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EX-32.1 - EXHIBIT 32.1 - Sculptor Capital Management, Inc.ozm-10xqx3q2018xex321.htm
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EX-31.1 - EXHIBIT 31.1 - Sculptor Capital Management, Inc.ozm-10xqx3q2018xex311.htm




 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  þ    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth 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
¨ 
  
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 October 30, 2018, there were 191,620,504 Class A Shares and 300,339,478 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).
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 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.


3





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
 
September 30, 2018
 
December 31, 2017
 
 
 
 
 
(dollars in thousands)
Assets
 

 
 
Cash and cash equivalents
$
195,041

 
$
469,513

Investments (includes assets measured at fair value of $452,959 and $224,722, including assets sold under agreements to repurchase of $42,526 and $0 as of September 30, 2018, and December 31, 2017, respectively)
485,210

 
238,974

Income and fees receivable
39,522

 
354,456

Due from related parties
32,344

 
28,202

Deferred income tax assets
367,240

 
375,230

Other assets, net
79,145

 
116,361

Assets of consolidated funds:
 
 
 
Investments of consolidated funds, at fair value
183,894

 
43,366

Other assets of consolidated funds
39,302

 
13,331

Total Assets
$
1,421,698

 
$
1,639,433

 
 
 
 
Liabilities and Shareholders’ (Deficit) Equity
 
 
 
Liabilities
 

 
 
Compensation payable
$
66,589

 
$
208,639

Unearned incentive
67,985

 
143,710

Due to related parties
281,996

 
281,555

Debt obligations
290,127

 
569,379

Securities sold under agreements to repurchase
42,378

 

Other liabilities
75,081

 
75,122

Liabilities of consolidated funds:
 
 
 
Other liabilities of consolidated funds
37,134

 
11,340

Total Liabilities
861,290

 
1,289,745

 
 
 
 
Commitments and Contingencies (Note 16)


 


 
 
 
 
Redeemable Noncontrolling Interests (Note 3)
585,206

 
445,617

 
 
 
 
Shareholders’ (Deficit) Equity
 

 
 

Class A Shares, no par value, 1,000,000,000 shares authorized, 191,607,259 and 189,573,210 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively

 

Class B Shares, no par value, 750,000,000 shares authorized, 300,339,478 and 339,339,478 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively

 

Paid-in capital
3,128,587

 
3,102,074

Accumulated deficit
(3,559,259
)
 
(3,555,905
)
Shareholders’ deficit attributable to Class A Shareholders
(430,672
)
 
(453,831
)
Shareholders’ equity attributable to noncontrolling interests
405,874

 
357,902

Total Shareholders’ Deficit
(24,798
)
 
(95,929
)
Total Liabilities, Redeemable Noncontrolling Interests and Shareholders’ Deficit
$
1,421,698

 
$
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 September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Revenues
 
 
 
 
 
 
 
Management fees
$
70,675

 
$
77,171

 
$
213,718

 
$
243,508

Incentive income
19,303

 
51,249

 
104,793

 
168,990

Other revenues
3,342

 
1,524

 
11,751

 
4,081

Income of consolidated funds
507

 
2,055

 
1,741

 
3,518

Total Revenues
93,827

 
131,999

 
332,003

 
420,097


 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
Compensation and benefits
74,635

 
74,490

 
218,061

 
214,112

Interest expense
4,820

 
5,611

 
18,923

 
17,043

General, administrative and other
50,289

 
33,136

 
136,648

 
114,229

Expenses of consolidated funds
(5
)
 
8,824

 
103

 
9,368

Total Expenses
129,739

 
122,061

 
373,735

 
354,752


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

 

 
(14,303
)
 

Net (losses) gains on investments in funds and joint ventures
(541
)
 
264

 
(1,014
)
 
1,050

Net gains of consolidated funds
290

 
7,658

 
756

 
8,278

Total Other (Loss) Income
(251
)
 
7,922

 
(14,561
)
 
9,328


 
 
 
 
 
 
 
(Loss) Income Before Income Taxes
(36,163
)
 
17,860

 
(56,293
)
 
74,673

Income taxes
(860
)
 
1,942

 
(372
)
 
17,242

Consolidated and Comprehensive Net (Loss) Income
(35,303
)
 
15,918

 
(55,921
)
 
57,431

Less: Net loss (income) attributable to noncontrolling interests
21,140

 
(9,760
)
 
33,945

 
(41,680
)
Less: Net income attributable to redeemable noncontrolling interests
(374
)
 
(432
)
 
(1,327
)
 
(1,238
)
Net (Loss) Income Attributable to Och-Ziff Capital Management Group LLC
(14,537
)
 
5,726

 
(23,303
)
 
14,513

Less: Change in redemption value of Preferred Units

 

 

 
(2,853
)
Net (Loss) Income Attributable to Class A Shareholders
$
(14,537
)
 
$
5,726

 
$
(23,303
)
 
$
11,660

 
 
 
 
 
 
 
 
(Loss) Earnings per Class A Share
 
 
 
 
 
 
 
(Loss) Income per Class A Share - basic
$
(0.08
)
 
$
0.03

 
$
(0.12
)
 
$
0.06

(Loss) Income per Class A Share - diluted
$
(0.08
)
 
$
0.03

 
$
(0.12
)
 
$
0.06

Weighted-average Class A Shares outstanding - basic
192,657,766

 
186,235,651

 
192,485,281

 
186,201,389

Weighted-average Class A Shares outstanding - diluted
192,657,766

 
186,235,651

 
192,485,281

 
186,201,389


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

 

 

 

 

 
750

 
750

Capital distributions

 

 

 

 

 
(17,690
)
 
(17,690
)
Cash dividends declared on Class A Shares ($0.07 per share)

 

 

 
(13,354
)
 
(13,354
)
 

 
(13,354
)
Dividend equivalents on Class A restricted share units

 

 
1,072

 
(1,072
)
 

 

 

Equity-based compensation, net of taxes
1,556,563

 
(35,000,000
)
 
7,803

 

 
7,803

 
10,673

 
18,476

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

 

 
190

 

 
190

 
(190
)
 

Comprehensive net income, excluding amounts attributable to redeemable noncontrolling interests

 

 

 
3,490

 
3,490

 
8,635

 
12,125

As of March 31, 2018
191,129,773

 
304,339,478

 
$
3,111,139

 
$
(3,524,919
)
 
$
(413,780
)
 
$
435,142

 
$
21,362

Capital contributions

 

 

 

 

 
128

 
128

Capital distributions

 

 

 

 

 
(6,793
)
 
(6,793
)
Cash dividends declared on Class A Shares ($0.02 per share)

 

 

 
(3,823
)
 
(3,823
)
 

 
(3,823
)
Dividend equivalents on Class A restricted share units

 

 
(195
)
 
195

 

 

 

Equity-based compensation, net of taxes
139,812

 
(500,000
)
 
9,025

 

 
9,025

 
12,344

 
21,369

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

 

 
(505
)
 

 
(505
)
 
505

 

Comprehensive net loss, excluding amounts attributable to redeemable noncontrolling interests

 

 

 
(12,256
)
 
(12,256
)
 
(21,440
)
 
(33,696
)
As of June 30, 2018
191,269,585

 
303,839,478

 
$
3,119,464

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

 
$
(1,453
)
Capital contributions

 

 

 

 

 
24

 
24

Capital distributions

 

 

 

 

 
(5,611
)
 
(5,611
)
Cash dividends declared on Class A Shares ($0.02 per share)

 

 

 
(3,829
)
 
(3,829
)
 

 
(3,829
)
Dividend equivalents on Class A restricted share units

 

 
90

 
(90
)
 

 

 

Equity-based compensation, net of taxes
337,674

 

 
9,238

 

 
9,238

 
12,510

 
21,748

Relinquishment of Group A Units

 
(3,500,000
)
 

 

 

 

 

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

 

 
(205
)
 

 
(205
)
 
205

 

Comprehensive net loss, excluding amounts attributable to redeemable noncontrolling interests

 

 

 
(14,537
)
 
(14,537
)
 
(21,140
)
 
(35,677
)
As of September 30, 2018
191,607,259

 
300,339,478

 
$
3,128,587

 
$
(3,559,259
)
 
$
(430,672
)
 
$
405,874

 
$
(24,798
)








7



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, 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 ($0.01 per share)

 

 

 
(1,849
)
 
(1,849
)
 

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

 

 
151

 
(151
)
 

 

 

Equity-based compensation, net of taxes
283,698

 
172,459

 
7,451

 

 
7,451

 
10,766

 
18,217

Relinquishment of Group A Units

 
(30,000,000
)
 

 

 

 

 

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

 

 
(12,173
)
 

 
(12,173
)
 
12,173

 

Dilution of proceeds from tax receivable agreement waiver
 
 
 
 
(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
)
Capital contributions

 

 

 

 

 
341

 
341

Capital distributions

 

 

 

 

 
(5,634
)
 
(5,634
)
Cash dividends declared on Class A Shares ($0.02 per share)

 

 

 
(3,703
)
 
(3,703
)
 

 
(3,703
)
Dividend equivalents on Class A restricted share units

 

 
114

 
(114
)
 

 

 

Equity-based compensation, net of taxes
87,739

 

 
9,294

 

 
9,294

 
13,421

 
22,715

Class B Shares granted to holders of Group P Units

 
71,850,000

 

 

 

 

 

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

 

 
(46
)
 

 
(46
)
 
46

 

Comprehensive net income, excluding amounts attributable to redeemable noncontrolling interests

 

 

 
13,098

 
13,098

 
22,142

 
35,240

As of June 30, 2017
185,214,692

 
339,339,478

 
$
3,078,150

 
$
(3,560,482
)
 
$
(482,332
)
 
$
247,276

 
$
(235,056
)
Capital contributions

 

 

 

 

 
191

 
191

Capital distributions

 

 

 

 

 
(6,120
)
 
(6,120
)
Cash dividends declared on Class A Shares ($0.02 per share)

 

 

 
(3,704
)
 
(3,704
)
 

 
(3,704
)
Dividend equivalents on Class A restricted share units

 

 
173

 
(173
)
 

 

 

Equity-based compensation, net of taxes
97,747

 

 
8,971

 

 
8,971

 
12,948

 
21,919

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

 

 
(47
)
 

 
(47
)
 
47

 

Comprehensive net income, excluding amounts attributable to redeemable noncontrolling interests

 

 

 
5,726

 
5,726

 
9,760

 
15,486

As of September 30, 2017
185,312,439

 
339,339,478

 
$
3,087,247

 
$
(3,558,633
)
 
$
(471,386
)
 
$
264,102

 
$
(207,284
)
See notes to consolidated financial statements.


8


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




 
Nine Months Ended September 30,
 
2018
 
2017
 
 
 
 
 
(dollars in thousands)
Cash Flows from Operating Activities
 
 
 
Consolidated net (loss) income
$
(55,921
)
 
$
57,431

Adjustments to reconcile consolidated net (loss) income to net cash provided by operating activities:
 
 
 
Amortization of equity-based compensation
67,848

 
63,696

Depreciation, amortization and net gains and losses on fixed assets
7,709

 
7,693

Net losses on early retirement of debt
14,303

 

Deferred income taxes
(3,341
)
 
12,395

Net losses (gains) on investments in funds and joint ventures, net of dividends
4,238

 
(1,050
)
Operating cash flows due to changes in:
 
 
 
Income and fees receivable
343,769

 
98,791

Due from related parties
(4,141
)
 
(2,308
)
Other assets, net
35,489

 
27,175

Compensation payable
(145,612
)
 
(152,838
)
Unearned incentive income
23,697

 
26,754

Due to related parties
442

 
(153
)
Other liabilities
8

 
(21,468
)
Consolidated funds related items:
 
 
 
Net gains of consolidated funds
(756
)
 
(8,278
)
Purchases of investments
(333,657
)
 
(383,184
)
Proceeds from sale of investments
194,802

 
146,907

Other assets of consolidated funds
(26,888
)
 
(306,453
)
Other liabilities of consolidated funds
25,792

 
78,044

Cash Provided by (Used in) Operating Activities
147,781

 
(356,846
)
 
 
 
 
Cash Flows from Investing Activities
 
 
 
Purchases of fixed assets
(3,596
)
 
(3,857
)
Proceeds from sale of fixed assets

 
57,599

Purchases of United States government obligations
(293,183
)
 
(112,400
)
Maturities of United States government obligations
20,500

 

Investments in funds
(152,272
)
 
(132,102
)
Proceeds from sales and maturities in investments in funds
172,950

 
4,310

Cash Used in Investing Activities
(255,601
)
 
(186,450
)
 
 
 
 


9


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


 
Nine Months Ended September 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
150,074

 
3,066

Distributions to noncontrolling and redeemable noncontrolling interests
(41,005
)
 
(16,317
)
Dividends on Class A Shares
(21,006
)
 
(9,256
)
Proceeds from debt obligations, net of issuance costs
301,681

 
127,864

Repayment of debt obligations, including prepayment costs
(595,431
)
 
(167,319
)
Proceeds from securities sold under agreements to repurchase, net of issuance costs
42,348

 

Proceeds from debt obligations of consolidated CLO

 
666,712

Repayment of debt obligation of consolidated CLO

 
(222,434
)
Other
(3,313
)
 
(970
)
Cash (Used in) Provided by Financing Activities
(166,652
)
 
531,400

Net Change in Cash and Cash Equivalents
(274,472
)
 
(11,896
)
Cash and Cash Equivalents, Beginning of Period
469,513

 
329,813

Cash and Cash Equivalents, End of Period
$
195,041

 
$
317,917

 
 
 
 
Supplemental Disclosure of Cash Flow Information
 

 
 
Cash paid during the period:
 

 
 
Interest
$
25,245

 
$
11,199

Income taxes
$
2,061

 
$
3,196

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

 
$
100,156

Liabilities related to the initial consolidation of CLO
$

 
$
99,878

Assets related to the deconsolidation of funds
$

 
$
653,629

Liabilities related to the deconsolidation of funds
$

 
$
629,282


See notes to consolidated financial statements.


10


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
SEPTEMBER 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, and Shanghai. 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.


11


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


12


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED
SEPTEMBER 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 10 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.
Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase (“repurchase agreements”) are accounted for as collateralized financing transactions. The Company provides securities to counterparties to collateralize amounts borrowed under repurchase agreements on terms that permit the counterparties to repledge or resell the securities to others. Cash borrowed is included within securities sold under agreements to repurchase in the consolidated balance sheets. Securities transferred to counterparties under repurchase agreements are included within investments in the consolidated balance sheets. Interest expense incurred on these transactions is included within interest expenses in the consolidated statements of comprehensive income (loss). See Note 9 for additional information.
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


13


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


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 now recognizes 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.
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.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. The Company elected to early adopt the standard in the third quarter of 2018. The impacts of adoption are reflected in certain disclosures in Note 4 and include removing disclosures related to: the amount of and reasons for transfers between Levels I and II of the fair value hierarchy, the policy for timing of transfers between levels, and the valuation processes for Level III fair value measurements. The adoption of the standard did not have a material effect on the Company’s consolidated financial statements.
None of the other changes to GAAP that went into effect in the nine months ended September 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 No. 2016-02, Leases. ASU 2016-02 requires that, for leases longer than one year, a lessee recognize in the consolidated balance sheets a right of use asset, representing the right to use the underlying asset for the lease term, and a lease liability, representing the requirement to make lease payments. The recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee have not significantly changed from existing guidance. The requirements of ASU 2016-02 are effective for the Company beginning in the first quarter of 2019. The Company expects its total assets and total liabilities in its consolidated balance sheets to increase upon adoption as a result of recording a lease asset and lease liability related to the Company’s operating leases. The Company is continuing to evaluate the impact that this guidance will have on its consolidated financial statements. 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.


14


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


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 September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Group A Units
$
(21,798
)
 
$
9,500

 
$
(35,343
)
 
$
41,145

Other
658

 
260

 
1,398

 
535

 
$
(21,140
)
 
$
9,760

 
$
(33,945
)
 
$
41,680

The following table presents the components of the shareholders’ equity attributable to noncontrolling interests:
 
September 30, 2018
 
December 31, 2017
 
 
 
 
 
(dollars in thousands)
Group A Units
$
400,822

 
$
353,791

Other
5,052

 
4,111

 
$
405,874

 
$
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 tables present the activity in redeemable noncontrolling interests:
 
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
 
Consolidated Funds
 
Preferred Units
 
Total
 
Consolidated Funds
 
Preferred Units
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Beginning balance
$
53,507

 
$
420,000

 
$
473,507

 
$
25,617

 
$
420,000

 
$
445,617

Capital contributions
111,887

 

 
111,887

 
149,172

 

 
149,172

Capital distributions
(562
)
 

 
(562
)
 
(10,910
)
 

 
(10,910
)
Comprehensive income
374

 

 
374

 
1,327

 

 
1,327

Ending Balance
$
165,206

 
$
420,000

 
$
585,206

 
$
165,206

 
$
420,000

 
$
585,206



15


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


 
Three Months Ended September 30, 2017
 
Nine Months Ended September 30, 2017
 
Consolidated Funds
 
Preferred Units
 
Total
 
Consolidated Funds
 
Preferred Units
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Beginning balance
$
24,678

 
$
420,000

 
$
444,678

 
$
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

Capital contributions
32

 

 
32

 
2,283

 

 
2,283

Comprehensive income
432

 

 
432

 
1,238

 

 
1,238

Ending Balance
$
25,142

 
$
420,000

 
$
445,142

 
$
25,142

 
$
420,000

 
$
445,142

Oz Operating Group Ownership
The Company’s equity interest in the Oz Operating Group increased to 42.6% as of September 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.
Relinquishment of Group A Units
In the third quarter of 2018, a former executive managing director of the Company relinquished 3,500,000 Group A Units and an equal number of Class B Shares.
4. INVESTMENTS AND FAIR VALUE DISCLOSURES
The following table presents the components of the Company’s investments as reported in the consolidated balance sheets:
 
September 30, 2018
 
December 31, 2017
 
(dollars in thousands)
United States government obligations, at fair value
$
287,164

 
$
12,973

CLOs, at fair value
165,795

 
211,749

Other funds and joint ventures, equity method
32,251

 
14,252

Total Investments
$
485,210

 
$
238,974

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


16


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


retention rules for certain CLOs managed by the Company, and continues to hold investments in CLOs subject to these requirements.
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 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.


17


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


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 September 30, 2018:
 
As of September 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
$
79,994

 
$

 
$

 
$
79,994

 
 
 
 
 
 
 
 
Included within investments:
 
 
 
 
 
 
 
United States government obligations
$
287,164

 
$

 
$

 
$
287,164

CLOs(1)
$

 
$

 
$
165,795

 
$
165,795

 
 
 
 
 
 
 
 
Investments of consolidated funds:
 
 
 
 
 
 
 
Bank debt
$

 
$
120,468

 
$
61,598

 
$
182,066

Corporate bonds

 
1,828

 

 
1,828

Total Investments of Consolidated Funds
$

 
$
122,296

 
$
61,598

 
$
183,894

_______________
(1) As of September 30, 2018, investments in CLOs had contractual principal amounts of $153.2 million outstanding, which excludes the Company’s investments in subordinated tranches of the notes, as these do not have contractual principal payments.
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.


18


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


Reconciliation of Fair Value Measurements Categorized within Level III
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 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.
The following table summarizes the changes in the Company’s Level III investments for the three months ended September 30, 2018:

June 30, 2018

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

September 30, 2018















(dollars in thousands)
Assets, at Fair Value
 
 
 
 
 
 
 
 
 
 
 
 
 
Included within investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
CLOs
$
148,127

 
$

 
$

 
$
24,655

 
$
(5,483
)
 
$
(1,504
)
 
$
165,795


 
 
 
 
 
 
 
 
 
 
 
 
 
Investments of consolidated funds:
 
 
 
 
 
 
 
 
Bank debt
$
32,515

 
$
6,094

 
$
(13,795
)
 
$
55,761

 
$
(19,356
)
 
$
379

 
$
61,598

The following table summarizes the changes in the Company’s Level III investments for the three months ended September 30, 2017
 
June 30, 2017
 
Transfers
In
 
Transfers
Out
 
Investment
Purchases
 
Investment
Sales / Settlements
 
Gains / Losses
 
September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(dollars in thousands)
Assets, at Fair Value
 
 
 
 
 
 
 
 
 
 
 
 
 
Included within investments:
 
 
 
 
 
 
 
 
 
 
 
 
 
CLOs
$
43,723

 
$

 
$

 
$
132,685

 
$

 
$
395

 
$
176,803

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments of consolidated funds:
 
 
 
 
 
 
 
 
Bank debt
$
39,338

 
$
8,840

 
$
(21,900
)
 
$
30,470

 
$
(33,975
)
 
$
564

 
$
23,337

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

 
$

 
$

 
$
131,104

 
$
(170,403
)
 
$
(6,655
)
 
$
165,795

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investments of consolidated funds:
 
 
 
 
 
 
 
 
Bank debt
$
18,807

 
$
2,438

 
$
(1,690
)
 
$
114,154

 
$
(72,838
)
 
$
727

 
$
61,598



19


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


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