Och-Ziff Capital Management Group LLC Q2 2008 Earnings Call Transcript

Sep.20.08 | About: Och-Ziff Capital (OZM)

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

Q2 2008 Earnings Call Transcript

August 6, 2008 10:00 am ET

Executives

Tina Madon – Managing Director, Head of IR

Dan Och – Chairman and CEO

Joel Frank – CFO

Analysts

Marc Irizarry – Goldman Sachs

Roger Freeman – Lehman Brothers

Hojoon Lee – Morgan Stanley

Cynthia Mayer – Merrill Lynch

Prashant Bhatia – Citigroup

Ken Worthington – JPMorgan

Operator

Good morning, everyone, and welcome to Och-Ziff Capital Management Group 2008 Second Quarter Earnings Conference Call. My name is Lacy, and I'll be your coordinator for today. (Operator instructions). I would now like to turn the call over to Ms. Tina Madon, Head of Investor Relations. Please proceed.

Tina Madon

Great. Thanks, Lacy. Good morning, everyone. We appreciate you joining us for our call today. With me are Dan Och, our Chairman and CEO; and Joel Frank, our Chief Financial Officer. Dan will review our second quarter 2008 business results, and Joel will take you through the details of our quarterly financials. After that, we'll take your questions.

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

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 certain financial measures, which are not prepared in accordance with U.S. Generally Accepted Accounting Principles. A reconciliation of our non-GAAP measures to the most directly comparable GAAP measures is available in our earnings release, which is posted on the For Shareholders page of our Web site.

Furthermore, no statement made during this call should be construed as an offer of 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.

Now let me turn the call over to Dan.

Dan Och

Thank you, Tina. Good morning, everyone, and thank you for joining our call today.

I will briefly review our results for the quarter and then spend time on the investment opportunities we are seeing in our core business and the progress we are making in our private investments business. Perhaps most important to begin with today is that against the backdrop of a challenging market environment during the second quarter, the value of our investment process was again readily apparent. Our absolute returns were strong, which successfully preserved investors' capital.

We have weathered tough market conditions throughout our 14-year history, and our model is well tested. We have risk-management processes in place which are central to our investment strategy and are designed to help us manage our business with relatively little volatility. As a firm, we entered this environment well prepared, and we are pleased with our investment performance for both the quarter and year-to-date periods.

Market conditions became increasingly difficult as the second quarter progressed. Continued write-downs and capital-related issues in the financial services sector, along with slowing economic growth, rising inflationary pressures, volatile commodity prices and a weakening dollar, contributed to declining asset values and heightened market volatility globally. Given this environment, asset flows into the hedge fund industry remained slow, a continuation of the pattern we began to see in the first quarter. Nevertheless, we view the current slowdown as a temporary cyclical reaction to broader market turmoil and are confident that the long-term secular growth drivers for the industry remain intact.

While market conditions are difficult and may remain so over the next several months, and potentially the next few quarters, we are executing on our strategic growth plans. In our hedge funds, which are the core of our business, we are intensely focused not only on preserving capital, but also on strategies to generate strong returns. We have teams focused globally on the geographies, industry sectors and asset classes where we see new opportunities.

Some of the areas we are looking at are

small and mid cap stocks in Asia, the financial services sector globally, and credit and structured products to name a few. We also continue to see strong growth potential in our private investments business, although successful execution of the investment strategies for these new platforms will take time and persistent, hard work.

Our Africa joint venture continues to identify investment opportunities, including natural resource deposits, such as copper and cobalt, and infrastructure such as telecom. We have deployed capital in several regions through our emerging markets platform. We continue to see attractive ideas in Eastern Europe, South America, Mexico and other geographies. And through our energy platform, we are seeing investment potential in exploration and production, alternative energy, carbon and related areas.

We remain disciplined and focused in executing our private investment strategy. A good example of this is our subprime mortgage servicing platform, RCS. We acquired RCS two years ago, and while we have been investing the resources to build the platform, we have been patient and thoughtful in committing capital. So far this year, we have passed on investing in roughly $10 billion of potential mortgage portfolios, as we feel valuations have not been sufficiently compelling, and our real estate assumptions are conservative.

We will continue to be patient and cautious, given ongoing market-driven asset depreciation, but we believe there will be increasing opportunities, given current economic conditions. While the return horizon of these investments is longer than those of our core hedge funds, we believe that the rates of return can be very attractive.

Now let me briefly review our second quarter business results. As of June 30th, assets under management totaled $33.6 billion, a $357 million net increase from March 31st. Our performance-driven asset appreciation in the quarter was partially offset by a small amount of net outflows. However, in an environment where lower capital commitments and increased redemptions have affected the hedge fund industry globally, we are pleased to have been successful in maintaining a consistent level of assets under management since the beginning of the year. We also continue to believe that our success in extending our performance track record builds the foundation for generating future organic growth in assets under management.

During 2001 to 2003, the last time there was a substantial market dislocation, we experienced a similar slowdown in investor capital commitments, with our assets under management remaining essentially unchanged during this period, although we successfully preserved capital and generated strong absolute returns. As markets stabilized in 2004 and investors regained confidence in the capital markets, we saw significant growth in our assets under management.

Our discussions with fund investors demonstrate strong interest in our platforms and our investment process. We are not only deepening our existing relationships but also targeting investor classes which could represent significant growth for both our core products and our new platforms. We believe that our traditional investor base, sovereign wealth entities, large international pools of capital and other platforms represent additional opportunities to grow assets under management.

While current market conditions are clearly weighing on investor sentiment and our realization of net inflows is taking longer as investors take more time to execute, we remain confident in our ability to attract new capital through existing and new channels over time.

Now let me review our funds investment performance. On a year-to-date basis through June 30, our flagship Master Fund was up 0.77% net, our European Master Fund up 0.43% net; our Asia Master Fund was down 5.07% net, and our Global Special Investments Master Fund was up 0.12% net. These returns were generated with less than half the volatility of the S&P 500 and with essentially no leverage. Additionally, we were able to outperform the major markets worldwide during the same period. The S&P 500 was down 11.9%, FTSE 100 was down 10.6%, and the Hang Seng Index was down 19%. As was the case during the 2001 to 2003 period, the magnitude of this outperformance adds significant value to our fund investors.

I'll review our investment performance by updating the analysis we provide each quarter, which compares our returns to those of the S&P 500 during the months in which the returns for the S&P 500 were negative. As you've heard me say before, we think this comparison best differentiates our model, especially in challenging markets. Comparatively, the S&P 500 was down four of the six months during the 2008 first half, with a cumulative total return for those negative months of minus 18.1%.

Investors who were in the OZ Master Fund during this same time period experienced a cumulative net return of minus 1.3%, or 16.8 percentage points higher than the S&P 500. As another point of comparison – over the last 12 months through June 30, the S&P 500 had a cumulative total return of minus 13.1%, versus the OZ Master Fund, which delivered a cumulative net return of positive 2.7%, or 15.8 percentage points higher than the S&P 500. This gives you a sense for the stability of our performance and our success in generating positive returns since the credit crisis began about a year ago.

Now let me turn the call over to Joel, who will take you through our financial results for the quarter.

Joel Frank

Thanks, Dan.

I'll briefly review our GAAP results, but I'll spend most of my time on economic income, which is what we use to measure the financial performance of our core business. In addition, we use distributable earnings to measure the after-tax operating performance of our core business and to help determine the earnings available to distribute to shareholders. Distributable earnings is calculated by taking economic income less adjusted income tax, which assumes all Group A units and RSUs were converted on a one-to-one basis and to Class A shares, what we call adjusted Class A shares.

Now turning to our financials. For the second quarter 2008, we reported a GAAP net loss of $61 million or $0.82 per basic share and $1.05 per diluted Class A share. A full discussion of our GAAP results is contained in our press release. Economic income for the second quarter 2008 was $93 million, 6% higher than the first quarter of this year.

Let me take you through the components of economic income, beginning with revenues. Management fees were $145 million, essentially unchanged from the first quarter of 2008. Our current average management fee remains at approximately 1.7%, which is a blended rate and includes the effect of our non-fee-paying assets. There was a $357 million net increase in assets under management from the 2008 first quarter, which resulted from performance-related appreciation of $389 million, partially offset by $32 million in net outflows. As Dan mentioned, we believe our capital flows were impacted by the market-driven slowdown in capital commitments to the hedge fund industry during the quarter.

Operating expenses are comprised of compensation and benefits and non-compensation costs. The second quarter 2008 compensation and benefits totaled $24 million. Of this amount, salaries and benefits were approximately $17 million, up 10% from the 2008 first quarter. In the second quarter, we hired 35 people, taking advantage of the current market opportunity to attract top talent. Of the investment professionals we hired, 65% related to our core business, and 35% related to our private investment business.

Second quarter compensation and benefits also included approximately $7 million of bonus expense. The majority of this amount relates to accruals for guarantees to new hires during the first half of this year, which will be paid at year-end. The short-term guarantee component of employee compensation arrangements allows us to be competitive in attracting world-class talent, while also controlling the growth in our fixed compensation expense. This ensures that the largest portion of our total compensation expense remains variable and discretionary over time.

In the 2008 second quarter, salaries and benefits expense was 12% of management fees. With flat asset growth, approximately 12 to 15% of annual management fees remains a good proxy for our salary and benefit expense. Non-comp expenses for 2008 second quarter were $29 million, 60% lower than the 2008 first quarter. The sequential decrease was due principally to lower interest expense as three-month LIBOR decreased during the quarter, and a reduction in professional services related to our 2007 audit costs, which were primarily recorded in the first quarter of this year.

In the 2008 second quarter, non-comp expenses were 20% of management fees. Assuming flat asset growth, we expect non-comp expenses to remain approximately 18 to 22% of annual management fees. We believe that maintaining our focus on preservation of capital and on the growth of our business will lead to asset growth, which leads to revenue growth and the sustainability of our operating margins over time.

Distributable earnings for the 2008 second quarter were $54 million or $0.13 per adjusted Class A share. Our adjusted Class A share count increased by about 786,000 shares in the second quarter, and the drivers of the change are detailed in our press release. You will see that the biggest component was RSUs awarded to employees as dividend equivalents in the first half of this year in connection with their IPO RSU grants. The share count will continue to be adjusted for dividend equivalents, and the magnitude of these adjustments will be proportionate to the size of the quarterly dividends paid.

Our second quarter 2008 dividend will be $0.11 per Class A share. As in prior quarters, we use cash to fund non-P&L items related to the operation of our business and investments which we believe will benefit the growth of our franchise. The most significant of these were

$8.6 million of investments in new businesses and $2.3 million of fixed assets and infrastructure investments relating to new office space.

I'd like to remind you that our tax rate in each quarter depends on the amount of flow of revenues and expenses through our legal entity structure. We would expect an estimated tax rate of 42 to 44% for the first three quarters of the year, as taxable income is comprised of only management fees less operating expenses. The tax rate in the fourth quarter is influenced by the magnitude and the character of the income earned and how it flows through our structure.

Our 2007 full-year effective tax rate was 20.6%. If the mix of our 2008 revenues and expenses varies in terms of magnitude and character from that of 2007, our 2008 full-year effective tax rate can vary substantially from that of 2007. In the first quarter of this year, we treated the fair value of compensation-related RSU awards as bonus expense, reducing economic income by $1.8 million. The corresponding number of RSUs was excluded from our adjusted Class A share base. Beginning in the second quarter, we no longer include the RSU expense in economic income, as it does not affect the earnings available to distribute to shareholders. We now include the number of RSUs awarded in our adjusted Class A share count as of their grant date, thus fully capturing the dilutive effect of these awards to our shareholders.

With that, we will be happy to take any questions you might have.

Question-and-Answer Session

Operator

(Operator instructions). And your first question comes from the line of Marc Irizarry with Goldman Sachs. Please proceed.

Marc Irizarry – Goldman Sachs

Great, thanks. It's Marc Irizarry. Dan, maybe you can talk a little bit about what's happening in terms of flows and the breakdown between redemptions versus signing up new LPs. And then also, if you look at the industry data, things have clearly slowed, but you guys have now flipped into outflow mode. So maybe you can sort of talk about your strategy relative to how you should look versus the industry.

Dan Och

Sure. If you look at our numbers, Marc, redemptions really haven't increased substantially from where they've been historically. And given the turmoil in the industry and some of the issues with redemptions at other funds, we're certainly satisfied with the level of redemptions. Inflows are lower than they've been historically, and we believe that's due to the environment. Our flows for the year are approximately flat. And while of course we're focused on growing assets, as you know, we're a performance-driven organization. I'd point you the – we've been through this 2001 to 2003, where our assets were flat despite what was extremely good performance and strengthened he organization, and we were not able to predict when that would turn. But when it did turn, it was quite dramatic.

Marc Irizarry – Goldman Sachs

And are you seeing any evidence of increased desire for sort of risk-managed – are you seeing anything in maybe your RFPs or your pipeline that says that folks are focused more on their alternative allocation to more risk-control type of strategies? Or is there maybe a shift more towards just going after higher return?

Dan Och

Our sense is that in general around Wall Street, not just in the hedge fund industry but around Wall Street, the appreciation for risk management and the difference between true, high-quality risk management versus supposed risk-management is substantial and dramatic and we expect that to benefit us going forward.

Marc Irizarry – Goldman Sachs

Great. And then maybe this is a question for both you and Joel. Can you talk about just your distribution, and what can you do in this tougher environment for industry-wide flows to sort of drive your own destiny on the distribution side? What's happening in terms of building out sort of your sales efforts?

Dan Och

Well, the opportunities that we see, and that we saw, whether it's large international investors, potential distribution through other channels, we think that the quality of our product, the quality of our returns, the reputation for ethics and integrity of the firm, play very well to all that. That was part of our plan before the environment became difficult. We haven't changed our plan because of the difficult environment; we are still focused in that area. We think that our firm is – given our brand name, given our reputation, given our results, we think we're extremely well-positioned for many of these channels. I do want to remind you that when we think about assets, we're also very focused on the returns that we're generating for our fund LPs. We're a performance-driven organization, and we won't just take in assets and raise assets for the purpose of raising assets. We are always going to remain focused on generating high-quality risk-adjusted returns for our fund LPs, because that's what drives Och-Ziff.

Operator

And our next question will come from the line of Roger Freeman with Lehman Brothers. Please proceed.

Roger Freeman – Lehman Brothers

Oh, hi, good morning. Dan, can you – you made an interesting comment about the hires during the quarter, obviously taking advantage of some of the weakness in the market. Can you maybe give a little more clarity as to the level of seniority of these folks? Are these coming mostly from buy-side, sell-side?

Joel Frank

I think it – this is Joel. I think that it's a gamut that runs across all levels in the organization. I think, as I said, it was – 65% of the investment professionals we hired was for our core business; 35 was for private business, but it really runs the gamut. We're seeing opportunities across the board, and we're going to take advantage of looking for the best talent and taking and hiring them if it fits into the organization.

Roger Freeman – Lehman Brothers

I guess where I was kind of going with this is to determine whether there are a lot of sort of senior-level hires in there, and especially in the core business, if you're sort of hiring ahead of what you actually maybe need right now, but that there's obviously opportunities for you to take advantage of that. Are we going to see a pickup in the comp expense structure?

Joel Frank

Look, I think the answer is, we continue to make the correct decisions, both for the short-term and the long-term growth of the business. We aren't sitting still, we're not waiting for anything to change. We continue to build our businesses. But we are also cognizant of the economics of the business and the environment and will make decisions based on what we think is best for the business and our investors. And if that is building these particular businesses and hiring senior people to do that, we will continue to do that, but again taking into account all factors both internally and externally.

Dan Och

And Roger, just to answer the last part of your question, the hires during the quarter, it was not a significant amount of senior people that will impact the comp structure, if I heard the last part of your question correctly.

Roger Freeman – Lehman Brothers

Yes, okay. And is there more of that? Or do you sort of take advantage of what you hope to – obviously, there's still more attrition coming out of the rest of the Street.

Dan Och

Well, look, in general, given the turmoil on Wall Street and the relative stability of our firm, and the history of our firm in terms of employee retention and employee morale, the attractiveness of Och-Ziff to people at the margin has increased. And that does create opportunities. We own 80% of the shares outstanding. And as Joel said, we're focused on making the correct long-term decisions for all the constituents – the fund LPs and the shareholders. But there's no – once again, I understand the question you're asking, no significant change to the comp structure.

Roger Freeman – Lehman Brothers

Got it, okay. And then the second, separate question – just your comments around sort of the mortgage opportunities you turned down this quarter – can you just talk a little bit more about sort of where in the capital structure some of those opportunities were, and what your real estate assumptions are, maybe peak or trough decline in home prices, that sort of thing?

Dan Och

Sure. Our business is different than some of the other businesses that funds are managing. Residential Credit Services is a subprime mortgage service that we bought approximately two years ago. We own the equity. So therefore, none of the potential liabilities can come onto the Och-Ziff balance sheet. In addition, RCS actually buys due diligences and services individual loans. At RCS, we don't buy securities in the market, so it's different than some of the other funds that exist. So RCS is specifically focused on the subprime and Alt-A areas. We think those are areas that have now moved to levels where they've become attractive. We did buy our first pool of mortgages after looking at more than $10 billion worth of mortgages. And I just think we use that point to illustrate an example of where, as we've talked, we believe in luck is when preparedness meets opportunity, which is why we purchased this servicing company two years ago. But we will be patient and do the right thing for our investors' capital.

Operator

And our next question will come from the line of Hojoon Lee with Morgan Stanley. Please proceed.

Hojoon Lee – Morgan Stanley

Good morning. Could you give us a sense of how you're allocated as a firm by investment strategy today? We know risk arb has come down based on prior comments.

Joel Frank

Yes. I don't have the numbers in front of me, Hojoon. But I think the answer is we're about approximately 5% in risk arb, about 12% in convertible arbitrage, around 45% in what we call equity restructuring, about 12% in credit, and then the difference would be our special and private investments.

Hojoon Lee – Morgan Stanley

That's great, thanks. And just as a follow-up – we've seen a trend of the big getting bigger in the hedge fund space, particularly in this environment. And I just want to know – do you find your limited partners are getting more concerned about your ability to deliver the type of returns you have in the past at your current size? Or is that not an issue yet?

Dan Och

We've been asked the question about size, as I'm sure most other funds have, since crossing the $5 billion mark some number of years ago. And I think that we've demonstrated that our model, we're a multi-strategy firm. We have substantial diversification by geography, by investment strategy. We've raised assets when we've generated investment capability to invest those assets. I think the last 12 months have demonstrated that our performance capabilities are as strong as ever, and that has been the case and continues to be the case.

Hojoon Lee – Morgan Stanley

Okay. And just as a follow-up, given the difficulties faced by broker dealers since the collapse of Bear Stearns, I just want to know – how have financing and other service terms changed over the past year for you? I think some prime brokers might say that they've got greater pricing power in this environment and I just wanted to see what your views are on this.

Dan Och

This is an area where – it's an area that we give a lot of focus to at very senior levels prior to any changes. Liquidity, counter party issues are things that we've been very focused on. Terming of our prime brokerage relationship is something we did a long time ago. Creating excess liquidity was something that we did well before the credit cycle turned. In addition, we think that our relationships, the prime brokers view us as a very important, very significant relationship. I think they anticipate that we'll be a strong and growing client for a number of years. So our relationships have been very good, and we haven't had any issues along the lines of what you've spoken about. I can't comment on what other firms have seen.

Joel Frank

And let me just add, too, that keep in mind, we don't – we aren't highly leveraged. In fact, we don't lever much at all. And therefore our requirements are very different than other firms, even though we have many relationships and our relationships are very strong.

Operator

And our next question will come from the line of Cynthia Mayer with Merrill Lynch. Please proceed.

Cynthia Mayer – Merrill Lynch

Hi, good morning. Just a couple of questions. I guess you talked a little about targeting new investor groups. And I'm wondering what exactly that means when you say you're targeting. And then have you had any investments from in terms of the further investment from your original investor in the IPO?

Dan Och

Well, when we talk about the term targeting, there's been no change. It's really – it's exactly what we spoke about on the IPO road show. We think that – we've always been a growing firm. We always when we've gone to different regions of the world, we've invested in those regions and built investment operations in those regions, and we've also raised investment capital in those regions.

And if you remember from the IPO road show, we talked about amongst the areas for potential raising of assets, we talked about sovereign wealth entities, other large international pools of capital, continuing to enhance and extend our relationships with some of the larger domestic institutional investors, the potential to offer our funds through other channels that made sense. And so I do want to be clear – there's no change; none of this is a reaction to market conditions being difficult. We’re continuing – everything we're doing, everything in our business, is harder than it was 18 to 24 months ago. But we're still focused on our plan, on doing the right things, on working harder, on ensuring that when and if this cycle ends, Och-Ziff is one of those companies, not just in our industry, but one of those companies that emerges from this cycle stronger and better, and more well-positioned.

Cynthia Mayer – Merrill Lynch

So where you see hesitation, that's also for – that goes for sovereign wealth funds as well?

Dan Och

We do see general – I think that's fair to say, yes.

Cynthia Mayer – Merrill Lynch

Okay. And just, I guess, a question on – you noted in the press release essentially no leverage at this point. I guess in the past, you've employed some leverage. And I'm just wondering, does that indicate a lack of conviction in some way or, as you say, waiting for the valuations to get even lower on things? Why would you employ no leverage in this environment?

Dan Och

Sure. (inaudible) demonstrates conviction, not lack of conviction. Essentially, we made a decision, when the credit crisis began, we made a decision that it was likely to be more significant than some market participants expected. There had been a number of what have turned out to be false bottoms in many areas of credit, in mortgages, in equities, certainly in financial service stocks. And we had the conviction to be patient. Our analysis and our experience and our view of risk-reward showed us that it made sense to be patient, and that's what we've done. I do also want to be clear, as we mentioned during the text earlier, there are several investment areas that have moved towards levels which we now consider to be attractive. And we have begun slowly adding to the portfolio in those areas. And should they continue to decline on a price basis, we expect to continue to add.

Cynthia Mayer – Merrill Lynch

Okay. If I could just ask a quick follow-up to that, I guess what percentage of the AUM then would be in cash at this point?

Joel Frank

Approximately 15% in the main fund.

Cynthia Mayer – Merrill Lynch

Thank you.

Dan Och

That was “one five” percent.

Operator

And our next question will come from Bhatia Prashant from Citi. Please proceed.

Prashant Bhatia – Citigroup

Hi, it's Prashant Bhatia. You talked about opportunities in financial services globally. What's interesting at this point? Is there a specific thesis or a region that's most interesting in financial services? Is it distressed, could you give some color on that?

Dan Och

Sure. I mean, we'll look at a number of different opportunities. And as you've seen, it's a very, very fluid sector. So the nature of the opportunity literally is changing on a month-to-month, if not a week-to-week basis. But when a sector declines as dramatically as financial services has, we tend to dedicate resources and look for opportunities. It's an area where our size creates advantages, because we do get an opportunity to look at many situations, some of which you've seen announced, some of which have not yet been announced, where we get opportunities to pursue them in different fashion than other market participants. We believe that the financial service industry is going to continue to exist coming out of this cycle. And we think we have the resources that it takes to analyze the balance sheets, the business going forward, the strength of management to determine which will be the strongest companies coming out, and what are the most appropriate levels.

Prashant Bhatia – Citigroup

Okay. And then is a bulk asset sale, similar to what we've seen a UBS or Merrill do, something that may interest you, picking up bulk assets as opposed to companies?

Dan Och

Absolutely. We think that's one of our advantages. We have the flexibility to pursue any and all types of investments.

Prashant Bhatia – Citigroup

Okay. And then, just dialogue with LPs, just curious, are there strategies that your LPs are more interested in going forward versus less interested in? Is that driving any kind of potential for new products down the road? What's the appetite for LPs in some of the newer products that they're –

Dan Och

Well, I think as a general statement, and not just our LPs, but just looking at LPs throughout the industry, I think there's a big interest in the whole category of distress and dislocation, and that's primarily a U.S. and European phenomenon. There's a big interest in energy, alternative energy and global warming-related types of investments. We think there's still a big interest in emerging markets, although I think that the skittishness and concern in the environment is likely to cool that to some extent.

Prashant Bhatia – Citigroup

Okay. And just finally, on the – you talked about general investors pulling back from flows in these environments. Is it any different by investor type – for example, the institutional client versus maybe the fund of fund, or the ultra-high-net worth client? Do you see a difference, depending on the type of client it is?

Dan Och

We don't really see a substantial difference. I mean, if you look at what's happened over the past 12 months, investors, different types of investors have sustained losses much greater than they anticipated. I mean they've seen money market funds and other AAA-rated securities that they thought were worth par and never gave it a second thought be worth dramatically less than par. Some of the sovereign wealth entities entered the financial service industries through investments that they saw decline more than I think they thought they were likely to decline. I think every investor has seen that somewhere. So I think there's just a general thought process which, by the way, could be shifting. We're not going to be able to predict when it shifts. But if you look back over the past nine to 12 months, I think there's been a general thought process by investors that downside's been more serious than they expected, let's be careful and hold back.

Prashant Bhatia – Citigroup

Okay. Great, thank you, that's very helpful.

Dan Och

Thank you.

Operator

And our next question will come the line of Ken Worthington with JP Morgan. Please proceed.

Ken Worthington – JPMorgan

Hi, good morning. Just a question on the Asian Master Fund, your Master Fund and European Master Fund returns are flat to a little bit up year-to-date. The Asian Master Fund is down about 5%. Are you focused on different market-neutral strategies in Asia than you are in the Master and European funds? Or are there some strategies that are not working as well? Trying to get a sense of why the discrepancy, and it may just be related to the Asian markets are down more than the rest of the world. But I thought I'd ask anyway.

Dan Och

Sure. Look, the primary answer is what you just said. Asian markets have been down more than the rest of the world. And the Asian market is designed to have some level of exposure to Asia. The loss thus far this year is probably slightly higher than where we'd really like it to be, nothing dramatic, nothing significant. But we are pretty demanding of ourselves here. And even with Asian markets down, in some cases, not just at 20%-ish, but some down dramatically more than that, this is probably still a little – a slightly greater loss than we'd be – that we'd expect from ourselves. But nothing significant, dramatic, nothing that's going to make us change anything in terms of our approach.

Ken Worthington – JPMorgan

Okay, thank you. My other questions were asked and answered. Thank you.

Operator

(Operator instructions). Our next question is a follow-up question from the line of Roger Freeman with Lehman Brothers. Please proceed.

Roger Freeman – Lehman Brothers

Hi, just a couple of follow-ups here. The Special Investments Fund, Dan, can you talk about your ability to bring in additional outside LP capital? It looks like that's been relatively flat since all the partner money went into it from the IPO. How – what kind of reception are you getting there?

Dan Och

Well, if you recall, the Special Investment Fund had actually been open since late 2005. And we really shifted focus. Our focus on the private investment side is to bring investors into the individual products that we're working on developing, rather than look to bring them into a commingled special investment fund.

Roger Freeman – Lehman Brothers

Okay. So what you're saying is that it's predicated on having opportunities to invest in, that's when you bring the money in?

Dan Och

No. In other words, the focus is on – our focus is on developing, for example, RCS as a separate investment platform, African Global as a separate investment platform, the energy and alternative energy business as a separate investment platform. That is where we are focused on growing the businesses and those assets. There's less of an emphasis on trying to bring assets into the Special Investment Fund. And if you remember, as part of the IPO, we said that's what we were going to do. We're going to take our proceeds, we're going to put them in the Special Investment Fund, but then they're going to get allocated to those individual investment platforms over time.

Roger Freeman – Lehman Brothers

Okay. So are you saying we won't see the assets, the AUM? We should see it in the total, the aggregate, right?

Dan Och

You absolutely should see it in the aggregate. We'll continue to report it. If investors want to invest in that fund, of course we'll be happy to have them do that. But our primary focus on the private investment side is not to – and this is something that we talked about – we changed about a year ago. Our primary focus is to get the investors to invest in the individual new private investment platforms directly, rather than the commingled Special Investment Fund. But you absolutely should see it as part of assets under management. It's included as part of assets under management and will continue to be so going forward.

Roger Freeman – Lehman Brothers

Got it. I guess the bigger question was, I think, at the time of the IPO, you had suggested that some of the LPs wanted to see more money in that fund, so you could establish some track record before they would commit, because there are a lot of offerings out there. And I guess now that you've got – it's been established for a bit, are you seeing sort of more uptake?

Dan Och

Well, look, as we said, given the overall environment and the lack of flows that we're seeing to almost everything, special investments would just be part of that overall environment.

Roger Freeman – Lehman Brothers

Got it. And there was I guess some report of an investment being made in some Russian investment company, Da Vinci Capital. Is that part of this, or is that something else?

Joel Frank

That's something else.

Roger Freeman – Lehman Brothers

Okay. And then – oh, the increase in the dividend this quarter, anything to read into that in terms of commitments to projects that are coming in, expenses coming in lower than expected, or any future spending? Or is it nothing really to read into there, because it's just a small piece of the total for the year?

Joel Frank

Yes, Roger. I wouldn't read anything into that. It's just our cash flow and operating requirements for this quarter. Obviously, that can change going forward, so I wouldn't read anything into those numbers.

Roger Freeman – Lehman Brothers

Okay. Just lastly, how big do you think credit could become as a percentage of AUM? I think in the past, it's gotten up to, I think, a peak that's 15%-ish or something like that. Do you think about it in terms of total allocation, what that could get to?

Dan Och

Well, in the last cycle, 2002, 2003, credit peaked at about 35 to 40% of the portfolio.

Roger Freeman – Lehman Brothers

That high, okay.

Dan Och

We don't see any reason why it couldn't potentially be that high, but we are going to be patient and responsive to opportunities.

Roger Freeman – Lehman Brothers

Okay. All right. Thanks a lot.

Dan Och

Thank you.

Operator

That concludes the question-and-answer session today. I would now like to turn the call over to Mr. Och for final remarks.

Dan Och

Thanks, Lacy. We appreciate you spending time with us today.

In closing, I want to briefly reiterate four points that I believe are important to understanding our company and its significant earnings power over time. First, we extended our track record in delivering consistent, risk-adjusted returns to our fund investors, with low leverage and low volatility. This track record differentiates us in the absolute return space, is intrinsic to the value of our model to our fund investors and our shareholders and positions us to grow assets under management as the markets stabilize.

Second, we are focused on strategies to generate strong returns in our core business. We are actively looking at the geographies, industry sectors and asset classes where we see the greatest opportunities. Third, we are making consistent progress with growing our private investments business, which represents a meaningful extension of the potential we have to generate returns. However, we are focused on disciplined execution across all of our new platforms. We are patient and conservative in committing capital until we see assets that reflect the appropriate risk-reward.

And fourth, our success in preserving capital, together with the opportunities we have to grow our assets under management over time, in both our core and private investments businesses, are essential elements to our future earnings power. Joel and I look forward to sharing further updates with you in the future. And with that, let me now turn the call back to Tina.

Tina Madon

Thanks, Dan. 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 Steve Bruce at 212-371-5999. This concludes our call. You may now disconnect.

Operator

Thank you for your participation in today's conference. This concludes your presentation. You may now disconnect. Good day, everyone.

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