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EX-32.1 - EXHIBIT 32.1 - Sculptor Capital Management, Inc.ozm-10xqx2q2018xex321.htm
EX-31.2 - EXHIBIT 31.2 - Sculptor Capital Management, Inc.ozm-10xqx2q2018xex312.htm
EX-31.1 - EXHIBIT 31.1 - Sculptor Capital Management, Inc.ozm-10xqx2q2018xex311.htm
EX-10.7 - EXHIBIT 10.7 - Sculptor Capital Management, Inc.exhibit107.htm
EX-10.6 - EXHIBIT 10.6 - Sculptor Capital Management, Inc.exhibit106.htm
EX-10.5 - EXHIBIT 10.5 - Sculptor Capital Management, Inc.exhibit105.htm
EX-10.4 - EXHIBIT 10.4 - Sculptor Capital Management, Inc.exhibit104.htm
EX-10.3 - EXHIBIT 10.3 - Sculptor Capital Management, Inc.exhibit103.htm
EX-10.2 - EXHIBIT 10.2 - Sculptor Capital Management, Inc.exhibit102.htm
EX-10.1 - EXHIBIT 10.1 - Sculptor Capital Management, Inc.ozm-10xqx2q2018xex101.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 June 30, 2018
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
 
¨
  
Accelerated filer
 
þ
 
 
 
 
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 July 30, 2018, there were 191,414,891 Class A Shares and 303,839,478 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, 2017, dated February 23, 2018 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 Oz Operating Partnerships 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 our business
 
 
 
funds
 
The multi-strategy funds, dedicated credit funds, including opportunistic credit funds and Institutional Credit Strategies products, real estate funds and other alternative investment vehicles for which we provide asset management services
 
 
 
GAAP
 
U.S. generally accepted accounting principles
 
 
 
Group A Units
 
Refers collectively to one Class A operating group unit in each of the Oz Operating Partnerships. Group A Units are equity interests held by our executive managing directors
 
 
 
Group B Units
 
Refers collectively to one Class B operating group unit in each of the Oz Operating Partnerships. Group B Units are equity interests held by our intermediate holding companies
 
 
 
Group D Units
 
Refers collectively to one Class D operating group unit in each of the Oz Operating Partnerships. Group D Units are non-equity, limited partner profits interests held by our executive managing directors
 
 
 
Group P Units
 
Refers collectively to one Class P operating group unit in each of the Oz Operating Partnerships. Group P Units are equity interests held by our executive managing directors
 
 
 
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
 
 
 
intermediate holding companies
 
Refers collectively to Oz Corp and Oz Holding, both of which are wholly owned subsidiaries of Och-Ziff Capital Management Group LLC
 
 
 
IPO
 
Our initial public offering of 36.0 million Class A Shares that occurred in November 2007


1



 
 
 
NYSE
 
New York Stock Exchange
 
 
 
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 Oz Operating Group
 
 
 
Oz Corp
 
Och-Ziff Holding Corporation, a Delaware corporation
 
 
 
Oz Holding
 
Och-Ziff Holding LLC, a Delaware limited liability company
 
 
 
Oz Operating Group
 
Refers collectively to the Oz Operating Partnerships and their consolidated subsidiaries
 
 
 
Oz Operating Partnerships
 
Refers collectively to OZ Management LP, OZ Advisors LP and OZ Advisors II LP
 
 
 
Partner Equity Units
 
Refers collectively to the Group A Units and Group P Units
 
 
 
Preferred Units
 
One Class A cumulative preferred unit in each of the Oz Operating Partnerships collectively represents one “Preferred Unit.” Certain of our executive managing directors collectively own 100% of the Preferred Units
 
 
 
PSUs
 
Class A performance-based RSUs
 
 
 
Registrant
 
Och-Ziff Capital Management Group LLC, a Delaware limited liability company
 
 
 
RSUs
 
Class A restricted share units
 
 
 
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
We file 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.ozm.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. We also use our website to distribute company information, and such information may be deemed material. Accordingly, investors should monitor our website, in addition to our press releases, SEC filings and public conference calls and webcast. The contents of our website are not, however, a part of this report.
Also posted on our website in the “Public Investors – Governance” section are charters for our Audit Committee; Compensation Committee; Nominating, Corporate Governance and Conflicts Committee and Corporate Responsibility and Compliance 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 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 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


3



construed as exhaustive and should be read in conjunction with the other cautionary statements and risks that are included in our filings with the SEC, including but not limited to our Annual Report.
There may be additional risks, uncertainties and factors that we do not currently view as material or that are not known. The forward-looking statements contained in this report are made only as of the date of this report. We do not undertake to update any forward-looking statement because of new information, future developments or otherwise.


4



PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
CONSOLIDATED BALANCE SHEETS — UNAUDITED
 
June 30, 2018
 
December 31, 2017
 
 
 
 
 
(dollars in thousands)
Assets
 

 
 
Cash and cash equivalents
$
183,968

 
$
469,513

Investments (includes assets measured at fair value of $398,917 and $224,722 as of June 30, 2018 and December 31, 2017, respectively)
433,111

 
238,974

Income and fees receivable
59,172

 
354,456

Due from related parties
32,252

 
28,202

Deferred income tax assets
365,519

 
375,230

Other assets, net
83,455

 
116,361

Assets of consolidated funds:
 

 
 
Investments of consolidated funds, at fair value
80,006

 
43,366

Other assets of consolidated funds
45,021

 
13,331

Total Assets
$
1,282,504

 
$
1,639,433

 
 
 
 
Liabilities and Shareholders’ (Deficit) Equity
 
 
 
Liabilities
 

 
 
Compensation payable
$
47,571

 
$
208,639

Unearned incentive
57,255

 
143,710

Due to related parties
281,722

 
281,555

Debt obligations
307,567

 
569,379

Other liabilities
65,242

 
75,122

Liabilities of consolidated funds:
 

 
 
Other liabilities of consolidated funds
51,093

 
11,340

Total Liabilities
810,450

 
1,289,745

 
 
 
 
Commitments and Contingencies (Note 15)


 


 
 
 
 
Redeemable Noncontrolling Interests (Note 3)
473,507

 
445,617

 
 
 
 
Shareholders’ (Deficit) Equity
 

 
 

Class A Shares, no par value, 1,000,000,000 shares authorized, 191,269,585 and 189,573,210 shares issued and outstanding as of June 30, 2018 and December 31, 2017, respectively

 

Class B Shares, no par value, 750,000,000 shares authorized, 303,839,478 and 339,339,478 shares issued and outstanding as of June 30, 2018 and December 31, 2017, respectively

 

Paid-in capital
3,119,464

 
3,102,074

Accumulated deficit
(3,540,803
)
 
(3,555,905
)
Shareholders’ deficit attributable to Class A Shareholders
(421,339
)
 
(453,831
)
Shareholders’ equity attributable to noncontrolling interests
419,886

 
357,902

Total Shareholders’ (Deficit) Equity
(1,453
)
 
(95,929
)
Total Liabilities, Redeemable Noncontrolling Interests and Shareholders’ (Deficit) Equity
$
1,282,504

 
$
1,639,433

See notes to consolidated financial statements.


5


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



 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Revenues
 
 
 
 
 
 
 
Management fees
$
70,593

 
$
80,082

 
$
143,043

 
$
166,337

Incentive income
34,656

 
66,115

 
85,490

 
117,741

Other revenues
3,867

 
1,781

 
8,409

 
2,557

Income of consolidated funds
650

 
968

 
1,234

 
1,463

Total Revenues
109,766

 
148,946

 
238,176

 
288,098


 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
Compensation and benefits
74,502

 
69,679

 
143,426

 
139,622

Interest expense
7,505

 
5,152

 
14,103

 
11,432

General, administrative and other
48,509

 
35,165

 
86,359

 
81,093

Expenses of consolidated funds
24

 
460

 
108

 
544

Total Expenses
130,540

 
110,456

 
243,996

 
232,691


 
 
 
 
 
 
 
Other (Loss) Income
 
 
 
 
 
 
 
Net losses on early retirement of debt
(14,303
)
 

 
(14,303
)
 

Net (losses) gains on investments in funds and joint ventures
(785
)
 
65

 
(473
)
 
786

Net (losses) gains of consolidated funds
(26
)
 
385

 
466

 
620

Total Other (Loss) Income
(15,114
)
 
450

 
(14,310
)
 
1,406


 
 
 
 
 
 
 
(Loss) Income Before Income Taxes
(35,888
)
 
38,940

 
(20,130
)
 
56,813

Income taxes
(2,524
)
 
3,244

 
488

 
15,300

Consolidated and Comprehensive Net (Loss) Income
(33,364
)
 
35,696

 
(20,618
)
 
41,513

Less: Loss (Income) attributable to noncontrolling interests
21,440

 
(22,142
)
 
12,805

 
(31,920
)
Less: Income attributable to redeemable noncontrolling interests
(332
)
 
(456
)
 
(953
)
 
(806
)
Net (Loss) Income Attributable to Och-Ziff Capital Management Group LLC
(12,256
)
 
13,098

 
(8,766
)
 
8,787

Less: Change in redemption value of Preferred Units

 

 

 
(2,853
)
Net (Loss) Income Attributable to Class A Shareholders
$
(12,256
)
 
$
13,098

 
$
(8,766
)
 
$
5,934

 
 
 
 
 
 
 
 
(Loss) Earnings per Class A Share
 
 
 
 
 
 
 
(Loss) Income per Class A Share - basic
$
(0.06
)
 
$
0.07

 
$
(0.05
)
 
$
0.03

(Loss) Income per Class A Share - diluted
$
(0.06
)
 
$
0.07

 
$
(0.05
)
 
$
0.03

Weighted-average Class A Shares outstanding - basic
192,562,459

 
186,142,576

 
192,397,606

 
186,183,971

Weighted-average Class A Shares outstanding - diluted
192,562,459

 
186,142,576

 
192,397,606

 
186,183,971

 
 
 
 
 
 
 
 
Dividends Paid per Class A Share
$
0.02

 
$
0.02

 
$
0.09

 
$
0.03


See notes to consolidated financial statements.


6




OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ (DEFICIT) EQUITY — 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, 2017
189,573,210

 
339,339,478

 
$
3,102,074

 
$
(3,555,905
)
 
$
(453,831
)
 
$
357,902

 
$
(95,929
)
Impact of adoption of ASU 2014-09

 

 

 
41,922

 
41,922

 
75,062

 
116,984

Capital contributions

 

 

 

 

 
878

 
878

Capital distributions

 

 

 

 

 
(24,483
)
 
(24,483
)
Cash dividends declared on Class A Shares

 

 

 
(17,177
)
 
(17,177
)
 

 
(17,177
)
Dividend equivalents on Class A restricted share units

 

 
877

 
(877
)
 

 

 

Equity-based compensation, net of taxes
1,696,375

 
(35,500,000
)
 
16,828

 

 
16,828

 
23,017

 
39,845

Impact of changes in Oz Operating Group ownership (Note 3)

 

 
(315
)
 

 
(315
)
 
315

 

Comprehensive net loss, excluding amounts attributable to redeemable noncontrolling interests

 

 

 
(8,766
)
 
(8,766
)
 
(12,805
)
 
(21,571
)
As of June 30, 2018
191,269,585

 
303,839,478

 
$
3,119,464

 
$
(3,540,803
)
 
$
(421,339
)
 
$
419,886

 
$
(1,453
)

See notes to consolidated financial statements.



7


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

 
Six Months Ended June 30,
 
2018
 
2017
 
 
 
 
 
(dollars in thousands)
Cash Flows from Operating Activities
 
 
 
Consolidated net (loss) income
$
(20,618
)
 
$
41,513

Adjustments to reconcile consolidated net (loss) income to net cash provided by operating activities:
 
 
 
Amortization of equity-based compensation
45,537

 
41,438

Depreciation, amortization and net gains and losses on fixed assets
5,166

 
5,456

Net losses on early retirement of debt
14,303

 

Deferred income taxes
(1,653
)
 
12,206

Net losses (gains) on investments in funds and joint ventures, net of dividends
1,941

 
(786
)
Operating cash flows due to changes in:
 
 
 
Income and fees receivable
324,119

 
95,518

Due from related parties
(4,049
)
 
(9,519
)
Other assets, net
33,070

 
(14,447
)
Compensation payable
(164,122
)
 
(158,639
)
Unearned incentive income
12,967

 
11,395

Due to related parties
167

 
333

Other liabilities
(9,799
)
 
8,120

Consolidated funds related items:
 
 
 
Net gains of consolidated funds
(466
)
 
(620
)
Purchases of investments
(170,149
)
 
(189,826
)
Proceeds from sale of investments
133,992

 
96,664

Other assets of consolidated funds
(31,706
)
 
(14,597
)
Other liabilities of consolidated funds
39,752

 
6,420

Cash Provided by (Used in) Operating Activities
208,452

 
(69,371
)
 
 
 
 
Cash Flows from Investing Activities
 
 
 
Purchases of fixed assets
(2,360
)
 
(3,292
)
Proceeds from sale of fixed assets

 
57,599

Purchases of United States government obligations
(250,555
)
 
(99,468
)
Maturities of United States government obligations
13,000

 

Investments in funds
(127,279
)
 
(23,609
)
Proceeds from sales and maturities in investments in funds
166,383

 
2,647

Cash Used in Investing Activities
(200,811
)
 
(66,123
)


8


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


 
Six Months Ended June 30,
 
2018
 
2017
 
 
 
 
 
(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
38,163

 
2,842

Distributions to noncontrolling and redeemable noncontrolling interests
(34,832
)
 
(10,197
)
Dividends on Class A Shares
(17,177
)
 
(5,552
)
Proceeds from debt obligations, net of issuance costs
301,678

 
17,466

Repayment of debt obligations, including prepayment fees
(577,759
)
 
(167,319
)
Proceeds from debt obligations of consolidated CLO

 
94,882

Other
(3,259
)
 
(630
)
Cash (Used in) Provided by Financing Activities
(293,186
)
 
81,546

Net Change in Cash and Cash Equivalents
(285,545
)
 
(53,948
)
Cash and Cash Equivalents, Beginning of Period
469,513

 
329,813

Cash and Cash Equivalents, End of Period
$
183,968

 
$
275,865

 
 
 
 
Supplemental Disclosure of Cash Flow Information
 

 
 
Cash paid during the period:
 

 
 
Interest
$
18,199

 
$
10,958

Income taxes
$
1,636

 
$
2,180

Non-cash transactions:
 
 
 
Assets related to the initial consolidation of CLO
$

 
$
100,156

Liabilities related to the initial consolidation of CLO
$

 
$
99,878


See notes to consolidated financial statements.


9


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
JUNE 30, 2018




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, 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 (collectively the “funds”). 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 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 funds.
The Company currently has two operating segments: the Oz Funds segment and the Companys real estate business. The Oz 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.
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 Advisors LP and OZ Advisors II LP and their consolidated subsidiaries (collectively, the “Oz Operating Group”). References to the Company’s “executive managing directors” refer to the current limited partners of OZ Management LP, OZ Advisors LP and OZ Advisors II LP other than the Company’s intermediate holding companies, and include 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 (“Oz Corp”) and Och-Ziff Holding LLC, each 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, 2017 (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. All significant intercompany transactions and balances have been eliminated in consolidation.
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. For example, incentive income for the majority of the Company’s multi-strategy assets under management is recognized in the fourth quarter each year, based on full year investment performance.


10


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
JUNE 30, 2018



Revenue Recognition Policies
The Company provides asset management services to its customers, including certain administrative services related to the funds’ operations, in exchange for management and incentive fees, which are included in the Company’s agreements with its customers. The services provided in connection with the identified performance obligations are satisfied over time. The agreements are generally automatically renewed on an annual basis unless the agreements are terminated by the general partner or directors of the respective funds.
Management Fees
Management fees for the Company’s multi-strategy funds typically range from 0.98% to 2.25% annually of assets under management based on the net asset value of these funds. For the Company’s opportunistic credit funds, management fees typically range from 0.75% to 1.75% annually based on the net asset value of these funds. Management fees for Institutional Credit Strategies, which relate primarily to the Company’s CLOs, generally range from 0.35% to 0.50% annually, and for CLOs are based on the par value of the collateral and cash held in the CLOs. Management fees for the Company’s real estate funds typically range from 0.75% to 1.50% annually based on the amount of capital committed or invested during the investment period, and on the amount of invested capital after the investment period. Management fees are recognized over the period during which the related services are performed.
Management fees are generally calculated and paid to the Company on a quarterly basis in advance, based on the amount of assets under management at the beginning of the quarter. Management fees are prorated for capital inflows and redemptions during the quarter. Accordingly, changes in the Company’s management fee revenues from quarter to quarter are driven by changes in the quarterly opening balances of assets under management, the relative magnitude and timing of inflows and redemptions during the respective quarter, as well as the impact of differing management fee rates charged on those inflows and redemptions.
The Company considers management fees to be a form of variable consideration, as the amount earned each quarter may depend on various contingencies, such as the value of assets under management, capital inflows and outflows during the period, or changes in committed or invested capital. Management fees, however, are generally crystallized at the end of each reporting period and are not subject to clawback and, therefore, the value of the management fees the Company is entitled to receive at the end of each quarter is generally no longer subject to the constraint.
Incentive Income
The Company earns incentive income based on the cumulative performance of the funds over a commitment period. Prior to the adoption of new revenue recognition accounting guidance in 2018, incentive income was recognized at the end of the applicable commitment period when the amounts were contractually payable, or “crystallized,” and when no longer subject to clawback. Beginning in 2018, as a result of the adoption of the new revenue recognition accounting guidance, the Company recognizes incentive income when such amounts are probable of not significantly reversing.
Incentive income is typically equal to 20% of the realized and unrealized profits, net of management fees, attributable to each fund investor in the Company’s multi-strategy funds, open-end opportunistic credit funds and certain other funds. Incentive income excludes unrealized gains and losses attributable to investments that the Company, as investment manager, believes lack a readily ascertainable market value, are illiquid or should be held until the resolution of a special event or circumstance (“Special Investments”). For the Company’s closed-end opportunistic credit funds, real estate funds and certain other funds, incentive income is typically equal to 20% of the realized profits, net of management fees, attributable to each fund investor. For CLOs, incentive income is typically 20% of the excess cash flows available to the holders of the subordinated notes.
The Company’s ability to earn incentive income from some of its funds may be impacted by hurdle rates, whereby the Company is not entitled to incentive income until the investment returns exceed an agreed upon benchmark. For a portion of


11


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
JUNE 30, 2018



these assets subject to hurdle rates, once the investment performance has exceeded the hurdle rate, the Company may receive a preferential “catch-up” allocation, equal to a full 20% of the net profits attributable to investors in these assets.
All of the Company’s multi-strategy funds and open-end opportunistic credit funds are subject to a perpetual loss carry forward, or perpetual “high-water mark,” meaning the Company will not be able to earn incentive income with respect to positive investment performance it generates for a fund investor in any year following negative investment performance until that loss is recouped, at which point a fund investor’s investment surpasses the high-water mark. The Company earns incentive income on any profits, net of management fees, in excess of the high-water mark.
The commitment period for most of the Company’s multi-strategy assets under management is for a period of one year on a calendar-year basis with income recognized annually, and therefore it generally crystallizes incentive income annually on December 31. The Company may also recognize incentive income related to fund investor redemptions at other times during the year, as well as on assets under management subject to commitment periods that are longer than one year. The Company may also recognize incentive income for tax distributions related to these assets. Such distributions are amounts distributed to the Company to cover tax liabilities related to incentive income that has been accrued at the fund level but would otherwise not be recognized by the Company until it is probable that a significant reversal will not occur. These distributions are not subject to clawback once distributed to the Company.
Incentive income is considered variable consideration, the recognition of which is subject to constraint. Incentive income is no longer constrained when it is probable that a significant reversal will not occur. Determining the amount of incentive income to record is subject to qualitative and quantitative factors including, where a fund is in its life-cycle, whether the Company has received or is entitled to receive incentive income distributions and potential sales of fund investments. The Company continuously evaluates whether there are additional considerations that could potentially impact the recognition of incentive income. To the extent that distributions have been received, but for which the recognition of incentive income is not appropriate, the Company will recognize a liability for unearned incentive income.
See Note 9 for additional information regarding the Company’s revenues.
Other Revenues
Other revenues consist primarily of interest income on investments in CLOs and cash and cash equivalents. Interest income is recognized on an effective yield basis. Additionally, prior to the sale of the Company’s aircraft in the first half of 2017, revenue related to non-business use of the corporate aircraft by certain executive managing directors was also included within other revenues. Revenue earned from non-business use of the corporate aircraft was recognized on an accrual basis based on actual flight hours.
Recently Adopted Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition, and most industry-specific revenue recognition guidance. 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 adopted ASU 2014-09 using a modified retrospective application approach as of the beginning of the first quarter of 2018 to all contracts within the scope of the standard as of the date of adoption. As a result of the adoption of ASU 2014-09, the Company recognized certain incentive income earlier than as prescribed under guidance in effect for fiscal year 2017, as the threshold for recognition of incentive income under ASU 2014-09 is lower than under the previous standard. The Company recognized an opening adjustment to shareholders’ equity of $117.0 million, which is net of $11.3 million of income tax, of which $41.9 million was attributable to Class A shareholders.


12


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
JUNE 30, 2018



The following table details the post-tax impact on the Company’s opening shareholders’ equity, by fund type, upon the adoption of ASU 2014-09:
 
(dollars in thousands)
 
 
Multi-strategy funds
$
2,727

Opportunistic credit funds
24,462

Real estate funds
89,795

Total
$
116,984

The adoption of this guidance resulted in a decrease to the liability for unearned incentive income of $99.4 million and an increase in income and fees receivable of $28.8 million.
None of the other changes to GAAP that went into effect in the six months ended June 30, 2018 had a material effect on the Company’s consolidated financial statements.
Future Adoption of Accounting Pronouncements
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 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 15 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 OZ 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 Group A Units held by the Company’s executive managing directors. Net (loss) income attributable to the Group A Units is driven by the earnings of the Oz Operating Group.
The following table presents the components of the net (loss) income attributable to noncontrolling interests:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Group A Units
$
(21,915
)
 
$
22,010

 
$
(13,545
)
 
$
31,645

Other
475

 
132

 
740

 
275

 
$
(21,440
)
 
$
22,142

 
$
(12,805
)
 
$
31,920



13


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
JUNE 30, 2018



The following table presents the components of the shareholders’ equity attributable to noncontrolling interests:
 
June 30, 2018
 
December 31, 2017
 
 
 
 
 
(dollars in thousands)
Group A Units
$
415,066

 
$
353,791

Other
4,820

 
4,111

 
$
419,886

 
$
357,902

The Preferred Units and fund investors’ interests in certain consolidated 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:
 
Six Months Ended June 30, 2018
 
Consolidated Funds
 
Preferred Units
 
Total
 
 
 
 
 
 
 
(dollars in thousands)
Beginning balance
$
25,617

 
$
420,000

 
$
445,617

Capital contributions
37,285

 

 
37,285

Capital distributions
(10,348
)
 

 
(10,348
)
Comprehensive income
953

 

 
953

Ending Balance
$
53,507

 
$
420,000

 
$
473,507

Oz Operating Group Ownership
The Company’s equity interest in the Oz Operating Group increased to 42.2% as of June 30, 2018, from 41.5% as of December 31, 2017, (excluding Group P Units, as they are not yet participating in the economics of the Oz Operating Group). Changes in the Company’s interest in the Oz Operating Group have historically been, and in the future may be, driven by the following: (i) the exchange of Group A Units and Group 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 related to the settlement of Class A restricted share units (the “RSUs”) or Class A performance-based RSUs (the “PSUs”); (iii) the forfeiture of Group A Units and participating Group P Units by a departing executive managing director; and (iv) the repurchase of Class A Shares and Group A Units. The Company’s interest in the Oz Operating Group is expected to continue to increase over time as additional Class A Shares are issued upon the exchange of Group A Units and Group P Units, as well as the settlement of vested RSUs or PSUs. These increases will be offset upon any conversion by an executive managing director of Group D Units, which are not considered equity for GAAP purposes, into Group A Units, at which time an equal number of Class B Shares is also issued to the executive managing director. Additionally, the Company’s economic interest in the Oz Operating Group will decline when Group P Units begin to participate, as described in Note 10 in the Annual Report.


14


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
JUNE 30, 2018



4. INVESTMENTS AND FAIR VALUE DISCLOSURES
The following table presents the components of the Company’s investments as reported in the consolidated balance sheets:
 
June 30, 2018
 
December 31, 2017
 
(dollars in thousands)
United States government obligations, at fair value(1)
$
250,790

 
$
12,973

CLOs, at fair value
148,127

 
211,749

Other funds and joint ventures, equity method
34,194

 
14,252

Total Investments
$
433,111

 
$
238,974

_______________
(1) Held by the Oz Operating Group with balances maturing between August 16, 2018 and June 20, 2019.
In the second quarter of 2018, as a result of a recent court decision that vacates application of U.S. risk retention rules in certain CLO transactions, the Company sold certain of its investments in CLOs. The Company is still subject to EU risk retention rules, and therefore continues to hold investments in those CLOs.
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 CLOs, real estate investments, equity and debt securities issued by private entities, limited partnerships, certain corporate bonds, certain credit default swap contracts, certain bank


15


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
JUNE 30, 2018



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.
Fair Value Measurements Categorized within the Fair Value Hierarchy
The following table summarizes the Company’s investments measured at fair value on a recurring basis within the fair value hierarchy as of June 30, 2018:
 
As of June 30, 2018
 
Level I

Level II

Level III

Total








 
(dollars in thousands)
Assets, at Fair Value
 
 
 
 
 
 
 
Included within cash and cash equivalents:
 
 
 
 
 
 
 
United States government obligations
$
32,719

 
$

 
$

 
$
32,719

 
 
 
 
 
 
 
 
Included within investments:
 
 
 
 
 
 
 
United States government obligations
$
250,790

 
$

 
$

 
$
250,790

CLOs(1)
$

 
$

 
$
148,127

 
$
148,127

 
 
 
 
 
 
 
 
Investments of consolidated funds:
 
 
 
 
 
 
 
Bank debt
$

 
$
47,491

 
$
32,515

 
$
80,006

_______________
(1) As of June 30, 2018, investments in CLOs had contractual principal amounts of $136.1 million outstanding, which excludes the Company’s investments in subordinated tranches of the notes, as these do not have contractual principal payments.


16


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
JUNE 30, 2018



The following table summarizes the Company’s investments measured at fair value on a recurring basis within the fair value hierarchy as of December 31, 2017:
 
As of December 31, 2017
 
Level I
 
Level II
 
Level III
 
Total
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Assets, at Fair Value
 
 
 
 
 
 
 
Included within cash and cash equivalents:
 
 
 
 
 
 
 
United States government obligations
$
99,704

 
$

 
$

 
$
99,704

 
 
 
 
 
 
 
 
Included within investments:
 
 
 
 
 
 
 
United States government obligations
$
12,973

 
$

 
$

 
$
12,973

CLOs(1)
$

 
$

 
$
211,749

 
$
211,749

 
 
 
 
 
 
 
 
Investments of consolidated funds:
 
 
 
 
 
 
 
Bank debt
$

 
$
24,559

 
$
18,807

 
$
43,366

_______________
(1) As of December 31, 2017, investments in CLOs had contractual principal amounts of $189.2 million outstanding, which excludes the Company’s investments in subordinated tranches of the notes, as these do not have contractual principal payments.
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, excluding those of the consolidated funds are recorded within net (losses) gains on investments in funds and joint ventures in the consolidated statements of comprehensive income (loss), and gains and losses of the consolidated funds are recorded within net (losses) gains of consolidated funds. Foreign exchange gains and losses on non-U.S. Dollar investments are also included within gains and losses in the tables below.


17


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
JUNE 30, 2018



The following table summarizes the changes in the Company’s Level III investments for the three months ended June 30, 2018:

March 31, 2018

Transfers
In
 
Transfers
Out
 
Investment
Purchases
 
Investment
Sales / Settlements
 
Gains / Losses

June 30, 2018















(dollars in thousands)
Assets, at Fair Value
 
 
 
 
 
 
 
 
 
 
 
 
 
Included within investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
CLOs
$
286,970

 
$

 
$

 
$
29,827

 
$
(162,145
)
 
$
(6,525
)
 
$
148,127


 
 
 
 
 
 
 
 
 
 
 
 
 
Investments of consolidated funds:
 
 
 
 
 
 
 
 
Bank debt
$
19,134

 
$
9,410

 
$
(2,705
)
 
$
42,537

 
$
(35,986
)
 
$
125

 
$
32,515

The following table summarizes the changes in the Company’s Level III investments for the three months ended June 30, 2017
 
March 31, 2017
 
Transfers
In
 
Transfers
Out
 
Investment
Purchases
 
Investment
Sales / Settlements
 
Gains / Losses
 
June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Assets, at Fair Value
 
 
 
 
 
 
 
 
 
 
 
 
 
Included within investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
CLOs
$
22,048

 
$

 
$

 
$
20,200

 
$

 
$
1,475

 
$
43,723

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments of consolidated funds:
 
 
 
 
 
 
 
 
Bank debt
$
16,663

 
$
5,207

 
$
(13,255
)
 
$
37,771

 
$
(8,122
)
 
$
1,074

 
$
39,338

In addition, in the second quarter of 2017, the Company consolidated a CLO, the amounts related to the initial consolidation of the CLO are reflected in the investment purchases in the tables above.


18


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
JUNE 30, 2018



The following tables summarize the changes in the Company’s Level III assets and liabilities for the six months ended June 30, 2018:
 
December 31, 2017
 
Transfers
In
 
Transfers
Out
 
Investment
Purchases
 
Investment
Sales / Settlements
 
Gains / Losses
 
June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Assets, at Fair Value
 
 
 
 
 
 
 
 
 
 
 
 
 
Included within investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
CLOs
$
211,749

 
$

 
$

 
$
106,449

 
$
(164,920
)
 
$
(5,151
)
 
$
148,127

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments of consolidated funds:
 
 
 
 
 
 
 
 
Bank debt
$
18,807

 
$
3,642

 
$
(415
)
 
$
71,816

 
$
(61,669
)
 
$
334

 
$
32,515

The following tables summarize the changes in the Company’s Level III assets and liabilities for the six months ended June 30, 2017:
 
December 31, 2016
 
Transfers
In
 
Transfers
Out
 
Investment
Purchases
 
Investment
Sales / Settlements
 
Gains / Losses
 
June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Assets, at Fair Value
 
 
 
 
 
 
 
 
 
 
 
 
 
Included within investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
CLOs
$
21,341

 
$

 
$

 
$
20,200

 
$

 
$
2,182

 
$
43,723

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments of consolidated funds:
 
 
 
 
 
 
 
 
Bank debt
$
18,127

 
$
4,323

 
$
(16,478
)
 
$
65,268

 
$
(33,242
)
 
$
1,340

 
$
39,338

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 independent pricing services. There were no transfers between Levels I and II during the periods presented above.
The table below summarizes the net change in unrealized gains and losses on the Company’s Level III investments held as of the reporting date:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Assets, at Fair Value
 
 
 
 
 
 
 
Included within investments:
 
 
 
 
 
 
 
CLOs
$
(4,729
)
 
$
1,475

 
$
(3,368
)
 
$
2,182

 
 
 
 
 
 
 
 
Investments of consolidated funds:
 
 
 
 
 
 
 
Bank debt
$
4

 
$
272

 
$
76

 
$
385



19


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
JUNE 30, 2018



Valuation Methodologies for Fair Value Measurements Categorized within Levels II and III
Investments in CLOs 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.
The Company elected to measure its investments in CLOs 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 funds and joint ventures in the consolidated statements of comprehensive income (loss). The Company accrues interest income on its investments in CLOs using the effective interest method.
Valuation Process for Fair Value Measurements Categorized within Level III
The Company has established a Valuation Committee to provide oversight of the monthly valuation results of the investments held by the Company and the funds. The Valuation Committee has assigned the responsibility of performing price verification and related quality controls in accordance with the Valuation Policy to the Valuation Controls Group. The Valuation Controls Group performs price verification procedures on all of the investments which include, but are not limited to the following: reviewing independent pricing provided by third-party valuation vendors, reviewing and collecting broker quotes and reviewing valuation models. The Valuation Controls Group performs additional quality controls to support valuation techniques including but not limited to: back testing, stale pricing reviews, and vendor due diligence. When pricing or verification sources cannot be obtained from external sources or if external prices are deemed unreliable, additional procedures are performed by the Valuation Controls Group, which may include comparing unobservable inputs to observable inputs for similar positions, reviewing subsequent market activities, performing comparisons of actual versus projected performance indicators, and reviewing the valuation methodology and key inputs. Independent third party valuation firms may be used to corroborate internal valuations.
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 June 30, 2018. The 2018 Term Loan and the CLO Investments Loans (each as defined in Note 8) are categorized as Level III within the fair value hierarchy. The fair value of the 2018 Term Loan and the CLO Investments Loans were determined using independent pricing services.
Loans Sold to CLOs Managed by the Company
During the six months ended June 30, 2018 and June 30, 2017, the Company sold $29.8 million and $10.3 million of loans to CLOs managed by the Company, respectively. These loans were previously purchased by the Company in the open market, and were sold for cash at cost to the CLOs. The loans were accounted for as transfers of financial assets and met the criteria for derecognition under GAAP.
The Company invests in senior secured and subordinated notes issued by certain CLOs to which it sold the loans discussed above. These investments represent retained interests to the Company and are in the form of a 5% vertical strip (i.e., 5% of each of the senior and subordinated tranches of notes issues by each CLO). The retained interests are reported within investments on the Company’s consolidated balance sheet. During the six months ended June 30, 2018, the Company made investments of $24.9 million related to these retained interests. As of June 30, 2018 and December 31, 2017, the Company’s investments in these retained interests had a fair value of $93.2 million and $70.4 million, respectively. The Company is subject to risks associated with the performance of the underlying collateral and the market yield of the assets. The Company’s risk of loss from retained interest is limited to its investments in these interests. The Company receives quarterly payments of interest and principal, as applicable, on these retained interests. In the six months ended June 30, 2018, the Company received $4.3 million of interest and principal payments related to the retained interests. In the six months ended June 30, 2017, the Company received no interest or principal payments related to the retained interests.


20


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
JUNE 30, 2018



The Company uses independent pricing services to value its investments in the CLOs, including the retained interests, 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 investments in CLOs.
5. 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:
 
June 30, 2018
 
December 31, 2017
 
 
 
 
 
(dollars in thousands)
Assets
 

 
 

Assets of consolidated funds:
 

 
 

Investments of consolidated funds, at fair value
$
80,006

 
$
43,366

Other assets of consolidated funds
45,021

 
13,331

Total Assets
$
125,027

 
$
56,697

 
 
 
 
Liabilities
 

 
 

Liabilities of consolidated funds:
 

 
 

Other liabilities of consolidated funds
51,093

 
11,340

Total Liabilities
$
51,093

 
$
11,340

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, insignificant 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.


21


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
JUNE 30, 2018



The table below presents the net assets of VIEs in which the Company has variable interests along with the maximum risk of loss as a result of the Company’s involvement with VIEs:
 
June 30, 2018
 
December 31, 2017
 
 
 
 
 
(dollars in thousands)
Net assets of unconsolidated VIEs in which the Company has a variable interest
$
9,964,144

 
$
8,300,163

 
 
 
 
Maximum risk of loss as a result of the Company’s involvement with VIEs:
 
 
 
Unearned revenues
57,616

 
144,124

Income and fees receivable
11,844

 
24,953

Investments in funds
159,356

 
222,192

Maximum Exposure to Loss
$
228,816

 
$
391,269

6. OTHER ASSETS, NET
The following table presents the components of other assets, net as reported in the consolidated balance sheets:
 
June 30, 2018
 
December 31, 2017
 
 
 
 
 
(dollars in thousands)
Fixed Assets:
 

 
 

  Leasehold improvements
$
54,269

 
$
53,419

  Computer hardware and software
46,727

 
44,190

  Furniture, fixtures and equipment
8,595

 
8,571

  Accumulated depreciation and amortization
(63,181
)
 
(58,671
)
  Fixed assets, net
46,410

 
47,509

Goodwill
22,691

 
22,691

Prepaid expenses
9,339

 
12,862

Loans held for sale

 
29,110

Other
5,015

 
4,189

Total Other Assets, Net
$
83,455

 
$
116,361



22


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
JUNE 30, 2018



7. OTHER LIABILITIES
The following table presents the components of other liabilities as reported in the consolidated balance sheets:
 
June 30, 2018
 
December 31, 2017
 
 
 
 
 
(dollars in thousands)
Accrued expenses
$
24,404

 
$
21,955

Legal provision(1)
13,000

 

Deferred rent credit
7,238

 
8,283

Uncertain tax positions
7,000

 
7,000

Interest payable
4,214

 
2,970

Loan trades payable

 
29,110

Other
9,386

 
5,804

Total Other Liabilities
$
65,242

 
$
75,122

_______________
(1)
Legal provision represents accruals for certain contingencies discussed in Note 15.

8. DEBT OBLIGATIONS
As of June 30, 2018, the Company’s indebtedness outstanding was primarily comprised of the 2018 Term Loan and the CLO Investments Loans (each as defined below).
2018 Term Loan and Revolving Credit Facility
On April 10, 2018 (the “Closing Date”), OZ Management LP, as borrower, (the “Borrower”), and certain other subsidiaries of the Company, as guarantors, entered into a senior secured credit and guaranty agreement (the “Senior Credit Agreement”) consisting of (i) a $250.0 million term loan (the “2018 Term Loan”) and (ii) a $100.0 million revolving credit facility (the “2018 Revolving Credit Facility”). As of June 30, 2018, $200.0 million remained outstanding under the 2018 Term Loan. The Company has not made any drawn-downs under the 2018 Revolving Credit Facility.
The 2018 Term Loan matures April 10, 2023, and the 2018 Revolving Credit Facility initially matures October 10, 2022. The maturity date of both the 2018 Term Loan and the 2018 Revolving Credit Facility may be extended pursuant to the terms of the Senior Credit Agreement. The proceeds from the 2018 Term Loan together with cash on hand were used to redeem the $400.0 million Senior Notes (as defined in the Company’s Annual Report) that were due in 2019. In connection with entry into the 2018 Senior Credit Agreement, the Company also terminated all commitments under the Company’s 2014 revolving credit facility.
The 2018 Term Loan bears interest at a per annum rate equal to, at the Company’s option, one, three or six month (or twelve months with the consent of each lender) LIBOR plus 4.75%, or a base rate plus 3.75%. Borrowings under the 2018 Revolving Credit Facility bear interest at a per annum rate equal to, at the Company’s option, one, three or six month (or twelve months with the consent of each lender), LIBOR plus 1.75% to 2.75%, or a base rate plus 0.75% to 1.75%.
The Company is required to pay an undrawn commitment fee at a rate per annum equal to 0.20% to 0.75% of the undrawn portion of the commitments under the 2018 Revolving Credit Facility, computed on a daily basis. The LIBOR and base rate margins under the 2018 Revolving Credit Facility, as well as the amount of the commitment fee owed by the Company under the 2018 Revolving Credit Facility, are based on the Company’s corporate rating.


23


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
JUNE 30, 2018



The obligations under the Senior Credit Agreement are guaranteed by the Oz Operating Partnerships and are secured by a lien on substantially all of the Oz Operating Partnerships’ assets, subject to certain exclusions.
The Senior Credit Agreement contains two financial maintenance covenants. The first financial maintenance covenant states that the Company’s total fee-paying assets under management as of the last day of any fiscal quarter must be greater than $20.0 billion, and the second states that the total net leverage ratio (as defined in the agreement) as of the last day of any fiscal quarter must be less than (i) 3.00 to 1.00, or (ii) following the third anniversary of the Closing Date, 2.50 to 1.00. As of June 30, 2018, the Company was in compliance with the financial maintenance covenants.
The Senior Credit Agreement contains customary events of default. If an event of default under the Senior Credit Agreement occurs and is continuing, then, at the request (or with the consent) of the lenders holding a majority of the commitments and loans, upon notice by the administrative agent to the Borrower, the obligations under the Senior Credit Agreement shall become immediately due and payable. In addition, if the Borrower or any of its material subsidiaries becomes the subject of voluntary or involuntary proceedings under any bankruptcy, insolvency or similar law, then any outstanding obligations under the Senior Credit Agreement will automatically become immediately due and payable.
CLO Investments Loans
The Company entered into loans to finance portions of investments in certain CLOs (collectively, the “CLO Investments Loans”). These loans are collateralized by the related investments in CLOs held by the Company. In general, the Company will make interest and principal payments on the loans at such time interest payments are received on its investments in the CLOs, and will make principal payments on the loans to the extent principal payments are received on its investments in the CLOs, with any remaining balance due upon maturity.
The loans are subject to customary events of default and covenants and include terms that require the Company’s continued involvement with the CLOs. The CLO Investments Loans do not have any financial maintenance covenants.
The table below presents information related to CLO Investments Loans as of June 30, 2018 and December 31, 2017. Carrying values presented below are net of discounts, if any, and unamortized deferred financing costs. The maturity date for each CLO Investments Loan is the earlier of the final maturity date presented in the table below or the date at which the Company no longer holds a risk retention investment in the respective CLO. As a result of a recent court decision that vacates application of U.S. risk retention rules in certain CLO transactions, the Company sold certain investments in CLOs and paid off the associated CLO Investments Loans.
Borrowing Date
 
Contractual Rate
 
Final Maturity Date
 
Carrying Value
 
 
 
 
 
 
June 2018
 
December 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(dollars in thousands)
November 28, 2016

EURIBOR plus 2.23%

December 15, 2023
 
$
17,540

 
$
18,041

June 7, 2017

LIBOR plus 1.48%

November 16, 2029
 
17,213

 
17,217

July 21, 2017

LIBOR plus 1.43%

January 22, 2029
 

 
21,709

August 2, 2017
 
LIBOR plus 1.41%
 
January 21, 2030
 
21,671

 
21,686

August 17, 2017
 
LIBOR plus 1.43%
 
April 30, 2030
 

 
22,922

September 14, 2017

LIBOR plus 1.41%

April 22, 2030
 

 
25,468

September 14, 2017

EURIBOR plus 2.21%

September 14, 2024
 
18,959

 
19,561

November 21, 2017
 
LIBOR plus 1.34%
 
May 15, 2030
 

 
26,202

January 26, 2018
 
EURIBOR plus 1.62%
 
January 31, 2025
 
17,725

 

February 21, 2018
 
LIBOR plus 1.27%
 
February 21, 2019
 
21,102

 

 
 
 
 
 
 
$
114,210

 
$
172,806



24


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
JUNE 30, 2018



CLO Financing Facility
On May 29, 2018, the Company, entered into a €100.0 million master credit facility agreement (the “CLO Financing Facility”) to facilitate secured borrowing transactions in the form of repurchase agreements to finance a portion of the risk retention investments in European CLOs managed by the Company. The borrowings will bear interest rates of the average effective interest rates of each class of securities comprising the securities sold under the repurchase agreements, plus a spread to be determined upon each borrowing. Each borrowing will have a set scheduled maturity date that will also be determined upon each borrowing. As of June 30, 2018, the CLO Financing Facility was undrawn.
9. REVENUES
The following table presents management fees and incentive income recognized as revenues for the three and six months ended June 30, 2018:
 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
 
Management Fees
 
Incentive Income
 
Management Fees
 
Incentive Income
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Multi-strategy funds
$
44,394

 
$
31,094

 
$
88,800

 
$
42,926

Credit
 
 
 
 
 
 
 
Opportunistic credit funds(1)
7,997

 
(3,704
)
 
19,104

 
30,531

Institutional Credit Strategies
12,555

 

 
23,748

 

Real estate funds
5,077

 
6,324

 
9,841

 
11,091

Other
570

 
942

 
1,550

 
942

Total
$
70,593

 
$
34,656

 
$
143,043

 
$
85,490

_______________
(1)
Revenues for opportunistic credit funds is reflective of a contract modification that resulted in an offset to previously recognized revenues.
A liability for unearned incentive income is generally recognized when the Company receives incentive income distributions from its funds, primarily its real estate funds, for which incentive income has not yet met the recognition threshold of being probable that a significant reversal of cumulative revenue will not occur. The following table presents the activity in the Company’s unearned incentive income for the six months ended June 30, 2018:
 
Unearned Incentive Income
 
(dollars in thousands)
Balance as of December 31, 2017
$
143,710

Effects of adoption of ASU 2014-09
(99,422
)
Amounts collected during the period
23,336

Amounts recognized during the period
(10,369
)
Balance as of June 30, 2018
$
57,255

The Company recognizes management fees over the period in which the performance obligation is satisfied. The Company records incentive income when it is probable that a significant reversal of income will not occur. The majority of management fees and incentive income receivable at each balance sheet date is generally collected during the following quarter.


25


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
JUNE 30, 2018



The following table presents the composition of the Company’s income and fees receivable as of June 30, 2018 and December 31, 2017:
 
June 30, 2018
 
December 31, 2017
 
 
 
 
 
(dollars in thousands)
Management fees
$
25,378

 
$
21,242

Incentive income
33,794

 
333,214

Income and Fees Receivable
$
59,172

 
$
354,456

10. EQUITY-BASED COMPENSATION EXPENSES
The Company grants equity-based compensation in the form of RSUs, PSUs (as defined below), Group A Units, Group P Units and Class A Shares to its executive managing directors, employees and the independent members of the Board under the terms of the 2007 Equity Incentive Plan and the 2013 Incentive Plan.
The following table presents information regarding the impact of equity-based compensation grants on the Company’s consolidated statements of comprehensive income (loss): 
 
Six Months Ended June 30,
 
2018
 
2017
 
 
 
 
 
(dollars in thousands)
Expense recorded within compensation and benefits
$
45,537

 
$
41,438

Corresponding tax benefit
$
3,820

 
$
3,658

The following tables present activity related to the Company’s unvested equity awards for the six months ended June 30, 2018:
 
Equity-Classified Awards
 
Liability-Classified Awards
 
Equity-Classified Awards
 
Unvested RSUs
 
Weighted-Average
Grant-Date Fair Value
 
Unvested RSUs
 
Weighted-Average
Grant-Date Fair Value
 
Unvested PSUs
 
Weighted-Average
Grant-Date Fair Value
December 31, 2017
14,530,602

 
$
4.67

 

 
$

 

 
$

Granted
31,306,251

 
$
2.45

 
72,017

 
$
2.04

 
10,000,000

 
$
1.18

Vested
(2,463,747
)
 
$
4.43

 

 
$

 

 
$

Canceled or forfeited
(7,084,279
)
 
$
3.18

 

 
$

 

 
$

Modified from Group A Units and Group P Units
6,407,968

 
$
6.36

 
7,345,991

 
$
6.36

 

 
$

June 30, 2018
42,696,795

 
$
3.56

 
7,418,008

 
$
6.32

 
10,000,000

 
$
1.18




26


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
JUNE 30, 2018



 
Group A Units
 
Group P Units
 
Unvested Group A Units
 
Weighted-Average
Grant-Date Fair Value
 
Unvested Group P Units
 
Weighted-Average
Grant-Date Fair Value
December 31, 2017
8,410,663

 
$
9.77

 
71,850,000

 
$
1.25

Vested
(1,574,811
)
 
$
9.93

 

 
$

Canceled or forfeited

 
$

 
(500,000
)
 
$
1.25

Modified to RSUs
(6,000,000
)
 
$
9.75

 
(29,000,000
)
 
$
1.25

June 30, 2018
835,852

 
$
9.67

 
42,350,000

 
$
1.25

Restricted Share Units (RSUs)
In the three months ended March 31, 2018, a certain executive managing director forfeited 6,000,000 Group A Units and 29,000,000 Group P Units for RSUs and certain other profit-sharing interests. The forfeiture of the Partner Equity Units was accounted for as a modification to 6,407,968 equity-classified RSUs and 7,345,991 liability-classified RSUs, and other awards. The fair value of the modified awards was $6.36 per RSU and was based on the fair value of the original awards immediately before they were modified. The Company will continue to recognize at least the minimum compensation expense that would have been previously recognized prior to the modification.
As of June 30, 2018, total unrecognized compensation expense related to equity-classified awards totaled $114.2 million with a weighted-average amortization period of 3.0 years. As of June 30, 2018, total unrecognized compensation expense related to liability-classified awards totaled $37.9 million with a weighted-average amortization period of 3.92 years. See the Company’s Annual Report for additional information regarding RSUs.
The following table presents information related to the settlement of RSUs: 
 
Six Months Ended June 30,
 
2018
 
2017
 
 
 
 
 
(dollars in thousands)
Fair value of RSUs settled in Class A Shares
$
4,133

 
$
918

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