OZM: BEST IDEA LONG

Jonathan Casteleyn, CFA

203-562-6500
jcasteleyn@hedgeye.com

FINANCIALS TEAM
TUESDAY MAY 13th, 2014

Joshua Steiner, CFA

203-562-6500
jsteiner@hedgeye.com

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QA@HEDGEYE.COM

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HEDGEYE 3

WE ARE BULLISH ON OZM SHARES

1
2
3
2

ONGOING ROTATION IN THE PENSION SYSTEM

Ongoing changes within the $18 trillion pension market benefit leading Alternative asset
managers with Alternatives set to grow from 20% of the pension system to 30% which would
result in $180 billion in inflow for leading hedge funds, P/E, and real estate firms.

HISTORICAL PERFORMANCE ACROSS CYCLE

The most important attribute of an asset manager is performance, which drives flows. OZM has
a 20-year track record of creating alpha. Thus, the current short-term underperformance should
mark a great entry point for new shareholders.

THE HUNT FOR YIELD

The start of 2014 is seeing market rotation into higher-yielding equities. OZM shares offer a 5%
yield sourced from its management fee alone, which is before considering an additional 5%
when the company produces incentive fees in-line with its historical average.
HEDGEYE 4

WHAT IS THE UPSIDE?

OZM SHARES COULD RETURN 100% OVER 5 YEARS FROM A COMBINATION
OLDEARNINGS
FORMAT = $800/SQUARE
FT AND DIVIDENDSNEW FORMAT = $1,300 SQ FT
OF
GROWTH
OZM 5 Year Opportunity

AUM in $MM
Organic Growth
Gains

42,600 $
6%
6%

Base Management Fee ($MM)

Incentive Fee ($MM)

$
$

639
511

Net Income ($MM)

Shares Outstanding (MM)
EPS
Dividend Per Share

$
$

607
505
$
$

1.20
1.08

FY1
47,712

FY2
53,437

FY3
59,850

FY4
67,032

FY5
75,076

716
573

$
$

802
641

$
$

898
718

$
$

1,005
804

$
$

1,126
901

680
530
$
$

1.28
1.15

762
557
$
$

1.37
1.23

853
585
$
$

1.46
1.31

956
614
$
$

1.56
1.40

1,070
645
$
$

AUM Growth
Earnings Growth
Cumulative Dividends
Cumulative Dividend Yield

1.66
1.49
76%

38%
$

7.68

62%

Assumptions assume OZM earns incentive every year for 5 years; Pretax margins of 66%; Tax rate of 20%
Sharecount grow s at 5% per year; w ith Organic and Market Appreciation of 6% per year

DATA SOURCE: HEDGEYE RISK MANAGEMENT ESTIMATES

HEDGEYE 5

SECTION ONE: PENSION TAILWINDS

PENSION TAILWINDS
THE PENSION MARKET IS HUGE AT $32 TRILLION GLOBALLY
OLD FORMAT
$800/SQUARE FT
NEW FORMAT = $1,300 SQ FT
AND
$18.8= TRILLION
IN THE U.S.

DATA SOURCE: TOWERS WATSON; ICI, BLOOMBERG

HEDGEYE 7

PENSION TAILWINDS
RECENT TOWERS WATSON SURVEY WORK COVERED A SUBSTANTIAL
PORTION OF ALL GLOBAL ASSETS:

DATA SOURCE: TOWERS WATSON

HEDGEYE 8

PENSION TAILWINDS
REDUCING RISK WAS THE OVERRIDING MESSAGE OF THE SURVEY:

DATA SOURCE: TOWERS WATSON

HEDGEYE 9

PENSION TAILWINDS
LDI ADOPTION IS INCREASING (MATCHING ASSETS TO LIABILITIES):

DATA SOURCE: TOWERS WATSON

HEDGEYE 10

PENSION TAILWINDS
GLIDE PATH PROCESSES ARE GROWING (AUTOMATIC RE-BALANCING):

DATA SOURCE: TOWERS WATSON

HEDGEYE 11

PENSION TAILWINDS
THE ACTION ITEMS ARE REDUCING EQUITIES AND ADDING TO OTHER ASSET
CLASSES:

DATA SOURCE: TOWERS WATSON

HEDGEYE 12

PENSION TAILWINDS
INCREMENTAL ADOPTION OF LDI AND GLIDE PATH IN THE PENSION MARKET
WILL CREATE AN INVESTABLE SHIFT INTO ALTERNATIVES AND FIXED
INCOME:

DATA SOURCE: TOWERS WATSON, HEDGEYE RISK MANAGEMENT ESTIMATES

HEDGEYE 13

PENSION TAILWINDS
THIS WILL CREATE AN ANNUAL TAILWIND OF $180 BILLION IN NET NEW
FLOWS OVER THE NEXT DECADE INTO THE ALTERNATIVES INDUSTRY, OR 6%
ORGANIC GROWTH

DATA SOURCE: TOWERS WATSON; HEDGEYE RISK MANAGEMENT ESTIMATES

HEDGEYE 14

PENSION TAILWINDS
CREATING RECORD INFLOW AT OCH ZIFF, A LEADER IN THE ALTERNATIVE
CATEGORY.

DATA SOURCE: RESPECTIVE COMPANY INFORMATION

HEDGEYE 15

PENSION TAILWINDS
PENSIONS ARE THE BIGGEST SINGLE CATEGORY OF UNDERLYING OZM AUM:

DATA SOURCE: RESPECTIVE COMPANY INFORMATION

HEDGEYE 16

SECTION TWO: PERFORMANCE RULES

PERFORMANCE RULES
OZM HAS A HISTORY OF ALPHA

DATA SOURCE: COMPANY DATA; BLOOMBERG

HEDGEYE 18

PERFORMANCE RULES
A SNAPSHOT OF OZMS RECENT INVESTMENT PERFORMANCE

DATA SOURCE: COMPANY DATA; BLOOMBERG

HEDGEYE 19

PERFORMANCE RULES
NO TWO DRAWDOWNS ARE THE SAME, BUT THE 08 AND 11 PERIODS WERE
RECTIFIED FAIRLY QUICKLY:

DATA SOURCE: COMPANY DATA; BLOOMBERG

HEDGEYE 20

PERFORMANCE RULES
THE STREET IS MODELING A STILL-ACHIEVABLE 7% RETURN FOR 2014

DATA SOURCE: COMPANY DATA; BLOOMBERG

HEDGEYE 21

PERFORMANCE RULES
RECENT PERFORMANCE HAS BEEN TEPID, BUT APRIL WAS A BIT BETTER
THAN MARCH

DATA SOURCE: COMPANY DATA

HEDGEYE 22

SECTION THREE: DIVIDEND ARISTOCRAT

DIVIDEND ARISTOCRAT
THE YTD SECTOR TRENDS ARE SPEAKING VOLUMES:

DATA SOURCE: BLOOMBERG

HEDGEYE 24

DIVIDEND ARISTOCRAT
OCH ZIFFS EARNINGS AND YIELD SOURCES:

DATA SOURCE: BLOOMBERG

HEDGEYE 25

DIVIDEND ARISTOCRAT
USING A 3-STAGE DIVIDEND DISCOUNT MODEL ON FULLY LOADED EARNINGS
PRODUCES A STOCK WITH A $22 VALUE

DATA SOURCE: BLOOMBERG

HEDGEYE 26

DIVIDEND ARISTOCRAT
ALTERNATIVELY, THE STOCK IS CURRENTLY TRADING AS THOUGH THERE
WILL NEVER AGAIN BE ANY INCENTIVE FEES

DATA SOURCE: BLOOMBERG

HEDGEYE 27

OTHER & LEGAL

OTHER & LEGAL

WE LOOKED AT OVER 30 PAST CASES INVOLVING INVESTIGATIONS OF FCPA:

DATA SOURCE: RESPECTIVE COMPANY DATA

HEDGEYE 29

OTHER & LEGAL

OZMS INQUIRY FROM THE SEC STARTED IN 2011 WHICH COULD LEAVE
SUBSTANTIAL TIME LEFT UNTIL FINALITY:

DATA SOURCE: RESPECTIVE COMPANY DATA; HEDGEYE RISK MANAGEMENT ESTIMATES

HEDGEYE 30

OTHER & LEGAL

FCPA LANGUAGE FROM THE FIRMS 10-K DISCLOSES THE ISSUE AND THE
COMPLIANCE FRAMEWORK IS ALREADY IN PLACE ACCORDING TO OZM

DATA SOURCE: COMPANY DATA

HEDGEYE 31

OTHER & LEGAL

THE STOCK HAS SHARPLY DISCOUNTED THIS DISCLOSURE SINCE THE
FILING OF THE 10-K

DATA SOURCE: COMPANY DATA

HEDGEYE 32

OTHER & LEGAL

THE REPRINT OF THE SEC SUBPOENA IN THE WSJ 2 WEEKS AGO RESULTED
IN AN ADVERSE MARKET REACTION

DATA SOURCE: BLOOMBERG

HEDGEYE 33

VALUATION
BASED ON JUST ITS MANAGEMENT FEES, THE STOCK IS TRADING AT A 32%
DISCOUNT TO ITS AVERAGE HISTORICAL MULTIPLE

DATA SOURCE: BLOOMBERG

HEDGEYE 34

VALUATION
RELATIVE TO THE TRADITIONAL ASSET MANAGERS THE STOCK IS TRADING
AT OVER A 25% DISCOUNT TO ITS MEAN VALUATION

DATA SOURCE: BLOOMBERG

HEDGEYE 35

CONCLUSION
1
2
3

OZM shares appear overly discounted in the short term because of

concerns around performance and legal issues creating an attractive
buying opportunity

The company has proven that it can deliver strong investment

performance across the cycle, which should insulate investors
against downside risk. The companys legal issues could take years
to resolve and the firm has not yet been charged with an infraction
Pension fund asset rotation is creating a secular growth tailwind for
the Alternative asset managers. This tailwind, coupled with decent
performance and dividends should enable a 100% total return over
the coming 5-year timeframe.

DATA SOURCE: HEDGEYE RISK MANAGEMENT ESTIMATES

HEDGEYE 36

WHAT IS THE UPSIDE?

OZM SHARES COULD RETURN 100% OVER 5 YEARS FROM A COMBINATION
OLDEARNINGS
FORMAT = $800/SQUARE
FT AND DIVIDENDSNEW FORMAT = $1,300 SQ FT
OF
GROWTH
OZM 5 Year Opportunity

AUM in $MM
Organic Growth
Gains

42,600 $
6%
6%

Base Management Fee ($MM)

Incentive Fee ($MM)

$
$

639
511

Net Income ($MM)

Shares Outstanding (MM)
EPS
Dividend Per Share

$
$

607
505
$
$

1.20
1.08

FY1
47,712

FY2
53,437

FY3
59,850

FY4
67,032

FY5
75,076

716
573

$
$

802
641

$
$

898
718

$
$

1,005
804

$
$

1,126
901

680
530
$
$

1.28
1.15

762
557
$
$

1.37
1.23

853
585
$
$

1.46
1.31

956
614
$
$

1.56
1.40

1,070
645
$
$

AUM Growth
Earnings Growth
Cumulative Dividends
Cumulative Dividend Yield

1.66
1.49
76%

38%
$

7.68

62%

Assumptions assume OZM earns incentive every year for 5 years; Pretax margins of 66%; Tax rate of 20%
Sharecount grow s at 5% per year; w ith Organic and Market Appreciation of 6% per year

DATA SOURCE: HEDGEYE RISK MANAGEMENT ESTIMATES

HEDGEYE 37

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SALES@HEDGEYE.COM
203.562.6500