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EX-32.1 - EXHIBIT 32.1 - Sculptor Capital Management, Inc.ozm-10xqx1q2017xex321.htm
EX-31.2 - EXHIBIT 31.2 - Sculptor Capital Management, Inc.ozm-10xqx1q2017xex312.htm
EX-31.1 - EXHIBIT 31.1 - Sculptor Capital Management, Inc.ozm-10xqx1q2017xex311.htm
EX-10.23 - EXHIBIT 10.23 - Sculptor Capital Management, Inc.ozm10q1q2017ex10_23.htm
EX-10.22 - EXHIBIT 10.22 - Sculptor Capital Management, Inc.ozm10q1q2017ex10_22.htm
EX-10.21 - EXHIBIT 10.21 - Sculptor Capital Management, Inc.ozm10q1q2017ex10_21.htm
EX-10.20 - EXHIBIT 10.20 - Sculptor Capital Management, Inc.ozm10q1q2017ex10_20.htm
EX-10.19 - EXHIBIT 10.19 - Sculptor Capital Management, Inc.ozm10q1q2017ex10_19.htm
EX-10.18 - EXHIBIT 10.18 - Sculptor Capital Management, Inc.ozm10q1q2017ex10_18.htm
EX-10.17 - EXHIBIT 10.17 - Sculptor Capital Management, Inc.ozm10q1q2017ex10_17.htm
EX-10.16 - EXHIBIT 10.16 - Sculptor Capital Management, Inc.ozm10q1q2017ex10_16.htm
EX-10.15 - EXHIBIT 10.15 - Sculptor Capital Management, Inc.ozm10q1q2017ex10_15.htm
EX-10.14 - EXHIBIT 10.14 - Sculptor Capital Management, Inc.ozm10q1q2017ex10_14.htm
EX-10.13 - EXHIBIT 10.13 - Sculptor Capital Management, Inc.ozm10q1q2017ex10_13.htm
EX-10.12 - EXHIBIT 10.12 - Sculptor Capital Management, Inc.ozm10q1q2017ex10_12.htm
EX-10.11 - EXHIBIT 10.11 - Sculptor Capital Management, Inc.ozm10q1q2017ex10_11.htm
EX-10.10 - EXHIBIT 10.10 - Sculptor Capital Management, Inc.ozm10q1q2017ex10_10.htm
EX-10.9 - EXHIBIT 10.9 - Sculptor Capital Management, Inc.ozm10q1q2017ex10_9.htm
EX-10.8 - EXHIBIT 10.8 - Sculptor Capital Management, Inc.ozm10q1q2017ex10_8.htm
EX-10.7 - EXHIBIT 10.7 - Sculptor Capital Management, Inc.ozm10q1q2017ex10_7.htm
EX-10.6 - EXHIBIT 10.6 - Sculptor Capital Management, Inc.a10q1q2017ex106.htm
EX-10.5 - EXHIBIT 10.5 - Sculptor Capital Management, Inc.ozm10q1q2017ex10-5.htm
EX-10.4 - EXHIBIT 10.4 - Sculptor Capital Management, Inc.ozm10q1q2017ex10_4.htm
EX-10.3 - EXHIBIT 10.3 - Sculptor Capital Management, Inc.ozm-10xqx1q2017xex103.htm
EX-10.2 - EXHIBIT 10.2 - Sculptor Capital Management, Inc.ozm-10xqx1q2017xex102.htm
EX-10.1 - EXHIBIT 10.1 - Sculptor Capital Management, Inc.ozm-10xqx1q2017xex101.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, 2017
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,” “smaller reporting company” and “emerging growth 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
 
¨
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
¨

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 April 27, 2017, there were 185,127,575 Class A Shares and 267,489,478 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 Holdings LLC
 
 
 
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, 2016, dated March 1, 2017 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
 
 
 
Och-Ziff Operating Group A Units
 
Refers collectively to one Class A operating group unit in each of the Och-Ziff Operating Group entities. Och-Ziff Operating Group A Units are equity interests held by our executive managing directors.
 
 
 
Och-Ziff Operating Group B Units
 
Refers collectively to one Class B operating group unit in each of the Och-Ziff Operating Group entities. Och-Ziff Operating Group B Units are equity interests held by our intermediate holding companies.
 
 
 
Och-Ziff Operating Group D Units
 
Refers collectively to one Class D operating group unit in each of the Och-Ziff Operating Group entities. Och-Ziff Operating Group D Units are non-equity, limited partner profits interests held by our executive managing directors.
 
 
 
Och-Ziff Operating Group P Units
 
Refers collectively to one Class P operating group unit in each of the Och-Ziff Operating Group entities. Och-Ziff Operating Group P Units are equity interests held by our executive managing directors.
 
 
 
Partner Equity Units
 
Refers collectively to the Och-Ziff Operating Group A Units and Och-Ziff Operating Group P Units.
 
 
 
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
 
 
 
Preferred Units
 
One Class A cumulative preferred unit in each of the Och-Ziff Operating Group entities collectively represents one “Preferred Unit.” Certain of our executive managing directors collectively own 100% of the Preferred Units.
 
 
 
Registrant
 
Och-Ziff Capital Management Group LLC, a Delaware limited liability company
 
 
 
Reorganization
 
The reorganization of our business that took place prior to the IPO
 
 
 
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 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
 
March 31, 2017
 
December 31, 2016
 
 
 
 
 
(dollars in thousands)
Assets
 

 
 
Cash and cash equivalents
$
351,810

 
$
329,813

Income and fees receivable
60,319

 
176,638

Due from related parties
19,352

 
20,494

Deferred income tax assets
684,788

 
695,441

Other assets, net (includes assets measured at fair value of $22,048 and $21,341 as of March 31, 2017 and December 31, 2016, respectively)
132,970

 
207,964

Assets of consolidated Och-Ziff funds:
 

 
 
Investments, at fair value
35,996

 
37,661

Other assets of Och-Ziff funds
21,314

 
17,544

Total Assets
$
1,306,549

 
$
1,485,555

 
 
 
 
Liabilities and Shareholders’ (Deficit) Equity
 

 
 
Liabilities
 

 
 
Compensation payable
$
39,031

 
$
206,106

Due to related parties
522,214

 
522,101

Debt obligations
410,612

 
577,128

Other liabilities (includes liabilities measured at fair value of $0 and $8,204 as of March 31, 2017 and December 31, 2016, respectively)
160,078

 
174,994

Liabilities of consolidated Och-Ziff funds:
 

 
 
Other liabilities of Och-Ziff funds
16,658

 
15,197

Total Liabilities
1,148,593

 
1,495,526

 
 
 
 
Commitments and Contingencies (Note 15)


 


 
 
 
 
Redeemable Noncontrolling Interests (Note 3)
441,971

 
284,121

 
 
 
 
Shareholders’ (Deficit) Equity
 

 
 

Class A Shares, no par value, 1,000,000,000 shares authorized, 185,126,953 and 184,843,255 shares issued and outstanding as of March 31, 2017 and December 31, 2016, respectively

 

Class B Shares, no par value, 750,000,000 shares authorized, 267,489,478 and 297,317,019 shares issued and outstanding as of March 31, 2017 and December 31, 2016, respectively

 

Paid-in capital
3,068,788

 
3,097,431

Accumulated deficit
(3,569,763
)
 
(3,563,452
)
Shareholders’ deficit attributable to Class A Shareholders
(500,975
)
 
(466,021
)
Shareholders’ equity attributable to noncontrolling interests
216,960

 
171,929

Total Shareholders’ (Deficit) Equity
(284,015
)
 
(294,092
)
Total Liabilities, Redeemable Noncontrolling Interests and Shareholders’ (Deficit) Equity
$
1,306,549

 
$
1,485,555

See notes to consolidated financial statements.


4


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



 
Three Months Ended March 31,
 
2017
 
2016
 
 
 
 
 
(dollars in thousands)
Revenues
 
 
 
Management fees
$
86,255

 
$
156,910

Incentive income
51,626

 
30,587

Other revenues
776

 
579

Income of consolidated Och-Ziff funds
495

 
366

Total Revenues
139,152

 
188,442


 
 
 
Expenses
 
 
 
Compensation and benefits
69,943

 
54,261

Interest expense
6,280

 
5,386

General, administrative and other
45,928

 
267,669

Expenses of consolidated Och-Ziff funds
84

 
266

Total Expenses
122,235

 
327,582


 
 
 
Other Income
 
 
 
Changes in tax receivable agreement liability

 
145

Net gains on investments in Och-Ziff funds and joint ventures
721

 
249

Net gains of consolidated Och-Ziff funds
235

 
545

Total Other Income
956

 
939


 
 
 
Income (Loss) Before Income Taxes
17,873

 
(138,201
)
Income taxes
12,056

 
18,539

Consolidated and Comprehensive Net Income (Loss)
5,817

 
(156,740
)
Less: (Income) loss attributable to noncontrolling interests
(9,778
)
 
87,845

Less: (Income) loss attributable to redeemable noncontrolling interests
(350
)
 
(461
)
Net Loss Attributable to Och-Ziff Capital Management Group LLC
(4,311
)
 
(69,356
)
Less: Change in redemption value of Preferred Units
(2,853
)
 

Net Loss Attributable to Class A Shareholders
$
(7,164
)
 
$
(69,356
)
 
 
 
 
Loss per Class A Share
 
 
 
Loss per Class A Share - basic
$
(0.04
)
 
$
(0.38
)
Loss per Class A Share - diluted
$
(0.04
)
 
$
(0.38
)
Weighted-average Class A Shares outstanding - basic
186,226,675

 
182,548,852

Weighted-average Class A Shares outstanding - diluted
186,226,675

 
182,548,852

 
 
 
 
Dividends Paid per Class A Share
$
0.01

 
$



See notes to consolidated financial statements.


5



OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT) — UNAUDITED
 
Och-Ziff Capital Management Group LLC
 
 
 
 
 
Number of
Class A
Shares
 
Number of
Class B
Shares
 
Paid-in
Capital
 
Accumulated
Deficit
 
Shareholders' Deficit
Attributable to Class A
Shareholders
 
Shareholders' Equity
Attributable to
Noncontrolling Interests
 
Total
Shareholders’
Equity (Deficit)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(dollars in thousands)
As of December 31, 2016
184,843,255

 
297,317,019

 
$
3,097,431

 
$
(3,563,452
)
 
$
(466,021
)
 
$
171,929

 
$
(294,092
)
Capital contributions

 

 

 

 

 
251

 
251

Capital distributions

 

 

 

 

 
(4,563
)
 
(4,563
)
Cash dividends declared on Class A Shares

 

 

 
(1,849
)
 
(1,849
)
 

 
(1,849
)
Dividend equivalents on Class A restricted share units

 

 
151

 
(151
)
 

 

 

Relinquishment of Och-Ziff Operating Group A Units (Note 3)

 
(30,000,000
)
 

 

 

 

 

Equity-based compensation, net of taxes
283,698

 
172,459

 
7,451

 

 
7,451

 
10,766

 
18,217

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

 

 
(12,173
)
 

 
(12,173
)
 
12,173

 

Dilution of proceeds from tax receivable agreement waiver (Note 3)

 

 
(21,219
)
 

 
(21,219
)
 
21,219

 

Change in redemption value of Preferred Units

 

 
(2,853
)
 

 
(2,853
)
 
(4,593
)
 
(7,446
)
Comprehensive net (loss) income, excluding amounts attributable to redeemable noncontrolling interests

 

 

 
(4,311
)
 
(4,311
)
 
9,778

 
5,467

As of March 31, 2017
185,126,953

 
267,489,478

 
$
3,068,788

 
$
(3,569,763
)
 
$
(500,975
)
 
$
216,960

 
$
(284,015
)
See notes to consolidated financial statements.



6


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

 
Three Months Ended March 31,
 
2017
 
2016
 
 
 
 
 
(dollars in thousands)
Cash Flows from Operating Activities
 
 
 
Consolidated net income (loss)
$
5,817

 
$
(156,740
)
Adjustments to reconcile consolidated net income to net cash provided by operating activities:
 
 
 
Amortization of equity-based compensation
18,478

 
18,542

Depreciation and amortization and loss on disposal of fixed assets
4,212

 
3,402

Deferred income taxes
10,609

 
15,531

Operating cash flows due to changes in:
 
 
 
Income and fees receivable
116,319

 
49,274

Due from related parties
1,142

 
(1,328
)
Other assets, net
18,070

 
4,257

Due to related parties
113

 
(341
)
Compensation payable
(166,951
)
 
(163,749
)
Other liabilities
(14,902
)
 
222,831

Consolidated Och-Ziff funds related items:
 
 
 
Net gains of consolidated Och-Ziff funds
(235
)
 
(545
)
Purchases of investments
(47,831
)
 
(48,974
)
Proceeds from sale of investments
49,750

 
50,700

Other assets of consolidated Och-Ziff funds
(3,789
)
 
(2,163
)
Other liabilities of consolidated Och-Ziff funds
1,456

 
1,741

Net Cash Used in Operating Activities
(7,742
)
 
(7,562
)
 
 
 
 
Cash Flows from Investing Activities
 
 
 
Purchases of fixed assets
(1,335
)
 
(1,331
)
Proceeds from sale of fixed asset (Note 7)
51,724

 

Purchases of United States government obligations

 
(29,915
)
Maturities of United States government obligations

 
18,500

Investment in Och-Ziff funds
(212
)
 
(1,569
)
Return of investment in Och-Ziff funds
3,373

 
554

Net Cash Provided by (Used in) Investing Activities
53,550

 
(13,761
)
 
 
 
 


7


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


 
Three Months Ended March 31,
 
2017
 
2016
 
 
 
 
 
(dollars in thousands)
Cash Flows from Financing Activities
 
 
 
Issuance and sale of Preferred Units, net of issuance costs
150,054

 

Contributions from noncontrolling and redeemable noncontrolling interests
251

 
233

Distributions to noncontrolling and redeemable noncontrolling interests
(4,563
)
 
(1,821
)
Dividends on Class A Shares
(1,849
)
 

Repayment of debt obligations
(167,319
)
 
(905
)
Withholding taxes paid on vested RSUs
(385
)
 
(1,628
)
Other, net

 
100

Net Cash Used in Financing Activities
(23,811
)
 
(4,021
)
Net Change in Cash and Cash Equivalents
21,997

 
(25,344
)
Cash and Cash Equivalents, Beginning of Period
329,813

 
254,070

Cash and Cash Equivalents, End of Period
$
351,810

 
$
228,726

 
 
 
 
 
 
 
 
Supplemental Disclosure of Cash Flow Information
 

 
 
Cash paid during the period:
 

 
 
Interest
$
1,960

 
$
419

Income taxes
$
1,149

 
$
545


See notes to consolidated financial statements.


8


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
MARCH 31, 2017




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, 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”) (collectively, the “Operating Partnerships,” and collectively with their consolidated subsidiaries, 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, 2016 (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 actual amounts of discretionary cash bonuses being recorded in the fourth quarter each year. All significant intercompany transactions and balances have been eliminated in consolidation.


9


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
MARCH 31, 2017



Interim Accrual of Annual Discretionary Cash Bonus
In the first quarter of 2017, the Company decided to provide a minimum annual discretionary cash bonus. As a result of this decision, the Company will accrue the minimum annual discretionary cash bonus on a straight-line basis during the year. The total amount of discretionary cash bonuses ultimately recognized for the full year, which is determined in the fourth quarter of each year, could differ materially from the minimum amount accrued, as the total discretionary cash bonus is dependent upon a variety of factors, including fund performance for the year. 
Reclassification of Changes in Tax Receivable Agreement Liability
In the first quarter of 2017, the Company reclassified the changes in tax receivable agreement liability from general, administrative and other expenses to other income (loss) in the consolidated statements of comprehensive income (loss). Prior period amounts have been reclassified to conform to the current year presentation. The reclassification had no impact on the Company’s results of operations.
Recently Adopted Accounting Pronouncements
In March 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-09, Improvements to Employee Share-Based Payment Accounting. The requirements of ASU 2016-09 were effective for the Company beginning in the first quarter of 2017. As permitted under the new guidance, the Company has made an accounting policy election to account for forfeitures on share-based compensation arrangements as they occur. Prior to the adoption of ASU 2016-09, the Company was required to estimate forfeitures. The decision to no longer estimate forfeitures was not material to the financial statements. Additionally, the Company will recognize all income tax effects of awards within consolidated and comprehensive net income when the awards vest or are settled. Prior to the adoption of ASU 2016-09, excess tax benefits were recorded to paid-in capital, while tax deficiencies were recorded in consolidated and comprehensive net income to the extent in excess of previously recorded excess tax benefits. The amendments related to the recognition of excess tax benefits and tax deficiencies in the statement of comprehensive income were applied prospectively.
In October 2016, the FASB issued ASU 2016-17, Consolidation (Topic 810): Interests Held through Related Parties that Are under Common Control. The guidance was effective for the Company beginning in the first quarter of 2017. ASU 2016-17 amended the consolidation guidance with respect to a single decision maker’s evaluation of interests held through related parties that are under common control when it is determining whether it is the primary beneficiary of a variable interest entity (“VIE”). Under the amended guidance, a reporting entity considers its indirect economic interests in a VIE held through related parties that are under common control on a proportionate basis, consistent with the way it would evaluate its indirect economic interests held through related parties that are not under common control. The adoption of ASU 2016-17 did not have a material impact on the Company’s consolidated financial statements.
None of the other changes to GAAP that went into effect in the three months ended March 31, 2017 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 goods or services. The Company is in the process of implementing the new revenue guidance and is continuing to evaluate the effect the ASU will have on its consolidated financial statements, including, whether the Company: (a) will be required to recognize incentive income earlier than as prescribed under current guidance, (b) should present certain revenue streams on a gross or net basis depending on whether it is identified as principal or agent in a transaction where the standard’s core principle is one of control and not risks and rewards, as is the cash with the current guidance, and (c) whether certain costs associated with


10


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
MARCH 31, 2017



business development and deal origination, which are currently recognized as an expense as incurred, should be initially deferred and subsequently recognized as an expense over a specified period. The ASU also introduces new qualitative and quantitative disclosure requirements and requires disaggregation of revenue information beyond that which is currently required, that will significantly impact the information presented in the notes to the Company’s consolidated financial statements. The Company expects to adopt ASU 2014-09 using a modified retrospective application approach in the first quarter of 2018.
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. The Company has determined that most of its operating leases will be reported as lease obligations, along with offsetting right to use assets on its consolidated balance sheet at their present value, and will continue to recognize associated expenses within consolidated net income (loss) in a manner similar to the existing accounting for leases (i.e., on a straight-line basis over the lease term). 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. See Note 17 of the Company’s Annual Report for details related to the Company’s existing operating lease obligations.
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 AND OCH-ZIFF OPERATING GROUP OWNERSHIP
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 fund investors’ interests in the consolidated Och-Ziff funds.
Net income (loss) attributable to the Och-Ziff Operating Group A Units is driven by the earnings (losses) of the Och-Ziff Operating Group. Net income attributable to fund investors’ interests in consolidated Och-Ziff funds is driven by the earnings of those funds.
As of March 31, 2017, Och-Ziff Operating Group P Units (as defined below) do not participate in the economics of the Och-Ziff Operating Group and will remain non-participating until certain service and performance conditions are met, as described below.
The following table presents the components of the net income (loss) attributable to noncontrolling interests:
 
Three Months Ended March 31,
 
2017
 
2016
 
 
 
 
 
(dollars in thousands)
Och-Ziff Operating Group A Units
$
9,635

 
$
(88,019
)
Consolidated Och-Ziff funds

 
262

Other
143

 
(88
)
 
$
9,778

 
$
(87,845
)


11


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
MARCH 31, 2017



The following table presents the components of the shareholders’ equity attributable to noncontrolling interests:
 
March 31, 2017
 
December 31, 2016
 
 
 
 
 
(dollars in thousands)
Och-Ziff Operating Group A Units
$
212,738

 
$
166,521

Consolidated Och-Ziff funds

 

Other
4,222

 
5,408

 
$
216,960

 
$
171,929

The Preferred Units and fund investors’ interests in certain consolidated Och-Ziff funds are redeemable outside of the Company’s control. These interests are classified within redeemable noncontrolling interests in the consolidated balance sheets. The following table presents the activity in redeemable noncontrolling interests:
 
Three Months Ended March 31, 2017
 
Consolidated Funds
 
Preferred Units
 
Total
 
 
 
 
 
 
 
(dollars in thousands)
Beginning balance
$
21,621

 
$
262,500

 
$
284,121

Change in redemption value of Preferred Units

 
7,446

 
7,446

Preferred Units issuance, net of issuance costs

 
150,054

 
150,054

Comprehensive income
350

 

 
350

Ending Balance
$
21,971

 
$
420,000

 
$
441,971

Och-Ziff Operating Group Ownership
The Company’s equity interest in the Och-Ziff Operating Group increased to 40.9% as of March 31, 2017, from 38.3% as of December 31, 2016. 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 and P 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 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 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.
Och-Ziff Operating Group P Units, 2017 Incentive Program and Limited Partnership Agreements Amendments
On February 13, 2017, the Company’s board of directors approved the Och-Ziff Capital Management Group LLC 2017 Incentive Program (the “2017 Incentive Program”). Under the terms of the 2017 Incentive Program, the Company granted Class P common units in each Operating Partnership (an “Incentive Award”) to certain executive managing directors. One Class P common unit in each Operating Partnership, collectively, is referred to as an “Och-Ziff Operating Group P Unit.”
The Company granted 71.9 million Och-Ziff Operating Group P Units in March 2017, at the average fair value of $1.25 per unit. The fair value was determined using the Monte-Carlo simulation valuation model, with the following assumptions: volatility of 35.7%, dividend rate of 10.0%, and risk-free discount rate of 2.2%. The requisite service period for these Incentive Awards was estimated to be 3.9 years at the time of the grant. Total unrecognized stock-based compensation expense related to


12


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
MARCH 31, 2017



unvested awards was $89.5 million. There were 71.9 million Och-Ziff Operating Group P Units outstanding as of March 31, 2017.
A grant of Och-Ziff Operating Group P Units will conditionally vest upon the applicable executive managing directors satisfying a service condition (the “Service Condition”) and certain market performance-based targets, expressed as percentages (the “Performance Condition”) being satisfied, as follows: 20% of Units vest upon a Performance Condition of 25% being achieved (i.e., total shareholder return from the contractually determined reference price of $3.21); an additional 40% (for a total of 60%) of Units vest upon a Performance Condition of 50% being achieved; an additional 20% (for a total of 80%) of Units vest upon a Performance Condition of 75% being achieved; and an additional 20% (for a total of 100%) of the Units vest upon a Performance Condition of 125% being achieved. Achievement of the applicable Performance Conditions earlier than estimated can materially affect the amount of equity-based compensation expense recognized by the Company in any given period.
Executive managing directors will be entitled to receive distributions on their Och-Ziff Operating Group P Units only after satisfaction of the Service Condition and the Performance Condition, from which time the executive managing director will be entitled to receive the same distributions per Unit on each Och-Ziff Operating Group P Unit as holders of Och-Ziff Operating Group A Units and Och-Ziff Operating Group D Units.
If a holder of an Incentive Award has not satisfied both the Service Condition and the applicable Performance Condition has not been met with respect to the units comprising such Incentive Award by the sixth anniversary of the respective grant date, such units will be forfeited and canceled immediately.
Upon satisfaction of the Service Condition and the Performance Condition, Och-Ziff Operating Group P Units may be exchanged at the executive managing director’s discretion for Class A Shares (or the cash value thereof, as determined by the Board) provided that (i) sufficient Appreciation (as defined in the Limited Partnership Agreements) has occurred for each Och-Ziff Operating Group P Unit to have become economically equivalent to an Och-Ziff Operating Group A Unit, and (ii) shareholders approve an amendment to the Company’s 2013 Incentive Plan to reserve a sufficient number of Class A Shares under the 2013 Incentive Plan. Upon the exchange of an Och-Ziff Operating Group P Unit for a Class A Share (or the cash equivalent), the exchanging executive managing director will have a right to potential future payments owed to him or her under the tax receivable agreement.
Effective March 1, 2017, the Board of Directors approved amendments to the Limited Partnership Agreements of the Operating Partnerships that, in addition to the events discussed above, adjust the measurement thresholds used in determining whether sufficient Appreciation has taken place for Och-Ziff Operating Group D Units issued prior to March 1, 2017, to have become economically equivalent to Och-Ziff Operating Group A Units. This amendment makes it more likely that outstanding Och-Ziff Operating Group D Units will convert to Och-Ziff Operating Group A Units.
Relinquishment of Och-Ziff Operating Group A Units
Och-Ziff Corp and Och-Ziff Holding, as the general partners of the Operating Partnerships, entered into a Relinquishment Agreement with Daniel S. Och and certain family trusts over which Mr. Och has investment control (the “Och Trusts”) effective as of March 1, 2017 (the “Relinquishment Agreement”). Pursuant to the Relinquishment Agreement, Mr. Och and the Och Trusts agreed to cancel, in the aggregate, 30.0 million of their vested Och-Ziff Operating Group A Units. The Relinquishment Agreement provides that if any of the Och-Ziff Operating Group D Units granted to James S. Levin on March 1, 2017 are forfeited, such forfeited units (up to an aggregate amount of 30.0 million) shall be reallocated to Mr. Och and the Och Trusts pursuant to the terms of the Limited Partnership Agreements. The Company accounted for the transaction as a repurchase of Och-Ziff Operating Group A Units for no consideration. A corresponding number of Class B Shares were also canceled.
Dilution of Proceeds from Tax Receivable Agreement Waiver
In September 2016, the Company amended the tax receivable agreement to provide that no amounts will be due or payable under the tax receivable agreement by Och-Ziff Corp, one of the Company’s wholly owned intermediate holding


13


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
MARCH 31, 2017



companies, with respect to the 2015 and 2016 taxable years. During the first quarter of 2017, Och-Ziff Corp contributed to the Och-Ziff Operating Group the cash previously set aside for such payments, which resulted in a reallocation of such contribution between the Company’s paid-in capital and the paid-in capital of the Och-Ziff Operating Group A Units (including within noncontrolling interests).
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. 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, and investments in affiliated credit funds.
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.


14


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
MARCH 31, 2017



Fair Value Measurements Categorized within the Fair Value Hierarchy
The following table summarizes assets measured at fair value on a recurring basis within the fair value hierarchy as of March 31, 2017:
 
As of March 31, 2017
 
Level I

Level II

Level III

Total








 
(dollars in thousands)
Investments of Och-Ziff, Excluding the Investments of Consolidated Och-Ziff Funds
 
 
 
 
United States government obligations included within cash and cash equivalents
$
19,977

 
$

 
$

 
$
19,977

Investments in CLO included within other assets, net (1) (2)

 

 
22,048

 
22,048

 
$
19,977

 
$

 
$
22,048

 
$
42,025

 
 
 
 
 
 
 
 
Investments of Consolidated Och-Ziff Funds
 
 
 
 
 
 
 
Bank debt
$

 
$
19,333

 
$
16,663

 
$
35,996

_______________
(1) As of March 31, 2017, investments in CLO had contractual principal amounts of $21.6 million outstanding.
(2) The Company elected to measure its investments in CLO at fair value through consolidated net income (loss) in order to simplify its accounting for these instruments. Changes in fair value of these investments are included within net gains on investments in Och-Ziff funds and joint ventures in the consolidated statements of comprehensive income (loss). The Company accrues interest income on its investments in CLO using the effective interest method.
The following table summarizes assets and liabilities measured at fair value on a recurring basis within the fair value hierarchy as of December 31, 2016:
 
As of December 31, 2016
 
Level I
 
Level II
 
Level III
 
Total
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Investments of Och-Ziff, Excluding the Consolidated Funds
 
 
 
 
 
 
 
United States government obligations included within cash and cash equivalents
$
139,974

 
$

 
$

 
$
139,974

Investments in CLO included within other assets, net (1) (2)

 

 
21,341

 
21,341

 
$
139,974

 
$

 
$
21,341

 
$
161,315

 
 
 
 
 
 
 
 
Investments of Consolidated Och-Ziff Funds
 
 
 
 
 
 
 
Bank debt
$

 
$
19,534

 
$
18,127

 
$
37,661

 
 
 
 
 
 
 
 
Liabilities of Och-Ziff, Excluding the Consolidated Funds
 
 
 
 
 
 
 
Obligation to deliver loans subject to forward sale agreement included within other liabilities
$

 
$
8,204

 
$

 
$
8,204

_______________
(1) As of December 31, 2016, investments in CLO had contractual principal amounts of $21.3 million outstanding.
(2) The Company elected to measure its investments in CLO at fair value through consolidated net income (loss) in order to simplify its accounting for these instruments. Changes in fair value of these investments are included within net gains on investments in Och-Ziff funds and joint ventures in the consolidated statements of comprehensive income (loss). The Company accrues interest income on its investments in CLO using the effective interest method.



15


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
MARCH 31, 2017



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. Gains and losses of Och-Ziff, excluding the consolidated funds are recorded within net gains on investments in Och-Ziff funds and joint ventures in the consolidated statements of comprehensive income (loss), and gains and losses of the consolidated Och-Ziff funds are recorded within net gains (losses) of consolidated Och-Ziff funds. Amounts related to the deconsolidation of the Company’s funds upon the adoption of ASU 2015-02 on January 1, 2016 are included within investment sales.
The following table summarizes the changes in the Company’s Level III assets and liabilities for the three months ended March 31, 2017:

December 31, 2016

Transfers
In
 
Transfers
Out
 
Investment
Purchases / Issuances
 
Investment
Sales / Settlements
 
Derivative Settlements
 
Gains (Losses)

March 31, 2017

















(dollars in thousands)
Investments of Och-Ziff, Excluding the Consolidated Funds















Investments in CLO
$
21,341

 
$

 
$

 
$

 
$

 
$

 
$
707

 
$
22,048


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments of Consolidated Och-Ziff Funds
 
 
 
 
 
 
 
 
 
 
Bank debt
$
18,127

 
$
771

 
$
(4,878
)
 
$
27,497

 
$
(25,120
)
 
$

 
$
266

 
$
16,663


The following table summarizes the changes in the Company’s Level III assets and liabilities for the three months ended March 31, 2016
 
December 31, 2015
 
Transfers
In
 
Transfers
Out
 
Investment
Purchases / Issuances
 
Investment
Sales / Settlements
 
Derivative Settlements
 
Gains (Losses)
 
March 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Bank debt
$
1,998,423

 
$
460

 
$
(489
)
 
$
19,614

 
$
(2,014,334
)
 
$

 
$
307

 
$
3,981

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

 
$
460

 
$
(489
)
 
$
19,614

 
$
(3,270,000
)
 
$

 
$
307

 
$
3,981

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.


16


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
MARCH 31, 2017



The table below summarizes the net change in unrealized gains and losses on the Company’s Level III assets and liabilities 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 March 31,
 
2017
 
2016
 
 
 
 
 
(dollars in thousands)
Investments of Och-Ziff, Excluding the Consolidated Funds
 
 
 
Investments in CLO
$
707

 
$

 
 
 
 
Investments of Consolidated Och-Ziff Funds
 
 
 
Bank Debt
$
113

 
$
36

Valuation Methodologies for Fair Value Measurements Categorized within Levels II and III
Investments in CLO and bank debt are valued using independent pricing services and thus there are no unobservable valuation inputs used in determining their fair value to disclose. For valuation methodologies of investments that were deconsolidated on January 1, 2016, please refer to the Company’s Annual Report.
Valuation Process for Fair Value Measurements Categorized within Level III
The Company has established an internal control infrastructure over the valuation of financial instruments that includes ongoing oversight by its Financial Controls Group and Valuation Committee, as well as periodic audits by the Company’s Internal Audit Group. These control functions are segregated from the trading and investing functions.
The Valuation Committee is responsible for establishing the valuation policy and monitors compliance with the valuation policy, ensuring that all of the funds’ investments reflect fair value, as well as providing oversight of the valuation process. The valuation policy includes, but is not limited to the following: determining the pricing sources used to value specific investment classes; the selection of independent pricing services; performing due diligence of independent pricing services; and the classification of investments within the fair value hierarchy. The Valuation Committee reviews a variety of reports on a monthly basis, which include, but are not limited to the following: summaries of the sources used to determine the value of the funds’ investments; summaries of the fair value hierarchy of the funds’ investments; methodology changes and variance reports that compare the values of investments to independent pricing services. The Valuation Committee is independent from the investment professionals and may obtain input from investment professionals for consideration in carrying out its responsibilities.
The Valuation Committee has assigned the responsibility of performing price verification and related quality controls in accordance with the valuation policy to the Financial Controls Group. The Financial Controls Group’s other responsibilities include, but are not limited to the following: overseeing the collection and evaluation of counterparty prices, broker-dealer quotations, exchange prices and pricing information provided by independent pricing services. Additionally, the Financial Control Group is responsible for performing back testing by comparing prices observed in executed transactions to valuations and/or valuations provided by independent pricing service providers on a bi-weekly and monthly basis; performing stale pricing analysis on a monthly basis; performing due diligence reviews on independent pricing services on an annual basis; and recommending changes in valuation policies to the Valuation Committee. The Financial Controls Group also verifies that indicative broker quotations used to value certain investments are representative of fair value 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.
When pricing or verification sources cannot be obtained from external sources or if external prices are deemed unreliable, additional procedures are performed by the Financial Controls Group, which may include comparing unobservable inputs to observable inputs for similar positions, reviewing subsequent market activities, performing comparisons of actual versus


17


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
MARCH 31, 2017



projected performance indicators, and reviewing the valuation methodology and key inputs. Independent third party valuation firms may be used to corroborate internal valuations.
Investment professionals and members of the Financial Controls Group review a daily profit and loss report, as well as other periodic reports that analyze the profit and loss and related asset class exposure of the funds’ investments.
The Internal Audit Group employs a risk-based program of audit coverage that is designed to provide an assessment of the design and effectiveness of controls over the Company’s operations, regulatory compliance, valuation of financial instruments and reporting. Additionally, the Internal Audit Group meets periodically with management and the Audit Committee of the Company’s Board of Directors to evaluate and provide guidance on the existing risk framework and control environment assessments.
Fair Value of Other Financial Instruments
Management estimates that the carrying value of the Company’s other financial instruments, including its debt obligations, approximated their fair values as of March 31, 2017. The Senior Notes are categorized as Level II and the CLO Investment Loan is categorized as Level III within the fair value hierarchy. The fair value of the Senior Notes and the CLO Investment Loan were determined using independent pricing services.
5. TRANSFERS OF FINANCIAL ASSETS
Investment in CLO and Related Transactions
In the fourth quarter of 2016, the Company purchased $27.4 million of Euro-denominated loans in the open market and contemporaneously entered into a forward sale agreement to sell the loans at cost to a European CLO managed by the Company. As of March 31, 2017, the entire balance of $27.4 million of the loans subject to the forward sale agreement was transferred and the criteria for derecognition met. The Company sold the derecognized loans to the CLO at cost, and therefore there were no realized gains or losses recognized on the sale.
In the fourth quarter of 2016, the Company purchased $21.5 million of senior secured and subordinated notes issued by the CLO to which it sold the loans discussed above. These investments in the CLO represent retained interests to the Company. The retained interest is reported as investment in CLO, at fair value, within other assets, net in the Company’s consolidated balance sheet (see Note 7).
The Company uses independent pricing services to value its investments in the CLO, and therefore the only key assumption is the price provided by such service. A corresponding adverse change of 10% or 20% on price would have a corresponding impact on the fair value of the Company’s investment. The Company has not yet received payments from its investment in the CLO nor any management fees from the CLO and does not expect to receive any payments until July 2017, in accordance with the underlying contractual agreements.


18


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
MARCH 31, 2017



6. VARIABLE INTEREST ENTITIES
In the ordinary course of business, the Company sponsors the formation of funds that are considered VIEs. See Note 2 of the Company’s Annual Report for a discussion of entities that are VIEs and the evaluation of those entities for consolidation by the Company.
The table below presents the assets and liabilities of VIEs consolidated by the Company:
 
March 31, 2017
 
December 31, 2016
 
 
 
 
 
(dollars in thousands)
Assets
 

 
 

Assets of consolidated Och-Ziff funds:
 

 
 

Investments, at fair value
$
35,996

 
$
37,661

Other assets of Och-Ziff funds
21,314

 
17,544

Total Assets
$
57,310

 
$
55,205

 
 
 
 
Liabilities
 

 
 

Liabilities of consolidated Och-Ziff funds:
 

 
 

Other liabilities of Och-Ziff funds
16,658

 
15,197

Total Liabilities
$
16,658

 
$
15,197

The assets presented in the table above belong to the investors in those funds, are available for use only by the fund to which they belong, and are not available for use by the Company. The consolidated funds have no recourse to the general credit of the Company with respect to any liability.
The Company’s direct involvement with funds that are VIEs and not consolidated by the Company is generally limited to providing asset management services and, in certain cases, direct investments in the VIEs. The maximum exposure to loss represents the potential loss of current investments or income and fees receivables from these entities, as well as the obligation to repay unearned revenues, primarily incentive income subject to clawback, in the event of any future fund losses. The Company has commitments to certain funds that are VIEs as discussed in Note 15. The Company does not provide, nor is it required to provide, any type of non-contractual financial or other support to its VIEs that are not consolidated.
The table below presents the net assets of VIEs in which the Company has variable interests:
 
March 31, 2017
 
December 31, 2016
 
(dollars in thousands)
Net assets of unconsolidated VIEs in which the Company has a variable interest
$
3,988,814

 
$
4,069,617

 
 
 
 
Maximum risk of loss as a result of the Company's involvement with VIEs:
 
 
 
Unearned revenues
101,260

 
96,409

Income and fees receivable
27,165

 
13,074

Investments in Och-Ziff funds
34,423

 
35,868

Maximum Exposure to Loss
$
162,848

 
$
145,351



19


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
MARCH 31, 2017



7. OTHER ASSETS, NET
The following table presents the components of other assets, net as reported in the consolidated balance sheets:
 
March 31, 2017
 
December 31, 2016
 
 
 
 
 
(dollars in thousands)
Fixed Assets:
 

 
 

Corporate aircraft held for sale
$
4,571

 
$
56,251

Leasehold improvements
52,415

 
54,414

Computer hardware and software
40,996

 
40,093

Furniture, fixtures and equipment
8,909

 
8,919

Accumulated depreciation and amortization
(51,666
)
 
(49,890
)
Fixed assets, net
55,225

 
109,787

Investments in Och-Ziff funds:
 
 
 
Investments in CLO, at fair value
22,048

 
21,341

Investments in other funds, equity method
14,301

 
16,453

Investments in Och-Ziff funds
36,349

 
37,794

Goodwill
22,691

 
22,691

Prepaid expenses
13,329

 
12,753

Trades receivable for loans subject to forward sale agreement

 
10,391

Loans held for sale

 
8,204

Other
5,376

 
6,344

Total Other Assets, Net
$
132,970

 
$
207,964

In March 2017, the Company sold one of its corporate aircraft for $51.7 million. The Company expects to sell the remaining corporate aircraft held for sale in the second quarter of 2017.
8. OTHER LIABILITIES
The following table presents the components of other liabilities as reported in the consolidated balance sheets:
 
March 31, 2017
 
December 31, 2016
 
 
 
 
 
(dollars in thousands)
Unearned incentive income
$
100,870

 
$
96,079

Accrued expenses
28,286

 
30,728

Deferred rent credit
9,951

 
15,046

Interest payable
6,608

 
2,654

Loan trades payable

 
10,391

Obligation to deliver loans subject to forward sale agreement, at fair value

 
8,204

Other
14,363

 
11,892

Total Other Liabilities
$
160,078

 
$
174,994



20


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
MARCH 31, 2017



9. DEBT OBLIGATIONS
As of March 31, 2017, the Company’s outstanding indebtedness was primarily comprised of senior notes (the “Senior Notes”) and a secured loan to finance the purchase of the Company’s investments in a CLO (“CLO Investment Loan”). The table below presents scheduled principal payments on the Company’s debt obligations for each of the next five years:
 
Scheduled Payments (1)
 
 
 
(dollars in thousands)
April 1, 2017 - December 31, 2017
$

2018
$

2019
$
400,000

2020
$

2021
$

_______________
(1) The Company is not currently able to make a reasonable estimate of the timing of payments in individual years in connection with the CLO Investment Loan (as defined below), as the timing of those payments is contingent on principal payments made to the Company on the Investments in CLO, and therefore the Company did not include those principal payments in the table above.
Senior Notes
On November 20, 2014, the Company issued $400.0 million of Senior Notes due November 20, 2019, unless earlier redeemed or repurchased. The Senior Notes were issued at a price of 99.417% of the aggregate principal amount and bear interest at a rate per annum of 4.50% payable semiannually in arrears. The Senior Notes are unsecured and unsubordinated obligations issued by a subsidiary of the Company, Och-Ziff Finance Co. LLC (“Och-Ziff Finance”), and are fully and unconditionally guaranteed, jointly and severally, on an unsecured and unsubordinated basis by OZ Management, OZ Advisors I and OZ Advisors II (collectively, the “Senior Notes Guarantors”).
The Senior Notes may be redeemed from time to time at the Company’s option, in whole or in part, at a redemption price equal to the greater of 100% of the principal amount to be redeemed and a make-whole redemption price (as defined in the Senior Notes indenture), in either case, plus any accrued and unpaid interest. If a change of control repurchase event occurs, the Company will be required to offer to repurchase the Senior Notes at a price equal to 101% of the aggregate principal amount, plus any accrued and unpaid interest.
The Senior Notes do not have any financial maintenance covenants. However, the Senior Notes include certain covenants, including limitations on Och-Ziff Finance’s and, as applicable, the Senior Notes Guarantors’ ability to, subject to exceptions, incur indebtedness secured by liens on voting stock or profit participating equity interests of their respective subsidiaries or merge, consolidate or sell, transfer or lease all or substantially all assets. The Senior Notes also provide for customary events of default, bankruptcy, insolvency or reorganization that may cause the Senior Notes to become immediately due and payable, plus any accrued and unpaid interest.
Revolving Credit Facility
On November 20, 2014, the Company entered into a $150.0 million, 5-year unsecured Revolving Credit Facility, which was subsequently amended on December 29, 2015, the proceeds of which may be used for working capital, general corporate purposes or other liquidity needs. The facility matures on November 20, 2019. The borrower under the Revolving Credit Facility is OZ Management and the facility is guaranteed by OZ Advisors I, OZ Advisors II and Och-Ziff Finance. The Company is able to increase the maximum amount of credit available under the facility to $225.0 million if certain conditions are satisfied.


21


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
MARCH 31, 2017



The Company is subject to a fee of 0.10% to 0.25% per annum on undrawn commitments during the term of the Revolving Credit Facility. Outstanding borrowings will bear interest at a rate per annum of LIBOR plus 1.00% to 2.00%, or a base rate plus 0% to 1.00%. The commitment fees and the spreads over LIBOR or the base rate are based on OZ Management’s credit rating throughout the term of the facility. The interest rate on the drawn portion of the commitment during the quarter ended March 31, 2017 was LIBOR plus 2.00%, and the undrawn commitment fee was 0.25%.
In March 2017, the Company repaid its outstanding obligation under the Revolving Credit Facility in full, and as a result has $150.0 million available under the facility as of March 31, 2017.
The Revolving Credit Facility includes two financial maintenance covenants. The first covenant prohibits total fee-paying assets under management as of the last day of any fiscal quarter to be less than $22.0 billion for two successive quarters. The second covenant prohibits the economic income leverage ratio (as defined in the Revolving Credit Facility) as of the last day of any fiscal quarter from exceeding 4.0 to 1.0. The Revolving Credit Facility allows a limited right to cure an event of default resulting from noncompliance with the economic income leverage ratio test with an equity contribution made to the borrower, OZ Management. Such cure right may not be used more than two times in any four-quarter period or more than three times during the term of the facility.
The Revolving Credit Facility includes provisions that restrict or limit, among other things, the ability of Och-Ziff Operating Group from:
Incurring certain additional indebtedness or issuing certain equity interest.
Creating liens.
Paying dividends or making certain other payments when there is a default or event of default under the Revolving Credit Facility.
Merging, consolidating, selling or otherwise disposing of its assets.
Engaging in certain transactions with shareholders or affiliates.
Engaging in a substantially different line of business.
Amending its organizational documents in a manner materially adverse to the lenders.
The Revolving Credit Facility permits the Och-Ziff Operating Group to incur, among other things, up to $150.0 million of indebtedness, up to an additional $200.0 million of indebtedness for financing of investments in CLOs in order to comply with risk retention regulatory requirements, and additional indebtedness so long as, after giving effect to the incurrence of such indebtedness, it is in compliance with an economic income leverage ratio of 4.0 to 1.0 and no default or event of default has occurred and is continuing. The facility also permits the Och-Ziff Operating Group to create liens to, among other things, secure indebtedness related to financing of CLO risk retention investments, as well as other indebtedness and obligations of up to $50.0 million.
Aircraft Loan
In February 2014, the Company entered into the Aircraft Loan to finance installment payments towards the purchase of a corporate aircraft. In March 2017, the Company sold the aircraft and repaid the outstanding principal balance in the amount of $46.4 million.
CLO Investment Loan
On November 28, 2016, the Company entered into a $16.0 million loan to finance 75% of its investment in the CLO (see Note 5). The CLO Investment Loan is collateralized by the notes of the CLO held by the Company and is subject to an interest rate of EURIBOR plus 2.23%. In general, the Company will make interest and principal payments on the CLO


22


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
MARCH 31, 2017



Investment Loan at such time interest payments are received on its investment in the CLO and will make principal payments on the CLO Investment Loan to the extent principal payments are received on its investment in the CLO. Any remaining unpaid principal balance is due on December 15, 2023. The CLO Investment Loan is subject to customary events of default and covenants and includes terms that require the Company’s continued involvement with the CLO. As of March 31, 2017, $16.2 million of principal was outstanding under the CLO Investment Loan.
10. PREFERRED UNITS
Pursuant to a securities purchase agreement, dated September 29, 2016 (the “Purchase Agreement”), certain of the Company’s executive managing directors, including Daniel S. Och (the “EMD Purchasers”), agreed to purchase up to a total of 400,000 Preferred Units for an aggregate amount of up to $400.0 million. On October 5, 2016, the Company completed a $250.0 million issuance and sale of 250,000 Preferred Units. On January 23, 2017, the Company completed an additional $150.0 million issuance and sale of 150,000 Preferred Units.
Distributions on the Preferred Units are payable on the liquidation preference amount and on a cumulative basis at an initial distribution rate of 0% per annum until February 19, 2020 (the “Step-up Date”), after which the distribution rate will increase in stages thereafter to a maximum of 10% per annum on and after the eighth anniversary of the Step-up Date. Subject to certain exceptions, unless distributions on the Preferred Units are declared and paid in cash for the then current distribution period and all preceding periods after the initial closing, the Och-Ziff Operating Group entities may not declare or pay distributions on or repurchase any of their equity securities that rank equal with or junior to the Preferred Units.
Following the occurrence of a change of control event, the Och-Ziff Operating Group entities will redeem the Preferred Units at a redemption price equal to the liquidation preference plus all accumulated but unpaid distributions (collectively, the “liquidation value”). For so long as the Och-Ziff Operating Group entities do not redeem all of the outstanding Preferred Units, the distribution rate will increase by 7% per annum, beginning on the 31st day following such change in control. The Och-Ziff Operating Group entities will not be required to effect such redemption until the earlier of (i) 91 days after the maturity date of the Revolving Credit Facility and (ii) the payment in full of all loans and other obligations and the termination of all commitments thereunder.
The Och-Ziff Operating Group entities may, at their option, redeem the Preferred Units at a price equal to: (i) 105% of the liquidation value until the day immediately prior to the Step-up Date; (ii) 103% of the liquidation value thereafter until the day immediately prior to the first anniversary of the Step-up Date; (iii) 101% of the liquidation value thereafter until the day immediately prior to the second anniversary of the Step-up Date; and (iv) thereafter at a price equal to the liquidation value. In addition, from and after March 31, 2020, if the amounts that were distributed to partners of the Och-Ziff Operating Group entities in respect of their equity interests in the Och-Ziff Operating Group entities (other than amounts distributed in respect of tax distributions or certain other distributions) or utilized for repurchase of units by such entities (or which were available but not used for such purposes) for the immediately preceding fiscal year were in excess of $100 million in the aggregate, then an amount equal to 20% of such excess shall be utilized to redeem Preferred Units on a pro rata basis for an amount equal to the liquidation value.
Furthermore, if the average closing price of the Company’s Class A Shares exceeds $15.00 per share for the previous 20 trading days, the Och-Ziff Operating Group entities have agreed to use their reasonable best efforts to redeem all of the outstanding Preferred Units as promptly as practicable. If such event occurs prior to February 19, 2020, the Company has agreed to use its reasonable best efforts to obtain consents from its lenders in order to redeem the Preferred Units as promptly as practicable.
Although the Preferred Units do not have voting rights, the consent of the holders’ committee, which initially consists of Daniel S. Och as sole member, is required to effect (i) any amendment to or waiver of the terms of the Preferred Units or (ii) any amendment to the limited partnership agreement of an Och-Ziff Operating Group entity that would have an adverse effect on any holder of the Preferred Units. Under the terms of the Preferred Units, each Och-Ziff Operating Group entity is


23


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
MARCH 31, 2017



prohibited from issuing any equity securities (or any debt or other securities convertible into equity securities of such entity) that rank equally with, or senior to, the Preferred Units, without the prior written consent of the holders’ committee.
As of March 31, 2017, the Company had 400,000 Preferred Units issued and outstanding.
11. INCOME TAXES
The computation of the effective tax rate and provision at each interim period requires the use of certain estimates and significant judgment including, but not limited to, the expected operating income for the year, projections of the proportion of income earned and taxed in foreign jurisdictions, permanent differences, and the likelihood of recovering deferred tax assets existing as of the balance sheet date. The estimates used to compute the provision for income taxes may change as new events occur, additional information is obtained or as tax laws and regulations change. Additionally, the amount of incentive income and discretionary cash bonuses recorded in any given quarter can have a significant impact on the Company’s effective tax rate. Accordingly, the effective tax rate for interim periods is not indicative of the tax rate expected for a full year.
The Registrant and each of the Och-Ziff Operating Group entities are partnerships for U.S. federal income tax purposes. Due to the Company’s legal structure, only a portion of the income earned by the Company is subject to corporate-level tax rates in the United States and in foreign jurisdictions.
The provision for income taxes includes federal, state and local taxes in the United States and foreign taxes at an approximate effective tax rate of 67.5% and -13.4% for the three months ended March 31, 2017 and 2016, respectively. The reconciling items from the Company’s statutory rate to the effective tax rate were driven primarily by the following: (i) a portion of the Company’s consolidated net income is not subject to federal, state and local corporate income taxes in the United States, as these amounts are allocated to the executive managing directors on their Och-Ziff Operating Group A Units or to fund investors in the Company’s consolidated funds (each of which is included within noncontrolling interests); (ii) a portion of the income earned by the Company is subject to the New York City unincorporated business tax; (iii) certain foreign subsidiaries are subject to foreign corporate income taxes; and (iv) the valuation allowance on the Company’s foreign tax credits increased during the quarter.
In accordance with GAAP, the Company recognizes tax benefits for amounts that are “more likely than not” to be sustained upon examination by tax authorities. For uncertain tax positions in which the benefit to be realized does not meet the “more likely than not” threshold, the Company establishes a liability, which is included within other liabilities in the consolidated balance sheets.
As of March 31, 2017 and December 31, 2016, the Company had a liability for unrecognized tax benefits of $7.0 million. As of and for the three months ended March 31, 2017, the Company did not accrue interest or penalties related to uncertain tax positions. As of March 31, 2017, the Company does not believe that there will be a significant change to the uncertain tax positions during the next 12 months. The Company’s total unrecognized tax benefits that, if recognized, would affect its effective tax rate was $4.6 million as of March 31, 2017.


24


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
MARCH 31, 2017



12. GENERAL, ADMINISTRATIVE AND OTHER
The following table presents the components of general, administrative and other expenses as reported in the consolidated statements of comprehensive income (loss):
 
Three Months Ended March 31,
 
2017
 
2016
 
(dollars in thousands)
Professional services
$
13,148

 
$
23,375

Occupancy and equipment
10,903

 
9,328

Information processing and communications
7,029

 
10,349

Recurring placement and related service fees
5,444

 
12,531

Business development
2,757

 
4,669

Insurance
1,960

 
4,004

Other expenses
4,687

 
3,413

 
45,928

 
67,669

FCPA settlements expense

 
200,000

Total General, Administrative and Other
$
45,928

 
$
267,669

13. (LOSS) EARNINGS PER CLASS A SHARE
Basic (loss) earnings per Class A Share is computed by dividing the net (loss) income attributable to Class A Shareholders by the weighted-average number of Class A Shares outstanding for the period. For the three months ended March 31, 2017 and 2016 the Company included 1,326,320 and 1,364,560 RSUs respectively, that have vested but have not been settled in Class A Shares in the weighted-average Class A Shares outstanding used to calculate basic and diluted (loss) earnings per Class A Share.
The Company did not include the Och-Ziff Operating Group P Units in the calculations of dilutive earnings per share, as the equity awards are not yet participating in the economics of the Company as the Performance Conditions have not been met as of March 31, 2017 (see Note 3).
The following tables present the computation of basic and diluted (loss) earnings per Class A Share:
Three Months Ended March 31, 2017
Net Loss Attributable to Class A Shareholders
 
Weighted-Average
Class A Shares
Outstanding
 
Loss Per Class A Share
 
Number of
Antidilutive Units
Excluded from
Diluted Calculation
 
 
 
 
 
 
 
 
 
(dollars in thousands, except per share amounts)
Basic
$
(7,164
)
 
186,226,675

 
$
(0.04
)
 
 
Effect of dilutive securities:
 
 
 
 
 
 
 
Och-Ziff Operating Group A Units

 

 
 
 
287,004,764

RSUs

 

 
 
 
19,730,352

Diluted
$
(7,164
)
 
186,226,675

 
$
(0.04
)
 
 


25


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
MARCH 31, 2017



Three Months Ended March 31, 2016
Net Loss Attributable to Class A Shareholders
 
Weighted-Average
Class A Shares
Outstanding
 
Loss Per Class A Share
 
Number of
Antidilutive Units
Excluded from
Diluted Calculation
 
 
 
 
 
 
 
 
 
(dollars in thousands, except per share amounts)
Basic
$
(69,356
)
 
182,548,852

 
$
(0.38
)
 
 
Effect of dilutive securities:
 
 
 
 
 
 
 
Och-Ziff Operating Group A Units

 

 
 
 
297,317,019

RSUs

 

 
 
 
14,758,228

Diluted
$
(69,356
)
 
182,548,852

 
$
(0.38
)
 
 
14. RELATED PARTY TRANSACTIONS
Due from Related Parties
Amounts due from related parties relate primarily to amounts due from the Och-Ziff funds for expenses paid on their behalf. These amounts are reimbursed to the Company on an ongoing basis.
Due to Related Parties
Amounts due to related parties relate primarily to future payments owed to the Company’s executive managing directors and the Ziffs under the tax receivable agreement, as discussed further in Note 15.
Management Fees and Incentive Income Earned from the Och-Ziff Funds
The Company earns substantially all of its management fees and incentive income from the Och-Ziff funds, which are considered related parties as the Company manages the operations of and makes investment decisions for these funds.
Management Fees and Incentive Income Earned from Related Parties and Waived Fees
As of March 31, 2017 and 2016, respectively, approximately $2.5 billion, of the Company’s assets under management represented investments by the Company, its executive managing directors, employees and certain other related parties in the Company’s funds. As of March 31, 2017 and 2016, approximately 65% and 49%, respectively, of these affiliated assets under management were not charged management fees and were not subject to an incentive income calculation.
The following table presents management fees and incentive income charged on investments held by related parties before the impact of eliminations related to the consolidated funds:
 
Three Months Ended March 31,
 
2017
 
2016
 
 
 
 
 
(dollars in thousands)
Fees charged on investments held by related parties:
 
 
 
Management fees
$
2,691

 
$
4,767

Incentive income
$
1,878

 
$
920



26


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
MARCH 31, 2017



Corporate Aircraft
The Company’s corporate aircraft are used for business purposes. From time to time, certain executive managing directors use the aircraft for personal use. For the three months ended March 31, 2017 and 2016 the Company charged $291 thousand and $321 thousand, respectively, for personal use of the aircraft by certain executive managing directors.
15. COMMITMENTS AND CONTINGENCIES
Tax Receivable Agreement
The purchase of Och-Ziff Operating Group A Units from the executive managing directors and the Ziffs with the proceeds from the 2007 Offerings, and subsequent taxable exchanges by them of Partner Equity Units for Class A Shares on a one-for-one basis (or, at the Company’s option, a cash equivalent), resulted, and, in the case of future exchanges, are anticipated to result, in an increase in the tax basis of the tangible and intangible assets of the Och-Ziff Operating Group that would not otherwise have been available. As a result, the Company expects that its future tax liability will be reduced. Pursuant to the tax receivable agreement entered into among the Company, the executive managing directors and the Ziffs, the Company has agreed to pay to the executive managing directors and the Ziffs 85% of the amount of tax savings, if any, actually realized by the Company.
The Company recorded its initial estimate of future payments under the tax receivable agreement as a decrease to paid-in capital and an increase in amounts due to related parties in the consolidated financial statements. Subsequent adjustments to the liability for future payments under the tax receivable agreement related to changes in estimated future tax rates or state income tax apportionment are recognized through current period earnings in the consolidated statements of comprehensive income (loss).
In connection with the departure of certain former executive managing directors since the IPO, the right to receive payments under the tax receivable agreement by those former executive managing directors was contributed to the Och-Ziff Operating Group. As a result, the Company expects to pay to the remaining executive managing directors and the Ziffs approximately 78% (from 85% at the time of the IPO) of the amount of cash savings, if any, in federal, state and local income taxes in the United States that the Company actually realizes as a result of the increases in tax basis.
The estimate of the timing and the amount of future payments under the tax receivable agreement involves several assumptions that do not account for the significant uncertainties associated with these potential payments, including an assumption that Och-Ziff Corp will have sufficient taxable income in the relevant tax years to utilize the tax benefits that would give rise to an obligation to make payments. The actual timing and amount of any actual payments under the tax receivable agreement will vary based upon these and a number of other factors. As of March 31, 2017, the estimated future payment under the tax receivable agreement was $520.8 million, which is recorded in due to related parties on the consolidated balance sheets.
Lease Obligations
The Company has non-cancelable operating leases for its headquarters in New York expiring in 2029 and various other operating leases for its offices in London, Hong Kong, Mumbai, Beijing, Shanghai and Houston expiring on various dates through 2024. The Company also has operating leases for other locations, as well as operating leases on computer hardware. The Company recognizes expense related to its operating leases on a straight-line basis over the lease term taking into account any rent holiday periods. The related lease commitments have not changed materially since December 31, 2016.
Litigation
From time to time, the Company is involved in litigation and claims incidental to the conduct of the Company’s business. The Company is also subject to extensive scrutiny by regulatory agencies globally that have, or may in the future have, regulatory authority over the Company and its business activities. This has resulted, or may in the future result, in regulatory agency investigations, litigation and subpoenas and costs related to each.


27


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
MARCH 31, 2017



On May 5, 2014, a purported class of shareholders filed a lawsuit against the Company in the U.S. District Court for the Southern District of New York (Menaldi v. Och-Ziff Capital Mgmt., et al.). The amended complaint asserted claims under the Securities Exchange Act of 1934 on behalf of all purchasers of Company securities from February 9, 2012 to August 22, 2014. Daniel Och, Joel Frank and Michael Cohen were also named as defendants. On March 16, 2015, all defendants moved to dismiss the amended complaint. On February 17, 2016, the court entered an order granting in part the motion to dismiss filed by the Company and Messrs. Och and Frank and dismissing Mr. Cohen from the action. On March 23, 2016, the Company and Messrs. Och and Frank filed their answer to the amended complaint. On November 18, 2016, plaintiffs filed a second amended complaint asserting claims under the Securities Exchange Act of 1934 on behalf of all purchasers of Company securities from November 18, 2011 to April 11, 2016. The second amended complaint alleges, among other things, breaches of certain disclosure obligations with respect to matters that were under investigation by the SEC and the DOJ, and names the Company and Messrs. Och, Frank and Cohen as defendants. On November 23, 2016, Mr. Cohen objected to being named as a defendant in the second amended complaint on procedural grounds. On December 21, 2016, the court directed the plaintiffs to file a motion for permission to renew their claims against Mr. Cohen. Plaintiffs filed their motion on January 7, 2017, and Mr. Cohen filed his opposition on January 21, 2017. On January 11, 2017, the Company and Messrs. Och and Frank filed motions to dismiss those portions of the second amended complaint that seek to revive dismissed claims or assert new claims against them. On March 24, 2017, plaintiffs filed their opposition to the motion to dismiss.
The Company believes the pending case is without merit and intends to defend it vigorously. The Company is unable to reasonably estimate the amount of loss or range of loss possible for this case.
Unearned Incentive Income
The Company receives incentive income distributions from certain real estate funds that are subject to clawback in the event of future losses in the respective fund. The Company recognizes this incentive income when it is no longer subject to clawback. These clawback contingencies will be resolved as remaining investments in the respective funds are realized, the timing of which is uncertain. The following table summarizes the activity in the Company’s unearned incentive income liability as of March 31, 2017:
 
Unearned Incentive Income
 
(dollars in thousands)
Balance as of December 31, 2016
$
96,079

Incentive income collected but subject to clawback
5,995

Incentive income recognized
(1,204
)
Balance as of March 31, 2017
$
100,870

Investment Commitments
From time to time, certain funds consolidated by the Company may have commitments to fund investments. These commitments are funded through contributions from investors in those funds, including the Company if it is an investor in the relevant fund.
The Company has unfunded capital commitments of $21.9 million to certain funds it manages. It expects to fund these commitments over the next five years. In addition, certain of the Company’s executive managing directors, collectively, have capital commitments to funds managed by the Company of up to $39.9 million. The Company has guaranteed these commitments in the event any executive managing director fails to fund any portion when called by the fund. The Company has historically not funded any of these commitments and does not expect to in the future, as these commitments are expected to be funded by the Company’s executive managing directors individually.


28


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
MARCH 31, 2017



The Company has committed to fund a portion of the operating budget for a joint venture. The amount of the commitment will be equal to the actual costs incurred in the projects the joint venture manages, as determined by the Company and its joint venture partner. The joint venture periodically returns substantially all of the cash that is contributed by the Company, as expenses incurred by the joint venture are generally reimbursed by the projects it manages.
Other Contingencies
In the normal course of business, the Company enters into contracts that provide a variety of general indemnifications. Such contracts include those with certain service providers, brokers and trading counterparties. Any exposure to the Company under these arrangements could involve future claims that may be made against the Company. Currently, no such claims exist or are expected to arise and, accordingly, the Company has not accrued any liability in connection with such indemnifications.
16. SEGMENT INFORMATION
The Company’s operating segments are the Och-Ziff Funds segment and the Company’s real estate business. The Och-Ziff Funds, which provides asset management services to the Company’s multi-strategy funds, dedicated credit funds and other alternative investment vehicles, is currently the Company’s only reportable operating segment under GAAP. The Company’s real estate business, which provides asset management services to its real estate funds, is included in the Other Operations, as it does not meet the threshold of a reportable operating segment under GAAP.
In addition to analyzing the Company’s results on a GAAP basis, management also reviews its results on an “Economic Income” basis. Economic Income excludes the adjustments described below that are required for presentation of the Company’s results on a GAAP basis, but that management does not consider when evaluating operating performance in any given period. Management uses Economic Income as the basis on which it evaluates the Company’s financial performance and makes resource allocation and other operating decisions. Management considers it important that investors review the same operating information that it uses.
Economic Income is a measure of pre-tax operating performance that excludes the following from the Company’s results on a GAAP basis:
Income allocations to the Company’s executive managing directors on their direct interests in the Och-Ziff Operating Group. Management reviews operating performance at the Och-Ziff Operating Group level, where the Company’s operations are performed, prior to making any income allocations.
Equity-based compensation expenses, depreciation and amortization expenses, and gains and losses on assets held for sale, as management does not consider these non-cash expenses to be reflective of operating performance. However, the fair value of RSUs that are settled in cash to employees or executive managing directors is included as an expense at the time of settlement.
Changes in the tax receivable agreement liability and gains and losses on investments in Och-Ziff funds, as management does not consider these to be reflective of operating performance.
Amounts related to the consolidated Och-Ziff funds, including the related eliminations of management fees and incentive income, as management reviews the total amount of management fees and incentive income earned in relation to total assets under management and fund performance.
In addition, expenses related to incentive income profit-sharing arrangements are generally recognized at the same time the related incentive income revenue is recognized, as management reviews the total compensation expense related to these arrangements in relation to any incentive income earned by the relevant fund. Deferred cash compensation is expensed in full in the year granted for Economic Income, rather than over the service period for GAAP.


29


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
MARCH 31, 2017



Finally, management reviews Economic Income revenues by presenting management fees net of recurring placement and related service fees, rather than considering these fees an expense, and by excluding the impact of eliminations related to the consolidated Och-Ziff funds.
Management does not regularly review assets by operating segment in assessing operating segment performance and the allocation of company resources; therefore, the Company does not present total assets by operating segment. Substantially all interest income and all interest expense related to outstanding indebtedness is allocated to the Och-Ziff Funds segment. The Company’s FCPA settlements were all allocated to the Och-Ziff Funds segment.
Och-Ziff Funds Segment Results
 
Three Months Ended March 31,
 
2017
 
2016
 
 
 
 
 
(dollars in thousands)
Och-Ziff Funds Segment:
 
 
 
Economic Income Revenues
$
126,724

 
$
166,769

Economic Income
$
43,446

 
$
(119,939
)
Reconciliation of Och-Ziff Funds Segment Revenues to Consolidated Revenues
 
Three Months Ended March 31,
 
2017
 
2016
 
 
 
 
 
(dollars in thousands)
Total consolidated revenues
$
139,152

 
$
188,442

Adjustment to management fees(1) 
(5,444
)
 
(12,531
)
Adjustment to incentive income(2) 

 

Other Operations revenues
(6,489
)
 
(8,776
)
Income of consolidated Och-Ziff funds
(495
)
 
(366
)
Economic Income Revenues - Och-Ziff Funds Segment
$
126,724

 
$
166,769

_______________
(1)
Adjustment to present management fees net of recurring placement and related service fees, as management considers these fees a reduction in management fees, not an expense. The impact of eliminations related to the consolidated Och-Ziff funds is also removed.
(2)
Adjustment to exclude the impact of eliminations related to the consolidated Och-Ziff funds.


30


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
MARCH 31, 2017



Reconciliation of Och-Ziff Funds Segment Economic Income to Loss Attributable to Class A Shareholders
 
Three Months Ended March 31,
 
2017
 
2016
 
 
 
 
 
(dollars in thousands)
Net Loss Attributable to Class A Shareholders—GAAP
$
(7,164
)
 
$
(69,356
)
Change in redemption value of Preferred Units
2,853

 

Net Loss Attributable to Och-Ziff Capital Management Group LLC—GAAP
$
(4,311
)
 
$
(69,356
)
Net income (loss) attributable to the Och-Ziff Operating Group A Units
9,635

 
(88,019
)
Equity-based compensation, net of RSUs settled in cash
18,478

 
18,542

Income taxes
12,056

 
18,539

Allocations to Och-Ziff Operating Group D Units
3,360

 
875

Adjustment for expenses related to compensation and profit-sharing arrangements based on fund investment performance
1,979

 
1,264

Changes in tax receivable agreement liability

 
(145
)
Depreciation and amortization and loss on disposal of fixed assets
4,212

 
3,402

Other adjustments
(1,011
)
 
(431
)
Other Operations
(952
)
 
(4,610
)
Economic Income - Och-Ziff Funds Segment
$
43,446

 
$
(119,939
)
17. SUBSEQUENT EVENTS
Dividend
On May 2, 2017, the Company announced a cash dividend of $0.02 per Class A Share. The dividend is payable on May 19, 2017, to holders of record as of the close of business on May 12, 2017.


31



Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in “Part II—Item 1A. Risk Factors” of this report. Actual results may differ materially from those contained in any forward-looking statements. This MD&A should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this quarterly report. An investment in our Class A Shares is not an investment in any of our funds.
Overview
Preferred Units Offering
As discussed in Note 10 to our consolidated financial statements, on September 29, 2016, we entered into the Purchase Agreement with the EMD Purchasers. Pursuant to the Purchase Agreement, the EMD Purchasers agreed to purchase up to $400.0 million of Preferred Units. In October 2016, we issued $250.0 million of the Preferred Units to the EMD Purchasers. An additional $150.0 million of Preferred Units were issued to the EMD Purchasers in January 2017. We used the proceeds from the Preferred Units issued in October 2016, as well as cash on hand, to pay the $412.1 million in penalties and disgorgement related to the settlements with the SEC and the DOJ discussed above. We used the proceeds from the second sale of the Preferred Units in January 2017 to pay the outstanding balance under our Revolving Credit Facility.
Overview of Our Financial Results
We reported GAAP net loss attributable to Class A Shareholders of $7.2 million for the 2017 first quarter, compared to net loss of $69.4 million for the 2016 first quarter, primarily due to the $200.0 million FCPA settlements expense taken in the first quarter of 2016, as well as higher incentive income and lower income taxes year-over-year, partially offset by lower management fees. Also partially offsetting the year-over-year improvement in net loss was higher bonus expense, which was driven by our decision to provide a minimum annual discretionary cash bonus. As a result of this decision, we will accrue the minimum annual discretionary cash bonus on a straight-line basis during the year. The total amount of discretionary cash bonuses ultimately recognized for the full year, which is determined in the fourth quarter of each year, could differ materially from the minimum amount accrued, as the total discretionary cash bonus is dependent upon a variety of factors, including fund performance for the year.
We reported Economic Income of $44.4 million for the 2017 first quarter, compared to net loss of $115.3 million for the 2016 first quarter, primarily due to the $200.0 million FCPA settlements expense taken in the first quarter of 2016, as well as higher incentive income. These improvements were partially offset by lower management fees, as well as higher bonus expense due to our decision to provide a minimum annual discretionary cash bonus.
Economic Income is a non-GAAP measure. For additional information regarding non-GAAP measures, as well as for a discussion of the drivers of the year over year change in Economic Income, please see “—Economic Income Analysis.”
Overview of Assets Under Management and Fund Performance
Assets under management totaled $33.9 billion as of March 31, 2017. Longer-dated assets under management, which are those subject to initial commitment periods of three years or longer, were $16.9 billion, comprising 50% of our total assets under management as of March 31, 2017.
Assets under management in our multi-strategy funds totaled $17.7 billion as of March 31, 2017, decreasing 36%, or $9.8 billion, year-over-year. This change was driven by net capital outflows of $12.1 billion, primarily in the OZ Master Fund, our largest multi-strategy fund, partially offset by performance-related appreciation of $2.3 billion. Our multi-strategy funds experienced elevated redemptions and reduced inflows during 2016 and into early 2017 as a result of the FCPA matter, the related inability to rely on Regulation D, and the overall redemption cycle currently affecting the hedge fund industry.
OZ Master Fund generated a gross return of 5.5% and a net return of 4.1% year-to-date through March 31, 2017. These returns were driven by the fund’s long/short equity special situations, merger arbitrage, credit-related and convertible and derivative arbitrage strategies. Please see “—Assets Under Management and Fund Performance—Multi-Strategy Funds” for additional information regarding the returns of the OZ Master Fund.


32



Assets under management in our dedicated credit products totaled $13.3 billion as of March 31, 2017, increasing $920.0 million, or 7%, year-over-year. This change was driven by capital net inflows of $591.2 million and performance-related appreciation of $893.0 million, partially offset by $564.1 million of distributions and other reductions in our closed-end opportunistic credit funds.
Assets under management in our opportunistic credit funds were $5.3 billion as of March 31, 2017. OZ Credit Opportunities Master Fund, our global opportunistic credit fund, generated a gross return of 4.6% and a net return of 3.2% year-to-date through March 31, 2017. These returns were driven in part by realizations in corporate credit, structured credit and successful resolutions in various distressed situations. Assets under management for the fund were $1.7 billion as of March 31, 2017.
Assets under management in Institutional Credit Strategies were $8.0 billion as of March 31, 2017, increasing $771.6 million, or 11%, year-over-year. The increase was primarily driven by two additional CLOs that closed in the 2016 fourth quarter, including our first European CLO. We also refinanced three existing CLOs totaling $1.3 billion of par value during the first quarter.
Assets under management in our real estate funds totaled $2.2 billion as of March 31, 2017, increasing $121.8 million year-over-year. Since inception through March 31, 2017, the net internal rate of return (“IRR”) was 21.0% for Och-Ziff Real Estate Fund II (for which the investment period ended in 2014), and 15.7% for Och-Ziff Real Estate Fund I (for which the investment period ended in 2010).
Assets Under Management and Fund Performance
Our financial results are primarily driven by the combination of our assets under management and the investment performance of our funds. Both of these factors directly affect the revenues we earn from management fees and incentive income. Growth in assets under management due to capital placed with us by investors in our funds and positive investment performance of our funds drive growth in our revenues and earnings. Conversely, poor investment performance slows our growth by decreasing our assets under management and increasing the potential for redemptions from our funds, which would have a negative effect on our revenues and earnings.
We typically accept capital from new and existing investors in our funds on a monthly basis on the first day of each month. Investors in our multi-strategy and our open-end opportunistic credit funds (other than with respect to capital invested in Special Investments) typically have the right to redeem their interests in a fund following an initial lock-up period of one to three years. Following the expiration of these lock-up periods, subject to certain limitations, investors may redeem capital generally on a quarterly or annual basis upon giving 30 to 90 days’ prior written notice. However, upon the payment of a redemption fee to the applicable fund and upon giving 30 days’ prior written notice, certain investors may redeem capital during the lock-up period. The lock-up requirements for our funds may generally be waived or modified at the sole discretion of each fund’s general partner or board of directors, as applicable.
With respect to investors with quarterly redemption rights, requests for redemptions submitted during a quarter generally reduce assets under management on the first day of the following quarter. Accordingly, quarterly redemptions generally will have no impact on management fees during the quarter in which they are submitted. Instead, these redemptions will reduce management fees in the following quarter. With respect to investors with annual redemption rights, redemptions paid prior to the end of a quarter impact assets under management in the quarter in which they are paid, and therefore impact management fees for that quarter.
Investors in our closed-end credit funds, Institutional Credit Strategies products, real estate and certain other funds are not able to redeem their investments. In those funds, investors generally make a commitment that is funded over an investment period (or at launch for our CLOs). Upon the expiration of the investment period, the investments are then sold or realized over time, and distributions are made to the investors in the fund.
In a declining market, during periods when the hedge fund industry generally experiences outflows, or in response to specific company events, we could experience increased redemptions and a consequent reduction in our assets under management. Recently, our assets under management have declined and we believe this trend will likely continue to some extent


33



for some period of time in light of the recently settled FCPA matter, the related inability to rely on Regulation D, and the current redemption trend in the hedge fund industry.
Information with respect to our assets under management throughout this report, including the tables set forth below, includes investments by us, our executive managing directors, employees and certain other related parties. As of March 31, 2017, approximately 7% of our assets under management represented investments by us, our executive managing directors, employees and certain other related parties in our funds. As of that date, approximately 65% of these affiliated assets under management are not charged management fees and are not subject to an incentive income calculation. Additionally, to the extent that an Och-Ziff fund is an investor in another Och-Ziff fund, we waive or rebate a corresponding portion of the management fees charged to the fund.
As further discussed below in “—Understanding Our Results—Revenues,” we generally calculate management fees based on assets under management as of the beginning of each quarter. The assets under management in the tables below are presented net of management fees and incentive income as of the end of the period. Accordingly, the assets under management presented in the tables below are not the amounts used to calculate management fees for the respective periods.
Summary of Changes in Assets Under Management
The tables below present the changes to our assets under management for the respective periods based on the type of funds or investment vehicles we manage.
 
Three Months Ended March 31, 2017
 
December 31, 2016
 
Inflows / (Outflows)
 
Distributions / Other Reductions
 
Appreciation / (Depreciation)
 
March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Multi-strategy funds
$
21,084,548

 
$
(4,159,118
)
 
$

 
$
777,041

 
$
17,702,471

Credit
 
 
 
 
 
 
 
 
 
Opportunistic credit funds
5,417,498

 
(211,182
)
 
(19,769
)
 
140,457

 
5,327,004

Institutional Credit Strategies
8,019,510

 
3,453

 

 
(8,602
)
 
8,014,361

Real estate funds
2,171,946

 
33,474

 
(16,432
)
 
642

 
2,189,630

Other
1,186,801

 
(495,048
)
 
(30,016
)
 
22,631

 
684,368

Total
$
37,880,303

 
$
(4,828,421
)
 
$
(66,217
)
 
$
932,169

 
$
33,917,834

 
Three Months Ended March 31, 2016
 
December 31, 2015
 
Inflows / (Outflows)
 
Distributions / Other Reductions
 
Appreciation / (Depreciation)
 
March 31, 2016
 
 
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Multi-strategy funds
$
29,510,248

 
$
(1,054,252
)
 
$

 
$
(944,866
)
 
$
27,511,130