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Och-Ziff Capital Management Group LLC (NYSE:OZM)

Q4 2012 Earnings Call

February 07, 2013 8:30 am ET

Executives

Tina Madon - Managing Director and Head of Investor Relations

Daniel Saul Och - Chairman, Chief Executive Officer and Chairman of Partner Management Committee

Joel Martin Frank - Chief Financial Officer, Senior Chief Operating Officer, Executive Managing Director, Principal Accounting Officer and Director

Analysts

Roger A. Freeman - Barclays Capital, Research Division

Daniel Thomas Fannon - Jefferies & Company, Inc., Research Division

Kenneth B. Worthington - JP Morgan Chase & Co, Research Division

William R. Katz - Citigroup Inc, Research Division

Marc S. Irizarry - Goldman Sachs Group Inc., Research Division

Cynthia Mayer - BofA Merrill Lynch, Research Division

Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division

Craig Siegenthaler - Crédit Suisse AG, Research Division

Bulent S. Ozcan - RBC Capital Markets, LLC, Research Division

Operator

Good morning, everyone, and welcome to Och-Ziff Capital Management Group's 2012 Fourth Quarter and Full-Year Earnings Conference Call. My name is Chanel, and I will be your coordinator for today. [Operator Instructions].

I would now like to turn the call over to Tina Madon, Head of Investor Relations at Och-Ziff.

Tina Madon

Thanks, Chanel. Good morning, everyone, and welcome to our call today. With me are Dan Och, our Chairman and CEO; and Joel Frank, our Chief Financial Officer, Senior Chief Operating Officer.

I'd like to remind you that today's call may include forward-looking statements. These statements reflect the current views of management about, among other things, assumptions with respect to levels of assets under management, future events, certain expense levels and financial performance, many of which by their nature are inherently uncertain and outside of our control. Och-Ziff's actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these forward-looking statements.

For a discussion of the risks that could affect our results, please see the risk factors described in our 2011 annual report. The company does not undertake any obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.

During today's call, we will be referring to economic income, distributable earnings and other financial measures that are not prepared in accordance with U.S. Generally Accepted Accounting Principles. Information about and reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are available in our earnings release, which is posted on the Class A Shareholders page of our website. Furthermore, no statements made during this call should be construed as an offer to purchase shares of the company or an interest in any Och-Ziff fund.

Today's call is being recorded and is copyrighted material of Och-Ziff Capital Management Group LLC. Telephonic and webcast replays will be made available later today. You can find the details for both on our website at www.ozcap.com.

With that, let me now turn the call over to Dan.

Daniel Saul Och

Thanks, Tina. Good morning, everyone. This morning, I'll review over investment performance for 2012 and January of this year. I'll also discuss our assets under management. I'll touch on our priorities for 2013 and what we're hearing from our fund investors. I'll also share our views on the environment for capital flows both for the hedge fund industry and Och-Ziff. After that, Joel will take you through our financial results and then we'll take your questions.

Global equity markets had a strong year overall in 2012. The S&P gained 16%, the EURO STOXX 50 was up nearly 20% and the Nikkei 225 was up nearly 26%. Economic policy drove market sentiment throughout the year, notable moves resulting from central bank announcements, political leadership changes and major policy decisions.

The 2012 investment returns were strong and we are very pleased with the performance of our funds. We continued this momentum in January, positioning us for a strong start to 2013. The value we provided to our investors last year reflects our ability to remain nimble and highly opportunistic, enabling us not only to protect capital in volatile or declining markets but also to generate strong absolute returns when market conditions are more constructive.

We accomplished this by having the expertise and capability to adjust our portfolio applications between various asset classes, geographies and strategies as the market environment changed. These attributes are hallmarks of the investment process here at Och-Ziff.

Our performance and business growth in 2012 are a testament to the caliber of our investment professionals and support staff. We firmly believe that we have and continue to develop and promote the highest-caliber team worldwide, and that team continues to get better with each year that passes. Our 20 partners and 50 Managing Directors give us the breadth and depth that sets us apart in the hedge fund industry. Our employees' collective skill and commitment to our business drove the strength of our results in the year that presented many opportunities and challenges.

Throughout 2012, we maintained an active dialogue with fund investors and continued to see increasing levels of interest in Och-Ziff. Our long track record, strong alignment of interest with fund investors, transparency and institutionally-oriented infrastructure, provided us with significant competitive differentiation. However, the macroeconomic and political backdrop weighed on investor confidence during 2012, which had an effect on capital allocation to hedge funds. Flows to the industry last year were roughly half the level seen in 2011 according to HFR. Additionally, we believe that the ongoing rotation of capital out of fund-of-funds and into direct investment strategies also affected the pace of flows to the industry.

As we turn to 2013, we believe more than ever that the secular growth opportunity for hedge funds is intact as institutional investors increasingly seek to mitigate risk and enhance the returns in their portfolios. We think that capital allocations to the hedge fund industry will begin to increase during the year if markets continue to stabilize. We firmly believe that the returns of our multi-strategy funds in 2012, as well as the performance and expansion of our credit products, position us to grow by capturing an increasing market share of new industry flows.

In 2013, we remain focused on 3 consistent objectives: to create value for fund investors by generating positive absolute returns with low volatility; take advantage of our investment expertise and institutional strengths to attract new capital to our funds; and to develop and expand additional product offerings, such as our credit and real estate platforms, in order to meet the needs of our fund investors, both existing and new. We believe that our continued ability to achieve these objectives will result in strong asset and earnings growth over time.

Now let me turn to our assets under management. On January 1 of this year, our assets under management totaled $31.9 billion, increasing 12% or $3.5 billion from $28.4 billion on January 1, 2012. This reflected approximately $3.4 billion of performance-related after depreciation and $100 million of capital net inflows, which included approximately $986 million of CLO assets. As you saw in our 8-K earlier this week, our assets under management on February 1 were $33.1 billion. This included a $1.2 billion net increase from January 1, reflecting approximately $700 million of year-to-date performance-driven asset appreciation and $500 million of net inflows.

In 2012, we experienced strong demand from pension funds, which represented 30% of our assets under management on January 1 of this year, a 2-percentage-point increase year-over-year. We anticipate that this demand will extend into 2013.

We continue to see strong interest from new investors and existing fund investors who seek to expand their relationships with us. As a result, our credit-focused platforms experienced rapid growth in 2012 and interest remains strong. Expanding these platforms is an important strategic priority for us.

Now let me turn to our fund's investment performance. For the full year through December 31, our Master Fund was up 11.6% net, our Europe Master Fund was up 8.6% net, our Asia Master Fund was up 7% net and our Global Special Investments Fund was up 9.8% net. These returns were generated with less than 1/4 of the volatility of the S&P 500 Index on a weighted-average basis. We were active in all of our strategies at various points throughout the year, with the most significant contributors to our performance being our credit-related strategies and long/short equity special situations.

In January, our performance continued to be strong, with Domestic Fund up 1.9% net, our Europe Master Fund up 3.4% net, our Asia Master Fund up 3.7% net and our Global Special Investments Fund up 0.5% net. Looking ahead to 2013, we are positive on the investing environment and believe that many of the market headwinds have diminished. We ended 2012 fully invested in the Master Fund. Although we remain cautious as macro-economic and political uncertainties persist, we believe the current environment will play to the strengths of our multi-strategy investment approach. In particular, we see compelling opportunities in event-driven and global long/short equity.

We also believe that we are well positioned in our credit strategies to take advantage of the deleveraging process that continues among financial institutions globally.

With that, let me now turn the call over to Joel, who will take you through our financial results.

Joel Martin Frank

Thanks, Dan. This morning I will review our 2012 fourth quarter and full year results and recap how we are thinking about expenses for the first quarter of this year. For the 2012 fourth quarter, we reported GAAP net income of $51 million, or $0.35 per basic and $0.34 per diluted Class A share. For the full year, our GAAP net loss was $316 million or $2.21 per basic and diluted Class A share. As always, discussion of our GAAP results is contained in our earnings press release.

Now let me take you through the details behind our economic income results beginning with revenues. Full-year 2012 management fees totaled $490 million, up slightly from the prior year, as average assets were slightly higher in 2012 compared with 2011. Management fees in the 2012 fourth quarter were $127 million, increasing by 4% from the third quarter. Our assets under management grew by approximately $1.7 billion, from $29.3 billion on July 1 to $31 billion on October 1. From October 1 to January 1 of this year, our assets under management increased approximately $900 million.

The 2012 fourth quarter, our average management fee was approximately 1.6%, a slight decrease from the 1.62% in the third quarter. This average included the effect of our non-fee paying assets, dedicated credit platforms, CLOs and other alternative investment vehicles. We experienced a significant expansion of our credit platforms over the past year and they continue to be a source of asset growth and diversification for the firm. These platforms generate lower management fees, which are reflective of the market for these products and maintain a 20% incentive structure.

Full-year 2012 incentive income totaled $600 million, more than 9x the incentive income we earned in 2011 due to strong investment performance across our funds. During 2013, a portion of our longer term lock-up for certain assets will mature and any related incentive income will crystallize as the performance measurement period for these assets expire. Although we can't predict performance and therefore the amount of incentive income we may earn, if any, approximately $574 million of the 3-year, multi-strategy assets will crystallize in the first quarter of this year and $715 [ph] million of these assets will crystallize in the third quarter.

Now let's turn to operating expenses. Full-year 2012 comp and benefits expense was $294 million, a 52% increase over the prior year, due principally to higher cash bonus expenses. Salaries and benefits were $79 million, 8% higher year-over-year. In the 2012 fourth quarter, salaries and benefits were $20 million, essentially unchanged on a sequential basis.

For the 2012 full year and fourth quarter, salaries and benefits were 16% of management fees. In the first quarter of 2013, we expect that this ratio will be 16% to 18%.

Full-year 2012 cash bonus expense was $215 million, a 79% increase from 2011 due to the significantly higher incentive income that resulted from our strong investment performance. This amount included the guarantees accrued throughout last year. In 2012, cash bonuses were 20% of total annual revenues compared to 22% in 2011. This year, we followed the same methodology for discretionary bonuses that we have always used. We determined bonuses based on the full-year economic results of the firm, including incentive income crystallized at year end, with the objective of maintaining a stable franchise and culture through a competitive compensation structure.

Our strong investment performance last year and our ability to protect capital during periods of significant market volatility reflect the skill and dedication of our employees. These attributes were equally evident in our strong returns in January. Our firm is comprised of extremely talented people who, through their focus and expertise, are integral to helping our business perform and expand, which in turn will drive the future growth in our assets under management and our earnings.

Now let me turn to non-compensation expenses. Full-year 2012 non-comp expenses were $104 million, 21% higher than the prior year. For the fourth quarter, non-comp expenses were $30 million, an 18% increase sequentially. The increase in both periods was due primarily to higher professional service fees. In the 2012 full year and fourth quarter, non-comp expenses were 21% and 24% of management fees, respectively. For the first quarter of 2013, we expect that this ratio will be 24% to 26%.

Our effective tax rate for 2012 full year and for the fourth quarter were 23% and 21%, respectively. For 2013 full year and for the first quarter, we estimate that our effective tax rate will be in the range of 22% to 25%. However, as always, these estimates are subject to many variables that won't be finalized until the fourth quarter of this year and therefore can vary materially.

Distributable earnings for 2012 full year were $537 million or $1.18 per adjusted Class A share, and for the fourth quarter were $351 million or $0.77 per adjusted Class A share. As you saw in our press release this morning, our 2012 fourth quarter dividend was $0.75 per Class A share, bringing our 2012 full-year dividend to $1.11 per Class A share.

Before closing, I wanted to update you on a change we are making to our monthly performance 8-Ks. Beginning March 1, we will stop disclosing performance for our Global Special Investment Fund as our strategic priorities have shifted to expanding our other products. We will continue to disclose estimated monthly and year-to-date performance, the OZ Master Fund, the OZ Europe Master Fund and the OZ Asia Master Fund. We will also continue to provide estimated assets under management for the firm as of the first of each month.

To conclude, we are very pleased with the performance of our business last year, which was reflected in the strength of our 2012 financial results. As we look forward to the remainder of 2013, I want to reemphasize both the scalability and earnings power of our model. As our assets under management grow our management fees will grow, which should more than offset increases in our fixed expenses over time. The scalability of our business and the resulting operative -- operating leverage this creates is an important driver of our future distributable earnings growth. Our ability to consistently generate strong absolute returns is essential to the value we provide to our fund investors and therefore to the stability of our assets and how we earn incentive income. As our assets under management grow and we continue to generate these types of returns, our incentive income grows, which is also a significant driver of the growth in our distributable earnings, as you saw in our 2012 results.

The only material offset to incentive income is discretionary cash bonuses, which are based on the full-year economics of the firm. As has always been our policy and as you are seeing in the dividend we declared today, we expect to continue to pay out substantially all of our annual distributable earnings to our shareholders.

With that, we will now take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Roger Freeman of Barclays.

Roger A. Freeman - Barclays Capital, Research Division

Dan, I know you spend a lot of time -- you and the investment committee, determining asset allocation and then times, for the past couple of years, how much to be in risky assets or not. And I'm just wondering if you -- your views currently. Are you as sanguine about sort of the cessation of the macro risks that have been hanging over the market as market performance would suggest?

Daniel Saul Och

Well, first of all, you have to remember that our asset allocations and our views can shift and can shift quickly. We ended last year fully invested in Master Funds. So I think that was a statement by us that, from the bottoms up, we were seeing more to do, more areas of opportunity, more investment idea, more flow from the bottoms up. And from the top down, we felt more comfortable than we had previously about a reduction in some of what we'll call the left-tail risks in the world. I don't want to comment on how we feel relative to the market. I think that what we've been very good at historically and hope to be very good at going forward is being ahead of some of those moves. I think obviously in the past few years we've been relatively good at raising cash and reducing risks in advance of certain market events and adding to exposures in advance of the opportunity set. I think that also -- that our LPs continue to see that more and more and more. I think in the -- historically, that was something that they would see every 3 or 4 years. And I think the last few years, they've seen us shift more frequently, and, if anything, have become even more comfortable with our capabilities there.

Roger A. Freeman - Barclays Capital, Research Division

I guess maybe another way to ask, as did you -- as you sit here now, do you think that they're likely to see significant shifts in allocations in and out of cash this year?

Daniel Saul Och

That's hard to say. There are events on the horizon that could impact that, but we're very comfortable. I will say that from the bottoms up, the team -- we think our ability to generate returns for investors. The strength, depth and breadth of our teams we think is higher than it's ever been. The differentiation between our capabilities and our competitors in a number of different areas, we think, continues to expand. The investment in resources, the commitment to different areas, the commitment internationally, where we haven't wavered at all despite certain difficulties the past few years, continues to generate differentiated idea flow and hopefully competitive differentiation.

Roger A. Freeman - Barclays Capital, Research Division

Okay. Great. I just have a little question on flows. So I think you meant -- you said that you thought that allocations to hedge funds would increase this year if markets continue to perform and, just kind of looking at your performance last year, it was strong. Is that comment sort of with a view that strong performance this quarter or this year, building off of last year, builds a track record that draws you to go back into alternatives? And then sort of a sub-question there is January flows. The strength there, was that pretty broad-based or was there much lumpiness in there and were there many new clients?

Daniel Saul Och

January flows were generally broad-based. In terms of flows going forward and our expectations and the reason for our confidence about where Och-Ziff is positioned, that's based on 2 factors. The 2 most relevant things in flows: Number one, how is Och-Ziff perceived and what breadth of product offerings do we have. We think both of those -- we think we continue to reinforce and increase investor perception of where we stand in both of those areas over the past several years. And then obviously, the overall environment and total amount of flows. We talked about some of the reasons why that was more difficult in 2012. But most importantly to us, we feel very, very good going forward. That's based on our performance numbers, what we know internally and how we feel about the strength of our areas, what we're hearing from investors, what they're looking to do, et cetera. So things are lined up to go well on that side. Obviously, things can change.

Operator

Our next question comes from Dan Fannon with Jefferies.

Daniel Thomas Fannon - Jefferies & Company, Inc., Research Division

I guess I just wanted to walk through some of the differences between 2010 and this year. I mean, Joel you gave us -- you highlighted the scalability of the model. But if I look at kind of the difference in the 2 years, the last kind of major performance-fee-generation year, you generated $138 million in performance fees greater in 2012 but yet the dividend was only -- or the distribution was only a couple of pennies higher. Can you kind of walk through the differences between now and then and ultimately how we should think about the scalability of your model?

Joel Martin Frank

Well, I think the answer to that, Dan, is that obviously, especially when it comes to bonuses, which is the big variable on the expense side, that we use the same methodology, the same thought process we always use. We look at full-year economics, we look at the competitive environment and we look at how our employees performed and how important they are to the business and maintaining the franchise. So there's no set number there but obviously, based on that and based on the outlook for the firm, that's how we're going to decide on economics. So you'd -- obviously you'd know the variable is bonuses and every year that will be evaluated based on the criteria I just told you.

Daniel Thomas Fannon - Jefferies & Company, Inc., Research Division

The overall staff levels, everything is -- and infrastructure, has that also been growing? Or are you talking about the same number of managing directors? Just trying to get a sense of -- you've scaled up, maybe, for higher AUM going forward, so we should see better leverage from here going up?

Joel Martin Frank

Yes, the business is growing and to your point, you're right. Because remember, as management fees grow, that covers -- more than covers the fixed expenses. So the fixed expense growth related to that will be managed. But again, the variability comes with the incentive and the bonuses.

Daniel Thomas Fannon - Jefferies & Company, Inc., Research Division

Okay. And then, just in terms of the kind of distribution and the infrastructure, particularly around the credit side. I guess, are you where you think you need to be right now for what you see as the opportunity? Or should we see continued potential adding of people and personnel around that area?

Daniel Saul Och

Look, we think overall there are -- while we have a large number of institutional investors, there are still a large number of institutional -- institutions globally with whom we don't have relationships in any of our product areas. We think we have substantial room for growth on the credit side. So I think it's reasonable to assume that we'll be adding personnel in that area.

Operator

Our next question comes from the line of Ken Worthington, JPMorgan.

Kenneth B. Worthington - JP Morgan Chase & Co, Research Division

First, there's the kind of the great debate about the rotation from credit to equity. So maybe first, in your conversations with a much more sophisticated client base, do those conversations suggest that this rotation is or may happen this year? Or is it very status quo based on the results of last year?

Daniel Saul Och

Yes, the clients that we deal with are really looking at it differently than the broad themes that you're discussing. I think the broad themes that you're discussing have a lot to do with the current level of interest rates, have a lot to do with expectations, right or wrong, that we may be close to a change in that cycle. Have a lot do with the fact that, for most investors, their opportunities and alternatives with interest rates where they are, are not dramatically different from the level of government interest rates. They're basically able to invest in different spread and duration product. When investors come to Och-Ziff to talk about credit, as with all areas, we think we provide a very, very differentiated product. We think that we have access to product and the ability to help create product that most investors don't see. And we're able to therefore offer substantially different return opportunities than what they're going to see in liquid -- public, liquid, popular credit markets. And so it's really hard for us to judge the shift. What we will say is that when we look today and say we think we have something to offer investors, where we can sit down and show them what we're doing and why it is so attractive and why we feel strongly that they should commit assets and that it's differentiated from what they're going to see from other firms, the answer is definitively yes.

Kenneth B. Worthington - JP Morgan Chase & Co, Research Division

And if we think about the expected kind of returns in credit for you this year versus last year, and rates are lower and credit spreads are much, much tighter, is expected returns based on what you're seeing likely to be that much different this year? Like obviously, you can't predict the future, but just based on your opportunity set -- or maybe that's the best way to say it, the opportunity set this year versus last year. Are the opportunities that much different or that much less than they might have been last year?

Daniel Saul Och

Well, as you said, obviously we can't predict the future, but you are correct. Credit spreads in general are tighter. And that includes credit spreads for what we'll call differentiated product. On the other hand, one could also argue that the differentiation between what we're seeing and what someone without our full resources, both in the U.S. and international, will see may be wider today than it was last year. Most importantly, when we look at the opportunities that we have and the returns we expect them to generate, they are extremely attractive and we do feel strongly that investors should be moving with us in that direction.

Kenneth B. Worthington - JP Morgan Chase & Co, Research Division

Okay. Perfect. And then, I don't know if you can share, but in terms of the performance fees for 2012 or maybe even 4Q. Can you give us a sense of how much came from the 3-year money? You gave us kind of some sense of what the 3-year money for the 1Q and 3Q was. But in terms of performance fees for 4Q, just to help us better model this?

Joel Martin Frank

We usually don't disclose it but I'll give you a sense that 4Q for the 3-year issuance [ph] was not material.

Kenneth B. Worthington - JP Morgan Chase & Co, Research Division

Okay, that's extremely helpful. And then lastly, the G&A. You mentioned the dollar number went up for the year and fourth quarter in professional fees. In the professional fees, is this -- is it legal costs that went up? Is it investment in technology? Can you just give it a sense of the step up, where in professional fees the spending came from?

Daniel Saul Och

It's professional fees related to operations and infrastructure, which include new initiatives. It includes the overall trend and new and additional regulatory reporting, that kind of stuff.

Operator

Our next question comes from the line of Bill Katz with Citi.

William R. Katz - Citigroup Inc, Research Division

Dan, can you just -- I was just trying to box what you said in terms of year-to-date contribution between AUM performance and flows. Your press release has a couple hundred million dollars of outflow but I thought I heard you say $500 million of inflow. Am I reading something incorrectly?

Daniel Saul Och

No, I think the -- what's in the press release is an estimate. So as you -- when we come out with final numbers, that will probably clarify that for you.

William R. Katz - Citigroup Inc, Research Division

Well, you said you had $500 million of inflows year-to-date?

Daniel Saul Och

No. What we said was $500 million of inflows at our February 1, 8-K.

William R. Katz - Citigroup Inc, Research Division

Okay. All right. That's helpful. Okay. Just coming back, Dan, I think the last couple of years you've been pretty upbeat about the opportunity set in the hedge funds yet the organic growth's been pretty lumpy. Your enthusiasm for this year, is that based on specific conversations you're having with investors and consultants? Or is it more of just the cumulative effect of the strategic advantage of your franchise?

Daniel Saul Och

I think it's 2 things. I think that we feel and I think the numbers show -- and I don't mean just the return numbers, but also just -- we feel that our ability and our perceived ability to generate extremely good absolute returns and to protect the capital continues to come through. To do it in more than one product area continues to come through. So if you then ask, okay, so how was Och-Ziff positioned when and if the flows occur? We just feel what we continue to -- we're in a better position than we've ever been in. In terms of flows into the industry, obviously, no one's -- we can't predict the future. But we do believe that after 5 -- roughly 5 years since the financial crisis -- the world's been in a mode for 5 years where concern about a contagion event has constantly been a very big factor in markets and in investor perceptions. I think we've all seen that investors may be moving out of that mode. All your discussion about rotation out of fixed income, into equities, about moving equity markets, about potentially moving capital out of short-term government securities that yield virtually 0, all of that seems to be occurring. If that does continue and occur, we do expect that to lead to flows into the hedge fund industry and we think we're well-positioned to capture it. So we feel extremely strongly about our position and we are cautiously optimistic about the flow environment.

William R. Katz - Citigroup Inc, Research Division

When you look at your flow dynamics for 2013 and given your G&A guidance, are you presuming your credit business would grow faster than your hedge fund business this year?

Daniel Saul Och

Very hard to say and also it depends how you define faster. As a percentage of AUM, obviously, if we had -- if we add $1 to each business, that is a much larger percentage increase to the credit business given its smaller base. So it depends how you define expectation.

Joel Martin Frank

But we feel that all of our products are very valuable to our fund investors and something they'll be interested in across the board.

William R. Katz - Citigroup Inc, Research Division

Okay. And then just coming to the 3-year locks. If we were to try and look back from 3 years from each of the first and third quarters in 2013 and look at the Master Fund overall returns, is that a reasonable proxy to try and estimate the performance fees?

Daniel Saul Och

Well, it's reasonable. I will tell you, obviously, there's embedded performance in the numbers up to this point in time. We can't predict what's going to happen to the point when these mature. But obviously, it's a reasonable way of looking at it.

William R. Katz - Citigroup Inc, Research Division

And just final one for me. Just following on the G&A question, is this guidance now more reflective of where you think you're going to be? Or is it a little bit of a short-term blip for buildout?

Daniel Saul Och

It's where we're going to be currently, and obviously if this changes, we'll adjust the guidance in the future.

Operator

Our next question comes from the line of Marc Irizarry, Goldman Sachs.

Marc S. Irizarry - Goldman Sachs Group Inc., Research Division

Dan, if I look at the non-multi-strat businesses, credit, CLOs, real estate, et cetera, it's about 14% of your assets today. When you think about building the business over time and about what your investors want from Och-Ziff, how big do you think the non-multi-strat business can be over time?

Daniel Saul Och

Well we think we have a lot of potential there. Our goal -- look, our goal is to grow all the businesses. We want to grow the multi-strat business, we want to grow the non-multi-strat businesses. And I think we've been clear, the way we intend to do that is by being amongst the best alternatives in the world for investors in each of those areas. But when one looks at the firms that are substantial in what you'd call the non-multi strat areas for Och-Ziff, many of them are much, much larger than we are. And while our goal isn't just size, our goal is to be amongst the best in the market and very often that means becoming larger and scalable and obviously we're not shy to commit to resources. So we do think that they can become larger and we like the fact that, as that happens, it's really good for our LPs, it's really good for our employees, both in those areas and in different areas and it's good for our shareholders. So we like the alignment of interests there.

Marc S. Irizarry - Goldman Sachs Group Inc., Research Division

And are you having conversations with your LPs suggesting that they want to step out into strategies outside of multi-strat or that they are sort of relying on you more for the tactical asset allocation?

Daniel Saul Och

It's not a matter of stepping out, it's a matter of wanting to use Och-Ziff for more and more of its capabilities. Don't forget, in addition to being very comfortable with our returns and the risk profile, they look at our brand and they say, "We're really comfortable with the operations and infrastructure. We're really comfortable with the internal culture of the firm. We're really comfortable with how you train and manage your people. We're really comfortable with how people work together on investment ideas. We feel very comfortable that when we go to one of your geographic regions or a different investment area, all the things that we consider excellent and disciplined at Och-Ziff are there across the board." So their desire to -- once they've done all that, their desire to invest with us in another product rather find another firm is really what's driving this.

Marc S. Irizarry - Goldman Sachs Group Inc., Research Division

Okay. And then Joel, can you give us a sense of performance. I think, for the last question you had on the 3-year money, are there any DFs on the accounts there who are below any kind of high water mark or should we assume that all that AUM is in, sort of, overall in aggregate in positive territory?

Joel Martin Frank

Yes. Like I said earlier, there is embedded performance in the 3-year tranche at this point, and I think that's what you should assume.

Operator

Our next question comes from the line of Cynthia Mayer, Bank of America Merrill Lynch.

Cynthia Mayer - BofA Merrill Lynch, Research Division

I guess in terms of the recent flows, the $500 million you mentioned, and sorry if you said this, but was that into a traditional 2 in 20 multi-strategy product and was it a 3-year or more traditional structure?

Daniel Saul Och

It was a mixture across the board.

Cynthia Mayer - BofA Merrill Lynch, Research Division

Okay. And in terms of the 3-year money that's crystallizing in 1Q and 3Q, it sounds like it's a fair amount. Do you have a sense of what kind of retention you'll see from those? And if we look at some of the redemptions at the turn of the year, how much of that was 3-year money?

Joel Martin Frank

Well, basically what we’re seeing is the people in the 3-year tranche are either re-upping the 3-year tranche or moving to 1 year or to other products in the firm.

Cynthia Mayer - BofA Merrill Lynch, Research Division

Okay, great. And then it sounds as if you're saying that last year's pressure -- there was some pressure across the industry in terms of the fund-of-funds and it sounds as if you're saying that the -- some of that has stabilized and won't be as big a factor in this year. Is that fair to say?

Daniel Saul Och

We think so. First of all, fund-of-funds are roughly 16% of AUM. That's a lot lower than it was when the decline in fund-of-funds AUM began. So just arithmetically the probability's in a better place. Number two, we think many of our fund-of-funds had done a very good job adapting their businesses to what clients are looking for. And that's it -- at Och-Ziff, we've been very focused for years on this concept of providing client solutions. Everything that you're hearing about in terms of new product development, in terms of different structures, it's all about providing solutions for clients. Sitting down with them and discussing: What are you looking for? What do you need? What are your issues? Here are all of our capabilities. How can we adapt our capabilities to work better for you, to become a deeper, more important relationship? That's why -- that was the genesis of the 3-year tranche. That was about, we want to commit more and longer to Och-Ziff. And we think that's going to continue to be the case. We've seen a number of our fund-of-funds clients, in our view, reposition themselves to be more of a solutions provider to clients. And we think that those who do that and do it well will add value and will do well and we're supportive of that effort.

Cynthia Mayer - BofA Merrill Lynch, Research Division

Okay. And I guess finally, in terms of your less liquid investments, the real estate, whatever side-pocketed private equity. How should we think about the pace of realizations, what that might mean for earnings?

Daniel Saul Och

Well, don't forget, that's broken down into 2 categories. You have capital invested in our -- well, it's 3 categories. You have capital invested in our multi-strategy funds, that's longer duration such as the 3-year tranche and I think you have a sense of how to do that. You have capital invested in our credit funds that tends to be similar to the 3-year tranche in terms of its terms. Capital invested in real estate, which is more -- you should think of that -- that is very similar to the way you'd think about the private equity side but obviously that's a relatively small percentage of our AUM.

Operator

Our next question comes from the line of Robert Lee with KBW.

Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division

Just a quick question and most of my questions have been asked and answered. But just maybe a little technical point on the credit and real estate funds. Oftentimes, particularly in credit funds, capital gets committed and then, for some of your peers, it doesn't actually earn management fees and so it's kind of drawn down. So are your credit and real estate funds structured the same way so they may be appearing in assets but you're not necessarily earning full management fees on them yet until they're drawn down?

Joel Martin Frank

No. They actually won't appear in assets unless we are earning management fees on them.

Robert Lee - Keefe, Bruyette, & Woods, Inc., Research Division

Okay. And I'm assuming -- I think you may have just mentioned this but I'm assuming these are kind of more traditional structures, with 8% kind of hurdle returns over time before...?

Joel Martin Frank

It depends on the structure. The structures do vary.

Operator

Our next question comes from the line of Craig Siegenthaler of Credit Suisse.

Craig Siegenthaler - Crédit Suisse AG, Research Division

First, just on asset allocation. Can you provide us some context in terms of how you've been shifting your allocations between the specific asset classes and also geographies?

Daniel Saul Och

Well, I mean, Joel, do you want me to give a rundown on where we were at the end of the year?

Joel Martin Frank

Yes, sure. So long/short equity is about 45%, converts about 12, structured credit 24%, credit 10, privates at 4%, merger [indiscernible] 5%. And we're fully invested, so there's no cash.

Daniel Saul Och

And you can run the numbers but the general shift during this -- which occurred during the second half of 2012, as we became more constructive from a bottoms up basis on the event-driven and long/short equity, particularly in Europe and Asia, we increased that exposure globally and the rest has remained relatively static.

Craig Siegenthaler - Crédit Suisse AG, Research Division

Got it. And then, do you have a view on if client demand is improving more for multi-strat-type hedge funds versus single strategies?

Daniel Saul Och

Well look, we think demand is improving for all areas here at Och-Ziff, but we think that has a lot to do with the differentiation. You have to ask clients -- over a long period of time, clients have become very comfortable with the consistency and repeatability of what we do. The last few years, a lot of that repeatability and consistency has been about preserving capital on the downside. But it's also been about generating returns on the upside. And we think LPs are becoming more and more comfortable with our ability to consistently and repeatedly generate returns and we think that's going to be the case going forward.

Joel Martin Frank

And I think we also offer them many opportunities through many structures and many types of platforms. And they like our capabilities across the board and we have flexibility with them to allow them to access those opportunities.

Craig Siegenthaler - Crédit Suisse AG, Research Division

And then just a technical question. Did the $200 million of net outflows quarter-to-date, that was a little bit off from what we were estimating from the last 2 8-Ks. So I'm wondering, did that include any inflow/outflow after February 1 of this year?

Joel Martin Frank

No. But you got to understand, it is an estimate. You have to understand how it's measured based on outflows as of December 31 and what actually is 2013. So I think it's better that you wait for the final numbers to come out to have clarity on those particular numbers.

Craig Siegenthaler - Crédit Suisse AG, Research Division

Got it. And just one final question. You said you're basically going to pay out all your earnings power in the form of dividends. I know this is a long time away but there is a large debt maturing in 2016. As we get closer, do you think you'll look to kind of change the dividend payout or do you just -- or are you pretty comfortable with your debt levels and you'll look to maintain around similar levels?

Joel Martin Frank

We'll assess that as we go forward, we always do. We -- as I said earlier, our expectation is to pay out the majority of our distributable earnings.

Daniel Saul Och

The dividend paid is also -- that's an important point. As we said earlier, our LPs have really become comfortable with the repeatability and consistency of what we do. This year, we're very pleased to have paid a cash dividend of $1.11. Our view is that, given the valuation and multiple of the stock, we think that the public market has not become this comfortable yet with the repeatability and consistency of what we do and our goal is to continue to show both our LPs and the public market the repeatability and consistency of what we do. And our plan is to continue to pay out substantially all the distributable earnings as a dividend.

Operator

Our next question comes from the line of Bulent Ozcan, RBC.

Bulent S. Ozcan - RBC Capital Markets, LLC, Research Division

I have a quick question on the pensions business. It's now about 30% of your investor type and where do you see this going? How much could it be? And a related question to that, if I look at the pension business and the foundation and endowments, I see that you get great traction with the pension clients, yet with the foundations/endowments, they have become less important than they had been in 2009. What's driving that? What's the difference between those 2 clients?

Daniel Saul Och

Look, pension funds, if you look at industry studies, as a general matter, foundations and endowments have been in the hedge fund and alternative space for longer and, as of several years ago, had larger overall allocations. So pension funds, in general, newer entrants, larger asset pools and were much less allocated to the alternative side. So that's -- what's driving it is that pensions, when they look, how they're going to generate the returns they need consistently and make sure to protect the capital during downside, alternatives make a lot of sense and so they're moving capitals close to the area.

Bulent S. Ozcan - RBC Capital Markets, LLC, Research Division

Is there any difference in the fees that you're asking?

Daniel Saul Och

No.

Bulent S. Ozcan - RBC Capital Markets, LLC, Research Division

Okay. And then, in terms of your capabilities, you said that you're going to add products. Are you also thinking about expanding your capabilities into other areas other than just liquid markets?

Daniel Saul Och

We don't have any plan at this point. I think we laid out our subject priorities and what we're looking to do. Our expansion is -- it's exactly what I said before. It's based on providing solutions to clients. It's based on clients saying, "Here's something that we want to do. Here's something we think Och-Ziff is going to be very good at." And then we look and say, "Okay, is it additive to the rest of our client base?" If it is, then it's something that we're willing to do. But we're not in the mode of looking to add new products. We are going to continue to be -- we think slow, thoughtful, methodical about what we do and why it is beneficial not just for the client looking to do it but for our overall client base.

Bulent S. Ozcan - RBC Capital Markets, LLC, Research Division

And a final question maybe on the competitive landscape. Do you think that competition is going to increase with more traditional asset managers looking for -- looking to add alternative asset managers -- or alternative asset management and trying to add assets there? What are your views for 2013? It seems like everybody wants to be in alternative asset management.

Daniel Saul Och

No. We don't think that -- we're not concerned about -- there's a lot of competition in our business. We're not concerned about competition from that area.

Operator

Your final question comes from the line of Patrick David of Economist Research.

Unknown Analyst

I'm starting to hear increasing buzz about the possibility of a 1994-like correction in bond markets. I'm curious how you guys think about that from a risk management standpoint and if you're thinking about making any significant changes to your positioning, given that increasing buzz?

Daniel Saul Och

We always run the portfolios thinking about where are the real risks in the world, where are the imbalances -- and also recognize that there are going to be things that will occur that we and others didn't think about or predict. And I think that over 18-year history, it hasn't been about predicting when something's going to happen or what it's going to be. It's about always running portfolios in terms of their hedging, in terms of their allocations, in terms of our minimal use of leverage, to be thoughtful about those things. So we're aware, and have been for quite some time, that interest rates are low. I think that historically we've been good at adjusting accordingly. And believe me, we're focused on that as well.

Operator

Ladies and gentlemen, that concludes the Q&A session. I'd now like to turn the call over to Ms. Madon for closing remarks.

Tina Madon

Thanks, Chanel. Thank you, everyone for joining us today and for your interest in Och-Ziff. If you have any questions, please don't hesitate to contact me at (212) 719-7381. Media inquiries should be directed to Jonathan Gasthalter at (212) 687-8080.

Operator

Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect. Have a great day.

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