Och-Ziff’s Growing Pains are No Problem

The unprecedented growth in alternative asset management platforms has been very good to the folks at Och-Ziff. They have managed to garner their share of the pie, and then some, showing what a well thought out business plan, solid risk adjusted returns and motivated personnel can accomplish.

But managing the growth can be tricky, as stock picking prowess and financial acumen are only two ingredients in the recipe for success.  Building infrastructure is key, and the barriers to entry can be daunting. 

These challenges trip up even the smartest people on the Street:

Och-Ziff, which has been one of the most reticent of hedge fund managers, will face the potential drawback of public disclosure.

It has had to report taking revenues of just over $1bn last year and $284m in the first three months of this year, and profit before tax of $611m last year and of $89m in the first quarter.

It paid only $23m in tax last year, and $4m in the first quarter of this year, a low rate that is sure to attract the attention of legislators.

It has also reported that its auditor has found a material weakness in its internal controls over financial reporting
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“We have significantly expanded our legal and professional accounting staff and continue to seek additional resources to further enhance our accounting and reporting functions and document retention practices.”

The prospectus said: “The identified material weakness relates to errors that resulted from having inadequate staffing resources, resulting in ineffective controls over the execution of certain complex, historical contracts containing ambiguous or conflicting terms.

Management is developing a plan to remediate the material weakness.

OZ Assets Under Mgmt

Mundane compliance issues like document retention do not make for flashy headlines, but are essential to building a successful asset management operation. And keeping some skin in the game is important as well. Och-Ziff is tackling this one head on:

The firm said its primary reason to float was to increase the alignment of interests between investors and fund managers: “Each of our partners will invest 100% of the after-tax proceeds received by him in connection with this offering in the investment funds we manage, including funds we may offer in the future.”

The firm’s 18 partners and other staff own $1.8bn of the funds. This is almost 7% of the total $27bn; the $2bn that is meant to be raised in the flotation should increase the total to 14%. The partners have agreed to keep it in the fund for five years.

This “hurt money” is seen as critical to the way hedge fund managers operate. The industry is often criticized for an asymmetric fee mechanism that rewards the manager when it makes money but fails to penalize it when it generates losses. Making sure the partners have invested a big proportion of their personal wealth in the fund is a way to redress the balance.

Personnel stability is essential for money management firms. From what i can see, Och-Ziff has figured out the retention side of the business figured out.  Forget Blackstone or Fortress, this is where I would like to hang my hat. 

Surely they have room for one more StockJockey.

Och-Ziff flotation aims to raise “hurt money”
Financial News
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The content contained represent the opinions of 1440 Wall Street. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author. No position in securities mentioned.

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