Och-Ziff Capital Management filed for a $2 billion initial public offering today, becoming the latest alternative asset management group to sell equity to the investing public.
One question that keeps arising when these offerings are discussed is whether it makes sense for an outsider to get in on a business that the insiders are getting out of. Och-Ziff has a strong reply: they aren’t getting out. In fact, they promise to re-invest the proceeds from the IPO in Och-Ziff funds, with a mandatory five-year lock-up.
We can’t help wonder if there’s not some kind of tax arbitrage behind this scheme. With plans afoot on Capitol Hill to tax hedge fund and private equity partnerships as corporations, this move might allow the owners of Och-Ziff to convert some of their carried-interest into investment capital subject to capital gains taxes.
The firm will remain under the tight control of founder Daniel Och. The current owners will control a majority of the voting rights, and they will sign an agreement giving Och an irrevocable proxy to vote their shares. The Wall Street Journal notes that Market Beat notes the fate of the fund is very much tied to Och himself. Investors in its funds are “entitled to a ‘one-time special redemption right’ allowing them to cash out of the fund if Mr. Och is unexpectedly unavailable to the firm for 90 days for any reason — death, disability, alien abuduction, whatever ,” according to Market Beat.
The role of Goldman Sachs as a lead underwriter of the IPO has prompted Deal Journal's Dana Cimilluca to put forward something of nepotism theory to explain why Goldman has been landing lead roles in the big hedge fund IPOs but missing out on the private equity offerings.
At Och-Ziff…three of seven executive officers and directors listed in the SEC filing heralding the deal have Goldman on their resume. They include co-founder Daniel Och, who spent more than 11 years at Goldman before starting the eponymous investment firm in 1994. According to the filing, he was in Goldman’s Risk Arbitrage department and later ran proprietary trading in equities and was co-head of U.S. stock trading. At Fortress, the hedge fund and private-equity firm that started the present U.S. trend of alternative asset managers going public in February, three of its 12 chieftains are old Goldmanites.
Meanwhile, Goldman isn’t mentioned anywhere in the section of the Blackstone IPO prospectus that discusses the backgrounds of its 10 honchos, and KKR’s founders are all Bear Stearns alumni.
A yet unremarked connection between the Blackstone IPO and the Och-Ziff IPO is the role of Skadden Arps corporate finance partner, Jennifer Bensch. On Blackstone, Bensch was listed as the second partner at Skadden (who acted as outside counsel to Blackstone) working on the transaction. She's in the same position in the Och-Ziff IPO. From our experience with big law firms, the placement of law firm partners usually works like this: the first name has the client relationship, and the second name does the work. This raises the possibility that Bensch may be the legal brain at the center of the recent push into the public capital markets by hedge funds and private equity firms. Bensch could not be reached for comment.
IPO Prospectus [SEC]
Och-Ziff Capital Hedge Fund Files for $2 Billion IPO [Bloomberg]
Midday Tidbits: Doc Och [Market Beat]
Goldman’s Hedge Fund Alumni Network [Deal Journal]