Och-Ziff Pushes on with IPO Despite Lower Returns

By Emma Trincal,HedgeWorld, Senior Financial Correspondent

Wednesday, October 24, 2007 5:53:14 PM ET

NEW YORK (HedgeWorld.com)—Och-Ziff Capital Management remains determined to go public, following a plan first announced in July.

While the market is balking at more initial public offerings due to the credit crunch, Och-Ziff has good reasons to move forward, and the deal is under way.

On Monday [Oct. 22], the $30.1 billion New York-based hedge fund filed with the Securities and Exchange Commission an amendment to its original S-1 securities registration form, which it submitted on July 2 Previous HedgeWorld Story.

Monday's filing included a prospectus with a proposed $31.50 mid-point price per share. Och-Ziff intends to offer 36 million shares to the market. As previously announced, the lead underwriters of the deal are Goldman Sachs & Co. and Lehman Brothers.

The recent filing provided new details about asset size growth and performance at Och-Ziff.

While the hedge fund has succeeded in attracting capital, its performance declined from the previous quarter, confirming that Och-Ziff suffered from this summer's market turbulence, along with many other prominent hedge funds. In addition, as has been the case with others, the lower performance has not triggered massive redemptions. Still, other managers that were hit over the summer are not pressing for an IPO just now.

Och-Ziff's determination to tap the public market at a time of declining performance may in part reflect fear that things could get worse moving forward, and it could be a bet on the ever-growing investor appetite for hedge funds, particularly in light of the possibility of accessing via the stock market an asset class that is otherwise limited to accredited investors.

The firm's recent filing offered information on its annualized returns compared to the Standard & Poor's 500 stock index, an equity benchmark. A look at former filings indicates that as of the end of last month, the firm's flagship OZ Master Fund Ltd. posted a net annualized return of 13.4%, less than the 16.4% gained by the S&P 500 during the same period. And a September filing showed that as of June 30, the annualized performance of the same fund was 17.5% versus 20.6% for the S&P 500.

Similarly, looking at the Dow Jones Industrial Average over the same period, the Dow was up 20% during the year-to-June 2007, and had gained 19% during the year-to-September 2007, outperforming Och-Ziff in both periods.

Not only did Och-Ziff underperform the S&P 500 and the Dow in both the second and third quarters, but during that period the company's annualized performance fell significantly. The latter is perhaps the most startling point, especially for a management company looking to raise money from investors, said Francis Gaskins, IPO analyst at Los Angeles-based research firm IPODesktop.com.

"They had a lousy September quarter. And you're supposed to have a great quarter just before you go public," Mr. Gaskins said. "I don't care what the reasons are. If you are an investor, you don't want an excuse."

Mr. Gaskins added that he thinks the credit bubble is hurting Och-Ziff, as it has many other hedge funds. "There is a worldwide bubble in CDOs [collateralized debt obligations] and derivatives, and they're trying to get out the door before more problems hit them."

That said, Och-Ziff did raise assets, an indication that investors' appetite for hedge funds is unabated. In the three months prior to Sept. 30, Och-Ziff raised an additional $1 billion, growing to $30.1 billion from $29.1 billion. At the end of last year, the firm had $22.6 billion of assets under management, demonstrating a 33% growth rate in the first nine months of this year.

For Mr. Gaskins, the asset size growth is one of the factors behind the firm's drive to launch the IPO. "They're trying to raise more money because they get paid on the amount of money they manage," he said.

Och-Ziff's management fees range from 1.5% to 2.5% of the assets, depending on the fund.

Mr. Gaskins also pointed to a negative net worth of $698 million for Och-Ziff, a figure disclosed in this week's filing. He attributed this figure to an increased level of debt.

In both the July and October filings, Och-Ziff disclosed that the owners of the firm had borrowed $750 million via a term loan, with the intention to distribute all the proceeds to themselves. "It would have been better for the shareholders if they had not taken the loan. They give the public a firm that has a $750 million debt. It's like having a big mortgage when you're selling out your house," said Mr. Gaskins.

In addition, "They're paying themselves a lot prior to the IPO," Mr. Gaskins noted. According to the filing, the top investment executives at Och-Ziff should receive $778.8 million from the share sale. Daniel Och, the firm's chief executive and chairman, will get most of it, $520 million. David Windreich, one of the firm's partners, will receive the second-most, $120.3 million.

Och-Ziff's original S-1 filing occurred before the credit crunch sent the markets into turbulence. The plan then was to raise up to $2 billion and to list the company on the New York Stock Exchange under the ticker symbol "OZM."

Some market observers were surprised by the announcement, made a few days before Independence Day. That's because Och-Ziff was jumping on the bandwagon of alternative investment managers going public just after The Blackstone Group LP's IPO spurred calls from Congress for an increase in the taxation rate for publicly traded private equity firms Previous HedgeWorld Story. The tax debate is still going on.

Since then, the summer credit market crisis happened, and along with it an overall slowdown in demand for IPOs.

Even worse, the two big alternative investment firms that now trade on the New York Stock Exchange—Fortress Investment Group LLC, which went public in February Previous HedgeWorld Story and Blackstone, which did so in June—have seen their stock perform below expectations. At $20 per share, Fortress' stock price is down 33% since its IPO. Blackstone's stock price has lost 25% of its initial value in four months, trading today at $26.

Thus, Och-Ziff's IPO is being carefully planned, with the firm taking the new regulatory and market climate into consideration, as reflected by a filing two weeks ago announcing that the planned size of the deal would be cut in half to $1 billion from $2 billion Previous Reuters Story.

With the price now released, it is believed that the listing of the hedge fund on the NYSE will happen before Thanksgiving. The road show has not yet begun but should occur soon. From the date a prospectus is filed with pricing information to the date of the actual IPO, two to three weeks typically elapse, sometimes more. Analysts said they expect the deal will take place within a month "…if all goes well, because it's not going to be an easy sale for them," Mr. Gaskins said.

Och-Ziff was founded in 1994 by Mr. Och, together with the Ziff Brothers Investments LLC. Mr. Och spent 11 years at Goldman Sachs prior to founding the hedge fund. The firm has 135 investment professionals, including 18 partners, working in New York; London; Hong Kong; Tokyo; Bangalore, India; and Beijing.

A spokesman for Och-Ziff declined to comment on the filing and the fund's performance.