Hedge fund Och-Ziff Capital files for IPO

[Andy Nguyen]

Hedge fund Och-Ziff Capital files for IPO
Monday July 2, 12:25 pm ET
By Dane Hamilton

NEW YORK (Reuters) - Och-Ziff Capital Management Group LLC, a multi-strategy investment fund with about $26.8 billion under management, filed for an initial public offering on Monday, making it the latest alternative investment firm to seek a public listing.

New York-based Och-Ziff said it would offer up to $2 billion worth of Class A shares on the New York Stock Exchange, representing limited liability company interests, under the symbol OZM (NYSE:OZM - News).

Och-Ziff was founded in 1994 by former Goldman Sachs trader Daniel Och and the billionaire Ziff publishing family. It is well regarded in the secretive, $1.5 trillion hedge fund world, particularly for its acumen in distressed debt and restructuring strategies.

Och-Ziff also has major operations in merger arbitrage, convertible arbitrage, private equity and real estate.

The offering comes amid a spate of IPOs and planned offerings by investment firms, including Blackstone Group (NYSE:BX - News), Fortress Investment Group (NYSE:FIG - News), GLG Partners and Third Point LLC.

Others are expected to follow, allowing such firms to raise money from the public markets rather than exclusively through wealthy families and institutional investors.

"It's a continuation of a recent trend, with a high-profile name monetizing some enterprise value," said Ferenc Sanderson, senior hedge fund research analyst at Lipper Inc., a unit of Reuters.

Och-Ziff said it is going public to attract and retain investment talent, develop new strategies and allow senior management to sell stakes in the firm. It said those managers will "reinvest all of their after-tax proceeds into certain of our funds."

Its flagship multi-strategy fund, OZ Master Fund Ltd., which makes up about 65 percent of funds under management, generated a net annualized return of 12.2 percent over the last five years, according to its registration statement.

"One of the principal purposes of this offering is to further increase the investment of our existing partners in our funds which will further align the interests of our existing partners and our fund investors," Och-Ziff said in the S-1 statement.

"We seek to deliver consistent, positive, risk-adjusted returns throughout market cycles," it added.

Och-Ziff, a firm with 18 partners, 27 managing directors and 300 employees, has grown from $5.8 billion in December, 2002 to nearly $27 billion today, putting it in a league with the top "alternative asset" firms, which basically manage any strategy that doesn't include "long only" stock and bond funds.

Alternative strategies, such as hedge, buyout, real estate and venture funds, have grown rapidly in recent years as investors seek consistent returns that aren't correlated to the broader markets.

Och spent more than 11 years at Goldman Sachs, where he was head of proprietary equities trading, among other titles.

Och founded Och-Ziff 13 years ago, backed by Ziff Brothers Investments LLC, which is an investment arm of the billionaire Ziff-Davis publishing family, which publishes PC Magazine, Car & Driver and other publications.

Goldman Sachs and Lehman Brothers are serving as co-lead managers for the offering.

 

[Andy Nguyen]

Hedge Funds Continue Public Path
By MICHAEL J. de la MERCED and JENNY ANDERSON
Published: July 3, 2007

Increasingly skeptical investors and lawmakers are apparently not enough to deter yet another hedge fund giant from going public.

Och-Ziff Capital Management, a $26.8 billion hedge fund founded by a former Goldman Sachs trader and members of the Ziff publishing family, filed for a $2 billion initial public offering yesterday. It joins a burgeoning field of alternative asset management companies that are seeking to raise capital in the public markets, acquire stock to use in deals and cash out their principal.

Since the debut of the Fortress Investment Group five months ago, selling shares to the public has become the latest achievement in an industry — alternative asset management — that not too long ago would have scoffed at the prospect of public ownership. Indeed, private equity firms profit by taking companies off the market and improving their operations. On its first day of trading, Fortress stock gained more than 60 percent.

But that rosy outlook began to fade last month when Congress intruded on the marketing of the offering for the Blackstone Group, the giant buyout firm. Two groups of legislators introduced bills to increase tax rates on private equity firms and some hedge fund managers. One would significantly raise taxes on partnerships related to investment management that go public; the other would increase taxes on “carried interest,” a term for the hefty performance fees that make up the bulk of buyout firms’ compensation.

Blackstone went public at $31 on June 22, raising $4.75 billion. Its shares gained 13 percent the first day and then began a slump that put them below the offering price. They were unchanged yesterday at $29.27.

Last week, GLG Partners, one of Europe’s biggest hedge funds, said it would pursue a listing in the United States through a merger with a holding company here.

Unlike Fortress and Blackstone, which have substantial private equity operations, Och-Ziff appears to be the first pure-play American hedge fund to seek an initial offering. As such, it offers a rare glimpse into the performance, asset growth and profitability of these kinds of firms. Hedge fund managers earn a management fee of about 2 percent of assets as well as about 20 percent of the profits.

Och-Ziff’s assets under management have grown rapidly, to almost $27 billion from $5.7 billion at the end of 2003, according to the firm’s prospectus. Its returns in recent years have not notably surpassed those of the S.& P. 500-stock index: for the last three years it had an identical return, and for the last year it returned 15.7 percent compared with the index’s 15.2 percent. Since inception, the main fund returned 17 percent compared with 11.6 percent for the S.& P. 500.

But in a point it will be sure to make to prospective investors, Och-Ziff has delivered those returns with less risk. Since 1994, the S.& P. 500 has been almost three times as volatile, and over the last year the broad market index has been more than four times as volatile.

“Achieving the same level of return while taking less risk is a commendable goal for investors,” said Ted Seides, director of investments at Protégé Partners, a fund of hedge funds, “though it’s not always the case that a lower volatility of returns equates to less risk.”

In 2006, Och-Ziff made $954 million in management fees and incentive income, up 93 percent from 2005. It paid $185 million in compensation and benefits. The firm has 300 people, 125 of whom are investment professionals and 18 are partners.

Hedge fund managers are allowed to defer their income offshore if they manage offshore funds — which are often set up to allow tax-exempt investors, like endowments, and foreigners to invest without facing taxes in the United States. Och-Ziff’s managers have about $1.8 billion in deferred income. The fund’s principals will invest all of the proceeds from the initial public offering back into the funds, where it will have to remain for five years.

Like Fortress and Blackstone, Och-Ziff plans to offer a stake in its management company, organizing itself as a master limited partnership that gives public investors limited say in the firm’s governance. Unions led by the A.F.L.-C.I.O. have led the charge against these private equity firms’ going public, and members of Congress have taken notice. The bill introduced last month by the top two members of the Senate Finance Committee would more than double the tax rates on carried interest.

Yet the Senate bill gives Fortress and Blackstone a five-year grace period on the higher tax rates, a concession not available to Och-Ziff. That may not matter eventually: the House’s legislation would eliminate the transition period, and Senator Max Baucus, one of the sponsors of the Senate bill, said he was open to narrowing that time frame.

The firm plans to trade on the New York Stock Exchange under the ticker symbol OZM.