Och-Ziff Capital Management Group LLC Management Discusses Q3 2013 Results - Earnings Call Transcript

Nov. 5.13 | About: Och-Ziff Capital (OZM)

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

Q3 2013 Earnings Call

November 05, 2013 8:30 am ET

Executives

Tina Madon - Managing Director and Head of Investor Relations

Daniel Saul Och - Founder, Chairman of the Board of Directors, Chief Executive Officer, Executive Managing Director, and Chairman of Partner Management Committee

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

Analysts

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

Steven J. Fullerton

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

Gerald E. O'Hara - Jefferies LLC, Research Division

Cynthia Mayer - BofA Merrill Lynch, Research Division

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

M. Patrick Davitt - Autonomous Research LLP

Operator

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

Tina Madon

Thanks, Kanthy. 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 and Senior Chief Operating Officer.

As a reminder, today's call may include forward-looking statements. Among other things, these statements reflect management's current views on assets under management, the capital flow environment, expense levels, financial performance, investment opportunities and strategic business priorities, many of which are inherently uncertain and outside our control.

Och-Ziff's actual financial results, investment performance and assets under management may differ possibly materially from those indicated in these forward-looking statements. Please see our 2012 annual report for description of the risk factors that could affect our financial results and our business. The company does not undertake any obligation to publicly update any forward-looking statements, whether due to 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 our website at www.ozcap.com. 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.

With that, I'll now turn the call over to Dan.

Daniel Saul Och

Thanks, Tina. Good morning, everyone, and thank you for joining us. This morning, I'll briefly review our year-to-date investment performance and our assets under management. I'll also update you on our capital flows and on the environment we see for investment opportunities globally.

During the third quarter and again in October, we generated strong performance with low volatility for our fund investors, further extending the strong absolute returns we generated in the first half of this year. The flexibility we have to move capital across strategies and geographies was again evident, and we remain highly opportunistic in capitalizing what we viewed as the best investment opportunities. Our investment teams operate within the framework of our consistent and disciplined process to identify the opportunities globally. This approach has been central to the repeatability of our returns historically and the subsequent value we have created for our fund investors.

We remain confident that allocations to hedge funds will grow. We believe institutional investors will continue to increase the proportion of their portfolios, investing with alternative managers to enhance their equity and fixed income returns. According to HFR, net inflows to hedge fund industry during the third quarter of this year were the highest in 9 quarters, and year-to-date, they exceed those for all of 2012, suggesting an improving trend line. While these are just a couple of data points, we believe that we are well positioned to benefit as capital allocations to the industries increase.

Now let me turn to our assets under management. As you saw in the 8-K we issued this morning, our assets under management as of November 1 totaled $38.5 billion. This amount reflects growth of $5.9 billion or 18% from $32.6 billion on December 31. The year-to-date increase was driven by approximately $3.5 billion of performance-related appreciation and $2.4 billion of net inflows, which includes the 2 CLOs we closed this year.

Pension funds and private banks remain the largest sources of our net inflows year-to-date. We continue to experience strong interest from fund investors across our platforms and have made solid progress in establishing relationships with new investors. Excluding the CLOs we've raised, our net inflows through September 30 have improved significantly year-over-year, driven by an increase in our gross inflows, which are more than 50% higher than they were for all of 2012. Although we can't predict future flows, the trend in our net flows appears to be improving.

We also made significant progress in expanding the capabilities of our fund investor relations team through additional hires globally and restructuring the team to focus on important sources of a new capital. We believe that these steps position us to attract significant additional assets, not only to our well-established multi-strategy platforms but also to our growing credit, real estate and long/short equity platforms. These 4 areas remain our strategic priorities for asset growth, although we continue to look for additional opportunities to meet the needs of our fund investors.

Now let me give you a quick update on our fund's investment performance. Year-to-date through October 31, our Master Fund was up 10.9% net, our Europe Master Fund was up 10.1% net, and our Asia Master Fund was up 10.5% net. These returns were generated with 36% of the volatility of the S&P 500 Index on a weighted average basis for these funds.

Our year-to-date performance continued to be driven primarily by our long/short equity and credit-related strategies. During the quarter, we took advantage of market volatility to enter a long/short equity allocation, where our focus remains on selecting positions with defined events and catalysts while also seeking investment opportunities with strong underlying fundamentals.

We remain fully invested in the Master Fund. In the U.S., with an improving economic backdrop, we continue to be cautiously optimistic about growth prospects for the medium term, but we remain patient, thoughtful investors. We believe the current environment plays to our strengths and our global reach.

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

Joel Martin Frank

Thanks, Dan. This morning, I'll review our 2013 third quarter results and discuss how we are thinking about expenses for the fourth quarter.

For the third quarter, we've reported GAAP net income of $25 million or $0.16 per basic and $0.14 per diluted Class A share. As always, our press release includes a detailed discussion of GAAP results.

Now let me turn to the 2013 third quarter economic income, starting with revenues. Management fees totaled $138 million, increasing slightly on a sequential basis as assets under management grew approximately $1.2 billion from April 1 to July 1. From July 1 to October 1, our assets under management grew another $1.7 billion to $37.8 billion.

Our average management fee for the quarter was approximately 1.5%. As a reminder, the management fees we earn vary based on which platforms our assets under management are invested in, and we anticipate that our average management fee will fluctuate over time based on the mix of products that drive our growth.

Incentive income was approximately $72 million for the third quarter. The majority of this amount related to crystallized incentive income earned on the expiration of approximately $800 million of 3-year multi-strategy assets with the remainder related to redemptions. The majority of these assets were reinvested for an additional 3 years in the same multi-strategy platform and the remainder across other platforms within the firm.

Now let me turn to our third quarter expenses. Comp and benefits totaled $28 million during the third quarter of this year. Of this amount, salaries and benefits were $23 million, up 6% from the second quarter, and the remainder were primarily guaranteed bonus expense. The increase was driven by our hiring activity globally during the quarter on both the investing side as well as the infrastructure side.

Salaries and benefits were 17% of management fees in the third quarter. We anticipate that this ratio will remain approximately 16% to 18% of management fees for the fourth quarter of this year.

In addition to employee bonuses, our Partner Incentive Plan will also impact our compensation expenses in the fourth quarter. As a reminder, our eligible pre-IPO partners may receive an annual discretionary performance award, which will be a mix of partner units and cash. We can award a maximum of 2.8 million units this year and 10% of the annual incentive income we earn up to a cap of $39.6 million.

Now turning to non-compensation expenses. Non-comp expenses totaled $29 million in the third quarter, a decline of 15% sequentially, primarily due to a net increase in professional fees. Non-comp expenses totaled 21% of management fees in the third quarter, and we anticipate this ratio to be 21% to 23% for the fourth quarter.

Our third quarter effective tax rate was 16%, declining sequentially due to an increase in our estimate of annual incentive income for this year, which impacts our full year effective tax rate calculation. As I've discussed in the past, our effective tax rate is impacted by several factors, including the amount of revenue we generate and how our revenue and expenses flow through our legal entity structure. As a result, our actual quarterly and annual effective tax rates can vary materially from our estimates. We estimate that our effective tax rate for the fourth quarter of this year will be in the range of 15% to 20%.

Our third quarter distributable earnings were $130 million or $0.27 per adjusted Class A share. As we disclosed in our press release this morning, our dividend for the third quarter is $0.25 for Class A share. As we approach the end of the year and begin to look towards 2014, I'd like to again emphasize the elements of our model which position us to deliver superior earnings growth over time.

Our year-to-date investment performance has been very strong, demonstrating the repeatability that our investment and risk management processes have achieved historically. Our assets under management have increased by 18% during the same period.

As Dan mentioned, current and prospective fund investors have reacted positively to our performance, and this remains the most important criteria in their decision to invest capital with us. We believe we are well positioned for additional asset growth and that we will see continued acceleration in organic net inflows as our business diversifies.

Complementing our investment performance and asset growth is a financial model that is simple and transparent with a clear linkage between our distributable earnings and our dividend. First, the management fees we earn more than exceed our fixed operating expenses, and our cost structure is scalable, meaning that we expect our operating expenses to grow at a lower rate than our assets under management over time. The results in operating leverage flows directly through to our distributable earnings.

Second, we earn 20% incentive income annually in cash on the majority of our assets as we generate investment returns. And the incentive income we earn as revenue is not subject to callbacks, and the majority of our assets under management are not subject to hurdle rates. Cash bonuses, which are discretionary, are the only operating expense paid out from the incentive income. The remainder flows directly through to our distributable learnings.

The assets we have in platforms and earned incentive income cumulatively over a multiyear period, such as our 3-year multi-strategy or dedicated credit assets, also create significant additional earnings potential. The sort of objective of the structure is reflected in our distributable earnings and dividends both this year and last year.

Third, as our assets grow, we earn management fees and incentive income on that growth. Year-to-date through November 1, our assets under management have increased by $5.9 billion. We are earning management fees and incentive income on that asset growth, which have been and will continue to be reflected in our earnings this year. The compounding effect of asset growth on our distributable earnings and dividends can be significant over time. Henceforth, our dividend policy is to distribute substantially all of our distributable earnings as dividends to our shareholders each quarter. We believe that the combination of these elements is a powerful driver of our current and future earnings potential.

With that, we are happy to take any questions you have.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Robert Lee.

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

Maybe a first question to you, Joel. Just could you maybe help us think about incentive-related comp in the fourth quarter? I mean, if I go back and look at it and I've kind of thought of it in the context of your full year revenue generation, some proportion of that -- and I mean, I think last year to use as a framework, I think, was like 19%. So is that the right way to be thinking of your incentive generate -- your incentive comp in the fourth quarter as really a function of the full year revenue? And then maybe what's kind of a reasonable range we should be thinking about for this year?

Joel Martin Frank

I think the easiest way to look at incentive comp, Robert, as you've modeled it throughout the year, is just to look at the performance that we're going to generate over the next couple of months and add that to the cumulative effect of where we are now. I think that's the easiest way of modeling this out. So you look at asset growth. Obviously, you'll factor that in, but typically, it's based on the investment that -- the investment returns that we have over the next couple of months.

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

Okay. Maybe a question for you, Dan. I'm just curious, you mentioned in the prepared comments that you're seeing -- so you see demand from pensions and private banks. But I'm just curious, within the pension segment, do you think part of what you're seeing as some increased demand, is that driven -- how much of that is driven by the fact that, hey, you've had a strong equity market last 1.5 years or so. And a lot of pensions may be reaching kind of their -- and it's time for them to reallocate, take down some of their equity exposure here or there, and then yourselves and maybe some of your peers or the beneficiaries of that or -- do you think that's maybe having some near-term effect?

Daniel Saul Och

We're seeing demand and client allocations in a number of different areas. If you look at credit, we presently have about $6 billion of assets under management in the credit area. You'll recall, some topic on these calls, we would talk about what it's going to take to get the first billion. We've also got demand for our multi-strategy product, a lot of interest in the real estate side, a lot of interest on long/short equity side. So what we're really seeing is, across-the-board interest in our products, across-the-board interest in the way Och-Ziff does things, a desire to establish new relationships with Och-Ziff and to increase relationships that have occurred. If you've heard Joel note on the call, the 3-year tranche that generated most of the incentive this quarter rolled into a new similar structure. So that's always very, very important to us.

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

All right. Then maybe to follow up to that, I mean, if you look ahead to next year, you had a lot of assets kind of roll off their initial 3-year tranche, I guess, this year, this quarter, I guess, or earlier in the year. And as -- again, as we kind of look to next year, my sense is that a lot -- it's not as much of that to be had next year that it's a good thing that things rolled over into a 3 -- new 3-year tranche. With just kind of on a near-term basis, you may not have as much of that kind of phenomena next year, where you have things rolling off a 3-year tranche.

Daniel Saul Och

Well, I think the thing to think about is some have reinvested in the 3-year tranche again, some have reinvested in other products. So approximately 4% of AUM is in our 3-year multi-strat tranches. But there are also some credit assets as well that are in those 3-year products, and you may see some of that during the year next year.

Operator

And we have the next question, and that comes from Bill Katz from Citi.

Steven J. Fullerton

This is Steve Fullerton filling in for Bill. How much of the recent traction improvement flows that you guys are seeing is from new investors versus LP's consolidating asset?

Daniel Saul Och

We don't disclose those numbers, but it's been across the board. It's new investors. It's current investors increasing. It's current investors interested in expanding the relationship with us. This concept, for them, they look at the quality of our investment products. They look at the quality of the organization, of its controls, of its operations, of its transparency, and we think all that's playing out well. We also feel good about the fact that the expansion is -- we feel is benefiting all of our investors. For example, on the credit side, we now got $6 billion of assets under management on the credit side. We've dramatically increased our resources and capabilities over the past several years on the credit side. If you're an investor in a multi-strategy fund, you're benefiting from that. You're benefiting from the flows. You're betting from -- benefiting from the capabilities. You're benefiting from the increased product capability. We -- same thing with the real estate side. There's no doubt that investors in the credit funds and the multi-strategy funds have benefited from the capabilities we have on the real estate side, and we believe investors on the real estate side also benefit from the flows and product coming from other areas of the firm. And that's always -- it's been a very important part about how we think about growing. Where do we think we have capability? Where can we deliver value to clients and excess return to clients? And where can we do it in a way that benefits all of the investors?

Steven J. Fullerton

Okay, great. And then can you just detail the factors that drove the decline in the fee rate? I know you guys said mix, but was there anything else? And how should we think about that going forward?

Daniel Saul Och

No, it's mostly -- you talk about the management fee rate. Most of it relates to flows into our credit assets, which typically, as you know, have lower management fees than our other funds. But this is a very important part of our organic growth in this -- in our assets under management. So -- but that's basically the reason.

Operator

And we have next question, and that comes from the line of Marc Irizarry of Goldman Sachs.

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

Great. Dan, can you talk a little bit about the -- just the progress in the, I guess, high-net worth channels and even maybe some of your strategic initiatives that are underway in terms of building out the business in some of the more retail-oriented channels?

Daniel Saul Och

Sure. Look, our goal -- right now, we haven't done anything specific that we're discussing in terms of those new channels and platforms. Our goals, which is similar to what we do with the private banks, is not to create a channel. It's not necessarily to be the first. We want to be the best alternative available for any channel that decides to come into our space. We think we executed that well with the private banks, and that's worked well for everybody. We believe that we are -- that positions that way for any new channels. So as I said, right now, we don't have anything specific to announce. But we do believe that any new group of investors looking to come into the alternative space in the areas that we touch, we believe that Och-Ziff is one of their best alternatives. And if we maintain that, along with our infrastructure and transparency, we'll be well positioned to take advantage when it's appropriate.

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

Okay. And then can you just give us a little more perspective on the credit business? And maybe if you take us through maybe the clients who are interested in your credit strategies these days, and I guess when you look at the credit markets, are you concerned about maybe certain of the areas in terms of capacity? And how do you think about that?

Daniel Saul Och

Well, our concern in the credit markets has more to do with the fact that in many areas, spreads have contracted, and in many areas, prices have increased. Our goal in the credit area, our goal in expanding credit products has been to find those areas where we feel we can deliver excess return, where we feel that we can provide value that's significant to clients and do it in a way that enhances all other areas of the firm that invest on the credit side. We're very proud of the fact, as we said, that we have $6 billion in AUM. First is where we were when we first got this started. Having said that, when we look at some of the managers who are very strong in the credit area, their AUM in that asset class is substantially higher than ours. And so we think we have a lot of room to do some very good things for clients going forward.

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

Okay. And then, Joe, can you give us sort of your, I guess, your outlook for 2014 in terms of maybe headcount, where you are today? And then as we think about building out some of the businesses like credit, how should we thinking about 2014 expenses?

Joel Martin Frank

So right now, we're about 532 people in headcount. And as the business grows, we'll obviously add people. But for the most part, a lot of the additions have been in the infrastructure supporting the people. There have been some investment professional hires but to a lower extent. So I think obviously, as management fees grow, that more than offsets the growth in compensation and other expenses over time. And I think that what you've seen is going to -- some of that will continue next year. But again, because of the scalability of the business, I think that the growth in management fees and the growth in assets will more than offset that expense.

Operator

And we have a next question from the line of Daniel Fannon from Jefferies.

Gerald E. O'Hara - Jefferies LLC, Research Division

It's actually Gerry O'Hara sitting in this morning. Just a quick question on the fundraising environment. If you could perhaps kind of give some color on that and to the extent that some of your peers have actually exited the business recently, if that's presenting some opportunities.

Joel Martin Frank

Well, to your second question, we don’t think that it's really having any impact. In terms of what we're seeing in the fund raising environment, because it's -- I can't really comment on the overall industry. I don’t know what other firms are doing. But we're seeing interest in a number of different areas. Pension funds and private banks, which have been the most robust for the past couple of years, continue to be robust. We're seeing more interest in Europe than we've seen over the past couple of years. I think that has a lot to do with the fact that Europe looks a little bit more stable. We're seeing more interest in large clients looking to establish more significant relationships. And as long as we continue to perform and continue to drive value, we think we can continue to grow. And we like the fact that the growth is in more than one area. That's always very important in this firm. We are thoughtful about capacity. We are thoughtful about driving returns. We're an investment-driven organization. That is what we intend to be in the future. And so when we can expand in an area such as credit or expand in an area such as real estate which has a lot of capacity, the investors in those areas do very well, and investors in other funds at Och-Ziff benefit from it. That's our formula. That's what we're going to keep doing going forward.

Gerald E. O'Hara - Jefferies LLC, Research Division

Great. And just a quick follow-up on that. If I -- my notes are right from a couple of calls earlier, you mentioned the majority of assets coming to the credit products at that time were existing clients. Has that sort of mix begun to shift? Or if you maybe kind of talk about that dynamic, I know you don’t disclose the actual numbers.

Joel Martin Frank

Yes. Generally, we don't disclose the exact mix, but it's really a mixture of new and current investors.

Daniel Saul Och

But it's also what you'd expect. Early on, it was current investors coming up and saying, "We know your credit products. We know the teams. We'd like to do this." And then as we developed a track record, developed a reputation, developed visibility, we think you're going to see new investors come in.

Operator

We have a next question, and it comes from the line of Cynthia Mayer from Bank of America Merrill Lynch.

Cynthia Mayer - BofA Merrill Lynch, Research Division

Just coming back to the rapid growth in credit, is it possible to get any color on the performance of the credit assets? Because your disclosure on Master Fund performance is so good. Is there a per-dealer way we should look at that versus benchmarks, versus peers? How do you think it's most helpful for us to think about that?

Daniel Saul Och

Well, we don't disclose that, and obviously, that's always a consideration quarter-to-quarter based on the size of the business and the growth. The returns have been excellent compared to whatever statistic you want to look at. But right now, we're at a point where we don't disclose the details.

Cynthia Mayer - BofA Merrill Lynch, Research Division

Okay. And, Joel, I guess the non-comp expense was below your guidance, I think, for the quarter. Was that a function of anything particular in the quarter? Or is it just -- obviously, probably a lot of it is just the leverage in the model, but it was, I think, down a little bit sequentially, too. Was there anything special going on?

Joel Martin Frank

Well, as I said, last quarter, we expect it to moderate over time, and it has. I mean, there'll be some variability in that, but I think if you follow the guidance I give, I think that will probably get you where you need to be.

Cynthia Mayer - BofA Merrill Lynch, Research Division

Okay. And just coming back one last time to the question of next year and the 3-year assets, if I look back 3 years, the fundraising was a little bit lower, I guess, in terms of what would -- 3 years ago from 2014 versus 3 years ago from 2013. And so should we expect that the 3-year assets crystallizing in 2014 would be a little bit lower? Or at this point, given the strong performance, should we think about it as on a par or higher?

Joel Martin Frank

Look, we're -- obviously, I'll give you guidance quarter-to-quarter on what we think is going to mature, both for the end of, obviously, 2013 and 2014. Again, because there'll be maturity across the board both in the 3-year tranches and some of our credit assets, there will be some incentive collected next year. But as I said, Cynthia, we'll give you guidance prior to that.

Operator

And we have a next question, and it comes from the line of Bulent Ozcan from RBC.

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

I have a question on sufficient [ph] identified credit, real estate and long-term equity as an opportunity, but you also said that you are looking for additional opportunities. Could you expand on that comment a little bit? And are you looking into different asset classes, ones basically provided by banks, some such strategies? Could you expand on the comments on the additional opportunities?

Daniel Saul Och

Sure. If you look at how we've grown historically, it's been a -- whether it's geographically or by investment discipline, it's finding an area where we think there is an opportunity, dedicating, committing, building a business, doing it in a way that works for the clients who invest in that area and for the rest of the clients and for the firm. So what we mean by that is very simple. The -- right now, our multi-strategy funds, our credit funds, our long/short equity funds and our real estate funds, which are our strategic growth areas, are all very significant and provide a lot of opportunity. Having said that, we're always on the lookout for areas where we think we can provide value to clients. Some of that will just lead to new things that we do within the current fund structure. It is potential that it can lead to new investment opportunities. Our new products tend to be driven by where we see investment opportunity, not necessarily where others are marketing funds or raising assets. That's the key.

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

And then maybe on the Chinese opportunity, I've read that you've been granted a $50 million quote -- quota to raise Chinese yuan. What is the opportunity here, how large could that be, and how do you think about it in terms of the timeframe?

Daniel Saul Och

Look, it's a long-term opportunity, I don't think anyone knows. I think it's fair to say that it's potentially significant. You'd want to be one of the firms that were selected, and it's a good example of where -- what we do at our firm in terms of our reputation, our preparedness and our commitment to geographic expansion, and having a significant business is relevant. We've had an -- operations in Asia since 2001. We do have an office in Beijing. We've been investors in China. Our firm has a relation -- a reputation in China. And we think that, along with the global relationship of the firm, was relevant to the decision. So doing those types of things, it goes back to my comment about the retail distribution. We're not going to plan for distribution. We're not going to be the ones to figure out the distribution channel. We want to be the ones -- when people say, "We want the best. Who's the best? That's our goal," we want them to say, "Och-Ziff," in any of the areas we're focusing. If we can do that, then we're doing the right things for our clients, and we'll grow.

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

And my final question -- I'm not sure if you can comment on that or would want to comment on it. But it seems like the Och-Ziff family is going through some restructuring with their funds. And would that impact Och-Ziff in any way? Could we see more additional capital being allocated to Och-Ziff to manage funds? Or I don't know if you can comment on any of that often used on the Och-Ziff family.

Daniel Saul Och

We don't expect that to impact our firm in any way.

Operator

And we have a next question, and it comes from the line of Patrick Davitt from Autonomous.

M. Patrick Davitt - Autonomous Research LLP

I would like to ask this 4Q compensation question a little bit differently. You obviously had much higher pre-4Q incentive fees this year. You don’t really appear to have much compensation associated with them. So is it fair to assume that above and beyond what you would normally accrue for this year's performance, because it's a 3-year money, there'll be a lot more on top of that? Or has there been some accrual for this already because it's 3-year money?

Daniel Saul Och

If you're -- I think what you're asking me is what bonus expense is going to be at the end of the year, is that correct?

M. Patrick Davitt - Autonomous Research LLP

I'm not asking what it's going to be. Yes, I'm just saying, has there been some compensation accrued for the 3-year money already, maybe even before this year?

Daniel Saul Och

The way we look at bonuses is we look at what the economics of the firm are on a year-to-year basis, and that at the end of the year when everything crystallizes, then we'll make a decision on what bonuses are. So it's based on the economics of the firm on a year-to-year basis, and it's based on the performance of individuals. If you look at the last couple of years, you'll get a sense of what those numbers have been, which is good finance. But don't forget also, you have to add in something for the Partner Incentive Plan, which I spoke about earlier.

M. Patrick Davitt - Autonomous Research LLP

Right, okay. And then more broadly, just curious how your conversations broadly with LPs have changed particularly since June around the tapered expectation volatility, which keeps swinging around pretty significantly?

Daniel Saul Och

We don't sense that had any significant impact on the conversation, and the conversations continue to be consistent with what we discussed earlier in the call.

Operator

That concludes the question-and-answer session today. And now I'd like to turn the call over to Ms. Madon. Please proceed.

Tina Madon

Thanks very much. 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. Thank you.

Operator

Thank you for your participation in today's conference call. This concludes your presentation. You may now disconnect. Have a good day.

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