Clark Avenue Worth: Sculptor Capital Administration: Boardroom Battle, Low cost Inventory

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Sculptor Capital Administration (SCU) (~$500MM market cap) might be extra acquainted to most by their outdated title, Och-Ziff (OZM was the outdated ticker) or OZ Administration, however the storied hedge fund supervisor (one of many first different managers to publicly listing pre-GFC) has run into powerful occasions in recent times.  There was a bribery scandal within the mid-2010s that noticed the agency pay over $400MM in fines and in more moderen years a public succession spat between founder Daniel Och and present CEO/CIO Jimmy Levin over Levin’s pay bundle.

Sculptor at this time has roughly ~$36B in property beneath administration, roughly half of which is in CLOs which have decrease administration charges, with the remaining in a mixture of their flagship hedge fund, actual property and different methods.  The publicly traded entity is a holding firm that owns partnership models within the working partnership (see the beneath diagram) which creates confusion across the share rely and possession percentages of the events concerned.

Och left the corporate in 2018, however continues to personal a bit of the working partnerships and controls ~12% of the vote (Levin has ~20% of the vote) by means of the B shares.  B shares have no financial curiosity within the publicly traded holding firm, however are supposed to match the financial curiosity within the working partnership (when you squint, its one share one vote), when you see it reported that Och owns lower than 1% of the corporate, that is simply the publicly traded SCU shares.  He is presumably nonetheless a major proprietor of the enterprise, which makes the present state of affairs awkward and definitely does not assist capital elevating efforts.  Och does not need Levin working what he views has his firm, and Levin does not need Och proudly owning a bit of what he views as his firm.

In October, Och despatched a letter to the board, the important thing excerpt:

I, in addition to different founding companions, have been contacted by a number of third events who’ve requested us whether or not the Firm is perhaps open to a strategic transaction that might not contain present senior administration persevering with to run the Firm. It isn’t stunning that third events would see the potential for such a transaction on condition that exterior analysts have beforehand recognized the Firm’s administration points and concluded that, at its present buying and selling worth, the Firm could also be price lower than the sum of its elements.

Shortly after, Sculptor’s board responded that they are all the time open to 3rd social gathering affords.  The backwards and forwards went on from there, on 11/18 the board shaped a particular committee, presumably there’s an effort being made to both promote the administration firm in complete to a 3rd social gathering or Levin taking it personal and out of Och’s fingers, or presumably some mixture the place the CLO enterprise will get offered to a 3rd social gathering and the remaining enterprise is taken personal.

What may or not it’s price?  The financials are fairly complicated right here, there’s a number of working leverage within the enterprise, excessive mounted prices within the type of giant minimal bonuses, the enterprise is not one you’d contemplate being run for the shareholders first.  Final yr was a tricky yr, the flagship fund completed down mid-teens, however a few quarters again, Levin outlined the next “run-rate” expectations for the enterprise:

In the present day, now we have significant earnings energy, and we typically take into consideration this in 2 buckets. First bucket, administration charges much less mounted bills or, mentioned in another way, earnings with out the affect of incentive revenue and the variable bonus expense in opposition to that incentive revenue. And the second is inclusive of that incentive revenue and that variable bonus expense in opposition to it.

So within the first bucket, we take a look at it as administration charges much less mounted expense, and this went from a meaningfully adverse quantity to what’s now a meaningfully constructive quantity, and that is the straightforward results of a few issues. It is rising administration charges whereas lowering or sustaining mounted bills. And the expansion within the administration charges comes from the circulation dynamic we mentioned, and it comes from compounding capital inside our evergreen funds. And so the place that leaves us at this time is simply shy of $1 of earnings per share from our administration charges much less mounted bills.

Various managers are sometimes valued on base administration charges, incentive charges are sometimes lumpy and shared closely with the funding workforce.  If we’re making an attempt to derive a non-public market worth, $1/share of administration charges is a pleasant spherical quantity to make use of.  Most different managers commerce for a high-teens a number of of administration price earnings, however we’ll low cost SCU right here to 10x to account for the hair and previous fame.  Additionally a third-party is perhaps apprehensive that property would flee with out Levin within the CEO/CIO seat.

Sculptor’s stability sheet is in pretty good condition, with $250MM in money and ~$150MM in investments of their funds, backing out the remaining $95MM time period mortgage will get you to $306MM of web property.  Placing all of it collectively, I get one thing round $15/share for SCU versus a present worth beneath $8.50.

I am over simplifying issues right here, I could possibly be making an apparent error, however the present construction does not appear to work for Och, Levin or the enterprise.  Some company motion must occur and there is loads of candidates that might have an interest on this enterprise.  If the established order prevails for some purpose, the inventory appears low cost anyway, the corporate appears to agree as nicely, they’ve spent $28.2MM of a $100MM inventory repurchase authorization (important in comparison with the Class A float) as of their Q3 earnings.

Disclosure: I personal shares of SCU

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