Sunday, March 26, 2023
HomeValue InvestingClark Avenue Worth: Sculptor Capital Administration: Boardroom Struggle, Low-cost Inventory

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

Sculptor Capital Administration (SCU) (~$500MM market cap) might be extra acquainted to most by their outdated title, Och-Ziff (OZM was the outdated ticker) or OZ Administration, however the storied hedge fund supervisor (one of many first various managers to publicly record pre-GFC) has run into powerful instances lately.  There was a bribery scandal within the mid-2010s that noticed the agency pay over $400MM in fines and in newer 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 belongings beneath administration, roughly half of which is in CLOs which have decrease administration charges, with the remainder in a mixture of their flagship hedge fund, actual property and different methods.  The publicly traded entity is a holding firm that owns partnership items within the working partnership (see the beneath diagram) which creates confusion across the share depend 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 haven’t any financial curiosity within the publicly traded holding firm, however are supposed to match the financial curiosity within the working partnership (in case you squint, its one share one vote), in case 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 big proprietor of the enterprise, which makes the present scenario awkward and definitely would not assist capital elevating efforts.  Och would not need Levin operating what he views has his firm, and Levin would 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 may be open to a strategic transaction that will 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 provided that exterior analysts have beforehand recognized the Firm’s administration points and concluded that, at its present buying and selling value, the Firm could also be value lower than the sum of its components.

Shortly after, Sculptor’s board responded that they are at all times open to 3rd social gathering presents.  The backwards and forwards went on from there, on 11/18 the board fashioned 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 value?  The financials are fairly complicated right here, there’s loads of working leverage within the enterprise, excessive fastened prices within the type of massive minimal bonuses, the enterprise is not one you’d contemplate being run for the shareholders first.  Final yr was a troublesome 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 usually take into consideration this in 2 buckets. First bucket, administration charges much less fastened bills or, stated in another way, earnings with out the impression of incentive earnings and the variable bonus expense in opposition to that incentive earnings. And the second is inclusive of that incentive earnings and that variable bonus expense in opposition to it.

So within the first bucket, we have a look at it as administration charges much less fastened expense, and this went from a meaningfully damaging 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 fastened bills. And the expansion within the administration charges comes from the movement 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 fastened bills.

Different managers are usually valued on base administration charges, incentive charges are sometimes lumpy and shared closely with the funding staff.  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 various managers commerce for a high-teens a number of of administration charge earnings, however we’ll low cost SCU right here to 10x to account for the hair and previous fame.  Additionally a third-party may be frightened that belongings would flee with out Levin within the CEO/CIO seat.

Sculptor’s steadiness sheet is in pretty fine 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 belongings.  Placing all of it collectively, I get one thing round $15/share for SCU versus a present value beneath $8.50.

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

Disclosure: I personal shares of SCU



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