OZM Analysis

FINANCIALS TEAM

OZM: BEST IDEA LONG

TUESDAY MAY 13th, 2014

Jonathan Casteleyn, CFA Joshua Steiner, CFA 203-562-6500 203-562-6500 [email protected] [email protected]

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DISCLAIMER Hedgeye Risk Management is a registered investment advisor, registered with the State of Connecticut. Hedgeye Risk Management is not a broker dealer and does not provide investment advice for individuals. This research does not constitute an offer to sell, or a solicitation of an offer to buy any security. This research is presented without regard to individual investment preferences or risk parameters; it is general information and does not constitute specific investment advice. This presentation is based on information from sources believed to be reliable. Hedgeye Risk Management is not responsible for errors, inaccuracies or omissions of information. The opinions and conclusions contained in this report are those of Hedgeye Risk Management, and are intended solely for the use of Hedgeye Risk Management’s clients and subscribers. In reaching these opinions and conclusions, Hedgeye Risk Management and its employees have relied upon research conducted by Hedgeye Risk Management’s employees, which is based upon sources considered credible and reliable within the industry. Hedgeye Risk Management is not responsible for the validity or authenticity of the information upon which it has relied. TERMS OF USE This report is intended solely for the use of its recipient. Re-distribution or republication of this report and its contents are prohibited. For more detail please refer to the appropriate sections of the Hedgeye Services Agreement and the Terms of Use at www.hedgeye.com

LEGAL

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WE ARE BULLISH ON OZM SHARES 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.

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OLD FORMAT = $800/SQUARE FT NEW FORMAT = $1,300 SQ FT

WHAT IS THE UPSIDE? OZM SHARES COULD RETURN 100% OVER 5 YEARS FROM A COMBINATION OF EARNINGS GROWTH AND DIVIDENDS

DATA SOURCE: HEDGEYE RISK MANAGEMENT ESTIMATES

FY1 FY2 FY3 FY4 FY5AUM in $MM 42,600$ 47,712$ 53,437$ 59,850$ 67,032$ 75,076$ Organic Growth 6%Gains 6%

Base Management Fee ($MM) 639$ 716$ 802$ 898$ 1,005$ 1,126$ Incentive Fee ($MM) 511$ 573$ 641$ 718$ 804$ 901$

Net Income ($MM) 607 680 762 853 956 1,070 Shares Outstanding (MM) 505 530 557 585 614 645

EPS 1.20$ 1.28$ 1.37$ 1.46$ 1.56$ 1.66$ Dividend Per Share 1.08$ 1.15$ 1.23$ 1.31$ 1.40$ 1.49$

AUM Growth 76%Earnings Growth 38%Cumulative Dividends 7.68$ Cumulative Dividend Yield 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

OZM 5 Year Opportunity

SECTION ONE: PENSION TAILWINDS

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PENSION TAILWINDS THE PENSION MARKET IS HUGE AT $32 TRILLION GLOBALLY AND $18.8 TRILLION IN THE U.S.

DATA SOURCE: TOWERS WATSON; ICI, BLOOMBERG

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PENSION TAILWINDS

DATA SOURCE: TOWERS WATSON

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

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PENSION TAILWINDS


“REDUCING RISK” WAS THE OVERRIDING MESSAGE OF THE SURVEY:

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PENSION TAILWINDS


LDI ADOPTION IS INCREASING (MATCHING ASSETS TO LIABILITIES):

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PENSION TAILWINDS


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

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PENSION TAILWINDS


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

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PENSION TAILWINDS

DATA SOURCE: TOWERS WATSON, HEDGEYE RISK MANAGEMENT ESTIMATES

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

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PENSION TAILWINDS

DATA SOURCE: TOWERS WATSON; HEDGEYE RISK MANAGEMENT ESTIMATES

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 …

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PENSION TAILWINDS

DATA SOURCE: RESPECTIVE COMPANY INFORMATION

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

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PENSION TAILWINDS

DATA SOURCE: RESPECTIVE COMPANY INFORMATION

PENSIONS ARE THE BIGGEST SINGLE CATEGORY OF UNDERLYING OZM AUM:

SECTION TWO: PERFORMANCE RULES

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PERFORMANCE RULES

DATA SOURCE: COMPANY DATA; BLOOMBERG

OZM HAS A HISTORY OF ALPHA

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PERFORMANCE RULES


A SNAPSHOT OF OZM’S RECENT INVESTMENT PERFORMANCE

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PERFORMANCE RULES


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

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PERFORMANCE RULES


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

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PERFORMANCE RULES

DATA SOURCE: COMPANY DATA

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

SECTION THREE: DIVIDEND ARISTOCRAT

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DIVIDEND ARISTOCRAT

DATA SOURCE: BLOOMBERG

THE YTD SECTOR TRENDS ARE SPEAKING VOLUMES:

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DIVIDEND ARISTOCRAT


OCH ZIFF’S EARNINGS AND YIELD SOURCES:

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DIVIDEND ARISTOCRAT


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

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DIVIDEND ARISTOCRAT


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

OTHER & LEGAL

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OTHER & LEGAL

DATA SOURCE: RESPECTIVE COMPANY DATA

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

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OTHER & LEGAL

DATA SOURCE: RESPECTIVE COMPANY DATA; HEDGEYE RISK MANAGEMENT ESTIMATES

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

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OTHER & LEGAL


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

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OTHER & LEGAL


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

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OTHER & LEGAL


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

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VALUATION


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

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VALUATION


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

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CONCLUSION 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 company’s 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.

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WHAT IS THE UPSIDE? OZM SHARES COULD RETURN 100% OVER 5 YEARS FROM A COMBINATION OF EARNINGS GROWTH AND DIVIDENDS


FY1 FY2 FY3 FY4 FY5AUM in $MM 42,600$ 47,712$ 53,437$ 59,850$ 67,032$ 75,076$ Organic Growth 6%Gains 6%

Base Management Fee ($MM) 639$ 716$ 802$ 898$ 1,005$ 1,126$ Incentive Fee ($MM) 511$ 573$ 641$ 718$ 804$ 901$

Net Income ($MM) 607 680 762 853 956 1,070 Shares Outstanding (MM) 505 530 557 585 614 645

EPS 1.20$ 1.28$ 1.37$ 1.46$ 1.56$ 1.66$ Dividend Per Share 1.08$ 1.15$ 1.23$ 1.31$ 1.40$ 1.49$

AUM Growth 76%Earnings Growth 38%Cumulative Dividends 7.68$ Cumulative Dividend Yield 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

OZM 5 Year Opportunity

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OZM Analysis

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