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

Q1 2013 Earnings Call

May 02, 2013 8:30 am ET

Executives

Tina Madon - Managing Director and Head of Investor Relations

Daniel Saul Och - Founder, Chairman, Chief Executive Officer, Executive Managing Director 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

William R. Katz - Citigroup Inc, Research Division

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

Roger A. Freeman - Barclays Capital, Research Division

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

Cynthia Mayer - BofA Merrill Lynch, Research Division

M. Patrick Davitt - Autonomous Research LLP

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

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

Operator

Good morning, everyone, and welcome to Och-Ziff Capital Management Group's 2013 First Quarter Earnings Conference Call. My name is Bhupendra. I will be your coordinator for today. [Operator Instructions] I would now like to turn the call over to Tina Madden, Head of Investor Relations at Och-Ziff. Please proceed.

Tina Madon

Thanks, Bhupendra. Good morning, everyone. With me today are Dan Och, our Chairman and CEO; and Joel Frank, our Chief Financial Officer and 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 2012 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'll be referring to economic income, distributable earnings and other financial measures that are not prepared in accordance with U.S. GAAP. 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 the 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, and welcome to our call today. This morning, I'll review our year-to-date performance and our assets under management. I'll also discuss the investment opportunities we're seeing and update you on our capital flows. After that, Joel will take you through our financial results, and then we'll take your questions.

The year-to-date performance of our funds through April 30 was strong. As we begin our 19th year in business, we remain intensely focused on delivering consistent, positive, absolute returns with low volatility to our fund investors. We continued to allocate capital opportunistically across our strategies and geographies, which was central to the returns that we have generated this year.

Our performance reflected the value of the flexibility that our multi-strategy approach and international capabilities provide. These attributes enabled us to respond quickly as market conditions changed and to capitalize on investment opportunities globally.

Institutional investors remain focused on allocating capital to alternative asset managers who can provide access to various investment strategies and platforms and have proven performance metrics.

Year-to-date through May 1, we experienced solid organic net inflows, and we remain confident that allocations to the industry will become more significant as institutional investors further seek to mitigate risk and enhance the return of their equity and fixed income portfolios.

Now let me turn to our assets under management. As we announced this morning, our assets under management as of May 1 totaled $35.6 billion, increasing $3 billion or 9% from $32.6 billion on December 31 of last year due to $1.8 billion of performance-related appreciation and approximately $1.2 billion of net inflows, including $597 million of CLO assets. These amounts included $400 million of performance-related appreciation for the month of April and $300 million of net inflows on May 1.

Our year-to-date net inflows primarily reflected an ongoing level of strong interest in our credit products. Our dialogue with investors remains very active about both our multi-strategy and credit platforms, and we are pleased with the diversity of investors we are in discussions with. Our assets under management from pension funds increased and we believe that our inflows from this source will continue to grow.

We are devoting more time to building new client relationships in addition to managing existing ones. We are making a substantial investment in expanding our fund investor relations capabilities and have made progress with senior hires for this team in several areas, including credit. We plan to expand our coverage teams globally, and we believe that, over time, these steps will contribute to increased capital flows.

Now for a quick update on our funds investment performance. Year-to-date through April 30, our Master Fund was up 5.4% net; Europe Master Fund, up 3.5% net; and our Asia Master Fund, up 10.7% net. These returns were generated with about half the volatility of the S&P 500 Index on a weighted average basis for these funds. Our year-to-date performance was driven primarily by our credit-related strategies in the U.S. and Europe and by a long/short equity globally. We remain fully invested in the Master Fund.

We are optimistic about the investment opportunity set worldwide. While market fundamentals were stronger during the first 4 months of this year, uncertainties in Europe, China and elsewhere persist. We continue to believe the current environment plays to the strength of our investment approach. We see compelling opportunities in long/short equity and the potential for increased activity in merger arbitrage. We also see additional opportunities in U.S. structured credit. Outside the U.S., we believe that Asia is becoming more interesting, particularly Japan given the Bank of Japan's recently announced stimulus plan.

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 discuss our 2013 first quarter results and review how we're thinking about expenses for the second quarter. For the 2013 first quarter, we reported GAAP net income of $26 million or $0.17 per basic and diluted Class A share. A discussion of our GAAP results is contained in our press release for your reference.

Now, let's turn to the details behind our 2013 first quarter economic income beginning with revenues. Management fees totaled $126 million, essentially unchanged from the 2012 fourth quarter. From January 1 to April 1, our assets under management grew by $3 billion to approximately $34.9 billion. Our average management fee was approximately 1.56% for the quarter, compared to 1.6% for the 2012 fourth quarter. The sequential change was primarily due to growth in our dedicated credit platforms and CLOs. As a reminder, our average management fee includes the effect of non-fee paying assets as well as our dedicated credit platforms, our CLOs and other alternative investment vehicles. The management fees for our credit products are lower than those for the multi-strategy products, which reflects market convention for credit assets.

Incentive income was approximately $101 million during the first quarter. This amount was primarily attributable to the incentive that crystallized on approximately $1.5 billion of longer-term assets under management. Of this amount, approximately 59% resulted from the restructuring of returns for certain assets in our credit platforms during the quarter, due to the expansion of our relationship with an existing investor. The remaining 41% was attributable to the portion of our 3-year multi-strategy assets that matured during the first quarter.

As I mentioned on the last call, approximately $765 million of our 3-year multi-strategy assets will crystallize in the third quarter of this year. However, we can't predict performance, and therefore, the amount of incentive income we may earn on these assets.

Now let me turn to our operating expenses. Comp and benefits totaled $23 million during the first quarter. Of this amount, salaries and benefits were $21 million, a 7% increase from the 2012 fourth quarter. First quarter comp and benefits also included $2 million of bonus expense. Salaries and benefits were 17% of management fees in the first quarter. We expect this ratio to continue to be approximately 16% to 18% of management fees through the second quarter of this year.

Now turning to non-compensation expenses. Non-comp expenses totaled $31 million in the first quarter, a slight increase from the 2012 fourth quarter. Non-comp expenses totaled 24% of management fees in the first quarter. We expect this ratio to continue to be 24% to 26% for the second quarter of this year.

Our 2013 first quarter effective tax rate was 21%. We estimate that this rate will be in the range of 20% to 25% for the second quarter of this year. As a reminder, this range is based on our estimated 2013 full year effective tax rate, which is subject to variables that won't be finalized until the fourth quarter of this year. Because of these factors, our full year tax rate can vary materially from our estimate.

Our 2013 first quarter distributable earnings were $137 million or $0.29 per adjusted Class A share. As you saw in our press release this morning, our dividend to the 2012 first quarter is $0.28 per Class A share. As we typically do, we use cash to fund items related to the operation of our business. Consistent with prior quarters, the most significant of these were; withholding taxes the be paid upon divesting of RSUs and principal rate payments on our variable rate borrowings.

In closing, I'd like to again highlight the operating leverage of our financial model, as well as its simplicity. The growth in our management fees and incentive income should more than offset growth in our operating expenses. Both our management fees and incentive income are paid in cash and flow through to the bottom line, and our dividend policy is to pay out essentially all of our distributable earnings each quarter. Any incentive income we earn as revenue is not subject to claw-backs and the majority of our assets under management are not subject to hurdle rates. Both the operating leverage and the simplicity of our model were clearly evident in our financial results last year and in the first quarter of this year and are important drivers of our earnings growth and margin expansion as our business grows over time.

With that, we will be happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Bill Katz from Citigroup.

William R. Katz - Citigroup Inc, Research Division

Just talk a little bit about the sort of the accelerated crystallization and sort of the net economic impact on a go-forward basis? Maybe, what happened and what the opportunity is here? And then away from this particular relationship, is there other relationships that have similar type of opportunities as well?

Daniel Saul Och

Well, basically, Bill, what this was, was we have a strategic investor where we're restructuring a relationship. They were invested in our longer-term credit assets for about 2.5 years. In order to expand the relationship and take more assets to manage, we restructured the entire relationship and earned incentive on the assets they were already invested in. So again, are there other opportunities going forward? Of course, we have other strategic relationships that are maybe more. Will this type of crystallization happen again? We can't predict that. And again, it could be a one-off thing. But again, as these relationships mature and grow, there could be different types of things and different types of structures that could create this kind of incentive.

William R. Katz - Citigroup Inc, Research Division

Okay. On a go-forward basis though, is there any detriment to the economic relationship just given the expanded relationship?

Daniel Saul Och

Not at all.

William R. Katz - Citigroup Inc, Research Division

Okay. And the other question is a little more tactical in nature. You mentioned that in your press release, that you're seeing good demand in the pension side for volume. I think, fund-of-funds has been an area of weakness just given what's going on in the industry at large. Can you talk a little bit about sort of the ins and outs, if you will, and what's happening on the fund-of-funds side? Is there any sort of dissipation -- just a slowdown, excuse me, in the redemption pressure there?

Daniel Saul Och

Well, our fund-of-funds as a percentage of AUM is roughly 15%, so that's stabilized at the levels -- recent levels. Look, we feel very good about the fund-of-funds who are our clients. We think they've done a good job as the industry has changed of demonstrating to their underlying clients what value they provide, why they're important, how to provide solutions for their clients. We're very supportive of these fund-of-funds and we're optimistic that, going forward, they'll grow and we'll grow with them.

Operator

Next question is from the line of Daniel Fannon from Jefferies.

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

First, just can you remind us what percent of total AUM is in the 3-year lockup at this -- or in some sort of longer-term lockup structures?

Joel Martin Frank

Our longer-term assets are about 20% of AUM. And the 3-year tranche, in particular, is about 4% of that.

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

4% of total? Okay, great. And also just as a quick follow-up, I just noticed quarter-over-quarter it looks like credit as a total percent of the Master Fund was down a little bit. Is that a function of opportunity set? I know it was obviously a big theme throughout most of 2012, but perhaps you can kind of touch on that a little bit as well. That'd be helpful.

Daniel Saul Och

Yes, I wouldn't read a lot into a small shift, but we're always dynamic in terms of moving around based on the opportunities. Credit, in particular, the credit spreads tightened across the board, throughout most of 2012 and early 2013. So we've been shifting our portfolio, taking advantage of the resources, the uniqueness of the opportunities that we have and we do believe that you're going to continue to see differentiation between our performance in those areas and most of our competitors.

Operator

Next question is from the line of Roger Freeman from Barclays.

Roger A. Freeman - Barclays Capital, Research Division

Just on the restructuring of the LP Agreement. Does -- is it fair to say that those crystallized fees are, say, pulled forward all else being equal from what you earned at the end of this year?

Joel Martin Frank

No, I'm not sure -- are you asking would that have been earned at the end of this year?

Roger A. Freeman - Barclays Capital, Research Division

Well, assuming that there were no returns between now and then. I mean...

Joel Martin Frank

Yes, not necessarily. Not necessarily. So they've been investing for 2.5 years. This was our longer-term assets, which run about 3 years. So it doesn't mean it would have been okay, so it would have been crystallized at some point. Anyway, what this allowed this investor to do was access more of our capabilities and our products and in order to do that, we just restructured the whole relationship, made it more flexible for them and they gave us additional assets to manage as well.

Roger A. Freeman - Barclays Capital, Research Division

Okay. But if they were -- when you say, 2 years and change, they might have been part of the 3Q 3-year crystallization?

Joel Martin Frank

They weren't part of the 3-year multi -- the 3-year multi - the Master Fund tranche. It's a different product.

Roger A. Freeman - Barclays Capital, Research Division

Got it, okay. And then, I guess, just on the -- yes. I wanted to ask, your credit obviously has become a bigger focus for you and you've done very well in it. It's the sort of 1 asset class that's not hedged. And I'm just thinking about the -- as that has become bigger and potentially more so, does that have an ability to increase the volatility of returns, or just kind of reduced the low correlation just because you're kind of subject to the credit -- the absolute credit market returns?

Daniel Saul Och

We don't think so. First of all, obviously, credit has become -- we're performing very well on credit and we've got some new products and some new investor relationships. But if you look at the multi-strategy fund, inventory of the long/short equity is roughly 50% of AUM as opposed to early 2012 when that number was closer to 30%. So that's -- part of the point of having the different investment disciplines, the different geographical capabilities is to move where there's opportunity, try and be ahead of the opportunities on the way in, and very important, I think we've been very good historically, and I was going to say 18 years but I guess it's now 19 years, at moving out before it's too late. So there's a lot of shifts going on. Japan, which was completely uninteresting in early 2012 has become very interesting lately. And you can't predict these things in advance. That's why you've got -- have to have people on the ground and be prepared.

Roger A. Freeman - Barclays Capital, Research Division

Just from an overall, I mean, sort of portfolio risk management perspective, is there sort of an upper limit to what you'd be comfortable having credit as a percent mix of the total?

Daniel Saul Och

Well, look, I think for all of our asset classes, there are limits based on the risk return, based on liquidity, based on downside scenarios, we always run our risk management and assume what's the downside in a bad environment, not a good environment. So you are correct that, in general, credit instruments become less liquid than large cap equities in difficult environments. And so look, we've always run our risk management in that way and we'll continue to do so.

Roger A. Freeman - Barclays Capital, Research Division

Okay. And then just lastly, in terms of the pace of discussions, and more importantly, sort of the time horizon from sort of initial dialogue to funding, is that starting to -- are you seeing that shrink in any meaningful manner?

Daniel Saul Och

Well, I don't think we're seeing it shrink, but don't forget part of what we're trying to do is in certain instances not have it shrink. To the extent that we're trying to get a multi-six-figure investor where we're providing a solution to them meaning, it's not just, "oh, okay, here's a product you have, I'll put it in, let's move on." Those things take a long time. On the other hand, getting larger amounts of assets committed for longer periods of time that fit the client really well where we think we're really situated to perform and excel for them is very important. We've noted -- Joel can give you some better numbers, but as a general matter, as our 3-year tranche -- as investors -- investments in our 3-year tranches have expired, in the vast, vast majority of cases, they've reinvested and added and/or looked at new products. So with a lot of these investors, we're not necessarily looking to shrink the time frame. We're looking to be their manager of choice on a multi-product basis and on a strategic basis and make sure that they're happy with our returns, our risk management and everything else that we do.

Operator

Next question is from the line of Ken Worthington from JP Morgan.

Unknown Analyst

This is Paul Lange [ph] on for Ken. Your focus on long/short at 50% is as big as it's ever been in terms of allocation by strategy. Wondering if you think that this can get much bigger. And given its size, is Och building more resources here or is it just able to scale with what it has?

Joel Martin Frank

Well, first of all, you have to realize that, that's across the globe. So if you look at the actual allocation in any geography, it's not particularly substantial relative to -- we're generally not one of the largest players in terms of size, in equities, in any of the geographies, so we can maintain our liquidity, maintain our nimbleness. Every asset class we're in has different risk return characteristics, has different liquidity characteristics. I think we've shown historically that we're pretty good at anticipating how that can change, particularly to the downside, before it changes. Very well hedged, liquid, long/short -- large cap long/short equity has different risk characteristics than other asset classes. But we're very comfortable not just the performance of the fund and not just the risk profile of the fund, but we're also very comfortable with how our differentiation and how our resources are enabling us to do some things that others aren't necessarily doing, which also reduces the risk.

Operator

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

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

Maybe going back to the credit products. I mean, is that -- a couple of things there. Number one, as those become a larger piece of the overall business and I guess my understanding is not some -- obviously not the CLO products, but the other credit products are more of the PE style-type structure. Is there any way of getting a sense of kind of the, I guess I'll call it, the accrued performance fees that you kind of have as of this date that in theory could be crystallized at some point down the road? Maybe somewhat similar fashion to what some of the PE firms or some of the other firms kind of report each quarter?

Joel Martin Frank

Right. Obviously, we don't disclose that at this point. We'll evaluate and we constantly evaluate based on the size and the quantity of what's invested in those assets and when we will disclose. I know that's not what exactly what you're looking for, but we can give you a sense of the size of the asset. The noncredit, the credit assets that are in CLOs are about $3.5 billion. The rest of the assets sit in the multi-strat funds so it gives you a sense of size. And I think the industry has some information on where those types of assets, structured credit and corporate credit, have what they've been returning over time so you can get a sense. But at this point, we're not disclosing that type of detail.

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

Okay. And maybe -- I appreciate that and hopefully we'll get some more down the road. But maybe drilling into the credit a little bit more. Within that kind of credit bucket, I mean, are there-- is that all one big fund that you're kind of raising assets in? Is it really kind of a combination of maybe some SMAs? Is there -- I'm discussing it, a mezz funds and a distressed fund, I mean, how should we think about kind of the product set underlying that in terms of its makeup?

Daniel Saul Och

The main things that we're doing right now are structured credit in the U.S., structured credit in Europe and structured -- and credit on a global basis. I think the key, strategically, is that we believe we're just at the beginnings of the growth in our credit business. This is an area where we think that we can add capabilities that benefit everybody. When we added the CLO capability, that benefited all of our constituents. It added resources. There was an enormous amount of capacity on the loan side. It works for multi-strategy investors, credit investors, people internally, et cetera. We think when we look at the size of some of the credit businesses around the Street, and some of them are very good and very well run, we think there are a host of things that we can do going forward that will benefit all of our constituents as we add them, make us stronger, give clients more options for us to provide solutions and hopefully grow the assets substantially.

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

Okay. I appreciate it. And maybe one last question just on the multi-strat products. It's been clearly more of a challenge to generate net flows into those strategies broadly. And is it really simply just kind of the mix where kind of the legacy fund-of-funds or high net worth is in private banks or are moving out and pensions are moving in, so is it really just the mix and there's a little bit of timing between the 2. Is there something maybe broader that you're sensing that there's just not as much even institutional interest in kind of a traditional multi-strat products as you thought or maybe there used to be?

Daniel Saul Och

Look, with us, it's primarily the mix. You've seen it in the numbers. You see a big reduction in the fund-of-funds as a percentage of AUM over a certain time period and a commensurate increase primarily on the pension side, as well as on the private bank side. We've had very substantial interest and continue to have substantial interest on the institutional side. As you pointed out, there have been outflows as well as inflows, but we definitely continue to do very well and see strong interest in terms of the inflows.

Operator

Next question is from the line of Cynthia Mayer from Bank of America Merrill Lynch.

Cynthia Mayer - BofA Merrill Lynch, Research Division

Maybe just following up on the -- all of the credit questions. I'm wondering if you'd just give a little color on the investors in the credit product, and are they -- is the mix of investor types and geography any different for them than your Master Fund and other strategies? And yes, I'll just leave it at that.

Daniel Saul Och

The mix is not particularly different, but I will say as a general matter, most of the investors and most of the dollars invested in our credit products today, are from investors with whom we already have relationships. And that makes sense because those are the first people that are going to see what you do and be on top of it. So we did mention that we are going to be focusing globally in terms of all of our products on expanding and growing the number of relationships that we have. But we certainly think, on the credit side, there's a lot of opportunity to expand that.

Cynthia Mayer - BofA Merrill Lynch, Research Division

Okay. So it's mostly existing -- from existing relationships of pensions or...

Daniel Saul Och

No, I don't think we've given a breakdown of the credit funds specifically. But as a general matter, the answer is yes. Most of the assets are certainly institutional.

Joel Martin Frank

And just to point out, that's expansion of current relationship is not necessarily a current investor moving from one product to another. It's an expansion because, obviously, we're providing more capability.

Cynthia Mayer - BofA Merrill Lynch, Research Division

Right, right. Presumably, they're taking their assets from someplace else and bringing them to you in addition to what they already have.

Joel Martin Frank

Correct.

Cynthia Mayer - BofA Merrill Lynch, Research Division

Okay. And I guess, just in terms of the mix of demand for Master Fund. Are you finding continued demand for 3-year -- for the 3-year lockup or for the more 1-year -- traditional 1-year structure?

Joel Martin Frank

A little bit of both. In other words, we do see interest in the 3-year tranche, but people who are investing in that 3-year tranche might move to a 1-year lockup. They may move to other products. So it's sort of a mixture of everything, but there's still interest in the 3-year tranche as well.

Cynthia Mayer - BofA Merrill Lynch, Research Division

Okay. And do you think there might, at some point, be more interest in the Asia and Europe products that you have as -- maybe as people get a little less risk-averse or they see some of the really strong returns in the Asian product? Or is there something more than simply returns that's deterring people from that, like they really just prefer a diversified product instead of something that's got a very focused geography to it?

Daniel Saul Och

We do think at some point there will be more interest. What we see going on is, I think, investors look at the 3 major geographic regions and say, okay, even if I know that things are not going well in Europe, it still may be a good investment opportunity. And credit may be very attractive if assets are sold but if not, they aren't. And Asia, which was kind of dormant and uninteresting through most of 2012, all of a sudden this thing happening in Japan that's a once in a 20-year or maybe once in a 50-year kind of change -- transformation and you're not going see it coming unless you were on the ground. So I think investors are looking. I know from our discussions they say, "Look, I feel even if I know where the economies are going, I'm not sure I know what that's going to mean for the investment classes and when, so I think I'm better off giving you the money to manage on a global basis as you see fit." At some point in time, interest will develop in Europe or Asia more specifically. Look, right now, we do have specific information in Europe on the credit side. So in response to that, we did create an investment product that focuses on European structured credit -- European credit only. But we do think it will happen at some point.

Operator

Next question is from the line of Patrick Davitt from Autonomous Research.

M. Patrick Davitt - Autonomous Research LLP

You mentioned as a lot of the 3-year money crystallized, most re-upped and actually put more money with you. And it looks like the vast majority of your 1Q flows were on the March 1 flow date. Is that related at all to that phenomenon?

Daniel Saul Och

No.

M. Patrick Davitt - Autonomous Research LLP

No? Okay. And it doesn't look like you accrued any compensation on this large performance fee. Will that flow through in 4Q, or is there not going to be any compensation on that?

Joel Martin Frank

No, basically the way we look at discretionary bonuses is it's based on the overall economics of the firm for the full year. This is only one component of that. So at the end of the year, when we understand the full economics of the firm, people's performance that's when we make decisions on discretionary bonuses.

Operator

Next question is from the line of Bulent Ozcan from RBC.

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

Quick question on the inflows. I was trying to kind of assess what percentage of the inflows are from continuous customers, existing customers versus new customers. Could you give a breakdown of that?

Daniel Saul Och

We actually don't -- we don't break that information down publicly.

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

Okay. And then in terms of maybe pension fund opportunity, it seems like you guys are getting more traction there. How big is the opportunity and how deep can you penetrate the market on -- are pension funds kind of hitting their limit in terms of exposure to alternative asset managers? What's the opportunity there?

Daniel Saul Och

Look, if you look at the behavior of pension funds and really what you're referring to -- you're talking about public pension funds in the U.S., I think, because that's primarily where the focus has been. I think they've shown that they are interested in increasing their investments with alternative managers, specifically those alternative managers they feel very strongly about. You saw a number of investments in excess of $1 billion made with certain funds by certain investors. We were really honored to be one of them and we think that's indicative [ph]. But we also want to remind you that there are corporate pension funds that have not been nearly as focused on alternatives. We think that's an opportunity. Internationally, there are lot of pension funds in other countries like Australia that have had the compulsory savings, which is an enormous pool of assets. We've done well there, but we think there's a lot of opportunity. Europe has been relatively dormant for a few years for reasons I'm sure you all can understand. We think there's a real opportunity for some pickup inflows from Europe, the Middle East, the sovereign wealth funds in the Middle East constantly bring in new capital. We used to talk about sovereign wealth funds, they're not the top of this. Remember, as a general matter, sovereign wealth funds have a huge amount of excess capital and take in more every month on every day. So we think there's a lot of options around the globe. Our focus, of course, we want to do really, really well with pension funds, but we think our model -- we think we've done there, well there, not because we targeted pension funds but because we've got the performance of products and the solutions provided and type of relationship that they're looking for.

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

Okay. And my final question deals with your global -- the effort to build a global coverage team and also the performance out of Europe in the April month. Could you just give us an indication of what the goal is in terms of the coverage team? As for Europe, you guys had great performance. April seems a little weak, given what you reported this morning. What was driving that performance in Europe?

Daniel Saul Och

Well, in terms of global coverage, I think what you're asking about is the Investor Relations coverage team. We're just -- we've embarked on a plan to expand the size of our Investor Relations coverage team. We think that the number of investors with whom we can have relationships, the complexity of each relationship, the number of products we have, the reputation of the firm keeps expanding. And so it make sense to expand the size and it allows each Investor Relations person to get more focus, even more focus and more attention to those clients who would like it as well as touching more clients. In terms of your -- I don't have any specific comments on the performance of any one geography last month. We think that we feel very good about our performance to this point this year across products and across the globe and I believe investors feel the same way.

Operator

The next question is from the line of Marc Irizarry from Goldman Sachs.

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

Just, Joel, quickly on the distributable earnings and the dividends. So I guess, that the base distribution was maybe $0.12 to $0.13 and the rest was from the crystallizations this quarter. When you look out to the fourth quarter distribution, should we expect that your distribution will be really dependent on the performance from here on in, and is there -- should we just be thinking about it right now there's no comp expense associated at all with that dividend that we're seeing?

Joel Martin Frank

No, it's performance for the full year, Marc, because this is only one product and one investor, so it's performance for the full year, not just from here and at the end of the year. And in terms of compensation, as I've said earlier, we take every element of the economics on the overall economics of the firm into account and people's performance, et cetera. So at the end of the year, we'll look at that and then assess what we think makes sense competitively and what makes sense for the firm and we'll make a decision then in terms of discretionary bonuses.

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

Okay. And then, Dan, on the credit business. You mentioned that there's a lot of existing investors there and I guess you have one that sounds like, just on the face of it there, they're relying on you even more to make the decisions given what's going on in credit markets and I guess how -- what their performance was there to -- can you just give a sense of -- it seems like the credit business you can argue that there's sort of some opportunistic investors who are in there versus sort of strategic allocators to that asset class. Can you just kind of differentiate, of the $3 billion or so that you have in credit, is that really more of an opportunistic-type business for now in terms of the client dollars in there? Or are there real strategic allocations towards credit as an asset class in those dollars in that bucket?

Daniel Saul Och

Well, first, the credit is very much a strategic business for us and we believe that the investors that we have look at credit strategically. That doesn't mean they don't move from one asset class to another opportunistically. But look, there are some firms that have very large amounts of capital under management on the alternative credit side, on the alternative fixed income side. And our goal is to move in that direction. We think we're going to do it by performing, by creating the right products, by finding the opportunities. We're also going to take advantage of our resource. For example, we've been very focused for at least 2 years that we have credit in commercial real estate. We looked ahead and said, okay, the banks want to have less. The banks don't want to put as much new product on their balance sheet. We've got a structured credit capability. We've got private equity real estate group that can help us research and source opportunities. That's an edge for us. It's an edge for our clients. Whether we turn that into a specific product or just use that to enhance other products, we'll see. But strategically, I think a lot of institutions are looking at their fixed income portfolios and getting a yield of, you tell the exact number, but they're getting a yield of 2-ish percent or something in that neighborhood. So if their goal is to get 7.5% or 8% and they're getting something closer to 2%, we think there's a very, very substantial opportunity for those alternative managers who can provide the right types of returns on a strategic basis.

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

Okay. And then can you just talk a little bit about -- you mentioned some of the folks you've hired to further build out your relationship capabilities. What's the strategy to sort of tap in to the high net worth/retail channel at this point and any update on progress there?

Daniel Saul Och

Well, those are really 2 separate areas, which is fine. The expansion we spoke about is primarily to focus on the institutional side. A few years ago, we did decide that it made sense to focus on the private banks in terms of high net worth. We think that's worked well. We're being patient and thoughtful on the high net worth side. We want to make sure that anything we get involved in is something that's going to be a good experience for the client. We're very conscious of exactly who the intermediaries are, what the level of due diligence, what the level of client understanding is. So I think that long term, that is definitely an area of interest and focus for us. It's not the area we're pushing the hardest on right now.

Operator

Thank you. That concludes the question-and-answer session today. I will now turn the call over to Ms. Madon.

Tina Madon

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

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Source: Och-Ziff Capital Management Group LLC Management Discusses Q1 2013 Results - Earnings Call Transcript
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