Institutional Investor's Alpha Magazine - May 2008 - (Page 29)

Och-Ziff Och has been notable for his ability to hire — and hang on to — talent. His four key senior investment partners and his CFO have been with the ﬁrm for more than a decade. David Windreich, a Goldman colleague, was Och-Ziff ’s ﬁ rst ofﬁcial employee in 1994 and now serves as head of U.S. merger arbitrage and event-driven strategies. CFO Joel Frank has also been with the ﬁ rm since 1994. Harold Kelly, who came to Och-Ziff in 1995 from Cargill Financial Services Corp., runs global convertible arbitrage and derivatives arbitrage. Michael Cohen, who joined in 1997 from Franklin Mutual Advisers, where he was an equity research analyst, oversees European merger arbitrage and event-driven investing. Zoltan Varga, who was working as an M&A analyst at Goldman when Och hired him in 1998, is in charge of Asian merger arbitrage and event-driven investing. About ﬁve years ago Och and his partners noticed a gap in the available funding for opportunities that fell in the middle ground between traditional long-short and private equity: Very little money was committed to investments of six to 36 months’ duration, especially those that required ﬂexibility and innovation in the deal ﬁnancing. “We decided that we wanted to actively pursue that space,” Och says, “but we did our homework ﬁrst, to ﬁgure out what resources we would need to prepare ourselves.” Preparation meant hiring expert staff. Since 2003, Och-Ziff has brought in some 30 private equity professionals. Initially, the team sought investments solely for the ﬂagship fund’s side-pocket investments, but they have since expanded their search to generate ideas for a range of Och-Ziff funds. One of the ﬁ rm’s most notable private deals came in 2005: Och-Ziff provided mezzanine ﬁnancing, at a lucrative interest rate of 18 percent, for the purchase of top-ranked English soccer club Manchester United by American businessman Malcolm Glazer. The opportunities inherent in such private transactions are far less liquid than Och-Ziff’s typical arbitrage strategies, and Och’s willingness to put his own money to work was crucial to the IPO. The ﬁrm never would have pursued the offering, Och says, if his partners, including CFO Frank, had disagreed with him — or declined to invest in the Global Special Investments fund alongside him and lock up their own aftertax proceeds for ﬁve years. Och was also keen to monetize the ﬁ rm’s success and to have stock options to use as a currency with which to reward current partners and attract new employees. To some of Och-Ziff ’s investors, like the U.K. foundation Wellcome Trust, the logic behind the IPO was clear. “The ﬁrm needs to have greater ﬂexibility to manage long-term succession issues, and we fully recognized that,” says Wellcome Trust CIO Danny Truell. “It is one of the challenges of the partnership model, and Goldman faced it as well.” Truell, who spent nine years working for Goldman Sachs Asset Management before joining London-based Wellcome Trust in 2005, adds, “The fact that they want to continue to diversify their business and grow their resources — and have more direct access to the capital markets — makes total sense to us.” Unlike the partners at Goldman, who agonized about an IPO through the 1980s and 1990s, Och and his team felt little or no hesitation at the prospect of going public. They gained conﬁdence as they watched the market’s warm response to several alternative-investment public listings, including a massive closed-end fund launch for Marshall Wace’s MW TOPS fund, which went public on the Euronext Amsterdam exchange in December 2006 and raised Ð1.5 billion ($2 billion), and the blazing success of Fortress Investment Group’s February 2007 IPO. Fortress’s share price soared nearly 70 percent on its ﬁ rst day of trading, to close at $31 (the price has since more than halved in the wake of the credit crisis). The subprime implosion — LANDIS ZIMMERMAN, CIO, certainly clouded Och-Ziff ’s HOWARD HUGHES IPO prospects, but the ﬁrm was MEDICAL INSTITUTE well prepared for the market turmoil from an investment standpoint. Coming into July, Och-Ziff’s funds had virtually no exposure to credit. Having seen credit spreads tightening, protective covenants disappearing and risks clearly escalating, Och and his team began selling off their credit positions in 2006. Last summer, as the crisis was unfolding, they radically dialed down their merger arbitrage exposure, from 15 percent to 3 percent. Not every manager was so prescient, however, and — as hedge fund ﬁrms sold whatever liquid assets they could to meet margin calls — equity market volatility soared. Despite last summer’s turbulence, Och plowed ahead toward the IPO, which was being co-led by Goldman and Lehman. He and his team were already two to three years into the development of several new investment platforms and joint venture projects and wanted to accelerate their growth. He was even more determined when he made the acquaintance of al-Ansari through JPMorgan Chase & Co. Before ﬁ ling for the IPO, Och had not been looking for a strategic partner, but it didn’t take long for him to become intrigued with the idea. In September he and alAnsari met for the ﬁrst time in London at Och-Ziff’s ofﬁces on Clifford Street, in the heart of Mayfair. The two men quickly realized how much they had in common as they sought to expand their investing activities around the world. For Och, the chance to have Dubai International’s help in making client introductions in the Persian Gulf states raised the likelihood of future asset inﬂows. For al-Ansari, the global hedge fund offered a pipeline of potential joint projects and private co-investments. On October 29, Och-Ziff announced that Dubai Interna- “It is harder to produce returns with tens of billions of dollars of assets than with singledigit billions.” MAY 2008 • INSTITUTIONAL INVESTOR’S ALPHA • 29

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - May 2008

Institutional Investor's Alpha Magazine - May 2008 Contents Letter from the Editor Longs & Shorts Pension Corner: Send in the Clones The Good Guys: Outside the Box Cover Story: Welcome to Oz Interview: The Tipping Point Regulation: When Sentinels Go Astray Strategies: Taking Credit Research Center: The Hedge Fund 100 Book Excerpt: Shoot the Messenger Alpha Bytes: VaR Enough? Unhedged: Commentary: Not Your Father's Activist

Institutional Investor's Alpha Magazine - May 2008

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