RBC Capital Markets analyst Bulent Ozcan takes a look at Och-Ziff, noting some key points that seem to be encouraging signs for the company’s future.
Our view: Diversification and repeatability of performance bodes well for Och-Ziff Capital Management Group LLC (NYSE:OZM)’s future
Key points:
The list of “all time highs” was long in the quarter, and we came away from today’s earnings call feeling very positive about Och-Ziff Capital Management Group LLC (NYSE:OZM)’s long term prospects.
It became clear that the firm and its business model are evolving. Och-Ziff has changed from being merely a hedge fund to a solutions provider.
Och-Ziff’s goals, targets are improving
While the firm’s goal would have been to produce strong consistent results for its LPs just a few years ago, it is now increasingly focused on offering products that meet investors needs. This might seem trivial to some who might wonder whether this shouldn’t have been the case all along. However, one should not forget that most hedge funds’ exclusive strategy remains attracting capital via strong performance only.
With the addition of further/supplemental strategies, Och-Ziff Capital Management Group LLC (NYSE:OZM) was able to generate over $3 billion of net flows in 2013. Clearly, Och-Ziff is giving its clients what they want. This close cooperation, in turn, leads to stickier assets. An increasing number of institutional investors are moving towards working with a smaller number of alternative asset managers that can provide a number of strategies across a variety of asset classes.
This is important given the high degree of operating leverage embedded in Och-Ziff’s business. We estimate margins on an economic basis to be around 55% for 2013. This could expand as AUM grows. As of February 1, 2014, Och-Ziff had net inflows of $1.1 billion.
However, investors should not expect Och-Ziff Capital Management Group LLC (NYSE:OZM) to provide strategies where it does not have a perceived competitive advantage – such as private equity. We expect future growth will come from existing customers and new customers internationally. We came away thinking that growing its Non-North American customer base will be a priority for Och-Ziff. After all, North American customers still make up 73% of its customer base.
Environment could be tailwind
We also believe that the 2014 investment environment will be a tailwind for Och-Ziff. Increased market volatility should drive investors to strategies that focus on preserving capital in down markets and participate in market upswings. This is OZM’s forte.
We are maintaining our Outperform rating and are raising our 2014 price target to $20 from $19.
Investment summary
We believe that the hedge fund industry in general and Och-Ziff Capital Management Group LLC (NYSE:OZM) in particular are firmly situated to experience strong growth over the next few years. AUM growth should be driven mainly by inflows from pension funds and sovereign wealth funds. We believe that Och-Ziff, with its focus on institutional clients, is well positioned to capitalize on this opportunity. Attractive valuation coupled with favorable macro trends provide an interesting investment opportunity.
Och-Ziff could benefit from growing demand for absolute return strategies: We believe that the hedge fund industry in general and Och-Ziff Capital Management Group LLC (NYSE:OZM) in particular will be able to capitalize on a trend towards allocating an increasing amount of capital to alternative strategies. We expect demand for investment products that provide strong, positive returns while limiting downside risk to increase.
We believe that Och-Ziff’s global footprint will help the company attract assets. We believe that Och-Ziff, with investment teams in London, Hong Kong, Beijing, and Mumbai, is better suited to explore global opportunities than hedge funds that have either a few or no international offices.
We believe that Och-Ziff will benefit from a bias toward large hedge funds. Investors should favour larger, more stable funds with proven track records. This should result in strong inflows to established players, such as Och-Ziff.
We expect Och-Ziff Capital Management Group LLC (NYSE:OZM) to benefit from an increasing demand for transparency. LPs increasingly want to understand their risk. As a publicly traded company, Och-Ziff has to comply with rules and regulations that privately owned hedge funds do not face. We believe that this is appealing to LPs that have to adhere to heightened fiduciary duties such as pension funds, endowments, and foundations.
