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Och Ziff 3Q2010 announcement shows 18% rise in assets (YTD), net inflows of $2.4bn

Tuesday, November 02, 2010
Opalesque Industry Update- Och-Ziff Capital Management Group LLC (NYSE: OZM) (the "Company" or "Och-Ziff") reported a GAAP Net Loss(1) of $93.5 million, or $1.04 per basic and $1.05 per diluted Class A Share, for the third quarter ended September 30, 2010. The Company also declared a $0.10 per share 2010 third quarter cash dividend on its Class A Shares.

Summary Highlights
• Distributable Earnings of $52.1 million, or $0.13 per Adjusted Class A Share, for the 2010 third quarter increasing from $34.2 million, or $0.08 per Adjusted Class A Share, for the 2009 third quarter

• Assets under management of $26.3 billion as of October 1, 2010, 4% higher than $25.3 billion as of July 1, 2010 and 19% higher than $22.1 billion as of October 1, 2009

• Estimated assets under management of $27.2 billion as of November 1, 2010, reflecting an 18% year-to-date increase which was attributable to capital net inflows of $2.4 billion and performance-related appreciation of $1.7 billion

• Year-to-date estimated net returns through October 31, 2010 of the OZ Master Fund of 6.7%, the OZ Europe Master Fund of 6.0%, the OZ Asia Master Fund of 9.0% and the OZ Global Special Investments Master Fund of 10.5%

"During the third quarter and in the month of October, we again generated positive, risk-adjusted returns," said Daniel S. Och, Chairman and Chief Executive Office of Och-Ziff. "Our consistent, disciplined approach to investing and managing risk, and the low volatility of our returns, has significant value to our fund investors. The investment environment has improved relative to the first half of 2010, and we saw new opportunities in many of our strategies to which we have deployed capital.

"We remain confident that capital allocations to alternative asset managers will be significant, but think that the environment has further reinforced the importance of manager selection. We believe that our year-to-date capital net inflows reflect a leading market share of those to the hedge fund industry and to absolute return managers in particular. We view our investment track record, transparency and infrastructure as the key drivers to furthering our competitive differentiation over time."

(1) References to the Company's GAAP Net Loss throughout this press release refer to the Company's GAAP net loss allocated to Class A shareholders.

GAAP NET LOSS ALLOCATED TO CLASS A SHAREHOLDERS

For the 2010 third quarter, Och-Ziff reported a GAAP Net Loss of $93.5 million, or $1.04 per basic and $1.05 per diluted Class A Share, compared to a GAAP Net Loss of $80.0 million, or $1.02 per basic and $1.06 per diluted Class A Share, for the 2009 third quarter. For the first nine months of 2010, Och-Ziff reported a GAAP Net Loss of $271.6million, or $3.16 per basic and diluted Class A Share, compared to a GAAP Net Loss of $250.2 million, or $3.23 per basic and $3.25 per diluted Class A Share, for the first nine months of 2009. The increase in the GAAP Net Loss for both periods was primarily driven by an increase in income tax expense, as well as an increase in the Company's interest in its principal operating subsidiaries (the "Och-Ziff Operating Group") due to the vesting of Class A Restricted Share Units ("RSUs") and the exchange of Och-Ziff Operating Group A Units ("Group A Units") for Class A Shares. As a result, a larger share of the losses of the Och-Ziff Operating Group was allocated to the Company. Offsetting these increases in the GAAP Net Loss was an increase in management fees as a result of higher assets under management and lower compensation and benefits expenses, as the accrual for estimated discretionary cash bonuses taken in the second and third quarters of 2009 did not recur in 2010. As it has done historically, the Company expects to record most of the discretionary cash bonus expense in the fourth quarter.

The GAAP Net Loss in the 2010 third quarter and first nine months primarily resulted from non-cash expenses of $411.8 million and $1.2 billion, respectively, associated with the Company's reorganization in connection with its initial public offering ("IPO") in November 2007. These expenses are related to the amortization of Group A Units, which represent equity interests in the Och-Ziff Operating Group that were issued to the Company's pre-IPO owners in exchange for their pre-IPO interests in those subsidiaries. The Group A Units generally vest annually over five years until November 2012. Accordingly, the amortization of these expenses is expected to result in a GAAP Net Loss on an annual basis through 2012. Once vested, the Group A Units may be exchanged on a one-to-one basis for Class A Shares.

Additionally, the GAAP Net Loss in the 2010 third quarter and first nine months were driven by non-cash expenses of $32.7 million and $92.0 million, respectively, for the amortization of equity-based compensation. This expense relates primarily to RSUs awarded to all of the Company's employees in connection with its IPO, which vest annually over four years until November 2011, and subsequent compensation-related grants. Each RSU represents the right to receive one Class A Share upon vesting.

Throughout this press release, the Company presents financial measures that are not prepared in accordance with GAAP. For a discussion of these non-GAAP measures, please see the discussion "Non-GAAP and Segment Financial Measures" at the end of this press release.

DISTRIBUTABLE EARNINGS (NON-GAAP)

The Company's Distributable Earnings for the 2010 third quarter were $52.1 million, or $0.13 per Adjusted Class A Share, compared to $34.2 million, or $0.08 per Adjusted Class A Share, in the 2009 third quarter. Distributable Earnings for the first nine months of 2010 were $158.3 million, or $0.39 per Adjusted Class A Share, compared to $73.9 million, or $0.18 per Adjusted Class A Share, in the first nine months of 2009. The year-over-year increase in both periods was primarily attributable to higher management fees as a result of higher assets under management and lower compensation and benefits expenses, as the accrual for estimated discretionary cash bonuses taken in the second and third quarters of 2009 did not recur in 2010. As it has done historically, the Company expects to record most of the discretionary cash bonus expense in the fourth quarter.

Distributable Earnings is a non-GAAP measure. For reconciliations of Distributable Earnings to the respective GAAP Net Losses for the periods described above, please see Exhibits 3 through 7 that accompany this press release. Additionally, please see the discussion of "Non-GAAP and Segment Financial Measures" at the end of this press release, including the definitions of Distributable Earnings and Adjusted Class A Shares.

ASSETS UNDER MANAGEMENT

Och-Ziff's assets under management were $26.5 billion as of September 30, 2010, compared with $25.5 billion in assets under management as of June 30, 2010 and $22.3 billion in assets under management as of September 30, 2009. The $4.2 billion year-over-year increase was driven by capital net inflows of $2.6 billion and performance-related appreciation of $1.6 billion. During the 2010 third quarter, the $978.4 million increase in assets under management was driven by performance-related appreciation of $756.8 million and capital net inflows of $221.6 million.

Estimated assets under management as of November 1, 2010 were $27.2 billion, which reflected November 1, 2010 capital net inflows of approximately $300 million and October 2010 performance-related appreciation of approximately $600 million. For the period from December 31, 2009 through November 1, 2010, estimated assets under management increased $4.1 billion, or 18%, driven by estimated capital net inflows of approximately $2.4 billion and estimated performance-related appreciation of approximately $1.7 billion.

INVESTMENT PERFORMANCE

For the first nine months of 2010, performance-related appreciation was principally driven by credit-related strategies in the U.S. and Europe, long/short equities and convertible arbitrage in Asia and private investments in Europe and Asia.

ECONOMIC INCOME FOR THE OCH-ZIFF FUNDS SEGMENT

The Company conducts substantially all of its business through the Och-Ziff Funds segment, which is currently the Company's only reportable segment under GAAP. This segment provides investment management and advisory services to the Company's hedge funds and separately managed accounts.

The measures discussed below are presented on an Economic Income basis. For reconciliations of these segment measures to the respective GAAP measures, please see Exhibits 3through 7 that accompany this press release. Additionally, please see the discussion of "Non-GAAP and Segment Financial Measures" at the end of this press release.

Total Revenues - Segment

Total revenues for the 2010 third quarter were $111.4 million, a 24% increase from total revenues for the 2009 third quarter of $89.6 million. Management fees were $105.5 million, 22% higher than management fees in the prior year period of $86.3 million.

Total revenues for the first nine months of 2010 were $324.5 million, a 21% increase from total revenues of $267.3 million in the first nine months of 2009. Management fees were $312.1 million, 19% higher than management fees in the prior year period of $263.2 million.

Total revenues increased year-over-year in both periods due primarily to higher management fees resulting from the growth in assets under management. This growth was driven by performance-related appreciation and capital net inflows.

Compensation and Benefits - Segment

Compensation and benefits for the 2010 third quarter totaled $18.6 million, 21% lower than compensation and benefits of $23.5 million for the 2009 third quarter. Compensation and benefits for the first nine months of 2010 totaled $53.4 million, 38% lower than compensation and benefits in the prior year period of $86.5 million.

The year-over-year decrease in both periods was principally attributable to the accrual for estimated discretionary cash bonuses taken in the second and third quarters of 2009 that did not recur in 2010. As it has done historically, the Company expects to record most of the discretionary cash bonus expense in the fourth quarter.

Non-Compensation Expenses - Segment

Non-compensation expenses for the 2010 third quarter were $20.3 million, a 9% decline from non-compensation expenses of $22.3 million for the 2009 third quarter. Non-compensation expenses for the first nine months of 2010 were $61.7 million, 10% lower than non-compensation expenses in the prior year period of $68.1 million.

In both periods, the decrease was primarily due to lower insurance costs and certain other expenses, partially offset by an increase in professional services fees. Also contributing to the year-to-date decline was lower interest expense on the Company's variable rate borrowings resulting from the decline in LIBOR rates and the early retirement of an aggregate of $105 million of the Company's term loan in 2009.

Economic Income - Segment

Economic Income for the Och-Ziff Funds segment for the 2010 third quarter was $72.4 million, a 65% increase from Economic Income of $43.8 million for the 2009 third quarter. Economic Income for the first nine months of 2010 was $209.1 million, an 86% increase from Economic Income of $112.6 million in the prior year period. The increase in both periods was driven primarily by a combination of higher management fees and lower compensation and benefits expenses, as described above.

ECONOMIC INCOME FOR THE COMPANY'S OTHER OPERATIONS (NON-GAAP)

The Company's Other Operations are comprised of its real estate business, which manages and provides advisory services to its real estate funds, and investments in new businesses established to expand certain of the Company's private investment platforms. The businesses within the Company's Other Operations are in their early development stages and are not included in the results of the Och-Ziff Funds segment.

Economic Income for the Company's Other Operations for the 2010 third quarter was a net loss of $2.9 million, compared to a net loss of $4.3 million for the 2009 third quarter. Economic Income for the Company's Other Operations for the first nine months of 2010 was a net loss of $10.1 million, compared to a net loss in the prior year period of $12.8 million. The decrease in the net loss for the three month period was principally the result of lower expenses related to the Company's Asia real estate business and increased management fees related to the launch of its new real estate fund. The decrease in net loss for the year-to-date period was the result of lower non-compensation expenses due to the reimbursement of organization expenses related to the Company's new real estate fund, which were primarily recorded in the second quarter of 2010, a decrease in the Company's share of the net losses of its African joint venture, as well as lower expenses related to the Company's Asia real estate business.

Economic Income for the Company's Other Operations is a non-GAAP measure. For reconciliations of Economic Income for the Company's Other Operations to the respective GAAP Net Losses for the periods described above, please see Exhibits 3 through 7 that accompany this press release. Additionally, please see the discussion of "Non-GAAP and Segment Financial Measures" at the end of this press release.

ECONOMIC INCOME FOR THE COMPANY (NON-GAAP)

Economic Income for the Company for the 2010 third quarter was $69.5 million, a 76% increase from Economic Income of $39.5 million for the 2009 third quarter. Economic Income for the Company for the first nine months of 2010 was $199.0 million, a nearly two-fold increase from Economic Income of $99.8 million in the prior year period. The increase for both periods was primarily attributable to higher management fees and lower compensation and benefits expenses in the Och-Ziff Funds segment.

Economic Income for the Company is a non-GAAP measure. For reconciliations of Economic Income for the Company to the respective GAAPNet Losses for the periods described above, please see Exhibits 3 through 7 that accompany this press release. Additionally, please see the discussion of "Non-GAAP and Segment Financial Measures" at the end of this press release.

CAPITAL

As of September 30, 2010, the number of Class A Shares outstanding was 90,525,165. For purposes of calculating Distributable Earnings per Share, the Company assumes that all interests of the partners and the Ziffs in the Och-Ziff Operating Group ("Partner Units") and RSUs outstanding during the period have been converted on a one-to-one basis into Class A Shares. For the third quarter and first nine months ended September 30, 2010, the total weighted-average Adjusted Class A Shares outstanding were 410,031,185 and 409,087,298, respectively.

DIVIDEND

The Board of Directors of Och-Ziff authorized a 2010 third quarter dividend of $0.10 per Class A Share. The dividend is payable on November 18, 2010 to holders of record as of the close of business on November 11, 2010. The ex-dividend date will be November 8, 2010.

For U.S. federal income tax purposes, the dividend will be treated as a partnership distribution. Based on the best information currently available, the Company estimates that when calculating withholding taxes, the entire amount of the 2010 third quarter dividend will be treated as U.S. source dividend income.

Non-U.S. holders of Class A Shares are generally subject to U.S. federal withholding tax at a rate of 30% (subject to reduction by applicable treaty or other exception) on their share of U.S. source dividends and certain other types of U.S. source income realized by the Company. With respect to interest, however, no withholding is generally required if proper certification (on an IRS Form W-8) of a beneficial owner's foreign status has been filed with the withholding agent. Non-U.S. holders must generally provide the withholding agent with a properly completed IRS Form W-8 to obtain any reduction in withholding.

* * * *

Och-Ziff will host a conference call today, November 2, 2010, at 8:30 a.m. Eastern Time to discuss the Company's 2010 third quarter results. The call will be open to the public and can be accessed by dialing (888) 680-0890 (callers inside the U.S.) or (617) 213-4857 (callers outside the U.S.). The number should be dialed at least ten minutes prior to the start of the call. The passcode for the call will be 35903544. A simultaneous webcast of the call will be available to the public on a listen-only basis on the For Shareholders page of the Company's website at www.ozcap.com.

For those unable to listen to the live broadcast, a replay will be available by dialing (888) 286-8010 (callers inside the U.S.) or (617) 801-6888 (callers outside the U.S.), passcode 38841451, beginning approximately two hours after the event for two weeks. A webcast replay of the event will also be available on the For Shareholders page of the Company's website.

* * * *

Non-GAAP and Segment Financial Measures

In addition to analyzing the Company's results on a GAAP basis, Och-Ziff's management also reviews the Company's results on an "Economic Income basis." Economic Income for the Company, the Och-Ziff Funds segment and Other Operations excludes the adjustments described below that are required for presentation of the Company's results on a GAAP basis, but that management does not consider when evaluating the operating performance of the Company in any given period. Management, therefore, uses Economic Income as the basis on which it evaluates the performance of the Company's business and makes resource allocation and other operating decisions. In addition, management believes that Economic Income provides a more comparable view of the Company's operating performance from period to period. Management considers it important that investors review the same operating information that it uses.

Economic Income is a measure of pre-tax operating performance that excludes the following from the Company's results on a GAAP basis:

• Income allocations to the Company's partners and Ziff Brothers Investments (the "Ziffs") on their direct interests in the Och-Ziff Operating Group. Management reviews operating performance at the Och-Ziff Operating Group level, where substantially all of the Company's operations are performed, prior to making any income allocations;

• Reorganization expenses related to the Company's IPO, equity-based compensation expenses and depreciation and amortization expenses, as management does not consider these non-cash expenses to be reflective of operating performance;

• Changes in the tax receivable agreement liability and net gain on early retirement of debt, as management does not consider these items to be reflective of operating performance;

• Net earnings on the deferred balances and net gains (losses) on investments in Och-Ziff funds, as these amounts primarily relate to amounts due to the Company's partners and the Ziffs for pre-IPO deferred incentive income, and amounts due to employees under deferred cash compensation arrangements, as management does not consider these items to be reflective of operating performance; and

• Amounts related to the consolidated Och-Ziff funds, including the related eliminations of management fees and incentive income, as management reviews the total amount of management fees and incentive income earned from all of the Och-Ziff funds in relation to total assets under management and fund performance.

In addition, deferred cash compensation expense and expenses related to compensation arrangements indexed to annual investment performance is recognized in full on the date they are determined (generally in the fourth quarter of each year), as management determines the total amount of compensation based on the Company's performance in the year of the award.

Management evaluates Economic Income for the Och-Ziff Funds segment, the Company's only reportable segment under GAAP, and for the Company's Other Operations. Economic Income for Other Operations is a non-GAAP measure that is calculated on the same basis as the methodology that is used to calculate Economic Income for the Och-Ziff Funds segment. Management also evaluates Economic Income for the Company, which is a non-GAAP measure that equals the sum of Economic Income for the Och-Ziff Funds segment and for the Company's Other Operations.

As a result of the adjustments described above, management fees, compensation and benefits, non-compensation expenses and net loss (income) allocated to partners' and others' interests in consolidated subsidiaries are presented on an Economic Income basis for the Company's Other Operations and the Company, and are also non-GAAP measures. No adjustments to the GAAP basis have been made for incentive income, other revenues and net losses on joint ventures. For a full description of the adjustments made to the Company's non-GAAP measures and reconciliations of these non-GAAP measures to the respective GAAPmeasures, please see Exhibits 3 through 7 that accompany this press release.

Distributable Earnings is a non-GAAP measure of after-tax operating performance and equals Economic Income for the Company less Adjusted Income Taxes. Adjusted Income Taxes are estimated assuming the conversion of all outstanding Partner Units into Class A Shares, on a one-to-one basis. Therefore, all income (loss) of the Och-Ziff Operating Group allocated to the partners is treated as if it were allocated to Och-Ziff Capital Management Group LLC. Partner Units represent interests in the Och-Ziff Operating Group held by the partners and the Ziffs, including the Group A Units and other non-equity profit interests in the Och-Ziff Operating Group that may convert into Group A Units upon the occurrence of certain events. Distributable Earnings per Share is equal to Distributable Earnings divided by the weighted-average number of Adjusted Class A Shares. Adjusted Class A Shares are determined assuming all Partner Units and RSUs are converted on a one-to-one basis into Class A Shares. Management uses Distributable Earnings, among other financial data, to determine the earnings available to distribute as dividends to holders of the Company's Class A Shares and to the Company's partners and the Ziffs with respect to their Partner Units.

The Company's non-GAAP measures should not be considered as alternatives to the Company's GAAP Net Loss or cash flow from operations, or as indicative of liquidity or the cash available to fund operations. The Company's non-GAAP measures may not be comparable to similarly-titled measures used by other companies.

Reconciliations of these non-GAAP measures to the most directly comparable financial measures calculated and presented in accordance with GAAP are included in Exhibits 3 through 7 attached to this press release.

* * * *

Forward-Looking Statements

This press release may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, that reflect the Company's current views with respect to, among other things, future events and financial performance, strategies and expectations, including but not limited to statements regarding the Company's financial performance and results, including its ability to increase assets under management, generate positive returns, preserve capital and identify investment opportunities and enhance the Company's investment platforms. The Company generally identifies forward-looking statements by terminology such as "outlook," "believe," "expect," "potential," "continue," "may," "will," "should," "could," "seek," "approximately," "predict," "intend," "plan," "estimate," "anticipate," "opportunity," "pipeline," "comfortable," "assume," "remain," "maintain," "sustain," "achieve" or the negative version of those words or other comparable words.

Any forward-looking statements contained in this press release are based upon historical information and on the Company's current plans, estimates and expectations. The inclusion of this or any other forward-looking information should not be regarded as a representation by the Company or any other person that the future plans, estimates or expectations contemplated by the Company will be achieved. Such forward-looking statements are subject to various risks and uncertainties and assumptions, including but not limited to global economic, business and market conditions, the conditions impacting the hedge fund industry, the Company's ability to successfully compete for fund investors, professional investment talent and investment opportunities, its successful formulation and execution of business and growth strategies and its ability to appropriately manage conflicts of interest and tax and other regulatory factors relevant to the Company's business, as well as assumptions relating to the Company's operations, financial results, financial condition, business prospects, growth strategy and liquidity.

If one or more of these or other risks or uncertainties materialize, or if the Company's underlying assumptions prove to be incorrect, the Company's actual results may vary materially from those indicated in these statements. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in the Company's filings with the Securities and Exchange Commission, including but not limited to the Company's Annual Report on Form 10-K for the year ended December 31, 2009 filed on March 4, 2010. There may be additional risks, uncertainties and factors that the Company does not currently view as material or that are not known. The forward-looking statements included in this document are made only as of the date of this document and the Company does not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.

This press release does not constitute an offer of any Och-Ziff fund.

* * * *

About Och-Ziff Capital Management Group LLC

Och-Ziff Capital Management Group LLC is one of the world's largest institutional alternative asset managers with offices in New York, London, Hong Kong, Mumbai and Beijing. Och-Ziff's funds seek to deliver consistent, positive, risk-adjusted returns throughout market cycles, with a strong focus on capital preservation. Och-Ziff's multi-strategy approach combines global investment strategies, including long/short equity special situations, convertible and derivative arbitrage, structured credit, other credit, private investments and merger arbitrage. As of November 1, 2010, Och-Ziff had approximately $27.2 billion in assets under management. For more information, please visit Och-Ziff's website at www.ozcap.com.

SOURCE Och-Ziff Capital Management Group LLC

(press release)

Source ML

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