Underperforming Och-Ziff looks to credit for growth

The US firm is turning more to credit and energy as its multi-strategy hedge funds see outflows.  

Och-Ziff Capital Management saw earnings and assets fall in the third quarter as volatile markets, poor performance in its multi-strategy hedge funds and outflows took their toll.

However, management said some of its credit strategies had been gathering assets and the firm is looking to build its credit business.

Och-Ziff is setting up a non-traded business development company (BDC) in partnership with NorthStar Asset Management and plans to expand into European CLOs, management said on the earnings call. The firm has also opened a Houston office and hired new energy experts.

Chairman and chief executive Dan Och said he expects to pursue energy opportunities both in equity and credit. The firm is currently in the market with energy and real estate credit funds, although Och-Ziff management declined to elaborate on targets.

The firm’s distributable earnings in the third quarter were $66.1 million, a 44.3 percent decrease from the same period last year. The declines “were primarily due to lower incentive income and management fees, as well as higher adjusted income taxes and operating expenses”, the firm said.

Och-Ziff’s assets were $44.6 billion in the third quarter, down by 5 percent from 30 September 2014. The decrease was primarily driven by redemptions in the multi-strategy hedge funds, as well as some distributions in credit and real estate.

The firm’s opportunities credit assets were at $4.9 billion, declining 4 percent year-on-year because of distributions. The assets in the firm’s institutional credit strategies (ICS) segment, which mainly handles CLOs, rose to $7.1 billion as of 30 September, increasing by $2.5 billion year-on-year from four CLOs that closed in that period. ICS managed 12 CLOs as of 30 September.

“Building on the success of our US ICS business, we are expanding into performing credit in Europe, with an additional focus on European CLOs. With the typical duration of about seven years this type of AUM is an attractive source of long-term capital, and is highly profitable as we reach scale,” Och said.

“Over time, we believe that our US performing credit platform, which currently managed $7 billion of assets, could grow to $20 billion plus. And our European platform could be another several billion in AUM.”

The firm also has a registration for a private BDC in the works. Och-Ziff is setting it up in partnership with New York-based real estate investment firm NorthStar Asset Management.

NorthStar has said it plans to initially raise $1 billion for the vehicle, which is still awaiting approval from the Securities and Exchange Commission.

INVESTIGATION

Och said he expects the BDC to be up and running in mid-2016, by which time an investigation involving the hedge fund firm and an African mining company should also be concluded.

Legal fees connected to the investigation have also seen the firm’s non-compensation expenses increase.

“We anticipate this increase normalising in mid-2016,” Och said, though he noted he could not be sure exactly when this will happen.

“This is a government that moves at its own pace and therefore specific timing isn’t always predictable. At this point, their best guess is mid-2016,” said chief financial officer John Frank.

The investigation involves an investment that found its way to a politician in Zimbabwe and was not properly disclosed. Och-Ziff has denied any wrongdoing.

The firm also said it was seeing increasing opportunities in the energy sector. Och-Ziff recently hired Mark Bisso and Jonathan Linker to work in its new Houston office, according to Reuters.

Asked whether the firm would pursue energy investments on the equity or credit side, Och said both. “We’re talking about hundreds and hundreds of billions of dollars of potential. We have capabilities on the private equity side, we’ve got very strong capabilities on the credit side, so it’d be all of the above and it’s a very substantial opportunity,” he said.

In terms of performance, both the flagship multi-strategy hedge fund and the main credit fund have been challenged by choppy markets this year. The OZ Master Fund, the firm’s largest hedge fund with $24.3 billion in assets, was down 2.1 percent net of fees in the year to the end of September.

The OZ Credit Opportunities Master Fund lost 2.5 percent over the same time frame. In 2014, the credit fund gained 11.2 percent net of fees, while the multi-strategy hedge fund returned 2.8 percent.