Och-Ziff public debut may be tough sell

By Jonathan Keehner

NEW YORK, Nov 9 (Reuters) - U.S. hedge fund operator Och-Ziff, which plans to raise about $1.1 billion in an initial public offering next week, could face a tough reception when it floats shares on Tuesday.

Last month the alternative asset manager, founded in 1994 by former Goldman Sachs trader Daniel Och and the Ziff family, cut the amount it planned to raise by half amid concerns that market turbulence might dampen demand.

But analysts still question the level of shareholder interest in Och-Ziff, which has $30 billion under management.

"I think they're going to have to cut the price," said Scott Sweet, managing director of research firm IPOboutique.com. "I would not be a player in that deal."

The last major asset manager to go public has hardly inspired investors. The Blackstone Group (BX.N: Quote, Profile, Research), which had its highly anticipated debut in June, was one of this summer's worst performing offerings and closed on Friday over 20 percent below its initial offering price.

"There's still a serious lingering hangover from Blackstone," said Sweet. "We're in a much, much worse environment."

Since June shaky credit markets have squeezed demand for securities related to subprime mortgages and leveraged loans, slowing deal activity and burdening equity values.

"The environment is getting tougher by the day," said Tabb Group consultant Adam Sussman. "When Och-Ziff cut their offering, I don't think they were pricing in that the credit problem would widen this much.

But for hedge funds like Och-Ziff, falling markets could bring opportunities, Sussman added.

"For investors with a riskier appetite, this is an opportunistic time," said Sussman. "Valuations are coming down for everything -- which makes it cheaper for Och-Ziff to make their investments."

DIFFICULT TO VALUE

Also potentially holding investors back is the dismal performance of Fortress Investment Group (FIG.N: Quote, Profile, Research), a hedge fund and private equity firm that manages some $43 billion in private equity, real estate and hedge fund assets.

Fortress, which went public early this year, now trades at about half of its initial offering price.

"They invest in assets that are illiquid and enormously difficult to value," said Morningstar Inc analyst Andrew Richards, adding that speculating on the underlying asset value has made Fortress' stock price volatile.

Similar issues could weigh on relatively opaque hedge funds like Och-Ziff, especially if weak credit markets continue to cause investors concern over the value of assets

Och-Ziff's proposed valuation at the midpoint of its price range values the company $9.8 billion, which is relatively high compared to valuation metrics applied to Fortress and Blackstone, according to Francis Gaskins, president of research firm IPOdesktop.com.

Och-Ziff has a negative price-to-book value ratio, Gaskins said, while both Fortress and Blackstone have positive book value. For the 12 months ending on both June 30 and September 30, the company also underperformed both the Dow Jones Industrial Average (.DJI: Quote, Profile, Research) and the Standard & Poor's 500 Index (.SPX: Quote, Profile, Research), Gaskins added.

RIGHT LONG TERM MOVE

Several alternative asset managers like private equity firms or hedge funds have explored going public in order to raise invest capital or let founding partners cash out -- but this summer's credit crunch dampened most plans.

In August, Man Group Plc (EMG.L: Quote, Profile, Research), slated to become the first firm to list an individual hedge fund on the New York Stock Exchange, delayed its plans due to market conditions. And analysts have speculated that Kohlberg Kravis Roberts & Co [KKR.UL], which filed for an IPO months ago, may have put those plans on ice.

But insiders ultimately expect asset managers will proceed with going public.

"The deals are harder to do and the valuations aren't as robust," John Duffy, chief executive of Keefe, Bruyette & Woods which is advising Och-Ziff on its offering, said at the Reuters Finance Summit this week. "But unless there is really a train wreck in one of the ones that's public, I think this trend will continue."

Indeed, Apollo Advisors founder Leon Black, speaking at The Deal's M&A Outlook 2008 conference in New York on Wednesday, said his firm was open to its own IPO.

"I don't relish the thought of being public for a lot of reasons" said Apollo founder Leon Black, adding: "Clearly in terms of attracting new talent it could also be very important. In terms of institutionalizing this group beyond its founding partners, I think it's the right long term move." (Additional reporting by Christian Plumb in New York and Svea Herbst-Bayliss in Boston; Editing by Tim Dobbyn)