholders’ equity attributable to noncontrolling interests:
 
September 30, 2016
 
December 31, 2015
 
 
 
 
 
(dollars in thousands)
Och-Ziff Operating Group A Units
$
174,838

 
$
429,312

Consolidated Och-Ziff funds

 
1,224,996

Other
4,348

 
2,090

 
$
179,186

 
$
1,656,398

The following table presents the activity in redeemable noncontrolling interests as presented in the consolidated balance sheets:
 
Nine Months Ended September 30,
 
2016
 
 
 
(dollars in thousands)
Beginning balance
$
832,284

Deconsolidation of Och-Ziff funds on adoption of ASU 2015-02 (See Note 3)
(813,116
)
Capital contributions
4

Comprehensive income
1,801

Ending Balance
$
20,973

Och-Ziff Operating Group Ownership
The Company’s interest in the Och-Ziff Operating Group increased to 37.9% as of September 30, 2016, from 37.8% as of December 31, 2015. Changes in the Company’s interest in the Och-Ziff Operating Group have historically been, and in the future may be, 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 settlement of Class A restricted share units (“RSUs”); (iii) the forfeiture of Och-Ziff Operating Group A Units and related Class B Shares by a departing executive managing director; and (iv) the repurchase of Class A Shares and Och-Ziff Operating Group A Units. 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 settlement 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


15


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
SEPTEMBER 30, 2016



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.
5. 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. government obligations and certain listed derivatives.
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, investments in affiliated credit funds, as well as the notes and loans 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.


16


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
SEPTEMBER 30, 2016



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 September 30, 2016 and December 31, 2015:
 
Fair Value
 
 
 
September 30, 2016
 
December 31, 2015
 
Fair Value Hierarchy
 
 
 
 
 
 
 
(dollars in thousands)
 
 
United States government obligations included within:
 
 
 
 
 
Cash and cash equivalents
$
20,000

 
$

 
Level I
Other assets
$
29,994

 
$
18,501

 
Level I
Consolidated Funds
As a result of the adoption of ASU 2015-02, the Company no longer consolidates the majority of the previously consolidated Och-Ziff funds as of January 1, 2016. In addition, as a result of the adoption of ASU 2015-07, the Company no longer categorizes within the fair value hierarchy investments held at net asset value. Prior year amounts were restated upon the adoption of ASU 2015-07. See Notes 2 and 3 for additional information regarding these ASUs.
The following table summarizes the consolidated funds’ assets measured at fair value on a recurring basis within the fair value hierarchy as of September 30, 2016:
 
As of September 30, 2016
 
Level I

Level II

Level III

Total








 
(dollars in thousands)
Bank debt
$


$
20,580


$
16,250


$
36,830

Total Investments, at Fair Value
$

 
$
20,580

 
$
16,250

 
$
36,830



17


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
SEPTEMBER 30, 2016



The following table summarizes the consolidated funds’ assets and liabilities measured at fair value on a recurring basis within the fair value hierarchy as of December 31, 2015:
 
As of December 31, 2015
 
Level I
 
Level II
 
Level III
 
Total
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Bank debt
$

 
$
4,809,367

 
$
1,998,423

 
$
6,807,790

Real estate investments

 

 
719,957

 
719,957

Residential mortgage-backed securities

 

 
323,571

 
323,571

Collateralized debt obligations

 

 
83,759

 
83,759

Energy and natural resources limited partnerships
2,100

 

 
70,604

 
72,704

Commercial real estate debt

 

 
18,295

 
18,295

Corporate bonds

 
75,149

 

 
75,149

United States government obligations
40,672

 

 

 
40,672

Asset-backed securities

 

 
23,739

 
23,739

Commercial mortgage-backed securities

 

 
13,803

 
13,803

Other investments
316

 
9

 
1,938

 
2,263

Financial Assets, at Fair Value
$
43,088

 
$
4,884,525

 
$
3,254,089

 
$
8,181,702

Investments held at net asset value
 
 
 
 
 
 
890,231

Total Investments, at Fair Value
 
 
 
 
 
 
$
9,071,933

 
 
 
 
 
 
 
 
Senior secured notes and loans payable of consolidated CLOs
$

 
$

 
$
6,636,838

 
$
6,636,838

Subordinated notes payable of consolidated CLOs

 

 
440,841

 
440,841

Notes and loans payable of consolidated CLOs, at fair value

 

 
7,077,679

 
7,077,679

Other liabilities, included within other liabilities of Och-Ziff funds
2,527

 
298

 

 
2,825

Financial Liabilities, at Fair Value
$
2,527

 
$
298

 
$
7,077,679

 
$
7,080,504



18


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
SEPTEMBER 30, 2016



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 or other funds are included within investment purchases.
The following table summarizes the changes in the Company’s Level III assets and liabilities for the three months ended September 30, 2016:
 
June 30, 2016
 
Transfers
In
 
Transfers
Out
 
Investment
Purchases
 
Investment
Sales
 
Derivative Settlements
 
Net Gains
of
Consolidated
Och-Ziff
Funds
 
September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Bank debt
$
8,868

 
$

 
$
(925
)
 
$
19,317

 
$
(11,325
)
 
$

 
$
315

 
$
16,250

The following table summarizes the changes in the Company’s Level III assets and liabilities (excluding notes and loans payable of consolidated CLOs) for the three months ended September 30, 2015:
 
June 30, 2015
 
Transfers In
 
Transfers Out
 
Investment Purchases
 
Investment Sales
 
Derivative Settlements
 
Net Gains (Losses) of Consolidated Och-Ziff Funds
 
September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Bank debt
$
1,802,755

 
$
585,086

 
$
(302,180
)
 
$
249,177

 
$
(273,840
)
 
$

 
$
(43,452
)
 
$
2,017,546

Real estate investments
737,478

 

 

 
46,425

 
(109,908
)
 

 
23,478

 
697,473

Residential mortgage-backed securities
414,331

 

 

 
6,433

 
(25,643
)
 

 
(10,280
)
 
384,841

Collateralized debt obligations
119,162

 

 

 
54

 
(10,187
)
 

 
2,032

 
111,061

Energy and natural resources limited partnerships
77,865

 

 

 
435

 

 

 
(6,351
)
 
71,949

Commercial real estate debt
61,267

 

 

 

 
(45,686
)
 

 
2,402

 
17,983

Corporate bonds
14

 

 

 

 

 

 
(13
)
 
1

Asset-backed securities
23,259

 

 

 
2,320

 
(878
)
 

 
941

 
25,642

Commercial mortgage-backed securities
679

 

 

 
13,599

 
(761
)
 

 
84

 
13,601

Other investments (including derivatives, net)
2,005

 

 

 

 

 
(298
)
 
261

 
1,968

 
$
3,238,815

 
$
585,086

 
$
(302,180
)
 
$
318,443

 
$
(466,903
)
 
$
(298
)
 
$
(30,898
)
 
$
3,342,065



19


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
SEPTEMBER 30, 2016



The following table summarizes the changes in the Company’s Level III assets and liabilities (excluding notes and loans payable of consolidated CLOs) for the nine months ended September 30, 2016:
 
December 31, 2015
 
Transfers
In
 
Transfers
Out
 
Investment
Purchases
 
Investment
Sales
(1)
 
Derivative Settlements
 
Net Gains
of
Consolidated
Och-Ziff
Funds
 
September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Bank debt
$
1,998,423

 
$

 
$
(466
)
 
$
66,545

 
$
(2,049,067
)
 
$

 
$
815

 
$
16,250

Real estate investments
719,957

 

 

 

 
(719,957
)
 

 

 

Residential mortgage-backed securities
323,571

 

 

 

 
(323,571
)
 

 

 

Collateralized debt obligations
83,759

 

 

 

 
(83,759
)
 

 

 

Energy and natural resources limited partnerships
70,604

 

 

 

 
(70,604
)
 

 

 

Commercial real estate debt
18,295

 

 

 

 
(18,295
)
 

 

 

Corporate bonds

 

 

 

 

 

 

 

Asset-backed securities
23,739

 

 

 

 
(23,739
)
 

 

 

Commercial mortgage-backed securities
13,803

 

 

 

 
(13,803
)
 

 

 

Other investments (including derivatives, net)
1,938

 

 

 

 
(1,938
)
 

 

 

 
$
3,254,089

 
$

 
$
(466
)
 
$
66,545

 
$
(3,304,733
)
 
$

 
$
815

 
$
16,250

_______________
(1)
Amounts related to the deconsolidation of the Company’s funds upon the adoption of ASU 2015-02 are included within investment sales.
The following table summarizes the changes in the Company’s Level III assets and liabilities (excluding notes and loans payable of consolidated CLOs) for the nine months ended September 30, 2015
 
December 31, 2014
 
Transfers
In
 
Transfers
Out
 
Investment
Purchases
 
Investment
Sales
 
Derivative Settlements
 
Net Gains
(Losses)
of
Consolidated
Och-Ziff
Funds
 
September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Bank debt
$
2,224,032

 
$
395,995

 
$
(642,790
)
 
$
1,000,120

 
$
(937,128
)
 
$

 
$
(22,683
)
 
$
2,017,546

Real estate investments
645,916

 

 

 
184,535

 
(207,955
)
 

 
74,977

 
697,473

Residential mortgage-backed securities
462,927

 

 

 
33,048

 
(98,020
)
 

 
(13,114
)
 
384,841

Collateralized debt obligations
173,746

 

 

 
7,478

 
(84,103
)
 

 
13,940

 
111,061

Energy and natural resources limited partnerships
65,909

 

 

 
15,707

 
(3,467
)
 

 
(6,200
)
 
71,949

Commercial real estate debt
29,815

 

 

 
33,891

 
(48,849
)
 

 
3,126

 
17,983

Corporate bonds
656

 

 

 
147

 
(521
)
 

 
(281
)
 
1

Asset-backed securities
21,368

 

 

 
6,141

 
(2,844
)
 

 
977

 
25,642

Commercial mortgage-backed securities
3,287

 

 

 
13,598

 
(3,665
)
 

 
381

 
13,601

Other investments (including derivatives, net)
2,144

 

 

 

 
(233
)
 
(668
)
 
725

 
1,968

 
$
3,629,800

 
$
395,995

 
$
(642,790
)
 
$
1,294,665

 
$
(1,386,785
)
 
$
(668
)
 
$
51,848

 
$
3,342,065



20


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
SEPTEMBER 30, 2016



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 periods presented above.
The table below summarizes the net change in unrealized gains and losses on the Company’s Level III assets and liabilities (excluding notes and loans 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 (loss):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Bank debt
$
242

 
$
(42,491
)
 
$
322

 
$
(27,838
)
Real estate investments

 
(4,892
)
 

 
25,920

Residential mortgage-backed securities

 
(14,072
)
 

 
(20,252
)
Collateralized debt obligations

 
(2,239
)
 

 
(1,194
)
Energy and natural resources limited partnerships

 
(6,352
)
 

 
(6,200
)
Commercial real estate debt

 
(99
)
 

 
623

Corporate bonds

 
(13
)
 

 
(252
)
Asset-backed securities

 
993

 

 
1,187

Commercial mortgage-backed securities

 
(34
)
 

 
(337
)
Other investments (including derivatives, net)

 
(46
)
 

 
47

 
$
242

 
$
(69,245
)
 
$
322

 
$
(28,295
)

The table below summarizes the changes in the notes and loans payable of consolidated CLOs for the three and nine months ended September 30, 2015. As a result of the adoption of ASU 2015-02, the Company no longer consolidates any of its CLOs as of January 1, 2016. Accordingly, no tables are presented for the three and nine months ended September 30, 2016.
For the three and nine months ended September 30, 2015, the Company recorded net unrealized gains of $130.1 million and $93.5 million for notes and loans payable of consolidated CLOs still outstanding as of September 30, 2015. Amounts related to the initial consolidation of the Company’s CLOs are included within issuances in the table below.
 
June 30, 2015
 
Issuances
 
Settlements
 
Net Gains of Consolidated
Och-Ziff Funds
 
September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Senior secured notes and loans payable of consolidated CLOs
$
5,827,658

 
$
924,526

 
$
(459,000
)
 
$
(64,878
)
 
$
6,228,306

Subordinated notes payable of consolidated CLOs
500,423

 
40,999

 

 
(65,172
)
 
476,250

 
$
6,328,081

 
$
965,525

 
$
(459,000
)
 
$
(130,050
)
 
$
6,704,556



21


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
SEPTEMBER 30, 2016




December 31, 2014
 
Issuances
 
Settlements
 
Net Losses (Gains) of Consolidated
Och-Ziff Funds
 
September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Senior secured notes and loans payable of consolidated CLOs
$
4,784,134

 
$
1,900,069

 
$
(459,000
)
 
$
3,103

 
$
6,228,306

Subordinated notes payable of consolidated CLOs
443,277

 
127,633

 

 
(94,660
)
 
476,250

 
$
5,227,411

 
$
2,027,702

 
$
(459,000
)
 
$
(91,557
)
 
$
6,704,556

Valuation Methodologies for Fair Value Measurements Categorized within Levels II and III
Bank Debt; Residential and Commercial Mortgage-Backed Securities; Collateralized Debt Obligations; Commercial Real Estate Debt; Corporate Bonds; Asset-Backed Securities; Notes and Loans 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 and loans 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 and yields. Significant increases (decreases) in the discount rates and yields in isolation would be expected to result in a significantly lower (higher) fair value measurement.
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 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.


22


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
SEPTEMBER 30, 2016



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 rate 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.
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.
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, price per square foot and production multiples in isolation would be expected to result in a significantly higher (lower) fair value measurement.
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 held by the consolidated funds as of September 30, 2016.
Type of Investment or Liability
 
Fair Value at
September 30, 2016
 
Valuation Technique
 
Unobservable Input
 
Range
(Weighted-Average)
 
(in thousands)
 
 
 
Bank debt
 
$
16,250

 
Independent pricing services
 
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, 2015.
Type of Investment or Liability
 
Fair Value at
December 31, 2015
 
Valuation Technique
 
Unobservable Input
 
Range
(Weighted-Average)
 
(in thousands)
 
 
 
Bank debt
 
$
1,949,227

 
Independent pricing services
 
n/a
 
 

 
 
49,196

 
Yield analysis
 
Yield
 
14% to 23% (16%)

Real estate investments
 
$
719,957

 
Discounted cash flow
 
Discount rate
 
10% to 30% (19%)

 
 
 
 
 
 
Cash flow growth rate
 
-24% to 36% (3%)

 
 
 
 
 
 
Capitalization rate
 
6% to 12% (8%)

 
 
 
 
 
 
Price per square foot
 
$50 to $187 ($159)

 
 
 
 
 
 
Absorption rate per year
 
0% to 27% (8%)

 
 
 
 
 
 
Exit multiple
 
5.9x to 18.9x (10.3x)

Residential mortgage-backed securities
 
$
312,839

 
Broker quotes
 
n/a
 
 

 
 
10,732

 
Independent pricing services
 
n/a
 
 


23


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
SEPTEMBER 30, 2016