S-1 1 ds1.htm FORM S-1 Form S-1
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As filed with the Securities and Exchange Commission on July 2, 2007

Registration No. 333-            

 


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


FORM S-1

 


REGISTRATION STATEMENT

UNDER THE SECURITIES ACT OF 1933

 


OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC

(Exact Name of Registrant as Specified in Its Charter)

 


 

Delaware   6282  
(State of Incorporation)   (Primary Standard Industrial Classification Code Number)  

(I.R.S. Employer

Identification Number)

9 West 57th Street

New York, New York 10019

(212) 790-0041

(Address, Including Zip Code, and Telephone Number,

Including Area Code, of Registrant’s Principal Executive Offices)

 


Jeffrey C. Blockinger

Chief Legal Officer

Och-Ziff Capital Management Group LLC

9 West 57th Street

New York, New York 10019

(212) 790-0041

(Name, Address, Including Zip Code, and Telephone Number,

Including Area Code, of Agent For Service)

 


Copies to:

 

Matthew J. Mallow

Jennifer A. Bensch

Skadden, Arps, Slate, Meagher & Flom LLP

Four Times Square

New York, New York 10036

(212) 735-3000

  

Jay Clayton

Glen T. Schleyer

Sullivan & Cromwell LLP

125 Broad Street

New York, New York 10004

(212) 558-4000

 


Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box:  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:  ¨

 


CALCULATION OF REGISTRATION FEE

 

 
Title of Each Class of Securities to be Registered  

Proposed Maximum

Aggregate Offering Price(1)(2)

 

Amount of

Registration Fee(1)

Class A shares

  $2,000,000,000   $61,400
 
(1) Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended.
(2) Includes the offering price of Class A shares that may be purchased by the underwriters upon the exercise of their over-allotment option.

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), shall determine.

 



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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion. Dated July 2, 2007

PROSPECTUS

Class A Shares

Representing Class A Limited Liability Company Interests

LOGO

 


This is the initial public offering of our Class A shares representing Class A limited liability company interests. We intend to use all of the net proceeds from this offering to acquire interests in our business from our existing owners, including members of our senior management. Our existing partners will reinvest all of their after-tax proceeds into certain of our funds.

Prior to this offering, there has been no public market for our Class A shares. It is currently estimated that the initial public offering price per Class A share will be between $              and $            . We intend to apply to list our Class A shares on the New York Stock Exchange under the symbol “OZM”.

Following this offering, our existing partners will hold all of our Class B shares, representing Class B limited liability company interests. The Class B shares will represent approximately         % of the total combined voting power of our company. Our existing partners will grant to the members of the Class B shareholder committee, which initially consists solely of our founder, Daniel Och, an irrevocable proxy to vote all of the Class B shares as such members shall determine, which proxy will terminate upon the later of Mr. Och’s withdrawal, death or disability or such time as our partners hold less than 40% of the total combined voting power of our company. In addition, the Class B shareholder committee will have approval rights with respect to certain actions of our board of directors so long as our partners continue to hold at least 40% of the total combined voting power of our company and will have the right to designate initially a majority of the nominees to our board of directors. As a result, Mr. Och will control all matters requiring shareholder approval as well as these additional approval and designation rights.

 


See “ Risk Factors” beginning on page 27 to read about factors you should consider before buying our Class A shares.

 


Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 


 

    

Per Class A

Share

   Total

Initial public offering price

   $      $  

Underwriting discount

   $      $  

Proceeds to us (before expenses)

   $      $  

To the extent that the underwriters sell more than          Class A shares, the underwriters have the option to purchase up to an additional          Class A shares from us at the initial public offering price less the underwriting discount.

The underwriters expect to deliver the Class A shares against payment in New York, New York on                     , 2007.

 

Goldman, Sachs & Co.

Lehman Brothers

 


Prospectus dated                      , 2007.


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This is the initial public offering of Class A shares representing limited liability company interests of Och-Ziff Capital Management Group LLC, a Delaware limited liability company that will be the holding company for the public’s ownership in the Och-Ziff Operating Group (defined below). Except where the context requires otherwise, in this prospectus:

 

  Ÿ  

“Assets under management” or “AUM” refers to the assets we manage. Our assets under management equal the sum of the net asset values, or “NAV,” of our private investment funds and our managed accounts. Our calculation of AUM may differ from the calculations of other asset managers and, as a result, this measure may not be comparable to similar measures presented by other asset managers. Our definition of AUM is not based on any definition of assets under management that is set forth in the agreements governing the investment funds that we manage. Assets under management presented in this prospectus include AUM relating to investments by us, our partners and our employees in our funds and deferred balances payable by our funds to the Och-Ziff Operating Group, as to which we charge no management fees and do not receive incentive income. As of April 30, 2007, our AUM relating to these investments and deferred balances was approximately $1.8 billion, or 6.8%, of our AUM. We expect the percentage of our assets under management related to these investments to increase following this offering as our existing partners will invest all of the after-tax proceeds received by them in connection with this offering into certain of our funds. See “Use of Proceeds”.

 

  Ÿ  

“Class B shareholder committee” refers to a committee of holders of our Class B shares, which initially shall consist solely of our founder, Daniel Och, which shall have the rights and authority with respect to voting, approval, board nomination and other rights as delegated to it by the Class B shareholders as set forth under “Certain Relationships and Related Party Transactions—Shareholders’ Agreement—Class B Shareholder Committee; Proxy and Approval Rights,” “—Board Representation” and “Description of Shares—Och-Ziff Capital Management Group LLC Limited Liability Company Agreement—Relationship with Och-Ziff Operating Group Entities”. Upon Mr. Och’s withdrawal, death or disability, the Class B shareholder committee will consist of the remaining members of the Partner Management Committee or a partner selected by the Partner Management Committee to replace Mr. Och as the sole member of the Class B shareholder committee.

 

  Ÿ  

“existing owners” refer, collectively, to our founder, Daniel Och, our 17 other existing partners and the Ziffs, who together own 100% of the interests in our business prior to this offering. The Ziffs’ residual equity interest in our business upon consummation of this offering will be economically identical to our existing partners’ residual equity interests. The Ziffs will not hold any of our Class B shares.

 

  Ÿ  

“existing partners” or “partners” refer to our existing owners other than the Ziffs.

 

  Ÿ  

“fund investors” or “investors in our funds” refer to the shareholders and limited partners of the Och-Ziff funds.

 

  Ÿ  

“Och-Ziff,” “our company,” “we,” “us” or “our” refer (1) prior to the consummation of this offering and related reorganization described under “Our Structure,” to the Och-Ziff Operating Group entities and their respective subsidiaries and the interests of our existing owners in our affiliated real estate business and (2) after the consummation of this offering and the related formation transactions, to Och-Ziff Capital Management Group LLC and its consolidated subsidiaries, including the Och-Ziff Operating Group (which will acquire our existing owners’ interests in the real estate business). References in this prospectus to the ownership of our existing owners include the ownership of current and future personal planning vehicles of these owners who are individuals. Completion of the reorganization will occur prior to this offering.

 

  Ÿ  

“Och-Ziff Compensation Committee” refers to the compensation committee of the board of directors of Och-Ziff Capital Management Group LLC, which shall be comprised of three

 

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independent members of our board of directors and shall have the rights and authority with respect to compensation matters relating to our executive officers and our compensation policies generally as delegated to it by our board of directors as set forth under “Management—Committees of the Board of Directors—Compensation Committee”.

 

  Ÿ  

“Och-Ziff Corp” refers to Och-Ziff Holding Corporation, a Delaware corporation, a wholly owned subsidiary of Och-Ziff and the sole general partner of OZ Management and OZ Advisors I.

 

  Ÿ  

“Och-Ziff funds” or “our funds” refer to the private investment funds and managed accounts that are managed by the Och-Ziff Operating Group.

 

  Ÿ  

“Och-Ziff Holding” refers to Och-Ziff Holding LLC, a Delaware limited liability company, a wholly owned subsidiary of Och-Ziff and the sole general partner of OZ Advisors II.

 

  Ÿ  

“Och-Ziff Operating Group” refers to OZ Management, OZ Advisors I and OZ Advisors II, which are owned and operated by our existing owners prior to this offering. Upon consummation of this offering, Och-Ziff Holding will be the sole general partner of OZ Advisors II and Och-Ziff Corp will be the sole general partner of OZ Management and OZ Advisors I.

 

  Ÿ  

“operating agreement” refers to the Amended and Restated Limited Liability Company Agreement of Och-Ziff Capital Management Group LLC that will be in effect upon consummation of this offering.

 

  Ÿ  

“operating group limited partnership agreements” refer, collectively, to the limited partnership agreement of each of OZ Management, OZ Advisors I and OZ Advisors II that will be in effect upon consummation of this offering, each of which will be substantially similar in form.

 

  Ÿ  

“OZ Advisors I” refers to OZ Advisors LP, a Delaware limited partnership and one of the Och-Ziff Operating Group entities.

 

  Ÿ  

“OZ Advisors II” refers to OZ Advisors II LP, a Delaware limited partnership and one of the Och-Ziff Operating Group entities.

 

  Ÿ  

“OZ Management” refers to OZ Management LP, a Delaware limited partnership and one of the Och-Ziff Operating Group entities.

 

  Ÿ  

“Partner Management Committee” refers to a committee of six partners of each Och-Ziff Operating Group entity, which initially shall consist of Messrs. Och, Windreich, Frank, Cohen, Varga and Brown, and shall have the authority to determine discretionary income allocations to our partners in respect of their Och-Ziff Operating Group Class C operating group units, to reconstitute the Class B shareholder committee and to approve transfers of interests in the Och-Ziff Operating Group entities, in each case as delegated to it by the partners of each Och-Ziff Operating Group entity as set forth under “Certain Relationships and Related Party Transactions—Limited Partnership Agreements of Och-Ziff Operating Group Entities—Partner Management Committee”.

 

  Ÿ  

“Partner Performance Committee” refers to a committee of five partners of each Och-Ziff Operating Group entity, which initially shall consist of Messrs. Och, Windreich, Frank, Cohen and Varga, and shall have the authority to make determinations as to partner non-performance, as delegated to it by the partners of each Och-Ziff Operating Group entity as set forth under “Certain Relationships and Related Party Transactions—Limited Partnership Agreements of Och-Ziff Operating Group Entities—Partner Performance Committee”.

 

  Ÿ  

“Ziffs” refer to Ziff Brothers Investments, L.L.C. and certain of its affiliates and control persons, which, together with Mr. Och, founded our business in 1994.

 


 

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Unless indicated otherwise, the information included in this prospectus assumes no exercise by the underwriters of their option to purchase up to an additional              Class A shares from us and that the Class A shares to be sold in this offering are sold at $              per Class A share, which is the midpoint of the price range indicated on the front cover of this prospectus.

In addition, except where the context requires otherwise, references in this prospectus to the percentage ownership of interests in the Och-Ziff Operating Group entities or similar references refer to the ownership of the residual equity interests in each such entity and not interests pursuant to which the Partner Management Committee in conjunction with the Och-Ziff Compensation Committee may from time to time determine to make discretionary income allocations to our existing or future partners.

This prospectus includes certain information regarding the historical performance of our funds. In considering the performance information relating to our funds contained herein, prospective Class A shareholders should bear in mind that the performance of our funds is not indicative of the possible performance of our Class A shares and is also not necessarily indicative of the future results of such funds, even if investments were in fact liquidated on the dates indicated, and there can be no assurance that these funds will continue to achieve, or that future funds will achieve, comparable results.

 

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PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our Class A shares. You should read this entire prospectus carefully, especially the risks of investing in our Class A shares discussed under “Risk Factors” beginning on page 27, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included elsewhere in this prospectus before making an investment decision.

Overview

We are a leading international, institutional alternative asset management firm and one of the largest alternative asset managers in the world, with approximately $26.8 billion of assets under management for over 700 fund investors as of April 30, 2007. We have a strong track record spanning over 13 years, which places us among the longest standing alternative asset managers globally.

We were founded in 1994 by Daniel Och, together with the Ziffs, with the goal of building a world class investment management business. Prior to founding our company, Mr. Och spent over 11 years at Goldman, Sachs & Co. Mr. Och instilled the team-based culture he experienced at Goldman Sachs into our firm, and this approach has helped us become a leader in the alternative asset management industry. Today, we have over 300 personnel, with over 125 investment professionals, including 18 partners, located in our New York headquarters and offices in London, Hong Kong, Tokyo and Bangalore. We have been a leader in international expansion in our industry and expect to further expand by opening an office in Beijing later this year.

We seek to deliver consistent positive, risk-adjusted returns throughout market cycles, with a focus on risk management and capital preservation. Our diversified, multi-strategy approach combines global investment strategies, including merger arbitrage, convertible arbitrage, equity restructuring, credit and distressed credit investments, private equity and real estate. We base our investment decisions on detailed, research-based, bottom-up analysis, and our investment philosophy focuses on opportunities for long-term value. Our investment processes are designed to incorporate risk management into every investment decision: our portfolio managers meet with analysts daily to review the risks related to their positions and the inherent risks associated with these positions, and we have a risk management committee that conducts regular oversight of portfolio risk. Risk management has been a core foundation of our business since inception and remains a critical part of our investment process today.

We manage and operate our business with a global perspective, looking to take advantage of investment opportunities wherever they arise. We have been among the pioneers in building out a global alternative investment platform, enabling our teams in the United States, Europe and Asia to share ideas and analysis across geographic regions and investment strategies.

We believe our deeply embedded, team-based culture differentiates us from our competitors. We currently have 18 partners and 27 managing directors, all of whom derive virtually all of their income payments from participation in the profits of our entire business. Our compensation system helps minimize the potential for asymmetric risk profiles between fund investors and our partners and employees and fosters a strong culture of internal cooperation and sharing of ideas. Additionally, all of our professional employees have the opportunity to eventually become managing directors and partners, providing a compelling incentive and retention mechanism. We have historically experienced very little employee turnover, and believe that, as a result of this culture, we have been particularly successful in attracting and retaining some of the leading investment and business talent in the industry.

 

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The long-term interests of our fund investors have always been, and will always be, of paramount importance and have driven, and will continue to drive, our growth strategy. This growth has been based on building and expanding investment platforms and geographic capabilities to enable us to provide the best possible investment services to our fund investors. This philosophy is consistent with our principal focus on attracting and retaining the best investment talent in the world. Our ability to offer growth and internal promotion opportunities to our investment professionals is an important component of our success.

Our assets under management have grown from approximately $5.8 billion as of December 31, 2002 to approximately $26.8 billion as of April 30, 2007, representing a 42% compound annual growth rate. We have continued to expand internationally, and today invest over 50% of our AUM in foreign markets. We take a measured approach to growth, accepting new investor capital commensurate with investment opportunities and our goal of delivering positive, risk-adjusted returns. We believe that our strong investment performance, disciplined risk management and the ongoing expansion of our international platform and products will provide the basis for continuing growth in the future.

Our Total Historical AUM

(dollars in billions)

LOGO

We believe in aligning our interests with those of our fund investors. Assets under management presented in this prospectus include AUM relating to investments by us, our partners and our employees in our funds and deferred balances payable by our funds to the Och-Ziff Operating Group, as to which we charge no management fees and do not receive incentive income. As of April 30, 2007, our AUM relating to these investments and deferred balances was approximately $1.8 billion, or 6.7%, of our AUM. One of the principal purposes of this offering is to further increase the investment of our existing partners in our funds which will further align the interests of our existing partners and our fund investors.

 

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Why We Are Going Public

 

  Ÿ  

To enable us to implement our growth strategy and continue to attract and retain the finest investment management talent in the world.

 

  Ÿ  

To continue to develop new investment strategies as we identify strategic opportunities around the world.

 

  Ÿ  

To offer existing and prospective partners and employees direct participation in our success, which will align the interests of our partners and employees with those of our investors.

 

  Ÿ  

Each of our existing partners will invest 100% of the after-tax proceeds received by him in connection with this offering in the investment funds we manage, including funds we may offer in the future. We believe this will assist us in building a track record and ultimately raising additional capital for our funds.

Industry Overview

The asset management business involves managing investments on behalf of third parties in exchange for contracted fees and other income. The industry manages trillions of dollars of assets, and can be broadly divided into two categories: traditional asset management and alternative asset management.

Traditional Asset Management

Traditional asset management, in general, involves managing portfolios of actively traded equity, fixed income and/or derivative securities. The investment objectives of such portfolios may include total return, capital appreciation, current income and/or replicating the performance of a specific index. Such portfolios may include investment companies registered under the Investment Company Act of 1940, or the “1940 Act,” (such as mutual funds, closed-end funds or exchange-traded funds) or separate accounts managed on behalf of individuals or institutions. Managers of such portfolios are compensated, in general, on a monthly or quarterly basis, at a contracted fee based on the assets under management, generally without regard to performance of the investments held in the portfolio. Managers of such portfolios, in the United States, are typically registered with the U.S. Securities and Exchange Commission, or the “SEC,” under the Investment Advisers Act of 1940, or the “Advisers Act”.

Alternative Asset Management

Alternative asset management, in general, involves a variety of investment strategies where the common element is the manager’s goal of delivering, within certain risk parameters, investment performance that is typically measured on an absolute return basis, meaning that performance is measured not by how well a fund performs relative to a benchmark index, but by how well the fund performs in absolute terms. Alternative asset managers strive to produce investment returns that have a lower correlation to the broader market than do traditional asset management strategies. Alternative asset managers typically earn management fees based on the value of the investments they manage and earn incentive income based on the performance of such investments. Alternative investment funds are typically exempt from registration with regulatory authorities. Advisers of such portfolios in the United States may or may not be registered with the SEC under the Advisers Act. Investment vehicles employing alternative investment strategies are commonly referred to as hedge funds, among other things.

Hedge Funds

The term “hedge funds” generally refers to privately held and unregistered collective investment vehicles. Because they are not subject to the investment limitations imposed by the 1940 Act, hedge

 

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funds differ from traditional investment vehicles, such as mutual funds, by the strategies they employ and the asset classes in which they invest. Asset classes in which hedge funds may invest are very broad and include liquid and illiquid securities, derivative instruments, asset-backed securities and a variety of other non-traditional assets, such as distressed securities and infrastructure investments, among others.

The increasing demand for hedge fund products by institutional investors is one of the main drivers of the hedge fund industry’s growth. According to McKinsey & Company, institutional investors accounted for approximately 40% to 50% of all new flows into hedge funds in 2006. Higher institutional demand is driven by several factors, including the pursuit of higher returns compared to those generated by traditional equity and fixed income strategies, the desire to diversify investment portfolios by investing in assets with low correlation to traditional asset classes, and an increased level of comfort with hedge fund investments as the industry continues to mature.

Historical Hedge Fund AUM and Net Asset Flows

(dollars in billions)

LOGO

Source: HFR Industry Reports © HFR Inc. 2007

Despite the rapid expansion in institutional inflows, alternative investment strategies still account for a relatively small portion of all institutional assets, signifying potential opportunity for continued growth. The increased role of institutional investors has resulted in a greater focus on risk management and investment operations throughout the industry.

Our Competitive Strengths

We believe our history of success is due to our competitive strengths in the following areas:

Leading Institutional Alternative Asset Management Firm.    We are one of the leading alternative asset managers in the world and have become a widely respected brand name in the industry. Our success and reputation have enabled us to attract and retain highly talented investment professionals around the globe. We believe that the strength and breadth of our franchise, supported by our people, investment approach and track record of success, provide a distinct advantage for raising capital, attracting and retaining talent, generating investment opportunities and maximizing long-term value for our shareholders.

 

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Diversified, Global Alternative Investment Platform.    During our 13-year history, we have grown by launching new funds that complement our existing strategies and capitalizing on opportunities to deploy our financial and intellectual capital. We have invested broadly in multiple geographic markets to enhance our access to global opportunities, expanding from our headquarters in New York to offices in London, Tokyo, Hong Kong and Bangalore, and we expect to open an office in Beijing later this year. We have also launched new funds that complement our existing strategies. We believe that there is significant potential for us to continue to develop our investment strategies in additional markets and that our ability to identify and quickly respond to opportunities to enter new growth areas is a key competitive advantage. A principal purpose of this offering is to establish and grow these investment platforms.

Our Culture.    Our team-based culture is deeply embedded and emphasizes the success of our company as a whole, enforced by our company-wide compensation structure. Compensation for managing directors and discretionary income allocations to partners are based primarily on total firm profitability, and no individual team or professional receives payouts tied solely to the performance of their specific strategies or investments. We also seek to provide our investment professionals with meaningful career opportunities and responsibility within our company. We believe this unique culture is a key differentiator of our company and has helped us attract and retain highly talented, results-driven people.

Experienced Global Investment Team.    We have a team of over 125 investment professionals, led by Daniel Och, David Windreich, Michael Cohen, Zoltan Varga and Harold Kelly, each of whom has been with our company for at least nine years. Our investment team, working from our offices in areas around the world, helps us to quickly identify new and diverse trading strategies and investment opportunities on a global basis. Building on their many years of industry experience, the team provides a deep knowledge of the global capital markets and has developed long-term relationships with financial leaders and businesses in the asset management industry which are critical to the success of our company.

Research-Driven Investment Process.    Over our 13-year history, we have developed and refined a rigorous, research-driven, bottom-up investment process based on extensive qualitative and quantitative analysis. We generally make investments where our analytical processes lead us to believe we have expertise and a competitive advantage, and then only in positions for which we believe the related risks are reasonable and manageable.

Record of Positive, Risk-Adjusted Returns.    We believe that our investment professionals have an exceptional record of generating positive, risk-adjusted returns, consistent with our funds’ investment objectives. We believe that our investment track record across a broad and expanding range of alternative asset classes and through varying economic conditions and market cycles is a key driver of our success.

Our Funds’ Low Correlation with the Broader Capital Markets.    With our investment strategies, we seek to generate positive returns with limited market correlation. Although many hedge funds claim to focus on delivering absolute returns, we believe that our ability to produce consistent, positive, risk-adjusted returns throughout market cycles differentiates us from our competitors.

 

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The following table sets forth the performance, volatility, Sharpe Ratio and correlation to the S&P 500 Index of our flagship global multi-strategy fund, OZ Master Fund, Ltd. Performance for OZ Master Fund, Ltd. is provided for illustrative purposes as it includes every strategy and geography in which our funds invest and constitutes approximately 65% of our AUM. Our other funds implement geographical or strategy focused investment programs. The performance metrics for our other funds vary from those of OZ Master Fund, Ltd., and such variance may be material.

In considering the performance information contained in this prospectus, prospective Class A shareholders should bear in mind that the performance reflected in the following table is not indicative of the possible performance of our Class A shares and is also not necessarily indicative of the future results of OZ Master Fund, Ltd. There can be no assurance that OZ Master Fund, Ltd. will continue to achieve, or that our other existing and future funds will achieve, comparable results.

 

     1 Year     3 Years     5 Years     Inception  

Net Annualized Return(1)

        

OZ Master Fund, Ltd.(2)

   15.7 %   12.2 %   12.2 %   17.0 %

S&P 500 Index(3)

   15.2     12.2     8.5     11.6  

Correlation of OZ Master Fund, Ltd. to S&P 500 Index(4)

   0.56     0.61     0.58     0.45  

Volatility

        

Master Fund Standard Deviation (Annualized)(5)

   1.6     2.8     4.2     5.0  

S&P 500 Index Standard Deviation (Annualized)(5)

   7.1     7.1     12.0     14.1  

Sharpe Ratio(6)

        

Master Fund

   6.42     3.01     2.22     2.53  

S&P 500 Index

   1.38     1.18     0.47     0.51  

(1) Net Annualized Return represents a composite of the average annual return of the funds that comprise OZ Master Fund, Ltd. Net Annualized Return is presented on a total return basis, net of all fees and expenses, and includes the reinvestment of all dividends and income.
(2) Performance from inception includes actual total return for the partial year beginning in April 1994. For the period from April 1994 through December 1997, performance represents the performance of Och-Ziff Capital Management, L.P., a Delaware limited partnership that was managed by Daniel Och following an investment strategy that is substantially similar to that of OZ Master Fund, Ltd. In addition, during this period performance was calculated by deducting management fees on a quarterly basis and incentive income on a monthly basis. Starting from January 1998, performance has been calculated by deducting both management fees and incentive income on a monthly basis from the composite returns of OZ Master Fund, Ltd.
(3) The returns of the S&P 500 Index are presented for the limited purpose of providing a comparison to the broader equity market. You should not assume that there is any material overlap between those securities in the portfolio of OZ Master Fund, Ltd. and those that comprise the S&P 500 Index. It is not possible to invest directly in the S&P 500 Index. Returns of the S&P 500 Index have not been reduced by fees and expenses associated with investing in securities and includes the reinvestment of dividends. The S&P 500 Index is an equity index owned and maintained by Standard & Poor’s, a division of McGraw-Hill, whose value is calculated as the free float-weighted average of the share prices of 500 large-cap corporations listed on the NYSE and Nasdaq.
(4) Correlation to the returns of the S&P 500 Index represents a statistical measure of the degree to which the return of one portfolio is correlated to the return of another. It is expressed as a factor that ranges from -1.0 (perfectly inversely correlated) to +1.0 (perfectly positively correlated).
(5) Standard deviation is a statistical measure of the degree to which an individual value in a distribution tends to vary from the mean of the distribution.
(6) Sharpe Ratio represents a measure of the excess return generated per unit of risk. The Sharpe Ratio is calculated by subtracting a “risk-free” rate from the composite returns, and dividing that amount by the standard deviation of the returns. The risk-free rate used is three-month LIBOR.

 

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See “Business—Investment performance” for additional information regarding these and other performance measures relating to our funds and limitations on such information.

Risk Management Expertise.    Risk management is a core element of our investment philosophy and process, and plays a crucial role in the strategy and operation of our business. Our risk management process is implemented at both the individual position and total portfolio levels and our Chief Executive Officer is responsible for managing overall portfolio risk.

Our Record of Growth.    We were established in 1994 with one professional located in an office in New York. Over time, we grew our company with the goal of creating an enduring business. Today, we have over 300 partners and other personnel, with over 125 investment professionals, including 18 partners, located in our New York headquarters and offices in London, Hong Kong, Tokyo and Bangalore. We expect to further expand by opening an office in Beijing later this year.

We have been among the pioneers in international expansion, and we believe that our international platform is among the strongest in our industry. At present, over 50% of our AUM is invested outside of the United States and this continued focus on international investing remains an important part of our growth strategy. We believe in maintaining a strong local presence in the foreign markets in which we invest. We opened our London office in 1998 and now have a staff of 60 (including four partners) in that location. In 2001, we opened our Asian headquarters in Hong Kong and, since then, have also opened offices in Tokyo and Bangalore, with a staff of 35 (including two partners) in Asia.

This growth has been systematic and methodical. We strive to build investment management platforms that allow us to more effectively invest our fund investors’ capital. We have developed several new investment platforms, including Latin America, Central Europe, South Africa, Indian real estate, energy, alternative energy and others. In order to provide additional capital to expand our business, each of our existing partners will invest all of his after-tax proceeds received in connection with this offering initially into our OZ Global Special Investments funds to grow these platforms, as described below.

Alignment of Interests.    One of our fundamental philosophies is to align our interests with those of our fund investors. As such, we encourage our partners and qualified employees to invest in our own products. Furthermore, each of our existing partners will invest all of his after-tax proceeds received in connection with this offering initially into our OZ Global Special Investments funds. These investments may be transferred to other Och-Ziff funds or new opportunities, but will otherwise not be redeemable by them for a period of five years following this offering, without the approval of the general partner or board of directors of such funds, as applicable. In addition, we intend to make equity awards to all of our employees at the time of this offering, which will vest over a four-year period. Our partners will not receive such awards. Equity in our business held by our partners will be subject to vesting, minimum retained ownership requirements and transfer restrictions as described under “Certain Relationships and Related Party Transactions—Shareholders’ Agreement” and “Certain Relationships and Related Party Transactions—Limited Partnership Agreements of Och-Ziff Operating Group Entities—Vesting; Forfeiture”.

Diverse Investor Base.    Our funds have a diverse and sophisticated investor base consisting of more than 700 investors across our funds, including many of the largest pension funds, university endowments and financial institutions. Many of our investors are invested in multiple Och-Ziff funds and have invested in our new funds at their launch dates. Our investor base is highly diversified, with no single investor accounting for more than 4% of our assets under management as of April 30, 2007.

 

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We believe that our deep investor relationships provide us with a competitive advantage as we seek to grow our existing businesses and launch new businesses.

Sources of Liquidity.    We believe the use of leverage in our funds’ investments has been conservative. For this reason, we have been able to secure access to pools of capital at fixed terms over several years. We may increase our use of leverage in the future in a manner that is consistent with our growth strategy and investment and risk management processes. Additionally, we have established long-term, committed debt facilities for our funds and have other commitments from lenders in place, which provide our funds with substantial additional liquidity and allow them to take advantage of opportunities within the marketplace. Most capital contributions from our fund investors are subject to lock-ups, and although our funds have not experienced any major outflows of capital, we closely measure and balance investors and financing with investment liquidity.

Our Growth Strategy

Our principal focus is to create long-term value for our fund investors, primarily by generating positive, risk-adjusted returns for our growing base of investors. We believe this philosophy will benefit our public shareholders over time. To do so, we continually seek to broaden our investment platform and capabilities by exploring and identifying new investment strategies and opportunities.

The specific components of our growth strategy are as follows:

Continue to Deliver Positive, Risk-Adjusted Returns.    Over our 13-year history, we have continually developed and refined our investment capabilities and processes, focusing on achieving positive, risk-adjusted returns for investors in our funds. We pride ourselves on our ability to recognize investment opportunities and dynamically deploy capital in a manner designed to maximize long-term value. This investment process includes a highly disciplined risk-management element, as we strongly believe our continued success and future growth depend upon our ability to understand, monitor and manage risks relating to each investment and our overall portfolio. We believe that our fundamental research-driven analysis, diversified and dynamic investment process, and highly disciplined risk management processes will provide opportunities for us to continue to deliver positive, risk-adjusted returns to our growing investor base.

Continue to Broaden Our Leading Global Alternative Investment Platform.    We have been a leader in establishing global investment capabilities in local markets outside of the United States, as evidenced by our activities in Europe and Asia. As capital markets develop and opportunities arise around the world, we expect to continue to open new offices and develop local teams to take advantage of those opportunities. We are currently pursuing such growth opportunities, including the expected opening of our Beijing office later this year.

We have also been a leader in expanding into new business lines. During the past three years, we have invested significant capital in private equity investments, developed a platform to invest in global energy (including alternative energy and renewable resources), developed a carbon trading platform, formed an emerging markets investment platform, and created a capital structure arbitrage business. Each of our 18 existing partners will invest 100% of his after-tax proceeds received in connection with this offering initially into our OZ Global Special Investments funds as investment capital to enable them to grow in several new areas.

Pursue New Investment Strategies.    Our investment teams are focused on identifying new, complementary investment strategies and opportunities across the globe. To maximize our flexibility, we manage our investment capital such that we are poised to pursue investment opportunities as they

 

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arise, whether due to specific corporate events or general market or economic changes or trends. We seek to diversify our investment platform and capabilities to better identify investment opportunities in existing and new geographies, strategies and asset classes.

Develop New Products.    We seek to develop and broaden our investment strategies and capabilities in areas around the world. Certain of these investment strategies have potential for separate product offerings of their own. We launch new products only after a thorough vetting process based upon these specific investment disciplines and geographies, providing investors in our funds with further opportunities to deploy capital and enabling us to diversify our product offerings and sources of revenue.

Continue to Broaden Our Investor Base.    Our investor base and related assets under management have grown significantly as we have continued to expand our capabilities and deliver positive, risk-adjusted returns. Many institutional investors have allocated significant amounts of capital to our multi-strategy and other product offerings, motivated, we believe, by our diversified, international risk-managed investment discipline and well-developed infrastructure and business management. We intend to continue to attract new capital, while striving to continue to deliver positive, risk-adjusted returns. To support these goals, our investment management, business management and operations teams work seamlessly together to refine and expand our investment capabilities and infrastructure.

Develop New Distribution Channels.    As we expand our investment platform, we believe our reputation and market position will attract new fund investors in developing global markets. Furthermore, new distribution channels for alternative asset management products are opening, and we believe we are well positioned to take advantage of these opportunities.

Our Structure

Prior to this offering, we will continue to conduct our business through the Och-Ziff Operating Group, which consists of separate entities owned and operated by our existing owners, and through our real estate business, which is a joint venture between entities owned and operated by our existing owners and unrelated third parties. Prior to the completion of this offering, we will reorganize our company through the transactions described under “Our Structure”. As a result, upon completion of this offering, Och-Ziff Capital Management Group LLC will be a holding company, and its primary assets will be its indirect ownership interest in the Och-Ziff Operating Group.

The Reorganization

Och-Ziff Operating Group.    Our business is presently conducted by the Och-Ziff Operating Group. Our existing owners will own the same proportionate interest in each Och-Ziff Operating Group entity and, immediately prior to this offering, such interests will be reclassified as described below.

With respect to each of our existing partners, such interests will be reclassified as both Class A operating group units, which will represent residual equity interests in our business, and Och-Ziff Operating Group Class C operating group units, which will represent interests in our business pursuant to which the Partner Management Committee in conjunction with the Och-Ziff Compensation Committee may from time to time determine to make discretionary income allocations to our partners, including new partners, in the future. Any such distributions would be made in accordance with our compensation philosophy of rewarding performance that increases long-term shareholder value and attracting and retaining the highest quality professionals. Any discretionary income allocations made pursuant to the Class C operating group units would reduce amounts available for distribution to us,

 

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our partners and the Ziffs in our respective capacities as owners of the residual equity interests in the Och-Ziff Operating Group after this offering. See “Certain Relationships and Related Party Transactions—Limited Partnership Agreements of Och-Ziff Operating Group Entities—Distributions”. The Ziffs’ existing interest in our business will be reclassified as Class A operating group units only, representing an approximately 10% interest in the residual equity of our business immediately prior to this offering. The Ziffs’ residual equity interest in our business will be economically identical to our existing partners’ residual equity interests. The Ziffs will not hold any of our Class B shares.

All of our interests in OZ Management and OZ Advisors I will be held through Och-Ziff Corp, which will be taxed as a corporation, and all of our interests in OZ Advisors II will be held through Och-Ziff Holding, which will be a disregarded entity for U.S. federal income tax purposes. Och-Ziff Corp will hold Class B operating group units in each of OZ Management and OZ Advisors I, and Och-Ziff Holding will hold Class B operating group units in OZ Advisors II. The Class B operating group units will be economically identical to the Class A operating group units held by our existing owners, representing residual equity interests in our business. The applicable intermediate holding company will be the sole general partner of the applicable Och-Ziff Operating Group entity and will, therefore, generally control the business and affairs of such entity.

One Class A operating group unit in each Och-Ziff Operating Group entity collectively represents one “Och-Ziff Operating Group A Unit” and one Class B operating group unit in each Och-Ziff Operating Group entity collectively represents one “Och-Ziff Operating Group B Unit”. In this prospectus, we refer to the Och-Ziff Operating Group A Units and the Och-Ziff Operating Group B Units, which together represent all of the residual equity interests in the Och-Ziff Operating Group entities, collectively as the “Och-Ziff Operating Group Units”.

As a result of the foregoing, the operating entities of the Och-Ziff Operating Group will continue to be entitled to all of the management fees and incentive income earned with respect to our funds. We have historically paid, and intend to continue to pay, a portion of our profits to our non-partner professionals as compensation in order to better align their interests with our own and with those of the investors in our funds. In addition, as noted above, the Partner Management Committee in conjunction with the Och-Ziff Compensation Committee may determine to allocate a portion of our net profits to our existing and future partners as discretionary income allocations on the Och-Ziff Operating Group Class C operating group units held by them. We may also determine to pay our partners additional annual cash amounts in the future and issue equity incentive awards to some or all of our partners and employees. Any such actions would reduce the income of the Och-Ziff Operating Group allocable to Och-Ziff Capital Management Group LLC.

Deconsolidation of Och-Ziff Funds.    In accordance with GAAP, certain of our funds have historically been consolidated into our combined financial statements notwithstanding the fact that we have only a minority interest in these funds. As a result, our historical combined financial statements reflect the assets, liabilities, revenues, expenses and cash flows of these funds on a gross basis rather than reflecting only the value of our investments in such funds. As of December 31, 2006, the assets of the Och-Ziff funds consolidated on our balance sheet were $36.0 billion, while the net asset value of our investments in these consolidated funds was approximately $414.5 million. All management fees and incentive income earned by us from these funds were eliminated as a result of the consolidation of these funds and are reflected on our historical financial statements as an increase in our allocated share of the net income from these funds.

Effective January 1, 2007, we no longer consolidate most of our domestic funds due to changes in the substantive rights afforded to the unaffiliated limited partners of those funds and, accordingly, our results for the first quarter of 2007 reflect the deconsolidation of those funds. We made similar changes to the rights of unaffiliated shareholders in our offshore funds that became effective on June 30, 2007,

 

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which resulted in the deconsolidation of most of those funds as of June 30, 2007. Accordingly, the fund investors’ interest in these funds, reflected as “non-controlling interests in consolidated subsidiaries” on our historical balance sheets and as “non-controlling interests in income of consolidated subsidiaries” on our historical income statements, will be eliminated. The deconsolidation will not have an effect on our equity or our net income, although individual line items in our consolidated financial statements will change significantly. For example, if we had deconsolidated the offshore funds as of and for the three months ended March 31, 2007, the following line items would have decreased by the following percentages as compared to our reported results for such period: total assets (91)%; total liabilities (80)%; total revenues (64)%; total expenses (57)%; other income (90)%; non-controlling interests in consolidated subsidiaries (99)% and non-controlling interests in income of consolidated subsidiaries (99)%. We believe that the changes to our financial reporting resulting from the deconsolidation of these funds will reflect our financial condition and results of operations in a manner that is consistent with how our management evaluates our business and the related risks and will provide shareholders with a better understanding of our business. Please refer to “Unaudited Pro Forma Financial Information” for a more detailed description of the deconsolidation of our funds and the effects on our financial statements as a result thereof.

Offering Transactions

Och-Ziff Capital Management Group LLC will issue             Class A shares in this offering (or             Class A shares if the underwriters exercise their option to purchase additional Class A shares in full). Och-Ziff will then contribute the proceeds from this offering to its intermediate holding companies, based on the relative value of those entities. The intermediate holding companies may enter into credit arrangements with one another with respect to a portion of such proceeds, depending upon the relative need and other business considerations. The intermediate holding companies will then contribute all of the proceeds received from us to the Och-Ziff Operating Group in exchange for newly issued Och-Ziff Operating Group B Units such that the intermediate holding companies will hold that number of Och-Ziff Operating Group B Units equal to the number of Class A shares issued in this offering. As a result, our existing owners’ ownership interests in the Och-Ziff Operating Group will be correspondingly reduced. Och-Ziff Operating Group B Units held by the intermediate holding companies will be economically identical in all respects to Och-Ziff Operating Group A Units that our existing owners will hold.

The Och-Ziff Operating Group will then use all of the offering proceeds (including any proceeds received from the underwriters’ exercise of their option to purchase additional Class A shares) to purchase Och-Ziff Operating Group A Units from our existing owners and to pay fees and expenses related to this offering and the other transactions discussed herein. As a result, we will not retain any of the net proceeds from this offering. Each of our existing partners will invest all of his after-tax proceeds received in connection with this offering initially into our OZ Global Special Investments funds. These investments may be transferred to other Och-Ziff funds or new opportunities, but will otherwise not be redeemable by them for a period of five years following this offering without the approval of the general partner or board of directors of such funds, as applicable.

All of the currently outstanding limited liability company interests of Och-Ziff Capital Management Group LLC are held by our existing partners. These interests will be reclassified as the Class B shares prior to this offering and will be adjusted so that our partners will hold              Class B shares (which may be reduced to              Class B shares if the underwriters exercise their option to purchase additional Class A shares) which will be equal to the number of Och-Ziff Operating Group A Units held by each such partner. The Ziffs will not hold any of our Class B shares. The Class B shares will have no economic rights but will entitle our existing partners to voting rights proportionate to their ownership

 

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of Och-Ziff Operating Group A Units. The Class B shares are not expected to be registered for public sale or listed on any securities exchange and will only be transferable by a holder in connection with a transfer of such holder’s Och-Ziff Operating Group A Units.

IPO Equity Awards.    At the time of this offering, we intend to grant to all of our employees (which do not include our partners)             Class A restricted share units in the aggregate under our 2007 equity incentive plan. These units will vest in equal installments over a four-year period beginning on the first anniversary of this offering. We will recognize compensation expense over the vesting period. If an employee leaves or is terminated for any reason, such employee will forfeit all unvested units. Upon vesting, we expect to issue registered Class A shares in respect of such vested units. As a result, such Class A shares will be freely transferable by non-affiliates upon issuance and by affiliates under Rule 144 under the Securities Act, or “Rule 144,” without regard to holding period limitations.

Voting and Approval Rights.    The Class B shares will have no economic rights but will entitle the holder to one vote per share. The Class A shares will also entitle the holder to one vote per share, and holders of Class A shares and Class B shares will vote together as a single class on all matters submitted to a vote of our shareholders. In addition, pursuant to a shareholders’ agreement to be entered into among us and the Class B shareholders, so long as our partners continue to own more than 40% of the total combined voting power of our company, the Class B shareholder committee will have approval rights with respect to certain actions of our board of directors. Moreover, under our operating agreement, the Class B shareholder committee will have certain consent rights with respect to structural and other changes involving our company. The Class B shareholder committee will also have the right initially to designate five of the seven nominees for election to our board of directors, with such number of nominees decreasing as our partners’ ownership interest in our business decreases. In addition, pursuant to the shareholders’ agreement, our partners will grant to the members of the Class B shareholder committee an irrevocable proxy to vote all of their Class B shares as such members may determine in their sole discretion until the later of Mr. Och’s withdrawal, death or disability or such time as our partners hold less than 40% of the total combined voting power of our company. As a result, the Class B shareholder committee initially will control the outcome of any matter submitted to a vote of our shareholders as well as these approval and board designation rights. The Class B shareholder committee will initially consist solely of Mr. Och. See “Certain Relationships and Related Party Transactions—Shareholders’ Agreement—Class B Shareholder Committee; Proxy and Approval Rights”, “—Board Representation” and “Description of Shares—Och-Ziff Capital Management Group LLC Limited Liability Company Agreement—Relationship with Och-Ziff Operating Group Entities”.

Exchange and Registration Rights.    Our existing owners will be entitled to exchange their Och-Ziff Operating Group A Units with the Och-Ziff Operating Group entities for our Class A shares on a one-for-one basis (or, at our option, a cash equivalent), subject to customary conversion rate adjustments for splits, unit distributions and reclassifications and subject to vesting, minimum retained ownership requirements and transfer restrictions. Upon any such exchange, the corresponding Class B shares held by an exchanging owner will be cancelled, and such exchanging owner may be entitled to certain payments under the tax receivable agreement described below. See “Certain Relationships and Related Party Transactions—Exchange Agreement” for additional information regarding our existing owners’ exchange rights. In addition, we intend to grant to our existing owners certain registration rights with respect to the Class A shares received by them as a result of any such exchange. The Och-Ziff Operating Group B Units held by the intermediate holding companies will not be exchangeable for Class A shares.

Tax Receivable Agreement.    The purchase by the Och-Ziff Operating Group of Och-Ziff Operating Group A Units from our existing owners with the net proceeds from this offering, as well as

 

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future taxable exchanges by our existing owners of Och-Ziff Operating Group A Units for our Class A shares on a one-for-one basis (or, at our option, a cash equivalent), is expected to result in an increase in the tax basis of the tangible and intangible assets of the Och-Ziff Operating Group that would not otherwise have been available. As a result, we expect that the amount of tax that we would otherwise be required to pay in the future will be reduced. Accordingly, Och-Ziff Corp and our other corporate taxpayer intermediate holding companies, if any, will enter into a tax receivable agreement with our existing owners whereby such intermediate holding companies will agree to pay to our existing owners 85% of the amount of tax savings actually realized. See “Certain Relationships and Related Party Transactions—Tax Receivable Agreement” for a more detailed description of our tax receivable agreement.

Vesting; Forfeiture; Transfer and Other Restrictions Applicable to Our Partners.    In connection with this offering, we will enter into the operating group limited partnership agreements and partner agreements with our existing partners. Pursuant to the operating group limited partnership agreements, the Och-Ziff Operating Group A Units received by our partners in the reorganization will vest, subject to their continued association with us, in equal installments on each anniversary date of this offering for five years, beginning on the first anniversary date of this offering. The unvested Och-Ziff Operating Group A Units of Mr. Och will be subject to forfeiture to the other partners if Mr. Och voluntarily terminates his association with us. The unvested Och-Ziff Operating Group A Units of any partner other than Mr. Och will be subject to forfeiture to the other partners if such partner voluntarily terminates his association with us or is required to withdraw for cause or if the Partner Performance Committee makes a non-performance determination with respect to such partner as described further under “Certain Relationships and Related Party Transactions—Limited Partnership Agreements of Och-Ziff Operating Group Entities—Vesting; Forfeiture”. We will recognize compensation expense over the vesting period. In addition, the operating group limited partnership agreements will provide for restrictions on transfers by our partners of their interests in our business, permitting transfers of their vested interests generally only as permitted by the Chairman of the Partner Management Committee and, on and after the fifth anniversary of this offering, as also permitted by the Partner Management Committee acting by majority vote. Any transfers will be further subject to a requirement that each partner, while he is associated with us, maintains a minimum ownership of 25% of the vested interests in our business received by him and without reduction for dispositions. Each of our partners will also be required to enter into a partner agreement with us that will place certain restrictions on him with respect to competing with us, soliciting our employees and fund investors and disclosing confidential information about our business. Our managing directors will be required to enter into similar agreements.

Restrictions on Transfer of the Ziffs’ Interest in Our Business.    The operating group limited partnership agreements will provide that the Och-Ziff Operating Group A Units received by the Ziffs in the reorganization will vest in equal installments on each anniversary date of this offering for five years, beginning on the first anniversary of this offering. The Ziffs’ Och-Ziff Operating Group A Units will not be subject to forfeiture. The Ziffs will not have any demand registration rights with respect to any Class A shares acquired by them upon exchange of their Och-Ziff Operating Group A Units but will have the same “piggyback” registration rights as our existing partners. In addition, following the first anniversary of this offering, the Ziffs will generally be entitled, in any given fiscal quarter, to exchange their Och-Ziff Operating Group A Units for Class A shares in an amount up to the lesser of (i) 3.3% of the total issued and outstanding Class A shares at the time of such disposition and (ii) 5% of the Class A shares that would have been held by them had they converted all of their Och-Ziff Operating Group A Units into Class A shares immediately prior to this offering. The Ziffs will generally be entitled to sell any such Class A shares received on any such exchange, subject to applicable law. The Ziffs will invest approximately 50% of the after-tax proceeds received by them in connection with this

 

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offering into our funds, which investments will be subject to the lock-up period applicable to the funds in which the Ziffs choose to invest. The Ziffs will also be permitted to contribute their Och-Ziff Operating Group A Units to charities, subject to the approval of the Chairman of the Partner Management Committee. See “Certain Relationships and Related Party Transactions—Limited Partnership Agreements of Och-Ziff Operating Group Entities—Restrictions on Transfer of the Ziffs’ Interest in Our Business”.

Certain Committees

Partner Management Committee.    The operating group limited partnership agreements will provide for the establishment of a “Partner Management Committee”. The Partner Management Committee will be a committee comprised of six partners, which shall consist initially of Messrs. Och, Windreich, Frank, Cohen, Varga and Brown, with Mr. Och serving as Chairman. The Partner Management Committee shall act by majority approval, with Mr. Och’s vote breaking any deadlock. Each member of the Partner Management Committee shall serve until such partner’s withdrawal, death, disability or, other than with respect to Mr. Och, removal by the Partner Performance Committee. Upon Mr. Och’s withdrawal, death or disability, the remaining members of the Partner Management Committee shall act by majority vote to either (1) replace Mr. Och with a partner to serve as Chairman, until such partner’s withdrawal, death, disability or removal by the other members of the Partner Management Committee or (2) reduce the size of the committee to the remaining members (in which event, there shall be no Chairman of the Partner Management Committee, and the remaining members will act by majority vote). Upon the withdrawal, death, disability or removal of any of the members of the Partner Management Committee other than the Chairman, the remaining members of the committee shall act by majority vote to fill such vacancy. Upon a reconstitution as provided in clause (1) above, the Partner Management Committee shall have the same rights of reconstitution in the event of the new partner’s withdrawal, death, disability or removal. The Partner Management Committee will have authority to make determinations with respect to distributions on the Och-Ziff Operating Group Class C operating group units, subject to the authority of the Och-Ziff Compensation Committee as described under “Management—Committees of the Board of Directors—Compensation Committee”. In addition, the Chairman of the Partner Management Committee (or, in the event there is no Chairman, the full committee) will have authority to approve transfers of Och-Ziff Operating Group units and the full committee will have authority to reconstitute the Class B shareholder committee as provided under “Certain Relationships and Related Party Transactions—Shareholders’ Agreement—Class B Shareholder Committee; Proxy and Approval Rights”.

Partner Performance Committee.    The operating group limited partnership agreements will provide for the establishment of a “Partner Performance Committee”. The Partner Performance Committee will be a committee comprised of five partners, which shall consist initially of Messrs. Och, Windreich, Frank, Cohen and Varga, with Mr. Och serving as Chairman. Each member of the Partner Performance Committee shall serve until such partner’s withdrawal, death, disability or, other than with respect to Mr. Och, removal by the other members of the Partner Performance Committee. Upon Mr. Och’s withdrawal, death or disability, the remaining members of the Partner Performance Committee shall act by majority vote to replace Mr. Och with a partner (who may or may not serve as Chairman) until such partner’s withdrawal, death, disability or removal by the other members of the Partner Performance Committee. Upon the withdrawal, death, disability or removal of any of the members of the Partner Performance Committee other than the Chairman, the remaining members of the committee shall act by majority vote to fill such vacancy. Upon a reconstitution as provided above, the Partner Performance Committee shall have the same rights of reconstitution in the event of the new partner’s withdrawal, death, disability or removal. The Partner Performance Committee will have authority to make partner non-performance determinations as provided under “Certain Relationships

 

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and Related Party Transactions—Limited Partnership Agreements of Och-Ziff Operating Group Entities—Vesting; Forfeiture”.

Class B Shareholder Committee.    The shareholders’ agreement will provide for the establishment of the “Class B shareholder committee”. The Class B shareholder committee initially will be a committee of one, consisting solely of Mr. Och until his withdrawal, death or disability. Upon Mr. Och’s withdrawal, death or disability, the Partner Management Committee shall act by majority vote to reconstitute the Class B shareholder committee either by (1) appointing a new partner to serve as the sole member of the Class B shareholder committee until such partner’s withdrawal, death, disability or removal by the Partner Management Committee, or (2) appointing the remaining members of the Partner Management Committee as the members of the Class B shareholder committee (in which event such members would act by majority vote in their capacity as the Class B shareholder committee). Upon a reconstitution as provided by clause (1) above, the Partner Management Committee shall have the same rights of reconstitution in the event of the new partner’s withdrawal, death, disability or removal. The Class B shareholder committee will have authority to vote all of the Class B shares, pursuant to a proxy, and will have certain approval rights over significant transactions as described under “Certain Relationships and Related Party Transactions—Shareholders’ Agreement—Class B Shareholder Committee; Proxy and Approval Rights,” in each case so long as our partners continue to hold at least 40% of the total combined voting power of our company. In addition, under our operating agreement, the Class B shareholder committee will have certain consent rights with respect to structural and other changes involving our company as described under “Description of Shares—Och-Ziff Capital Management Group LLC Limited Liability Company Agreement—Relationship with Och-Ziff Operating Group Entities”. The Class B shareholder committee will also have the right initially to designate five of the seven nominees for election to our board of directors, with such number of nominees decreasing as our partners’ ownership interest in our business decreases. See “Certain Relationships and Related Party Transactions—Shareholders’ Agreement—Board Representation”.

Effects of Transactions

As a result of our structure, we will be a holding company with our Class A shares widely held and publicly traded, but our existing owners will retain their economic interest in us in the form of direct interests in the Och-Ziff Operating Group. All of the businesses operated by the Och-Ziff Operating Group and, prior to this offering, our real estate business, and all of the interests in our business held by us or our existing owners prior to this offering, will be operated or held, as the case may be, by the Och-Ziff Operating Group following this offering.

 

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The diagram below(1) depicts our organizational structure immediately following the above-described transactions:

LOGO

 


(1) This diagram does not give effect to              Class A restricted share units to be granted under our 2007 equity incentive plan to all of our employees in connection with this offering or the issuance of any Class A shares upon exercise of the underwriters’ option to purchase additional Class A shares.
(2) Our existing partners will grant to the members of the Class B shareholder committee an irrevocable proxy to vote all of such shares. The Ziffs will not hold any of our Class B shares.
(3) Och-Ziff Operating Group A Units and Och-Ziff Operating Group B Units together represent all of the residual equity interests in the Och-Ziff Operating Group.
(4) Held solely by existing partners for potential future discretionary income allocations.

 

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Tax Consequences and Distributions

We believe that under existing law we will be treated, for U.S. federal income tax purposes, as a partnership and not as an association or a publicly traded partnership taxable as a corporation. Accordingly, holders of Class A shares will be required to report their allocable share of our income for U.S. federal income tax purposes, regardless of whether any cash or other distributions are paid to them. See “Material U.S. Federal Tax Considerations—Taxation of Our Company—Federal Income Tax Opinion Regarding Partnership Status”. Income will be allocable to holders of Class A shares as a result of dividends and interest from Och-Ziff Corp and Och-Ziff Holding’s income, which will be based on the operations of the Och-Ziff Operating Group.

We believe that the Och-Ziff Operating Group entities will also be treated as partnerships and not as corporations for U.S. federal income tax purposes. Accordingly, the direct holders of Och-Ziff Operating Group Units that are not taxed on a flow-through basis, including Och-Ziff Corp and our existing owners, will incur U.S. federal, state and local income taxes on their proportionate share of any net taxable income of the Och-Ziff Operating Group.

After this offering, we intend to cause the Och-Ziff Operating Group to make distributions to holders of Och-Ziff Operating Group Units in order to fund any distributions we may declare on the Class A shares. However any such distributions will be at the sole discretion of our board of directors. If the Och-Ziff Operating Group makes such distributions, the holders of Och-Ziff Operating Group Units will be entitled to receive distributions pro rata, based on their partnership interests. No similar distributions will be made on the corresponding Class B shares of Och-Ziff held by our partners. In addition, in accordance with the operating group limited partnership agreements, we will cause the applicable Och-Ziff Operating Group entities to distribute cash on a pro rata basis to direct holders of Och-Ziff Operating Group Units in an amount at least equal to the maximum tax liabilities arising from the ownership of such units, if any. Because the purpose of such tax distributions is to enable Och-Ziff Corp and the existing owners to satisfy their respective tax liabilities, no such distribution will necessarily be required to be distributed by our intermediate holding companies to us, and we may determine not to pay cash distributions on the Class A shares. The declaration and payment of distributions on the Class A shares will be at the sole discretion of our board of directors. A holder of Class A shares will be required to report its share of our taxable income even if the board of directors does not pay distributions. See “Risk Factors—Risk Related to Taxation—You may be subject to U.S. federal income tax on your share of our taxable income, regardless of whether you receive any cash dividends from us”.

Members of the United States Congress have introduced legislation that would, if enacted, preclude us from qualifying for treatment as a partnership for U.S. federal income tax purposes under the publicly traded partnership rules. If this or any similar legislation were to be enacted and to apply to us, Class A shareholders would be negatively impacted because we would incur a material increase in our tax liability, which could result in a reduction in the value of our Class A shares. See “Risk Factors—Risks Related to Taxation—Members of the United States Congress have introduced legislation that would, if enacted, preclude us from qualifying for treatment as a partnership for U.S. federal income tax purposes under the publicly traded partnership rules. It is unclear whether any such legislation will be enacted and, if enacted, how the legislation would apply to us. Our structure also is subject to potential judicial or administrative change and differing interpretations, possibly on a retroactive basis. We may determine not to proceed with this offering if our ability to qualify as a partnership for U.S. federal income tax purposes remains uncertain, or if any other legislative or executive branch actions occur which would materially affect our ability to move ahead with the offering”.

 

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Term Loan and Pre-Offering Distribution

We expect to enter into a new $750 million term loan prior to this offering. We presently intend to use the full amount of the proceeds to make a pro rata distribution to our existing owners prior to this offering. For a more detailed description of our new term loan, please refer to “Description of New Term Loan”.

Additional Information

Our principal executive offices are located at 9 West 57th Street, New York, New York 10019. The telephone number of our principal executive offices is (212) 790-0041.

 

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The Offering

 

Shares offered by us in this offering

   Class A shares:

Shares to be outstanding immediately after this offering

  

Class A shares:

Class B shares:

Shares to be held by our existing owners immediately after this offering

  

Class A shares: None

Class B shares:             (100% held by our partners)

Och-Ziff Operating Group Units to be held by us and our existing owners immediately after this offering

  


                    by us, or approximately         %

                    by our existing owners, or approximately         %

Voting

  

One vote per Class A share

 

One vote per Class B share

 

Holders of our Class A shares and Class B shares will vote together as a single class on all matters submitted to a vote of our shareholders. Following this offering, our existing partners will hold all of the Class B shares, representing         % of the total combined voting power of our outstanding Class A shares and Class B shares and will grant to the members of the Class B shareholder committee an irrevocable proxy to vote all of such Class B shares until the later of Mr. Och’s withdrawal, death or disability or such time as our partners hold less than 40% of the total combined voting power of our company. See “Certain Relationships and Related Party Transactions—Shareholders’ Agreement—Class B Shareholder

   Committee; Proxy and Approval Rights” and “Description of Shares”. The Ziffs will not hold any Class B shares and will not be entitled to any Class B voting rights.

Approval and board designation rights

   Our Class B shareholder committee will have approval rights with respect to certain actions of our board of directors so long as our partners and their permitted transferees continue to hold more than 40% of the total voting power of our outstanding shares. The Class B shareholder committee will also have the right to designate nominees for election to our board of directors, based on their ownership of our voting securities. Initially, the Class B shareholder committee will have the ability to designate five of the seven nominees for election to our board of directors. In addition, under our operating agreement, the Class B shareholder committee will have certain

 

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   consent rights with respect to structural and other changes involving our company. See “Certain Relationships and Related Party Transactions—Shareholders’ Agreement—Class B Shareholder Committee; Proxy and Approval Rights,” “—Board Representation” and “Description of Shares—Och-Ziff Capital Management Group LLC Limited Liability Company Agreement—Relationship with Och-Ziff Operating Group Entities”.

Use of proceeds

  

We estimate that the net proceeds from the sale of our Class A shares in this offering, after deducting offering expenses and the underwriting discounts, will be approximately $             billion (at an assumed initial public offering price of $             per Class A share, which is the midpoint of the price range set forth on the cover page of this prospectus).

 

We intend to contribute all of the proceeds from this offering to the Och-Ziff Operating Group, which in turn will apply those proceeds to purchase              Och-Ziff Operating Group A Units from our existing owners, including members of our senior management, and to pay fees and expenses related to the transactions as described under “Our Structure—The Transactions—Offering Transactions”. Accordingly, we will not retain any of the proceeds from this offering.

 

Each of our existing partners will invest all of his after-tax proceeds received in connection with this offering initially into our OZ Global Special

  

Investments funds. These investments may be transferred to other Och-Ziff funds or new opportunities, but will otherwise not be redeemable by them for a period of five years following this offering without the approval of the general partner or board of directors of such funds, as applicable. The Ziffs will invest approximately 50% of the after-tax proceeds received by them in connection with this offering into our funds, which investments will be subject to the lock-up period applicable to the funds in which the Ziffs choose to invest.

 

For further information, see “Use of Proceeds”.

Cash distribution policy    Historically, we have had a policy of distributing substantially all of our economic income to our existing partners. Our intention is to distribute to our Class A shareholders on a quarterly basis

 

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substantially all of Och-Ziff’s net after-tax share of our annual economic income in excess of amounts determined by us to be necessary or appropriate to provide for the conduct of our business, to compensate our employees, to make discretionary income allocations to our partners on the Och-Ziff Operating Group

Class C operating group units, to make appropriate investments in our business and our funds, to comply with applicable law, to service our new term loan and any of our other debt instruments or agreements or to provide for future distributions to our Class A shareholders for any one or more of the ensuing four quarters. We expect that our first quarterly distribution will be paid in the          quarter of 2007 in respect of the prior quarter. Incentive income has a significant impact on our economic income and these amounts are not determinable until completion of our fiscal year. We currently anticipate that quarterly distributions in respect of our first three fiscal quarters will be based on actual performance, but will not reflect any assumption as to incentive income that may or may not be recorded at year end. Accordingly, if our performance for a given year enables us to earn incentive income, the distributions made in respect of our first three fiscal quarters will be smaller than the distribution we make in respect of our fourth fiscal quarter.

 

The declaration and payment of any future distributions will be at the sole discretion of our board of directors, which may change our distribution policy at any time. Any payments made to our partners and compensatory payments made to our employees, including any discretionary income allocations on the Class C operating group units as determined by the Partner Management Committee in conjunction with the Och-Ziff Compensation Committee, will reduce amounts available for distribution to our Class A shareholders. Our ability to make such distributions may be limited by, among other things, contractual restrictions and legal, tax and regulatory restrictions.

 

We will be a holding company and, as such, our ability to pay distributions on our Class A shares will be subject to the ability of our subsidiaries to provide cash to us, which may be limited by, among other things, contractual restrictions and legal, tax and regulatory restrictions. See

 

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“Description of New Term Loan”. We will fund any such distribution by causing our subsidiaries to make corresponding distributions. More specifically, first, we will cause the Och-Ziff Operating Group to make a distribution to all of its unitholders (consisting of our existing owners and our intermediate holding companies) holding Och-Ziff Operating Group Units, whether or not vested, on a pro rata basis and, second, we will cause our intermediate holding companies to distribute the proceeds of such distributions to us in an amount sufficient to pay aggregate distributions declared by our board of directors on our Class A shares. No such distributions will be paid in respect of our Class B shares.

 

In addition, in accordance with the operating group limited partnership agreements, we will cause the applicable Och-Ziff Operating Group entities to distribute cash on a pro rata basis to direct holders of Och-Ziff Operating Group Units in an amount at least equal to the maximum tax liabilities arising from the direct ownership of such units, if any. Och-Ziff Operating Group will distribute to such unitholders, on a pro rata basis, tax distributions based upon the maximum income allocable to any such unitholder at the maximum combined U.S. federal, New York State and New York City tax rates. Holders of our Class A shares will not be entitled to these distributions.

 

See “Cash Distribution Policy” .

Owners’ exchange rights; tax receivable agreement

  

At any time and from time to time, subject to vesting, minimum retained ownership requirements and transfer restrictions, each of our existing owners will have the right to exchange each of its Och-Ziff Operating Group A Units with the Och-Ziff Operating Group entities for one of our Class A shares (or, at our option, a cash equivalent). To effect an exchange, an existing owner must simultaneously exchange one Och-Ziff Operating Group A Unit—being an equal limited partner interest in each Och-Ziff Operating Group entity—for one Class A share. The purchase by the Och-Ziff Operating Group of Och-Ziff Operating Group A Units from our existing owners with the net proceeds from this offering, as well as future taxable exchanges by our existing owners of Och-Ziff Operating Group

 

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   A Units for our Class A shares on a one-for-one basis (or, at our option, a cash equivalent), is expected to result in an increase in the tax basis of the tangible and intangible assets of the Och-Ziff Operating Group that would not otherwise have been available. As a result, we expect that the amount of tax that we would otherwise be required to pay in the future will be reduced. Accordingly, in connection with such purchases and exchanges, the existing owner will receive a right, under a tax receivable agreement, to receive 85% of the value of the applicable tax benefit in cash when Och-Ziff Corp, or our other corporate taxpayer intermediate holding companies that acquire Och-Ziff Operating Group A Units in connection with an exchange, if any, actually realizes certain tax savings. As an existing owner exchanges his Och-Ziff Operating Group A Units, our interest in the Och-Ziff Operating Group B Units will be correspondingly increased and the exchanging owner’s corresponding Class B shares will be cancelled. Och-Ziff Operating Group B Unit will not be exchangeable for our Class A shares.
Proposed New York Stock Exchange symbol    “OZM”
Risk factors    Please read the section entitled “Risk Factors” beginning on page 27 for a discussion of some of the factors you should carefully consider before deciding to invest in our Class A shares.

References in this section to the number of our Class A shares and Class B shares to be outstanding after this offering, and the percent of our voting rights held, do not reflect:

 

  Ÿ  

             Class A shares issuable upon exchange of                      Och-Ziff Operating Group A Units (or                     Class A shares if the underwriters exercise in full their option to purchase additional Class A shares) held by our existing owners;

 

  Ÿ  

             Class A shares issuable on exercise of the underwriters’ option to purchase additional Class A shares in full if they sell more than              Class A shares in this offering; or

 

  Ÿ  

interests that may be granted under our 2007 equity incentive plan, consisting of:

 

  Ÿ  

             Class A restricted share units that we expect to grant to all of our employees (which do not include our partners) at the time of this offering, which will vest, subject to their continued employment, in equal installments on each anniversary date of this offering for four years, beginning on the first anniversary date of this offering;

 

  Ÿ  

             Class A shares and Och-Ziff Operating Group units reserved for issuance under our 2007 equity incentive plan (see “Management—Equity Incentive Plan”).

 

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SUMMARY HISTORICAL COMBINED AND

UNAUDITED PRO FORMA FINANCIAL INFORMATION

Summary Historical Combined Financial Information

The following tables set forth certain summary financial information on a historical basis. The Och-Ziff Operating Group is considered our predecessor for accounting purposes, and its combined financial statements will be our historical financial statements following this offering. The summary historical combined financial information set forth below as of December 31, 2006 and 2005, and for the years ended December 31, 2006, 2005 and 2004, has been derived from our audited combined financial statements included elsewhere in this prospectus. The summary historical combined financial information set forth below as of December 31, 2004, 2003 and 2002, and for the years ended December 31, 2003 and 2002, has been derived from our unaudited accounting records prepared on a consistent basis with the financial statements described above.

The summary historical combined financial information set forth below as of March 31, 2007 and 2006, and for the three months ended March 31, 2007 and 2006, has been derived from our unaudited interim combined financial statements included elsewhere in this prospectus. The unaudited interim combined financial statements include all normal and recurring adjustments that are, in the opinion of management, necessary for a fair presentation of our financial position and results of operations for the periods presented. Effective January 1, 2004, the Och-Ziff Operating Group adopted FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities, an interpretation of ARB No. 51, which requires us to consolidate variable interest entities in which we were determined to be the primary beneficiary. As a result, amounts presented for 2002 and 2003 are not comparable to amounts presented in subsequent periods.

In addition, as of January 1, 2007, the Och-Ziff Operating Group no longer consolidates most of its domestic funds due to changes in the substantive rights afforded to the unaffiliated limited partners of those funds. Similar changes to the rights of unaffiliated shareholders in its offshore funds were made in June 2007 and resulted in the deconsolidation of most of the offshore funds as of June 30, 2007. As a result, the financial information presented for the three months ended March 31, 2007 is not comparable to the financial information presented for the three months ended March 31, 2006.

In addition, incentive income, which has a significant impact on our results of operations, is determined on an annual basis at the end of our fiscal year and is not reflected in our interim financial results, other than incentive income actually earned during a given interim period as a result of investor redemptions during the period. Accordingly, our interim results are not indicative of the results we expect for a full fiscal year.

Compensation and benefits for all periods presented does not include any payments to Daniel Och, which were accounted for as equity distributions, but includes compensation for all other partners. For periods following the completion of the Reorganization, payments to all of our existing owners in respect of their Och-Ziff Operating Group A Units will be treated as equity distributions. After completion of this offering, compensation expense will reflect the amortization of significant non-cash equity-based compensation expense relating to the vesting of the Och-Ziff Operating Group A Units to be issued to all existing partners, including Daniel Och, as well as the vesting of Class A restricted share units granted to all employees in connection with this offering. Accordingly, compensation and benefits expense reflected in our historical results is not indicative of future compensation and benefits expense.

 

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The information below should be read in conjunction with “Our Structure,” “Selected Combined Financial and Operating Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the combined financial statements and notes thereto included elsewhere in this prospectus.

 

    Summary Historical Financial Information  
   

Three Months

Ended March 31,

    Year Ended December 31,  
    2007     2006     2006     2005     2004     2003     2002  
    (dollars in thousands)  

Summary Operating Information

             

Revenues

             

Management fees, incentive income and other revenues

  $ 24,439     $ 3,953     $ 33,391     $ 22,456     $ 18,280     $ 233,053     $ 70,089  

Och-Ziff funds income

    259,927       194,801       972,442       489,352       267,646       133,911       148,362  
                                                       

Total Revenues

    284,366       198,754       1,005,833       511,808       285,926       366,964       218,451  
                                                       

Expenses

             

Compensation and benefits

    87,801       59,775       446,672       239,466       153,503       125,949       46,303  

Non-compensation expenses

    25,667       16,467       147,675       88,962       60,825       52,145       22,848  

Och-Ziff funds expenses

    150,060       130,192       495,621       418,705       199,782       138,824       115,279  
                                                       

Total Expenses

    263,528       206,434       1,089,968       747,133       414,110       316,918       184,430  
                                                       

Total Other Income

    1,030,167       882,832       3,290,175       1,640,983       1,167,756       423,822       (29,046 )
                                                       

Income Before Non-Controlling Interests in Income of Consolidated Subsidiaries and Income Taxes

    1,051,005       875,152       3,206,040       1,405,658       1,039,572       473,868       4,975  

Non-controlling interests in income of consolidated subsidiaries

    (962,177 )     (827,558 )     (2,594,706 )     (1,134,869 )     (836,007 )     (268,274 )     1 9,449  
                                                       

Income Before Income Taxes

    88,828       47,594       611,334       270,789       203,565       205,594       24,424  
                                                       

Income taxes

    3,640       1,684       23,327       9,898       9,785       7,655       3,175  
                                                       

Net Income

  $ 85,188     $ 45,910     $ 588,007     $ 260,891     $ 193,780     $ 197,939     $ 21,249  
                                                       

 

   

As of
March 31,

2007

  As of December 31,
      2006   2005   2004   2003   2002
    (dollars in thousands)

Summary Balance Sheet Information

           

Cash and cash equivalents

  $ 44,450   $ 23,590   $ 69,550   $ 27,800   $ 12,680   $ 20,824

Och-Ziff funds assets

  $ 22,305,683   $ 35,967,024   $ 24,184,369   $ 16,002,932   $ 1,592,526   $ 1,670,934

Total assets

  $ 22,768,010   $ 36,075,049   $ 24,305,342   $ 16,076,195   $ 2,139,652   $ 1,971,648

Och-Ziff funds liabilities

  $ 2,675,516   $ 14,260,142   $ 9,543,812   $ 5,264,619   $ 130,183   $ 402,769

Total liabilities

  $ 3,349,592   $ 15,050,088   $ 10,021,681   $ 5,608,569   $ 404,621   $ 546,078

Non-controlling interests in consolidated subsidiaries

  $ 18,160,034   $ 19,777,297   $ 13,544,966   $ 9,972,112   $ 1,372,853   $ 1,230,224

Total equity

  $ 1,258,384   $ 1,247,664   $ 738,695   $ 495,514   $ 362,178   $ 195,346

 

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Summary Unaudited Pro Forma Financial Information

The summary unaudited pro forma financial information presented below was derived from the application of pro forma adjustments to the combined financial statements of Och-Ziff Operating Group, the predecessor for accounting purposes of Och-Ziff Capital Management Group LLC, to give effect to the Pre-Offering Distribution and the Transactions (each as defined under “Our Structure”). The unaudited pro forma statements of operations have been prepared as if the Pre-Offering Distribution and the Transactions occurred on January 1, 2006. The unaudited pro forma balance sheet information has been prepared as if the Pre-Offering Distribution and the Transactions had occurred as of March 31, 2007. The summary unaudited pro forma financial information should be read in conjunction with “Unaudited Pro Forma Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our combined financial statements and the related notes included elsewhere in this prospectus.

The pro forma adjustments are based upon available information and methodologies that we believe are reasonable. The unaudited pro forma statements of operations information and unaudited pro forma balance sheet information are presented solely for illustrative and informational purposes and are not necessarily indicative of what our actual operations or financial position would have been had the Pre-Offering Distribution and the Transactions taken place on the dates indicated, or during the periods presented, nor does it purport to represent our results for any future period.

 

     Summary Unaudited Pro Forma
Financial Information
     Three Months
Ended March 31,
   Year Ended
December 31,
     2007    2006    2006
Summary Pro Forma Operating Information         

Revenues

        

Management fees, incentive income and other revenues

   $                  $                  $              

Och-Ziff funds income

        
                    

Total Revenues

        
                    

Expenses

        

Compensation and benefits

        

Non-Compensation expenses

        

Och-Ziff funds expenses

        
                    

Total Expenses

        
                    

Total Other Income

        
                    

Income Before Non-controlling Interests in Income of Consolidated Subsidiaries and Income Taxes

        
                    

Non-controlling interests in income of consolidated subsidiaries

        
                    

Income (Loss) Before Income Taxes

        
                    

Income taxes

        
                    

Net Income (Loss)

   $      $      $  
                    

Net Income (Loss) Per Share (Basic and Diluted)

   $      $      $  
                    

Weighted Average Class A Shares

        
                    

Summary Pro Forma Balance Sheet Information

   As of March 31,
2007
         

Cash and cash equivalents

   $                    

Investments in affiliated Och-Ziff funds

   $        

Och-Ziff funds assets

   $        

Total assets

   $        

Och-Ziff funds liabilities

   $        

Total liabilities

   $        

Non-controlling interests in consolidated subsidiaries

   $        

Total equity (deficit)

   $        

 

 

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RISK FACTORS

Investing in our Class A shares involves a high degree of risk. You should carefully consider the following risks as well as other information contained in this prospectus, including our combined financial statements and the notes to those statements, before investing in our Class A shares. The occurrence of any of the following risks could materially adversely affect our business, prospects, financial condition, results of operations and cash flow, in which case the trading price of our Class A shares could decline and you could lose all or part of your investment. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially adversely affect our business, prospects, financial condition, results of operations and cash flow.

Risks Related to Our Business

Difficult market conditions can materially adversely affect our business in many ways, including by reducing the value or performance of the investments made by our funds and by reducing the ability of our funds to raise or deploy capital, each of which could materially reduce our revenue and cash flow and materially adversely affect our financial condition.

The success of our business is highly dependent upon conditions in the global financial markets and economic conditions throughout the world that are outside our control and difficult to predict. Factors such as interest rates, availability of credit, inflation rates, economic uncertainty, changes in laws (including laws relating to taxation), trade barriers, commodity prices, currency exchange rates and controls, and national and international political circumstances (including wars, terrorist acts or security operations) can have a material negative impact on the value of our funds’ portfolio investments, which in turn would reduce our revenues and profitability.

Unpredictable or unstable market conditions may result in reduced opportunities to find suitable risk-adjusted investments to deploy capital and make it more difficult to exit and realize value from our existing investments, which could materially adversely affect our ability to raise new funds and sustain our growth. In addition, during such periods, financing and merger and acquisition activity may be greatly reduced, making it harder and more competitive for asset managers to find suitable event-driven opportunities. Also, during periods of adverse economic conditions or during a tightening of global credit markets, we may have difficulty obtaining funding for additional investments at attractive rates, which would further reduce our profitability.

Our revenue, net income and cash flow are all highly variable, and since we do not earn or record meaningful incentive income or incentive compensation expense on a quarterly basis, our quarterly results are not indicative of results for a completed fiscal year, which may increase the volatility of the price of our Class A shares.

Our revenue, net income and cash flow are all highly variable, primarily due to the fact that a substantial portion of our revenues is derived from incentive income from our funds, which is contingent on the funds’ annual performance. In addition, the investment return profiles of most of our funds are volatile. We may also experience fluctuations in our results from quarter to quarter due to a number of other factors, including changes in the values of our funds’ investments, changes in the amount of distributions, dividends or interest paid in respect of investments, changes in our operating expenses, the degree to which we encounter competition and general economic and market conditions. Such variability and unpredictability may lead to volatility in the trading price of our Class A shares and cause our results for a particular period not to be indicative of our performance in a future period or particularly meaningful as a basis of comparison against results for a prior period. It may be difficult for us to achieve steady growth in net income and cash flow on a quarterly basis, which could in turn lead to large adverse movements in the price of our Class A shares or increased volatility in our Class A share price generally.

 

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The timing and receipt of incentive income generated by our funds is uncertain and will contribute to the volatility of our results. Given this uncertainty, we do not record incentive income on our interim financial statements other than incentive income actually earned during a given interim period as a result of investor redemptions during the period. Accordingly, our interim results are not indicative of the results we expect for a full fiscal year. In addition, incentive income depends on our funds’ performance and opportunities for realizing gains, which may be limited. We cannot predict when, or if, any realization of investments will occur. If we were to have a realization event in a particular quarter, it may have a significant impact on our results for that particular quarter which may not be replicated in subsequent quarters. We recognize revenue on investments in our funds based on our allocable share of realized and unrealized gains (or losses) reported by such funds, and a decline in realized or unrealized gains, or an increase in realized or unrealized losses, would materially adversely affect our revenue, which could further increase the volatility of our quarterly results.

Our funds have “high water marks” whereby we do not earn incentive income during a particular year even though the fund had a positive return in such year as a result of losses in the immediately preceding year. If a fund investor experiences losses, we will not be able to earn incentive income with respect to such investor’s investment in a fund until it surpasses the previous year’s high water mark. The incentive income we earn is therefore dependent on the net asset value of each fund investor’s investment in the fund, which could lead to significant volatility in our quarterly results.

Because our revenue, net income and cash flow can be highly variable from quarter to quarter and year to year, we plan not to provide any guidance regarding our expected quarterly and annual operating results. The lack of guidance may affect the expectations of public market analysts and could cause increased volatility in our Class A share price.

The asset management business is intensely competitive.

The asset management business is intensely competitive, with competition based on a variety of factors, including investment performance, the quality of service provided to fund investors, brand recognition and business reputation. We compete for fund investors, talent and for investment opportunities with a number of hedge funds, private equity funds, specialized funds, traditional asset managers, commercial banks, investment banks and other financial institutions. A number of factors serve to increase our competitive risks:

 

  Ÿ  

a number of our competitors have greater financial, technical, marketing and other resources and more personnel than we do;

 

  Ÿ  

several of our competitors have recently raised, or are expected to raise, significant amounts of capital, and many of them have similar investment objectives to ours, which may create additional competition for investment opportunities and may reduce the size and duration of pricing inefficiencies that many alternative investment strategies seek to exploit;

 

  Ÿ  

some of our competitors have greater capital, lower targeted returns or greater sector or investment strategy specific expertise than we do, which creates competitive disadvantages with respect to investment opportunities;

 

  Ÿ  

some of these competitors may also have a lower cost of capital and access to funding sources that are not available to us, which may create competitive disadvantages for us with respect to investment opportunities;

 

  Ÿ  

some of our competitors may have higher risk tolerances or different risk assessments which could allow them to consider a wider variety of investments and to bid more aggressively than us for investments that we want to make;

 

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  Ÿ  

there are relatively few barriers to entry impeding new funds, including a relatively low cost of entering this business, and the successful efforts of new entrants into our business, including former “star” portfolio managers at large diversified financial institutions, major commercial and investment banks and other financial institutions, have resulted in increased competition;

 

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some investors may prefer to invest with an investment manager that is not publicly traded;

 

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investors may develop concerns that we will allow our business to grow to the detriment of fund performance; and

 

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other industry participants will from time to time seek to recruit our investment professionals and other employees away from us.

We may lose investment opportunities in the future if we do not match investment prices, structures and terms offered by competitors. Alternatively, we may experience decreased rates of return and increased risks of loss if we match investment prices, structures and terms offered by competitors. In addition, changes in the global capital markets could diminish the attractiveness of our funds relative to investments in other investment products. This competitive pressure could materially adversely affect our ability to make successful investments and limit our ability to raise future funds, either of which would materially adversely impact our business, revenue, results of operations and cash flow.

Over the past several years, the size and number of hedge funds and private equity funds has continued to increase. We expect this trend to continue and, thus, if our performance is not consistently above the performance of our competitors, it will become increasingly difficult for our funds to raise capital and continue to achieve growth. More significantly, the allocation of increasing amounts of capital to alternative investment strategies by institutional and individual investors may lead to a reduction in profitable investment opportunities, including by driving prices for investments higher and increasing the difficulty of achieving consistent, positive returns. Competition for investors is based on a variety of factors, including:

 

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investment performance;

 

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investor perception of investment managers’ ability, drive, focus and alignment of interest with them;

 

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quality of service provided to and duration of relationship with investors;

 

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business reputation; and

 

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level of fees, incentive income and expenses charged for services.

These and other factors could reduce our earnings and revenues and materially adversely affect our business. In addition, if we are forced to compete with other alternative asset managers on the basis of price, we may not be able to maintain our current management fee and incentive income structures. We have historically competed for investors primarily on the performance of our funds, and not on the level of our fees or incentive income relative to those of our competitors. However, as the alternative asset management sector matures, there is a risk that fees and incentive income will decline, without regard to the historical performance of a manager. Fee or incentive income reductions on existing or future funds, without corresponding decreases in our cost structure, would materially adversely affect our revenues and profitability.

The loss of services of any of our key partners, particularly our founder Daniel Och, would materially adversely affect our business.

The success of our business depends on the efforts, judgment and personal reputations of our key partners, particularly our founder, Daniel Och, and other members of our senior management

 

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team, including Joel Frank, David Windreich, Michael Cohen, Zoltan Varga and Harold Kelly. Our key partners’ reputations, expertise in investing, relationships with investors in our funds and relationships with third parties on whom our funds depend for investment opportunities and financing are each critical elements in operating and expanding our business. The loss of any of these individuals could jeopardize our relationships with our fund investors and members of the business community. We believe our performance is highly correlated to the performance of these individuals. Accordingly, the retention of our key partners is crucial to our success, and none of them is obligated to remain associated with us. In addition, if any of our key partners were to join or form a competitor, some of our fund investors could choose to invest with that competitor rather than in our funds. The loss of the services of any of our key partners would have a material adverse effect on us, including our ability to retain and attract investors and raise new funds, and the performance of our funds. We do not carry any “key man” insurance that would provide us with proceeds in the event of the death or disability of any of our key partners.

Our ability to retain our professionals is critical to our success and our ability to grow depends on our ability to attract additional partners and managing directors.

Our most important asset is our people, and our continued success is highly dependent upon the efforts of all of our partners and managing directors. Our future success and growth depend to a substantial degree on our ability to retain and motivate our partners and other key personnel and to strategically recruit, retain and motivate new talent, including new partners and managing directors. However, we may not be successful in our efforts to recruit, retain and motivate the required personnel as the market for qualified investment professionals is extremely competitive. Historically, we have compensated our partners through distributions on their interests in our business and our managing directors through profit participation payments. As we grow our business as a public company, we may not be able to provide future partners with equity interests in our business to the same extent or with the same tax consequences as our existing partners. Therefore, in order to recruit and retain existing and future partners, we may need to increase the level of distributions we make to them. We may determine to do this through the issuance of interests in our business, including, without limitation, Och-Ziff Operating Group Class C operating group units, with respect to which the Partner Management Committee will have the authority to declare distributions. As a result, our total compensation and benefits expense would increase and would adversely affect our profitability, and our cash available for distribution to the holders of the residual equity interests in our business would be reduced. In addition, issuances of equity interests in our business to current or future personnel would dilute Class A shareholders.

Our investment professionals possess substantial experience and expertise in investing, are responsible for locating and executing our funds’ investments, have significant relationships with the institutions which are the source of many of our funds’ investment opportunities, and in certain cases have strong relationships with our fund investors. Therefore, if our investment professionals join competitors or form competing companies it could result in the loss of significant investment opportunities and certain existing investors. As a result, the loss of even a small number of our investment professionals could jeopardize the performance of our funds, which would have a material adverse effect on our results of operations.

The operating group limited partnership agreements provide that the Och-Ziff Operating Group A Units received by our partners in the Reorganization will vest, subject to their continued association with us, in equal installments on each anniversary date of this offering for five years, beginning on the first anniversary of this offering. The unvested Och-Ziff Operating Group A Units of Mr. Och will be subject to forfeiture to the other partners if Mr. Och voluntarily terminates his association with us. The unvested Och-Ziff Operating Group A Units of any partner other than Mr. Och will be subject to

 

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forfeiture to the other partners if such partner voluntarily terminates his association with us or is required to withdraw for cause or if the Partner Performance Committee makes a non-performance determination with respect to such partner. However, these provisions of the operating group limited partnership agreements may be amended by the partners at any time. We, our shareholders and the Och-Ziff Operating Group have no ability to enforce those provisions of the operating group limited partnership agreements or to prevent the partners from amending those provisions or waiving any such obligations.

In addition, all of our partners will be subject to transfer restrictions and minimum retained ownership requirements with respect to their equity interests in us. The Class A restricted share units held by our managing directors will be subject to certain vesting requirements, and all of our partners and managing directors will enter into partner agreements or managing director agreements with us, as applicable, which agreements will place certain restrictions on them with respect to competing with us, soliciting our employees and fund investors and disclosing confidential information about our business, as described further under “Management—Partner and Managing Director Agreements”. These requirements and agreements lapse over time, may not be enforceable in all cases and can be waived by us at any time. There is no guarantee that these requirements and agreements or the forfeiture provisions of the operating group limited partnership agreements will prevent any of these professionals from leaving us, joining our competitors or otherwise competing with us. Any of these events would have a material adverse affect on our business.

Each of our funds has special withdrawal provisions pursuant to which the failure of Daniel Och to be actively involved in the business provides investors with the right to redeem from the funds. The loss of the services of Daniel Och would have a material adverse effect on each of our funds and on us.

Investors in each of our funds are generally given a one-time special redemption right (not subject to redemption fees) if Daniel Och dies or ceases to perform his duties with respect to the fund for 90 consecutive days or otherwise ceases to be involved in the activities of the Och-Ziff Operating Group. The death or inability of Mr. Och to perform his duties with respect to any of our funds for 90 consecutive days, or termination of Mr. Och’s involvement in the activities of the Och-Ziff Operating Group for any reason, could result in substantial redemption requests from investors in each of our funds. Any such event would have a direct material adverse effect on our revenues and earnings, and would likely harm our ability to maintain or grow assets under management in existing funds or raise additional funds in the future. Such withdrawals could lead possibly to a liquidation of our funds and a corresponding elimination of our management fees and potential to earn incentive income. The loss of Mr. Och could, therefore, ultimately result in a loss of substantially all of our earnings.

We have experienced rapid growth, which may be difficult to sustain and which may place significant demands on our administrative, operational and financial resources.

Our assets under management have grown from approximately $6 billion as of December 31, 2002 to $26.8 billion as of April 30, 2007. Our rapid growth has caused, and if it continues will continue to cause, significant demands on our legal, accounting and operational infrastructure, and increased expenses. The complexity of these demands, and the expense required to address them, is a function not simply of the amount by which our assets under management have grown, but of significant differences in the investing strategies employed within our funds. In addition, we are required to continuously develop our systems and infrastructure in response to the increasing sophistication of the investment management market and legal, accounting and regulatory developments.

 

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Our future growth will depend on, among other things, our ability to maintain an operating platform and management system sufficient to address our growth and will require us to incur significant additional expenses and to commit additional senior management and operational resources. As a result, we face significant challenges:

 

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in maintaining adequate financial and business controls;

 

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in implementing new or updated information and financial systems and procedures; and

 

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in training, managing and appropriately sizing our work force and other components of our business on a timely and cost-effective basis.

There can be no assurance that we will be able to manage our expanding operations effectively or that we will be able to continue to grow, and any failure to do so could materially adversely affect our ability to generate revenue and control our expenses.

Operational risks may disrupt our business, result in losses or limit our growth.

We rely heavily on our financial, accounting, trading and other data processing systems to, among other things, execute, confirm, settle and record transactions across markets and geographies in a time-sensitive, efficient and accurate manner. If any of these systems do not operate properly or are disabled, we could suffer financial loss, a disruption of our business, liability to our funds, regulatory intervention or reputational damage.

In addition, we operate a business that is highly dependent on information systems and technology. Our information systems and technology may not continue to be able to accommodate our growth, and the cost of maintaining such systems may increase from its current level. Such a failure to accommodate growth, or an increase in costs related to such information systems, could have a material adverse effect on us.

We rely on our headquarters in New York City, where most of our personnel are located, for the continued operation of our business. We have taken precautions to limit the impact that a disruption to our New York headquarters could cause (for example, by ensuring our London office can operate independently of our other offices and establishing a SunGard “hot site” located in New Jersey, from which we could run our operations). Although these precautions have been taken, a disaster or a disruption in the infrastructure that supports our business, including a disruption involving electronic communications or other services used by us or third parties with whom we conduct business, or directly affecting our headquarters, could have a material adverse impact on our ability to continue to operate our business without interruption. Our disaster recovery programs may not be sufficient to mitigate the harm that may result from such a disaster or disruption. In addition, insurance and other safeguards might only partially reimburse us for our losses, if at all.

Finally, although we perform and back-up all key functions of our business, including portfolio valuation, internally, we rely on third-party service providers for certain aspects of our business, including for certain information systems and technology and administration of our funds. Severe interruptions or deteriorations in the performance of these third parties or failures of their information systems and technology could impair the quality of the funds’ operations and could impact our reputation and hence materially adversely affect our business.

The historical and unaudited pro forma financial information included in this prospectus is not necessarily indicative of our future performance.

The historical combined financial information included in this prospectus is not indicative of our future financial results. Our historical combined financial information consolidates a large number of

 

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our funds which will not be consolidated after this offering, as described further under “Unaudited Pro Forma Financial Information”. In addition, the historical combined financial information included in this prospectus does not reflect the added costs, including taxes, that we will incur as a public company or the impact of our change in structure. In addition, we will incur significant compensation expense as a result of the issuance of the Och-Ziff Operating Group A Units to our existing partners and the grant of Class A restricted share units to all of our employees in connection with this offering. This compensation expense will be recognized over the applicable vesting period. As a result of these expenses, we expect to report losses on our GAAP financial statements during such periods. In preparing our unaudited pro forma financial information for the years prior to this offering, we adjusted our historical combined financial information for the transactions described in “Our Structure—The Transactions” and, as such, this financial information does not purport to represent the results of any future periods.

The results of future periods are likely to be materially different as a result of:

 

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the deconsolidation of our non-controlled investment company subsidiaries;

 

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the recognition of equity-based compensation;

 

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interest expense associated with borrowings of $750 million under our new term loan;

 

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the conversion of the Ziff profit-sharing interest;

 

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the impact of the transactions occurring in connection with this offering on a pro forma basis, including the impact of the tax receivable agreement and an increase in our tax expense as a result of Och-Ziff Corp being taxable as a corporation, and the incremental expenses we will incur as a result of being a publicly traded company;

 

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fund performance in the future which differs from the historical performance reflected in our unaudited pro forma financial information; and

 

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the pace of growth of our business in the future, including the formation of new funds, which differs from the historical growth reflected in our unaudited pro forma financial information.

The estimates used in our unaudited pro forma financial information are not necessarily an accurate estimate of our actual experience as a public company or indicative in any way of our future performance.

The requirements of being a public entity and sustaining our growth may strain our resources.

As a public entity, we will be subject to the reporting requirements of the U.S. Securities Exchange Act of 1934, as amended, or the “Exchange Act,” and requirements of the U.S. Sarbanes-Oxley Act of 2002, or the “Sarbanes-Oxley Act”. These requirements may place a strain on our systems and resources. The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act requires that we maintain effective disclosure controls and procedures and internal control over financial reporting, which is discussed below. In order to maintain and improve the effectiveness of our disclosure controls and procedures, significant resources and management oversight will be required. We will be implementing additional procedures and processes for the purpose of addressing the standards and requirements applicable to public companies. In addition, sustaining our growth will also require us to commit additional management, operational and financial resources to identify new professionals to join our company and to maintain appropriate operational and financial systems to adequately support expansion. These activities may divert management’s attention from other business concerns, which could have a material adverse effect on our business, financial condition, results of operations and cash flows. We expect to incur significant additional annual expenses related to these steps and, among other things, additional directors and officers liability insurance, director fees, reporting requirements of the SEC, transfer agent fees, hiring additional accounting, legal and administrative personnel, increased auditing and legal fees and similar expenses.

 

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Our internal control over financial reporting does not currently meet all of the standards contemplated by Section 404 of the Sarbanes-Oxley Act, and failure to achieve and maintain effective internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our financial condition, results of operations, business and Class A share price.

Once we become a public company, the Sarbanes-Oxley Act of 2002 and the related rules will require our management to conduct annual assessments of the effectiveness of our internal control over financial reporting and will require a report by our independent registered public accounting firm addressing these assessments, as well as an independent audit of our internal control over financial reporting, beginning with our fiscal year ending December 31, 2008. Our internal control over financial reporting does not currently meet all of the standards contemplated by Section 404 of the Sarbanes-Oxley Act that, after our first year as a public company, we will be required to meet. We are in the process of addressing our internal control over financial reporting and are establishing formal policies, processes and practices related to financial reporting and to the identification of key financial reporting risks, assessment of their potential impact and linkage of those risks to specific areas and activities within our organization.

Additionally, we have begun the process of documenting our internal control procedures to satisfy the requirements of Section 404. However, we do not currently have comprehensive documentation of our internal controls and have not yet tested our internal controls in accordance with Section 404. As a public company, we will be required to complete our initial assessment in a timely manner. If we are not able to implement the requirements of Section 404 in a timely manner or with adequate compliance, our independent registered public accounting firm may not be able to certify as to our assessment concerning the effectiveness of our internal control over financial reporting. Matters impacting our internal controls may cause us to be unable to report our financial information on a timely basis and thereby subject us to adverse regulatory consequences, including sanctions by the SEC or violations of applicable stock exchange listing rules. There could also be a negative reaction in the financial markets due to a loss of investor confidence in us and the reliability of our financial statements. Any such event could adversely affect our financial condition, results of operations and business, and lead to a decline in the price of our Class A shares.

Our independent registered public accounting firm identified a material weakness in our internal controls, which, if not properly remediated, could result in material misstatements of our financial statements in future periods.

Our independent registered public accounting firm reported to our management a material weakness in our internal control over financial reporting as of and for December 31, 2006. A material weakness is defined by the standards issued by the Public Company Accounting Oversight Board as a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The identified material weakness relates to errors that resulted from having inadequate staffing resources resulting in ineffective controls over the execution of certain complex, historical contracts containing ambiguous or conflicting terms and the financial close process as it relates to the proper assessment of the terms and provisions of these complex contracts and the application of the relevant accounting. The errors identified relate to accounting for certain historical profits interests in the company and for certain revenues and expenses from associated entities. Management is developing a plan to remediate the material weakness. We have significantly expanded our legal and professional accounting staff and continue to seek additional resources to further enhance our accounting and reporting functions and document retention practices. However, if these measures fail to remediate the material weakness or if additional material weaknesses in our

 

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internal controls are discovered in the future, we may be unable to provide required financial information in a timely and reliable manner, or otherwise comply with the standards applicable to us as a public company, and our management may not be able to report that our internal control over financial reporting is effective for the year ending December 31, 2008, as would be required by Section 404 of the Sarbanes-Oxley Act of 2002, or thereafter. There could also be a negative reaction in the markets due to a loss of investor confidence in us and the reliability of our financial statements and, as a result, our business may be harmed and the price of our Class A shares may decline.

We are subject to third-party litigation risk which could result in significant liabilities and reputational harm which could materially adversely affect our results of operations, financial condition and liquidity.

In general, we will be exposed to risk of litigation by our fund investors if our management of any fund is alleged to constitute gross negligence or willful misconduct. Investors could sue us to recover amounts lost by our funds due to our alleged misconduct, up to the entire amount of loss. Furthermore, we may be subject to litigation arising from investor dissatisfaction with the performance of our funds or from allegations that we improperly exercised control or influence over companies in which our funds have large investments. In addition, we are exposed to risks of litigation or investigation relating to transactions which presented conflicts of interest that were not properly addressed. In such actions we would be obligated to bear legal, settlement and other costs (which may be in excess of available insurance coverage). In addition, although we are indemnified by our funds, our rights to indemnification may be challenged. If we are required to incur all or a portion of the costs arising out of litigation or investigations as a result of inadequate insurance proceeds or failure to obtain indemnification from our funds, our results of operations, financial condition and liquidity would be materially adversely affected.

In our funds, we are exposed to the risk of litigation if the funds suffer catastrophic losses due to the failure of a particular investment strategy or due to the trading activity of an employee who has violated market rules and regulations. Any litigation arising in such circumstances is likely to be protracted, expensive and surrounded by circumstances which are materially damaging to our reputation and our business. In addition, we face the risk of litigation from investors in our funds if we violate restrictions in such funds’ organizational documents (for example, by failing to adhere to the limits we have to set on maximum exposure by a fund to a single investment).

Certain of our funds are incorporated or formed under the laws of the Cayman Islands. Cayman Islands laws, particularly with respect to shareholders rights, partner rights and bankruptcy, differ from the laws of the United States and could change, possibly to the detriment of our funds and investment management subsidiaries.

In addition, with a workforce consisting of many very highly paid investment professionals, we face the risk of lawsuits relating to claims for compensation, which may individually or in the aggregate be significant in amount. The cost of settling such claims could materially adversely affect our results of operations.

Extensive regulation of our business affects our activities and creates the potential for significant liabilities and penalties. Increased regulatory focus could result in additional burdens on our business. Our reputation, business and operations could be materially affected by regulatory issues.

Our business is subject to extensive regulation. We are subject to regulation, including periodic examinations, by governmental and self-regulatory organizations in the jurisdictions in which we operate around the world. The SEC oversees our activities as a registered investment adviser under the Advisers Act. We are also subject to regulation under the Exchange Act and the U.S. Securities Act of 1933, as amended, or the “Securities Act,” and various other statutes. In addition, we are subject to

 

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regulation by the Department of Labor under the U.S. Employee Retirement Income Security Act of 1974, or “ERISA”. In the United Kingdom, we are subject to regulation by the U.K. Financial Services Authority. Our Asian operations, and our investment activities around the globe, are subject to a variety of regulatory regimes that vary country by country, including the Financial Services Agency in Japan and the Securities and Futures Commission in Hong Kong.

Each of the regulatory bodies with jurisdiction over us has the authority to grant, and in specific circumstances to cancel, permissions to carry on our business and to conduct investigations and administrative proceedings. Such investigations can result in fines, suspensions of personnel or other sanctions, including censure, the issuance of cease-and-desist orders or the suspension or expulsion of a broker-dealer or investment adviser from registration or memberships. For example, a failure to comply with the obligations imposed by the Advisers Act, including record-keeping, advertising and operating requirements, disclosure obligations and prohibitions on fraudulent activities, or a failure to maintain our funds’ exemption from compliance with the 1940 Act could result in investigations, sanctions and reputational damage. Our funds are involved regularly in trading activities which implicate a broad number of U.S. and foreign securities law regimes, including laws governing trading on inside information, market manipulation and a broad number of technical trading requirements that implicate fundamental market regulation policies. Even if an investigation or proceeding did not result in a sanction or the sanction imposed against us or our personnel by a regulator were small in monetary amount, the adverse publicity relating to the investigation, proceeding or imposition of these sanctions could harm our reputation and cause us to lose existing investors or fail to gain new investors.

In addition, we regularly rely on exemptions from various requirements of the Securities Act, the Exchange Act, the Advisers Act and ERISA in conducting our asset management activities. These exemptions are sometimes highly complex and may in certain circumstances depend on compliance by third parties whom we do not control. If for any reason these exemptions were to become unavailable to us, we could become subject to regulatory action or third-party claims and our business could be materially and adversely affected. See “—Risks Related to Our Organization and Structure— If we are deemed an investment company under the Investment Company Act of 1940, our business would be subject to applicable restrictions under that Act, which could make it impracticable for us to continue our business as contemplated and would have a material adverse impact on the market price of our Class A shares”. The requirements imposed by our regulators are designed primarily to ensure the integrity of the financial markets and to protect investors in our funds and are not designed to protect holders of our Class A shares.

Various factors, including recent financial scandals, have caused investors and governmental authorities to express concerns over the integrity of the U.S. financial markets and the adequacy of the current regulation of financial institutions, including alternative asset managers. Accordingly, the regulatory environment relevant to our business and to investors in our funds is subject to change in a manner that may be adverse to us and fund investors. For example, we may be materially adversely affected as a result of new or revised legislation or regulations imposed by the SEC, or other U.S. or non-U.S. governmental regulatory authorities or self-regulatory organizations that supervise the financial markets, including developments that are not directed at alternative asset managers but nevertheless affect our business and operations. We also may be materially adversely affected by changes in the interpretation or enforcement of existing laws and rules by these governmental authorities and self-regulatory organizations. Such changes could place limitations on the type of investor that can invest in alternative investment funds or on the conditions under which such investors may invest. Furthermore, such changes may limit the scope of investing activities that may be undertaken by alternative investment managers. It is not practicable to determine with meaningful specificity the extent of the impact of any new laws, regulations or initiatives that may be proposed, or whether any of the proposals will become law. Any such regulations could increase our costs of doing

 

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business or materially adversely affect our profitability and materially adversely affect our ability to recruit, retain and motivate our current and future professionals.

Regulatory developments specifically designed to increase oversight of alternative investment funds may materially adversely affect our business. In recent years, there has been debate in U.S. and foreign governments about new rules and regulations for investment funds. Any new rules or regulations could negatively impact our ability to conduct our investment activities and thereby reduce the value of our Class A shares. See “—Risks Related to Taxation—Members of the United States Congress have introduced legislation that would, if enacted, preclude us from qualifying for treatment as a partnership for U.S. federal income tax purposes under the publicly traded partnership rules”.

Our failure to deal appropriately with conflicts of interest could damage our reputation and materially adversely affect our business.

As we have expanded the scope of our business, we increasingly confront potential conflicts of interest relating to our funds’ investment activities. Certain of our funds have overlapping investment objectives and potential conflicts may arise with respect to our decisions regarding how to allocate investment opportunities among those funds. For example, a decision to acquire material non-public information about a company while pursuing an investment opportunity for a particular fund gives rise to a potential conflict of interest when it results in our having to restrict the ability of other funds to buy or sell securities in the public markets. In addition, investors (or holders of Class A shares) may perceive conflicts of interest regarding investment decisions for funds in which our partners, who have and may continue to make significant personal investments, are personally invested.

It is possible that actual, potential or perceived conflicts could give rise to investor dissatisfaction or litigation or regulatory enforcement actions. Appropriately dealing with conflicts of interest is complex and difficult and our reputation could be damaged if we fail, or appear to fail, to deal appropriately with one or more potential or actual conflicts of interest. Regulatory scrutiny of, or litigation in connection with, conflicts of interest would have a material adverse effect on our reputation which would materially adversely affect our business in a number of ways, including as a result of redemptions by our investors from our funds, an inability to raise additional funds and a reluctance of counterparties to do business with us.

Employee misconduct could harm us by impairing our ability to attract and retain investors and subjecting us to significant legal liability and reputational harm.

There is a risk that our employees could engage in misconduct that materially adversely affects our business. We are subject to a number of obligations and standards arising from our asset management business and our authority over the assets managed by our asset management business. The violation of these obligations and standards by any of our employees would materially adversely affect our investors and us. Our business often requires that we deal with confidential matters of great significance to companies in which we may invest. If our employees were improperly to use or disclose confidential information, we could suffer serious harm to our reputation, financial position and current and future business relationships. It is not always possible to detect or deter employee misconduct, and the extensive precautions we take to detect and prevent this activity may not be effective in all cases. If one of our employees were to engage in misconduct or were to be accused of such misconduct, our business and our reputation could be materially adversely affected.

Our organizational documents do not limit our ability to enter into new lines of business, and we may enter into new businesses, make future strategic investments or acquisitions or enter into joint ventures, each of which may result in additional risks and uncertainties in our business.

We intend, to the extent that market conditions warrant, to grow our business by increasing assets under management and creating new investment products and businesses. Accordingly, we

 

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may pursue growth through strategic investments, acquisitions or joint ventures, which may include entering into new lines of business, such as the broker-dealer or financial advisory industries. In addition, we expect opportunities will arise to acquire, or enter into joint ventures with, other alternative or traditional asset managers. To the extent we make strategic investments or acquisitions, enter into joint ventures, or enter into a new line of business, we will face numerous risks and uncertainties, including risks associated with (i) the required investment of capital and other resources, (ii) the possibility that we have insufficient expertise to engage in such activities profitably or without incurring inappropriate amounts of risk, (iii) combining or integrating operational and management systems and controls and (iv) loss of investors in our fund due to the perception that we are no longer focusing on our core fund management duties. Entry into certain lines of business may subject us to new laws and regulations with which we are not familiar, or from which we are currently exempt, and may lead to increased litigation and regulatory risk. If a new business generates insufficient revenues or if we are unable to efficiently manage our expanded operations, our results of operations will be materially adversely affected. In the case of joint ventures, we are subject to additional risks and uncertainties in that we may be dependent upon, and subject to liability, losses or reputational damage relating to, systems, controls and personnel that are not under our control.

We may use substantial amounts of leverage to finance our business, which will expose us to substantial risks.

We may eventually use a significant amount of borrowings to finance our business operations as a public company. This will expose us to the typical risks associated with the use of substantial leverage, including those discussed below under “—Risks Related to Our Funds—Dependence on significant leverage in investments by our funds could materially adversely affect our ability to achieve positive rates of return on those investments”. These risks could be exacerbated by our funds’ use of leverage to finance investments and cause us to suffer a decline in the credit ratings assigned to our debt by rating agencies. Such a decline in our ratings might well result in an increase in our borrowing costs and could otherwise adversely affect our business in a material way. In addition, as our long-term unsecured debt and committed secured credit facilities expire, or if our lenders fail, we will need to replace them by entering into new facilities or finding other sources of liquidity, and there is no guarantee that we will be able to do so on attractive terms or at all, particularly in a liquidity or other market crisis. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Historical Liquidity and Capital Resources” for a further discussion of our liquidity.

An increase in our borrowing costs may adversely affect our earnings and liquidity.

Under our new term loan, we will have borrowings in the amount of $750 million. When this term loan matures in                     , 2013, we will be required to either refinance it by entering into new facilities, which could result in higher borrowing costs, or issuing equity, which would dilute existing shareholders. We could also repay the term loan by using cash on hand or cash from the sale of our assets. No assurance can be given that we will be able to enter into new facilities or issue equity in the future on attractive terms, or at all. Our term loan will be a LIBOR-based floating-rate obligation and the interest expense we incur will vary with changes in the applicable LIBOR reference rate. As indicated in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Quantitative and Qualitative Disclosures about Market Risk,” a 10% change in LIBOR would result in a $             change in our annual interest expense associated with this term loan. An increase in interest rates would adversely affect the market value of any fixed-rate debt investments and/or subject them to prepayment or extension risk, which may adversely affect our earnings and liquidity.

 

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Risks Related to Our Funds

Our results of operations are dependent on the performance of our funds. Poor fund performance will result in reduced revenues, reduced returns on our principal investments in our funds and reduced earnings. Poor performance of our funds will make it difficult for us to retain or attract investors to our funds and to grow our business. The performance of each fund we manage is subject to some or all of the following risks.

The historical returns attributable to our funds should not be considered as indicative of the future results of our funds or of our future results or of any returns expected on an investment in our Class A shares.

We have presented in this prospectus under “Business—Investment Performance” the net composite returns relating to the historical performance of our funds, and also refer to other metrics associated with historical returns, such as risk and correlation measures. The returns are relevant to us primarily insofar as they are indicative of incentive income we have been allocated in prior years. The historical and potential future returns of our funds, however, are not expected to be directly linked to returns on our Class A shares. Therefore, you should not conclude that positive performance of our funds will result in positive returns on an investment in Class A shares. However, poor performance of our funds will cause a decline in our revenue from such funds, and would therefore have a negative effect on our performance and the returns on an investment in our Class A shares.

Moreover, with respect to the historical returns of our funds:

 

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the historical returns of our funds should not be considered indicative of the future results that should be expected from such funds or from any future funds we may raise;

 

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our funds’ returns have benefited from investment opportunities and general market conditions that may not repeat themselves, and there can be no assurance that our current or future funds will be able to avail themselves of profitable investment opportunities; and

 

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the rates of return reflect our historical cost structure, which may vary in the future due to factors beyond our control, including changes in law.

In addition, future returns will be affected by the applicable risks described elsewhere in this prospectus, including risks of the industries and businesses in which a particular fund invests.

Poor performance of our funds would cause a decline in our revenue, income and cash flow and could materially adversely affect our ability to raise additional capital.

In the event that any of our funds were to perform poorly, our revenue, income and cash flow would decline because the value of our assets under management would decrease, which would result in a reduction in management fees. A decrease in our investment returns would result in a reduction in incentive income and, if such decrease was substantial, could result in the elimination of incentive income for a given year. Moreover, we could experience losses on our investments of our own principal as a result of poor investment performance by our funds. Poor performance of our funds could make it more difficult for us to raise new capital. Investors in our funds might decline to invest in future funds we raise and investors in our funds might redeem their investments as a result of poor performance of the funds in which they are invested in favor of investments which are perceived to have lower risk or greater opportunity for returns. Investors and potential investors in our funds continually assess our funds’ performance, and our ability to raise capital for existing and future funds and avoid excessive redemption levels will depend on our funds’ continued satisfactory performance.

 

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Dependence on significant leverage in investments by our funds could materially adversely affect our ability to achieve positive rates of return on those investments.

Our funds may choose to use leverage as part of their respective investment programs and regularly borrow a substantial amount of their capital either directly or through the use of derivative instruments. The use of leverage poses a significant degree of risk and enhances the possibility of a significant loss in the value of the investments in our funds. Our funds may borrow money from time to time to purchase or carry securities. The interest expense and other costs incurred in connection with such borrowing may not be recovered by appreciation in the securities purchased or carried, and will be lost—and the timing and magnitude of such losses may be accelerated or exacerbated—in the event of a decline in the market value of such securities. Gains realized with borrowed funds may cause the fund’s net asset value to increase at a faster rate than would be the case without borrowings. However, if investment results fail to cover the cost of borrowings, the fund’s net asset value could also decrease faster than if there had been no borrowings. Increases in interest rates could also decrease the value of fixed-rate debt investments that our funds make. Any of the foregoing circumstances could have a material adverse effect on our financial condition, results of operations and cash flow.

Third-party investors in our funds will have the right to remove us as investment manager or general partner of the funds and investors in our funds may redeem their investments. These events would lead to a decrease in our revenues, which could be substantial.

The governing agreements of all of our funds provide (or will be amended to provide) that, subject to certain conditions, third-party investors in those funds will have the right, without cause, to vote to remove us as investment manager or general partner of the fund by a simple majority vote, resulting in the elimination of management fees and incentive income derived from those funds. In addition to having a significant negative impact on our revenue, net income and cash flow, the occurrence of such an event with respect to any of our funds would likely result in significant reputational damage to us.

Investors in our funds may also generally redeem their investments on an annual or quarterly basis following the expiration of a specified period of time when capital may not be redeemed (typically between five and nine fiscal quarters), subject to the applicable fund’s specific redemption provisions. In a declining market, the pace of redemptions and consequent reduction in our assets under management could accelerate. The decrease in revenues that would result from significant redemptions in our funds could have a material adverse effect on our business, revenues, net income and cash flows.

The due diligence process that we undertake in connection with investments by our funds may not reveal all facts that may be relevant in connection with an investment.

Before making investments, particularly investments in securities that are not publicly traded, we conduct due diligence that we deem reasonable and appropriate based on the facts and circumstances applicable to each investment. When conducting due diligence, we may be required to evaluate important and complex business, financial, tax, accounting, environmental and legal issues. Outside consultants, legal advisors, accountants and investment banks may be involved in the due diligence process in varying degrees depending on the type of investment. Nevertheless, when conducting due diligence and making an assessment regarding an investment, we rely on the resources available to us, including information provided by the target of the investment and, in some circumstances, third-party investigations. The due diligence investigation that we will carry out with respect to any investment opportunity may not reveal or highlight all relevant facts that may be necessary or helpful in evaluating such investment opportunity. Moreover, such an investigation will not necessarily result in the investment being successful.

 

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Most of our funds invest in relatively high-risk, illiquid assets, and we may fail to realize any profits from these activities for a considerable period of time or lose some or all of our principal investments.

Most of our funds invest in securities that are not publicly traded. In many cases, our funds may be prohibited by contract or by applicable securities laws from selling such securities for a period of time. Our funds will generally not be able to sell these securities publicly unless their sale is registered under applicable securities laws, or unless an exemption from such registration is available. The ability of many of our funds to dispose of investments is heavily dependent on the public equity markets. Even if the securities are publicly traded, large holdings of securities can often be disposed of only over a substantial length of time, exposing the investment returns to risks of downward movement in market prices during the intended disposition period. Accordingly, under certain conditions, our funds may be forced to either sell securities at lower prices than they had expected to realize or defer—potentially for a considerable period of time—sales that they had planned to make. Contributing capital to these funds is risky, and we may lose some or all of the principal amount of our investments.

Valuation methodologies for certain assets in our funds can be subject to significant subjectivity and the values of assets established pursuant to such methodologies may never be realized, which could result in significant losses for our funds.

There are no readily ascertainable market prices for a large number of the illiquid investments in our funds. The value of the investments of our funds is determined periodically by us based on the fair value of such investments. The fair value of investments is determined using a number of methodologies described in the funds’ valuation policies. These policies are based on a number of factors, including the nature of the investment, the expected cash flows from the investment, bid or ask prices provided by third parties for the investment, the length of time the investment has been held, the trading price of securities (in the case of publicly traded securities), restrictions on transfer and other recognized valuation methodologies. The methodologies we use in valuing individual investments are based on a variety of estimates and assumptions specific to the particular investments, and actual results related to the investment therefore often vary materially as a result of the inaccuracy of such assumptions or estimates. In addition, because many of the illiquid investments held by our funds are in industries or sectors which are unstable, in distress, or undergoing some uncertainty, such investments are subject to rapid changes in value caused by sudden company-specific or industry-wide developments.

Because there is significant uncertainty in the valuation of, or in the stability of the value of illiquid investments, the fair values of such investments as reflected in a fund’s net asset value do not necessarily reflect the prices that would actually be obtained by us on behalf of the fund when such investments are sold. Realizations at values significantly lower than the values at which investments have been reflected in fund net asset values would result in losses for the applicable fund, a decline in asset management fees and the loss of potential incentive income. Also, a situation where asset values turn out to be materially different from values reflected in fund net asset values will cause investors to lose confidence in us which may, in turn, result in redemptions from our funds or difficulties in raising additional capital.

Our funds make investments in companies that we do not control.

Investments by all of our funds will include debt instruments and equity securities of companies that we do not control. Such instruments and securities may be acquired by our funds through trading activities or through purchases of securities from the issuer. Those investments will be subject to the risk that the company in which the investment is made may make business, financial or management decisions with which we do not agree or that the majority stakeholders or the management of the

 

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company may take risks or otherwise act in a manner that does not serve our interests. In addition, we may make investments in which we share control over the investment with co-investors, which may make it more difficult for us to implement our investment approach or exit the investment when we otherwise would. If any of the foregoing were to occur, the values of investments by our funds could decrease and our financial condition, results of operations and cash flow could suffer as a result.

We expect our funds to make investments in companies that are based outside of the United States, which may expose us to additional risks not typically associated with investing in companies that are based in the United States.

All of our funds generally invest a significant portion of their assets in the equity, debt, loans or other securities of issuers located outside the United States. Investments in non-U.S. securities involve certain factors not typically associated with investing in U.S. securities, including risks relating to:

 

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currency exchange matters, including fluctuations in currency exchange rates and costs associated with conversion of investment principal and income from one currency into another;

 

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less developed or efficient financial markets than in the United States, which may lead to potential price volatility and relative illiquidity;

 

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the absence of uniform accounting, auditing and financial reporting standards, practices and disclosure requirements and less government supervision and regulation;

 

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differences in the legal and regulatory environment;

 

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difficulties in enforcing contracts and filing claims under foreign legal systems;

 

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less publicly available information in respect of companies in non-U.S. markets;

 

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certain economic and political risks, including potential exchange control regulations and restrictions on our non-U.S. investments and repatriation of profits on investments or of capital invested, the risks of political, economic or social instability, the possibility of expropriation or confiscatory taxation and adverse economic and political developments; and

 

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the possible imposition of non-U.S. taxes or withholding on income and gains recognized with respect to such securities.

There can be no assurance that adverse developments with respect to such risks will not materially adversely affect our funds’ investments that are held in certain countries or the returns from these investments.

Risk management activities may materially adversely affect the return on our funds’ investments.

When managing our exposure to market risks, we may (on our own behalf or on behalf of our funds) from time to time use forward contracts, options, swaps, caps, collars and floors or pursue other strategies or use other forms of derivative instruments to limit our exposure to changes in the relative values of investments that may result from market developments, including changes in prevailing interest rates, currency exchange rates and commodity prices. The success of any hedging or other derivative transactions generally will depend on our ability to correctly predict market changes, the degree of correlation between price movements of a derivative instrument, the position being hedged, and the creditworthiness of the counterparty and other factors. As a result, while we may enter into a transaction in order to reduce our exposure to market risks, the transaction may result in poorer overall investment performance than if it had not been executed. Such transactions may also limit the opportunity for gain if the value of a hedged position increases.

 

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Certain of our investments may be concentrated in certain asset types or in a geographic region, which could exacerbate any negative performance of those funds to the extent those concentrated investments perform poorly.

The governing agreements of our funds contain only limited investment restrictions and only limited requirements as to diversification of fund investments, either by geographic region or asset type. During periods of difficult market conditions or slowdowns in these regions, the decreased revenues and difficulty in obtaining access to financing may be exacerbated by this concentration of investments, which would result in lower investment returns for our funds.

Our funds’ investments are subject to numerous additional risks.

Our funds’ investments are subject to numerous additional risks, including the following:

 

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Generally, there are few limitations on the execution of our funds’ investment strategies, which are subject to the sole discretion of the investment manager or the general partner of such funds.

 

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The funds may engage in short-selling, which is subject to the theoretically unlimited risk of loss because there is no limit on how much the price of a security may appreciate before the short position is closed out. A fund may be subject to losses if a security lender demands return of the lent securities and an alternative lending source cannot be found or if the fund is otherwise unable to borrow securities that are necessary to hedge its positions.

 

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The funds are exposed to the risk that a counterparty will not settle a transaction in accordance with its terms and conditions because of a dispute over the terms of the contract (whether or not bona fide) or because of a credit or liquidity problem, thus causing the fund to suffer a loss. Counterparty risk is accentuated for contracts with longer maturities where events may intervene to prevent settlement, or where the fund has concentrated its transactions with a single or small group of counterparties. Generally, the funds are not restricted from dealing with any particular counterparty or from concentrating any or all of their transactions with one counterparty. Moreover, the funds’ internal monitoring of the creditworthiness of their counterparties may prove insufficient. The absence of a regulated market to facilitate settlement may increase the potential for losses.

 

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Credit risk may arise through a default by one of several large institutions that are dependent on one another to meet their liquidity or operational needs, so that a default by one institution causes a series of defaults by the other institutions. This “systemic risk” may materially adversely affect the financial intermediaries (such as prime brokers, clearing agencies, clearing houses, banks, securities firms and exchanges) with which the funds interact on a daily basis.

 

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The efficacy of investment and trading strategies depend largely on the ability to establish and maintain an overall market position in a combination of financial instruments. A fund’s trading orders may not be executed in a timely and efficient manner due to various circumstances, including systems failures or human error. In such event, the funds might only be able to acquire some but not all of the components of the position, or if the overall position were to need adjustment, the funds might not be able to make such adjustment. As a result, the funds would not be able to achieve the market position selected by the management company or general partner of such funds, and might incur a loss in liquidating their position.

 

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The funds are subject to risks due to potential illiquidity of assets. The funds may make investments or hold trading positions in markets that are volatile and which may become illiquid. Timely divestiture or sale of trading positions can be impaired by decreased trading volume, increased price volatility, concentrated trading positions, limitations on the ability to transfer positions in highly specialized or structured transactions to which they may be a party,

 

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and changes in industry and government regulations. It may be impossible or costly for the funds to liquidate positions rapidly in order to meet margin calls, withdrawal requests or otherwise, particularly if there are other market participants seeking to dispose of similar assets at the same time or the relevant market is otherwise moving against a position or in the event of trading halts or daily price movement limits on the market or otherwise.

 

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Fund investments are subject to risks relating to investments in commodities, futures, options and other derivatives, the prices of which are highly volatile and may be subject to the theoretically unlimited risk of loss in certain circumstances, including if the fund writes a call option. Price movements of commodities, futures and options contracts and payments pursuant to swap agreements are influenced by, among other things, interest rates, changing supply and demand relationships, trade, fiscal, monetary and exchange control programs and policies of governments and national and international political and economic events and policies. The value of futures, options and swap agreements also depends upon the price of the securities underlying them. In addition, the funds’ assets are subject to the risk of the failure of any of the exchanges on which their positions trade or of their clearinghouses or counterparties.

Most of our funds utilize distressed debt and equity investment strategies which involve significant risks and potential additional liabilities.

Most of our funds invest a portion of their assets in issuers with weak financial conditions, poor operating results, substantial financial needs, negative net worth and/or special competitive problems. These funds also invest in issuers that are involved in bankruptcy or reorganization proceedings. In such situations, it may be difficult to obtain full information as to the exact financial and operating conditions of these issuers. Furthermore, some of our funds’ distressed investments may not be widely traded or may have no recognized market. Depending on the specific fund’s investment profile, a fund’s exposure to such investments may be substantial in relation to the market for those investments and the acquired assets are likely to be illiquid and difficult to sell or transfer. As a result, it may take a number of years for the fair value of such investments to ultimately reflect their intrinsic value as perceived by us.

A central strategy of our distressed securities investing is to predict the occurrence of certain corporate events, such as debt and/or equity offerings, restructurings, reorganizations, mergers, takeover offers and other transactions. If we do not accurately predict these events, the market price and value of our funds’ investment could decline sharply.

In addition, these investments could subject our funds to certain potential additional liabilities that may exceed the value of their original investments. Under certain circumstances, payments or distributions on certain investments may be reclaimed if any such payment or distribution is later determined to have been a fraudulent conveyance, a preferential payment or similar transaction under applicable bankruptcy and insolvency laws. In addition, under certain circumstances, a lender that has inappropriately exercised control of the management and policies of a debtor may have its claims subordinated or disallowed, or may be found liable for damages suffered by parties as a result of such actions. In the case where the investment in securities of troubled companies is made in connection with an attempt to influence a restructuring proposal or plan of reorganization in bankruptcy, our funds may become involved in substantial litigation.

Our funds are subject to risks due to potential illiquidity of assets.

Our funds may make investments or hold trading positions in markets that are volatile and which may become illiquid. Timely divestiture or sale of trading positions can be impaired by decreased trading volume, increased price volatility, concentrated trading positions, limitations on the ability to

 

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transfer positions in highly specialized or structured transactions to which we may be a party, and changes in industry and government regulations. When a fund holds a security or position it is vulnerable to price and value fluctuations and may experience losses to the extent the value of the position decreases and it is unable to timely sell, hedge or transfer the position. Therefore, it may be impossible or costly for our funds to liquidate positions rapidly, particularly if the relevant market is moving against a position or in the event of trading halts or daily price movement limits on the market or otherwise. Alternatively, it may not be possible in certain circumstances for a position to be purchased or sold promptly, particularly if there is insufficient trading activity in the relevant market or otherwise.

If our risk management systems are ineffective, we may be exposed to material unanticipated losses.

We continue to refine our risk management techniques, strategies and assessment methods. However, our risk management techniques and strategies may not fully mitigate the risk exposure of our funds in all economic or market environments, or against all types of risk, including risks that we might fail to identify or anticipate. Some of our strategies for managing risk in our funds are based upon our use of historical market behavior statistics. We apply statistical and other tools to these observations to measure and analyze the risks to which our funds are exposed. Any failures in our risk management techniques and strategies to accurately quantify such risk exposure could limit our ability to manage risks in the funds or to seek positive, risk-adjusted returns. In addition, any risk management failures could cause fund losses to be significantly greater than the historical measures predict. Furthermore, our mathematical modeling does not take all risks into account. Our more qualitative approach to managing those risks could prove insufficient, exposing us to material unanticipated losses. See “Business—Risk Management Principles and Practices”.

We are subject to risks in using prime brokers, custodians, administrators and other agents.

All of our funds depend on the services of prime brokers, custodians, administrators or other agents to carry out certain securities transactions. In the event of the insolvency of a prime broker and/or custodian, the funds might not be able to recover equivalent assets in full as they will rank among the prime broker’s and custodian’s unsecured creditors in relation to assets which the prime broker or custodian borrows, lends or otherwise uses. In addition, the funds’ cash held with a prime broker or custodian may not be segregated from the prime broker’s or custodian’s own cash, and the funds will therefore rank as unsecured creditors in relation thereto.

Risks Related to Our Organization and Structure

Control by Mr. Och of the combined voting power of our shares and our existing partners holding their economic interest through Och-Ziff Operating Group may give rise to conflicts of interests.

Upon consummation of this offering, our partners will control approximately         % of the combined voting power of our Class A shares and Class B shares through their ownership of 100% of our Class B shares. In addition, each of our partners has granted to the members of the Class B shareholder committee, which initially consists solely of our founder, Daniel Och, an irrevocable proxy to vote all of such shares as such members may determine in their sole discretion, which proxy will terminate upon the later of Mr. Och’s withdrawal, death or disability or such time as our partners hold less than 40% of the total combined voting power of our company. Accordingly, Mr. Och initially will have the ability to elect all of the members of our board of directors and thereby to control our management and affairs. In addition, he will be able to determine the outcome of all matters requiring shareholder approval and will be able to cause or prevent a change of control of our company or a

 

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change in the composition of our board of directors, and could preclude any unsolicited acquisition of our company. The control of voting power by Mr. Och could deprive Class A shareholders of an opportunity to receive a premium for their Class A shares as part of a sale of our company, and might ultimately affect the market price of the Class A shares. Upon Mr. Och’s withdrawal, death or disability, the Class B shareholder committee will consist of either (i) the remaining members of the Partner Management Committee, who shall act by majority vote in such capacity, or (ii) a partner elected by majority vote of the remaining members of the Partner Management Committee to serve as the sole member of the Class B shareholder committee.

Because our partners control more than 50% of our voting power, we are eligible for the “controlled company” exception from NYSE requirements that our board of directors be comprised of a majority of independent directors and that our compensation committee and nominating, corporate governance and conflicts committee consist solely of independent directors. While we do not currently intend to utilize this exception, we may in the future determine to do so.

In addition, the shareholders’ agreement among us and our partners, in their capacity as the Class B shareholders, will provide the Class B shareholder committee, so long as our partners and their permitted transferees continue to hold more than 40% of the total combined voting power of our outstanding Class A shares and Class B shares, with approval rights over a variety of significant board actions, including:

 

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any incurrence of indebtedness, in one transaction or a series of related transactions, by us or any of our subsidiaries or controlled affiliates in an amount in excess of approximately 10% of the then existing long-term indebtedness of us and our subsidiaries;

 

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any issuance by us or any of our subsidiaries or controlled affiliates, in any transaction or series of related transactions, of equity or equity-related outstanding shares which would represent, after such issuance, or upon conversion, exchange or exercise, as the case may be, at least 10% of the total combined voting power of our outstanding Class A shares and Class B shares other than (1) pursuant to transactions solely among us and our wholly owned subsidiaries, or (2) upon conversion of convertible securities or upon exercise of warrants or options, which convertible securities, warrants or options are either outstanding on the date of, or issued in compliance with, the shareholders’ agreement;

 

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any equity or debt commitment or investment or series of related equity or debt commitments or investments by us or any of our subsidiaries or controlled affiliates in an entity or related group of entities in an amount greater than $250 million;

 

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any entry by us, any subsidiary or controlled affiliate into a new line of business that does not involve investment management and that requires a principal investment in excess of $100 million;

 

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the adoption of a shareholder rights plan;

 

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any appointment or removal of a chief executive officer or co-chief executive officer; or

 

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the termination of the employment of an executive officer or the association of a partner with us or any of our subsidiaries or controlled affiliates without cause.

Furthermore, the partners and the Class B shareholder committee have certain consent rights with respect to structural and other changes involving our company as described under “Description of Shares—Och-Ziff Capital Management Group LLC Limited Liability Company Agreement—Amendment of Our Operating Agreement” and “Description of Shares—Och-Ziff Capital Management Group LLC Limited Liability Company Agreement—Relationship with Och-Ziff Operating Group Entities”.

 

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In addition, our partners are entitled to approximately         % of our economic returns through their holdings of         % of the Och-Ziff Operating Group Units. Because they hold their economic interest in our business directly through Och-Ziff Operating Group, rather than through the public company, our partners may have conflicting interests with holders of Class A shares. For example, our partners may have different tax positions from you which could influence their decisions regarding whether and when to dispose of assets, and whether and when to incur new or refinance existing indebtedness, especially in light of the existence of the tax receivable agreement. In addition, the structuring of future transactions may take into consideration the partners’ tax considerations even where no similar benefit would accrue to us.

We intend to pay regular distributions but our ability to do so may be limited by our holding company structure, as we are dependent on distributions from the Och-Ziff Operating Group to make distributions and to pay taxes and other expenses.

As a holding company, our ability to make distributions or to pay taxes and other expenses will be subject to the ability of our subsidiaries to provide cash to us. We intend to make quarterly distributions to our Class A shareholders. Accordingly, we expect to cause the Och-Ziff Operating Group to make distributions to its direct unitholders holding Och-Ziff Operating Group Units, initially our wholly owned subsidiaries and our existing owners, pro rata in an amount sufficient to enable us to pay such distributions to our Class A shareholders; however, no assurance can be given that such distributions will or can be made. Our board can reduce or eliminate our distributions at any time, in its discretion. In addition, Och-Ziff Operating Group is required to make minimum tax distributions to its direct unitholders. If the Och-Ziff Operating Group has insufficient funds to make such distributions, we may have to borrow additional funds or sell assets, which could materially adversely affect our liquidity and financial condition. Furthermore, by paying cash distributions rather than investing that cash in our business, we might risk slowing the pace of our growth, or not having a sufficient amount of cash to fund our operations, new investments or unanticipated capital expenditures, should the need arise.

The declaration and payment of any future distributions will be at the sole discretion of our board of directors, which may change our distribution policy at any time. Because we only earn and recognize incentive income on an annual basis, we anticipate that quarterly distributions in respect of the first three fiscal quarters will be disproportionate to distributions in respect of the last fiscal quarter, which will typically be paid in the first fiscal quarter. Our board of directors will take into account general economic and business conditions, our strategic plans and prospects, our business and investment opportunities, our financial condition and operating results, working capital requirements and anticipated cash needs, contractual restrictions and obligations, including payment obligations pursuant to the tax receivable agreement and restrictions pursuant to our credit arrangements, legal, tax and regulatory restrictions, restrictions or other implications on the payment of distributions by us to our Class A shareholders or by our subsidiaries to us and such other factors as our board of directors may deem relevant. Any payments made to our partners and compensatory payments made to our employees, including any discretionary income allocations on the Och-Ziff Operating Group Class C operating group units as determined by the Partner Management Committee in conjunction with the Och-Ziff Compensation Committee, will reduce amounts available for distribution to our Class A shareholders.

The vast majority of cash and investment assets reflected on our historical combined balance sheets belongs to our funds which are presented on a consolidated basis under GAAP. We depend on the cash we receive from the Och-Ziff Operating Group.

Our historical combined financial information includes significant investment asset balances, cash and restricted cash that is owned by our consolidated subsidiaries. Although the investments, cash and other assets of certain of our funds have historically been included in our consolidated statements for financial reporting purposes, such assets are not available to us to pay dividends or for other liquidity

 

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needs but rather is property of the relevant fund. Following changes made to our fund documents, these funds are no longer included in our combined financial statements as of January 1, 2007 for the the relevant domestic funds and as of June 30, 2007 for the relevant offshore funds, and such assets will therefore no longer appear on the face of our balance sheet. We depend on distributions from the Och-Ziff Operating Group for cash and the Och-Ziff Operating Group depends primarily on the management fees and incentive income it receives from our funds and its portion of the distributions made by the funds, if any, for cash.

We will be required to pay our existing owners for most of the tax benefits we realize as a result of the tax basis step-up we receive in connection with taxable exchanges by our existing owners of Och-Ziff Operating Group A Units or our acquisitions of those units from our existing owners.

At any time and from time to time, subject to vesting, minimum retained ownership requirements and transfer restrictions, each of our existing owners will, and each of our future owners may, have the right to exchange its Och-Ziff Operating Group A Units for our Class A shares on a one-for-one basis (or, at our option, a cash equivalent) in a taxable transaction. These taxable exchanges, as well as our acquisitions of Och-Ziff Operating Group A Units from our owners (including in connection with this offering), may result in increases in the tax depreciation and amortization deductions, as well as an increase in the tax basis of other assets, of Och-Ziff Operating Group that otherwise would not have been available. These increases in tax depreciation and amortization deductions, as well as the tax basis of other assets, may reduce the amount of tax that our corporate taxpayer intermediate holding companies that hold an interest in an Och-Ziff Operating Group entity would otherwise be required to pay in the future, although the IRS may challenge all or part of increased deductions and tax basis increase, and a court could sustain such a challenge.

Prior to this offering, we will enter into a tax receivable agreement with our existing owners that will provide for the payment by the corporate taxpayers to those owners of 85% of the amount of tax savings, if any, that the corporate taxpayers actually realize (or are deemed to realize in the case of an early termination payment by the corporate taxpayers or a change of control, as discussed below) as a result of these increases in tax deductions and tax basis of the Och-Ziff Operating Group. The payments that the corporate taxpayers may make to our existing owners could be material in amount. Furthermore, owners that acquire their interests in the Och-Ziff Operating Group after consummation of this offering may become a party to the tax receivable agreement.

Were the IRS to challenge a tax basis increase, our owners who have received payments under the tax receivable agreement will not reimburse the corporate taxpayers for any such payments that have been previously made. As a result, in certain circumstances, payments could be made to our owners under the tax receivable agreement in excess of the corporate taxpayers’ cash tax savings. The corporate taxpayers’ ability to achieve benefits from any tax basis increase, and the payments to be made under this agreement, will depend upon a number of factors, including the timing and amount of our future income.

Decisions made by the partners in the course of running our business, in particular decisions made with respect to the sale or disposition of assets or change of control, may influence the timing and amount of payments that are payable to an exchanging or selling owner under the tax receivable agreement. In general, earlier disposition of assets following an exchange or acquisition transaction will tend to accelerate such payments and increase the present value of the tax receivable agreement.

In addition, the tax receivable agreement provides that, upon a merger, asset sale or other form of business combination or certain other changes of control, the corporate taxpayers’ (or their

 

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successors’) obligations with respect to exchanged or acquired units (whether exchanged or acquired before or after such change of control) would be based on certain assumptions, including that the corporate taxpayers would have sufficient taxable income to fully utilize the deductions arising from the increased tax deductions and tax basis and other benefits related to entering into the tax receivable agreement. See “Certain Relationships and Related Party Transactions—Tax Receivable Agreement”.

If we are deemed an investment company under the Investment Company Act of 1940, our business would be subject to applicable restrictions under that Act, which could make it impracticable for us to continue our business as contemplated and would have a material adverse impact on the market price of our Class A shares.

We do not believe that we are an “investment company” under the 1940 Act because the nature of our assets and the sources of our income exclude us from the definition of an investment company under the 1940 Act. In addition, we believe our company is not an investment company under Section 3(b)(1) of the Investment Company Act because it is primarily engaged in a non-investment company business. We intend to conduct our operations so that we will not be deemed an investment company. However, if we were to be deemed an investment company, restrictions imposed by the 1940 Act, including limitations on our capital structure and our ability to transact with affiliates, could make it impractical for us to continue our business as contemplated. In addition, we would no longer be treated, for U.S. federal income tax purposes, as a partnership and our earnings would become taxable as a corporation, which could have a material adverse effect on our business and the price of our Class A shares.

Risks Related to this Offering

All of the proceeds from this offering (net of underwriting discounts) will be used to acquire interests in our business from our existing owners. Accordingly, we will not retain any proceeds from this offering.

We estimate that our net proceeds from this offering (net of underwriting discounts), at an assumed initial public offering price of $             per Class A share and after deducting estimated underwriting discounts and commissions will be approximately $             billion, or $             billion if the underwriters exercise their option to purchase additional Class A shares in full. We intend to use all of these net proceeds to acquire interests in our business from our existing owners as described under “Our Structure—The Transactions—Offering Transactions”. Accordingly, we will not retain any of the proceeds from the offering. See “Use of Proceeds”.

An active market for our Class A shares may not develop.

Prior to this offering there has been no trading market for our Class A shares. We intend to submit an application to have our Class A shares listed on the New York Stock Exchange, or the “NYSE,” under the symbol “OZM”. However, we cannot assure you that our Class A shares will be approved for listing on the NYSE or, if approved, that a regular trading market of our Class A shares will develop on that exchange or elsewhere or, if developed, that any market will be sustained. Accordingly, we cannot assure you of the likelihood that an active trading market for our Class A shares will develop or be maintained, the liquidity of any trading market, your ability to sell your Class A shares when desired, or at all, or the prices that you may obtain for your Class A shares. The initial public offering price per Class A share will be determined by agreement among us and the representatives of the underwriters, and may not be indicative of the price at which our Class A shares will trade in the public market after this offering.

 

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The market price and trading volume of our Class A shares may be volatile, which could result in rapid and substantial losses for our shareholders.

Even if an active trading market develops, the market price of our Class A shares may be highly volatile and could be subject to wide fluctuations. In addition, the trading volume in our Class A shares may fluctuate and cause significant price variations to occur. If the market price of our Class A shares declines significantly, you may be unable to resell your Class A shares at or above your purchase price, if at all. We cannot assure you that the market price of our Class A shares will not fluctuate or decline significantly in the future. Some of the factors that could negatively affect the price of our Class A shares or result in fluctuations in the price or trading volume of our Class A shares include:

 

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variations in our quarterly operating results;

 

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failure to meet our earnings estimates;

 

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publication of research reports about us or the investment management industry or the failure of securities analysts to cover our Class A shares after this offering;

 

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additions or departures of our partners and other key management personnel;

 

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adverse market reaction to any indebtedness we may incur or securities we may issue in the future;

 

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actions by shareholders;

 

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changes in market valuations of similar companies;

 

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speculation in the press or investment community about our business;

 

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changes or proposed changes in laws or regulations or differing interpretations thereof affecting our business or enforcement of these laws and regulations, or announcements relating to these matters;

 

  Ÿ  

adverse publicity about the asset management industry generally or individual scandals, specifically; and

 

  Ÿ  

general market and economic conditions.

Our Class A share price may decline due to the large number of shares eligible for future sale and for exchange into Class A shares.

The market price of our Class A shares could decline as a result of sales of a large number of our Class A shares or the perception that such sales could occur. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and price that we deem appropriate. After the consummation of this offering, we will have              outstanding              Class A shares on a fully diluted basis and              Class A restricted share units granted to employees pursuant to our 2007 equity incentive plan, and              Class A shares and Och-Ziff Operating Group Units will remain available for future grant under our 2007 equity incentive plan. See “Shares Eligible for Future Sale”. Beginning in 2008, the Class A shares reserved under our 2007 equity incentive plan will be increased on the first day of each fiscal year during the plan’s term by the lesser of (x) the excess of (i)         % of the number of outstanding Class A shares and Class B shares of the company on the last day of the immediately preceding fiscal year over (ii) the number of shares reserved and available for issuance under our 2007 equity incentive plan as of such date or (y)              shares.

We have agreed with the underwriters not to sell, otherwise dispose of or hedge, directly or indirectly, any of our Class A shares or any securities issuable upon conversion of, or exchange or exercise for, Class A shares (including Och-Ziff Operating Group units), subject to specified exceptions, during the period from the date of this prospectus continuing through the date 180 days

 

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after the date of this prospectus, except with the prior written consent of Goldman, Sachs & Co. and Lehman Brothers Inc. Subject to these agreements, we may issue and sell in the future additional Class A shares or any securities issuable upon conversion of, or exchange or exercise for, Class A shares (including Och-Ziff Operating Group units).

Our existing owners will own an aggregate of              Och-Ziff Operating Group A Units upon consummation of this offering. Each existing owner will have the right to exchange each of its Och-Ziff Operating Group A Units for one of our Class A shares (or, at our option, a cash equivalent) at any time, subject to vesting, minimum retained ownership requirements and transfer restrictions. Our existing owners, executive officers and directors and our employees who are receiving Class A restricted share units in connection with this offering have agreed with the underwriters not to dispose of or hedge, directly or indirectly, any of our Class A shares or any securities issuable upon conversion of, or exchange or exercise for, Class A shares (including Och-Ziff Operating Group units), subject to specified exceptions, during the period from the date of this prospectus continuing through the date 180 days after the date of this prospectus, except with the prior written consent of Goldman, Sachs & Co. and Lehman Brothers Inc. After the expiration of this 180-day lock-up period, these Class A shares and Och-Ziff Operating Group A Units will be eligible for resale from time to time, subject to certain contractual restrictions and Securities Act limitations. Under certain circumstances the 180-day lock-up period may be extended.

Prior to the consummation of this offering, our existing owners will enter into a registration rights agreement with us. Under that agreement, after the expiration of their 180-day lock-up period, the partners will have the ability to cause us to register the Class A shares they acquire upon exchange of their Och-Ziff Operating Group A Units and our partners and the Ziffs will have certain “piggyback” registration rights in connection with registered offerings of our securities.

At the time of this offering, we intend to grant to all of our employees              Class A restricted share units in the aggregate under our 2007 equity incentive plan. These units will vest in equal installments over a four-year period beginning on the first anniversary of this offering. We intend to file a registration statement on Form S-8 to register an aggregate of              interests reserved for issuance under our 2007 equity incentive plan (not including automatic annual increases thereto) and, as a result, such Class A shares will be freely transferable by non-affiliates upon issuance and by affiliates under Rule 144, without regard to holding period limitations.

In addition, the operating group limited partnership agreements authorize the Och-Ziff Operating Group entities to issue an unlimited number of additional partnership interests and authorize the general partner to specify (a) the allocations of items of partnership income, gain, loss, deduction and credit to holders of each such class or series of interests; (b) the right of holders of each such class or series of interests to share (on a pari passu, junior or preferred basis) in partnership distributions; (c) the rights of holders of each such class or series of interests upon dissolution and liquidation of the limited partnership; (d) the voting rights, if any, of holders of each such class or series of interests; and (e) the conversion, redemption or exchange rights applicable to each such class or series of units, including exchanges for Class A shares. The total number of interests that may be created pursuant to the foregoing and the issuance thereof that may be authorized by the general partner is not limited.

Investors in this offering will suffer immediate and substantial dilution.

The initial public offering price per Class A share will be substantially higher than our pro forma as adjusted net tangible book value per share immediately after this offering. As a result, you will pay a price per Class A share that substantially exceeds the book value of our assets after subtracting our liabilities. At an initial offering price of $             per Class A share (the midpoint of the price range set forth on the cover page of this prospectus) you will incur immediate dilution in an amount of $             per Class A share.

 

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Our partners’ beneficial ownership of Class B shares, our shareholders’ agreement, and anti-takeover provisions in our charter documents and Delaware law could delay or prevent a change in control.

Upon consummation of this offering, our partners will beneficially own all of our Class B shares, representing approximately         % of the total voting power of our company. In addition, our partners will grant to the members of the Class B shareholder committee (which initially consists solely of Mr. Och) an irrevocable proxy to vote all of such shares as they may determine in their sole discretion, which proxy will terminate upon the later of Mr. Och’s withdrawal, death or disability or such time as our partners hold less than 40% of the total combined voting power of our company. As a result, Mr. Och will be able to control all matters requiring the approval of shareholders and will be able to prevent a change in control of our company. In addition, under our shareholders’ agreement, the Class B shareholder committee has approval rights with respect to certain actions of our board of directors, including actions relating to a potential change in control, so long as our partners continue to hold at least 40% of the total combined voting power of our company and has the ability to initially designate five of the seven nominees to our board of directors, and, under our operating agreement, the Class B shareholder committee will have certain consent rights with respect to structural and other changes involving our company. See “—Risks Related to Our Organization and Structure—Control by Mr. Och of the combined voting power of our shares and our existing partners holding their economic interest through Och-Ziff Operating Group may give rise to conflicts of interest”.

In addition, provisions in our operating agreement may make it more difficult and expensive for a third party to acquire control of us even if a change of control would be beneficial to the interests of our shareholders. For example, our operating agreement provides for a staggered board, requires advance notice for proposals by shareholders and nominations, places limitations on convening shareholder meetings, and authorizes the issuance of preferred shares that could be issued by our board of directors to thwart a takeover attempt. The market price of our Class A shares could be adversely affected to the extent that Mr. Och’s control over us, as well as provisions of our operating agreement, discourage potential takeover attempts that our shareholders may favor.

Risks Related to Taxation

Our structure involves complex provisions of U.S. federal income tax law for which no clear precedent or authority may be available. Our structure also is subject to potential legislative, judicial or administrative change and differing interpretations, possibly on a retroactive basis.

The U.S. federal income tax treatment of holders of the Class A shares depends in some instances on determinations of fact and interpretations of complex provisions of U.S. federal income tax law for which no clear precedent or authority may be available. You should be aware that the U.S. federal income tax rules are constantly under review by persons involved in the legislative process, the IRS, and the U.S. Treasury Department, frequently resulting in revised interpretations of established concepts, statutory changes, revisions to regulations and other modifications and interpretations. The IRS pays close attention to the proper application of tax laws to partnerships. The present U.S. federal income tax treatment of an investment in the Class A shares may be modified by administrative, legislative or judicial interpretation at any time, possibly on a retroactive basis, and any such action may affect investments and commitments previously made. For example, changes to the U.S. federal tax laws and interpretations thereof could make it more difficult or impossible to meet the qualifying income exception for us to be treated as a partnership for U.S. federal income tax purposes that is not taxable as a corporation, affect or cause us to change our investments and commitments, change the character or treatment of portions of our income (including, for instance, treating carried interest as ordinary income rather than capital gain), affect the tax considerations of an investment in us and adversely affect an investment in our Class A shares. See “Risk Factors—Risks Related to Taxation—Members of the United States Congress have introduced legislation that would, if enacted, preclude us

 

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from qualifying for treatment as a partnership for U.S. federal income tax purposes under the publicly traded partnership rules. Our structure also is subject to potential judicial or administrative change and differing interpretations, possibly on a retroactive basis. We may determine not to proceed with this offering if our ability to qualify as a partnership for U.S. federal income tax purposes remains uncertain, or if any other legislative or executive branch action occurs which would materially affect our ability to move ahead with this offering”.

Our organizational documents and agreements permit the board of directors to modify our operating agreement from time to time, without the consent of the holders of Class A shares, in order to address certain changes in U.S. federal income tax regulations, legislation or interpretation. In some circumstances, such revisions could have a material adverse impact on some or all of the holders of our Class A shares. Moreover, we will apply certain assumptions and conventions in an attempt to comply with applicable rules and to report income, gain, deduction, loss and credit to holders in a manner that reflects such holders’ beneficial ownership of partnership items, taking into account variation in ownership interests during each taxable year because of trading activity. However, these assumptions and conventions may not be in compliance with all aspects of applicable tax requirements. It is possible that the IRS will assert successfully that the conventions and assumptions used by us do not satisfy the technical requirements of the Code and/or Treasury regulations and could require that items of income, gain, deductions, loss or credit, including interest deductions, be adjusted, reallocated, or disallowed, in a manner that adversely affects holders of the Class A shares.

Members of the United States Congress have introduced legislation that would, if enacted, preclude us from qualifying for treatment as a partnership for U.S. federal income tax purposes under the publicly traded partnership rules. Our structure also is subject to potential judicial or administrative change and differing interpretations, possibly on a retroactive basis. We may determine not to proceed with this offering if our ability to qualify as a partnership for U.S. federal income tax purposes remains uncertain, or if any other legislative or executive branch action occurs which would materially affect our ability to move ahead with this offering.

On June 14, 2007, the Chairman and the Ranking Republican Member of the United States Senate Committee on Finance introduced legislation that would tax as corporations publicly traded partnerships that directly or indirectly derive income from investment adviser or asset management services. In addition, the Chairman and the Ranking Republican Member concurrently issued a press release stating that they do not believe that proposed public offerings of private equity and hedge fund management firms are consistent with the intent of the existing rules regarding publicly traded partnerships because the majority of their income is from the active provision of services to investment funds and limited partner investors in such funds. Further, they have sent letters to the Secretary of the Treasury and the Chairman of the U.S. Securities and Exchange Commission regarding these tax issues in which they express a view that recent initial public offerings of firms that manage private equity and hedge funds “raise serious tax questions that if left unaddressed have the potential to jeopardize the integrity of the tax code and the corporate tax base over the long-term”. As explained in the technical explanation accompanying the proposed legislation:

Under the bill, the exception from corporate treatment for a publicly traded partnership does not apply to any partnership that, directly or indirectly, has any item of income or gain (including capital gains or dividends), the rights to which are derived from services provided by any person as an investment adviser, as defined in the Investment Advisers Act of 1940, or as a person associated with an investment adviser, as defined in that Act. Further, the exception from corporate treatment does not apply to a partnership that, directly or indirectly, has any item of income or gain (including capital gains or dividends), the rights to which are derived from asset management services provided by an investment adviser, a person associated with an investment adviser, or any person related to either, in connection with the management of assets

 

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with respect to which investment adviser services were provided. For purposes of the bill, these determinations are made without regard to whether the person is required to register as an investment adviser under the Investment Advisers Act of 1940.

If enacted in its proposed form, the proposed legislation introduced by the Chairman and the Ranking Republican Member of the United States Senate Committee on Finance would be applicable to taxable years of a partnership beginning on or after June 14, 2007. On June 20, 2007, a Congressman from Vermont introduced legislation in the House of Representatives that is substantially similar to the proposed legislation introduced by the Chairman and the Ranking Republican Member of the United States Senate Committee on Finance. In addition, on June 22, 2007, a Congressman from Michigan, joined by the Chairmen and other members of the United States House of Representatives Committee on Ways and Means, introduced legislation in the House of Representatives that would have the effect of treating publicly traded partnerships that derive income directly or indirectly from investment management services as corporations for U.S. federal income tax purposes.

If any version of these legislative proposals survives the legislative and executive process in its proposed form and were to be enacted into law, or if other similar legislation were to be enacted or any other change in the tax laws, rules, regulations or interpretations were to preclude us from qualifying for treatment as a partnership for U.S. federal income tax purposes under the publicly traded partnership rules, Class A shareholders would be negatively impacted because we would incur a material increase in our tax liability as a public company from the date any such changes became applicable to us, which could result in a reduction in the value of our Class A shares. We may determine not to proceed with this offering if our ability to qualify as a partnership for U.S. federal income tax purposes remains uncertain, or if any other legislative or executive branch actions occur which would materially affect our ability to move ahead with the offering.

You may be subject to U.S. federal income tax on your share of our taxable income, regardless of whether you receive any cash dividends from us.

So long as we are not required to register as an investment company under the 1940 Act and 90% of our gross income for each taxable year constitutes “qualifying income” within the meaning of the Internal Revenue Code of 1986, as amended, or the “Code,” on a continuing basis, we will be treated, under current law, as a partnership for U.S. federal income tax purposes and not as an association or a publicly traded partnership taxable as a corporation. You may be subject to U.S. federal, state, local and possibly, in some cases, foreign income taxation on your allocable share of our items of income, gain, loss, deduction and credit (including our allocable share of those items of any entity in which we invest that is treated as a partnership or is otherwise subject to tax on a flow-through basis) for each of our taxable years ending with or within your taxable year, regardless of whether or not you receive cash dividends from us. See “Material U.S. Federal Tax Considerations”.

You may not receive cash dividends equal to your allocable share of our net taxable income or even the tax liability that results from that income. In addition, certain of our holdings, including holdings, if any, in a Controlled Foreign Corporation (“CFC”) and a Passive Foreign Investment Company (“PFIC”), may produce taxable income prior to the receipt of cash relating to such income, and holders of our Class A shares that are United States persons will be required to take such income into account in determining their taxable income. Under our operating agreement, in the event of an inadvertent partnership termination in which the Internal Revenue Service (“IRS”) has granted us limited relief, each holder of our Class A shares also is obligated to make such adjustments as are required by the IRS to maintain our status as a partnership. Such adjustments may require persons who hold our Class A shares to recognize additional amounts in income during the years in which they hold such shares. We may also be required to make payments to the IRS.

 

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There can be no assurance that amounts paid as dividends on Class A shares will be sufficient to cover the tax liability arising from ownership of Class A shares.

Any dividends paid on Class A shares will not take into account your particular tax situation (including the possible application of the alternative minimum tax) and, therefore, because of the foregoing as well as other possible reasons, may not be sufficient to pay your full amount of tax based upon your share of our net taxable income. In addition, the actual amount and timing of dividends will always be subject to the discretion of our board of directors and we cannot assure you that we will in fact pay cash dividends as currently intended. In particular, the amount and timing of dividends will depend upon a number of factors, including, among others:

 

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our actual results of operations and financial condition;

 

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restrictions imposed by our operating agreement or applicable law;

 

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restrictions imposed by our new term loan;

 

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reinvestment of our capital;

 

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the timing of the investment of our capital;

 

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the amount of cash that is generated by our investments or to fund liquidity needs;

 

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levels of operating and other expenses;

 

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contingent liabilities; or

 

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factors that our board of directors deems relevant.

Even if we do not distribute cash in an amount that is sufficient to fund your tax liabilities, you will still be required to pay income taxes on your share of our taxable income.

If we were to be treated as a corporation for U.S. federal income tax purposes, the value of the Class A shares would be adversely affected.

We have not requested, and do not plan to request, a ruling from the IRS on our treatment as a partnership for U.S. federal income tax purposes, or on any other matter affecting us. Under current law and assuming full compliance with the terms of our operating agreement (and other relevant documents) and based upon factual statements and representations made by us, Skadden, Arps, Slate, Meagher & Flom LLP has opined that we will be treated as a partnership, and not as an association or a publicly traded partnership taxable as a corporation for U.S. federal income tax purposes. However, opinions of counsel are not binding upon the IRS or any court, and the IRS may challenge this conclusion and a court may sustain such a challenge. The factual representations made by us upon which Skadden, Arps, Slate, Meagher & Flom LLP will rely relate to our organization, operation, assets, activities, income, and present and future conduct of our operations.

In general, if an entity that would otherwise be classified as a partnership for U.S. federal income tax purposes is a “publicly traded partnership” (as defined in the Code) it will be nonetheless treated as a corporation for U.S. federal income tax purposes, unless the exception described below, and upon which we intend to rely, applies. A publicly traded partnership will, however, be treated as a partnership, and not as a corporation for U.S. federal income tax purposes, so long as 90% or more of its gross income for each taxable year constitutes “qualifying income” within the meaning of the Code and it is not required to register as an investment company under the 1940 Act. We refer to this exception as the “qualifying income exception”.

Qualifying income generally includes dividends, interest, capital gains from the sale or other disposition of stocks and securities and certain other forms of investment income. We expect that our

 

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income generally will consist of interest and dividends (including dividends from Och-Ziff Corp and interest on indebtedness from Och-Ziff Corp), capital gains and other types of qualifying income, such as income from notional principal contracts, securities loans, options, forward contracts and future contracts. No assurance can be given as to the types of income that will be earned in any given year. If we fail to satisfy the qualifying income exception described above, items of income and deduction would not pass through to holders of the Class A shares and holders of the Class A shares would be treated for U.S. federal (and certain state and local) income tax purposes as shareholders in a corporation. In such a case, we would be required to pay income tax at regular corporate rates on all of our income. In addition, we would likely be liable for state and local income and/or franchise taxes on all of such income. Moreover, dividends to holders of the Class A shares would constitute ordinary dividend income taxable to such holders to the extent of our earnings and profits, and the payment of these dividends would not be deductible by us. Taxation of us as a publicly traded partnership taxable as a corporation could result in a material adverse effect on our cash flow and the after-tax returns for holders of Class A shares and thus could result in a substantial reduction in the value of the Class A shares.

Tax gain or loss on disposition of our Class A shares could be more or less than expected.

If you sell your Class A shares, you will recognize a gain or loss equal to the difference between the amount realized and the adjusted tax basis in those Class A shares. Prior distributions to you in excess of the total net taxable income allocated to you, which decreased the tax basis in your Class A shares, will in effect become taxable income to you if the Class A shares are sold at a price greater than your tax basis in those Class A shares, even if the price is less than the original cost.

We treat each purchaser of our Class A shares as having the same tax benefits without regard to the Class A shares purchased. The IRS may challenge this treatment, which could adversely affect the value of our Class A shares.

Because we cannot match transferors and transferees of Class A shares, we will adopt depreciation and amortization positions that may not conform with all aspects of existing Treasury regulations. A successful IRS challenge to those positions could adversely affect the amount of tax benefits available to our holders. It also could affect the timing of these tax benefits or the amount of gain on the sale of Class A shares and could have a negative impact on the value of our Class A shares or result in audits of and adjustments to our holders’ tax returns.

If we were not to make, or cause to be made, an otherwise available election under Section 754 of the Internal Revenue Code to adjust our asset basis or the asset basis of OZ Advisors II, a holder of Class A shares could be allocated more taxable income in respect of those shares prior to disposition than if such an election were made.

We currently do not intend to make, or cause to be made, an election to adjust asset basis under Section 754 of the Internal Revenue Code with respect to us or OZ Advisors II. If no such election is made, there will generally be no adjustment to the basis of the assets of OZ Advisors II upon our acquisition of interests in OZ Advisors II in connection with this offering or upon a subsequent exchange of OZ Operating Group A Units for Class A shares, or to our assets or to the assets of OZ Advisors II upon a subsequent transferee’s acquisition of Class A shares from a prior holder of such shares, even if the purchase price for those interests or shares, as applicable, is greater than the share of the aggregate tax basis of our assets or the assets of OZ Advisors II attributable to those interests or units immediately prior to the acquisition. Consequently, upon a sale of an asset by us or OZ Advisors II, gain allocable to a holder of Class A shares could include built-in gain in the asset existing at the time we acquired those interests, or such holder acquired such shares, which built-in gain would otherwise generally be eliminated if a Section 754 election had been made. See ‘‘Material U.S. Federal Tax Considerations—Administrative Matters—Tax Elections.’’

 

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The sale or exchange of 50% or more of our capital and profit interests will result in the termination of our partnership for federal income tax purposes.

We will be considered to have been terminated for federal income tax purposes if there is a sale or exchange of 50% or more of the total interests in our capital and profits within a 12-month period. Our termination would, among other things, result in the closing of our taxable year for all holders and could result in a deferral of depreciation deductions allowable in computing our taxable income. See “Material U.S. Federal Tax Considerations” for a description of the consequences of our termination for federal income tax purposes.

Complying with certain tax-related requirements may cause us to forego otherwise attractive business or investment opportunities or enter into acquisitions, borrowings, financings or arrangements we may not have otherwise entered into.

In order for us to be treated as a partnership for U.S. federal income tax purposes, and not as an association or publicly traded partnership taxable as a corporation, we must meet the qualifying income exception discussed above on a continuing basis and we must not be required to register as an investment company under the 1940 Act. In order to effect such treatment we (or our subsidiaries) may be required to invest through foreign or domestic corporations, forego attractive business or investment opportunities or enter into borrowings or financings we may not have otherwise entered into. This may adversely affect our ability to operate solely to maximize our cash flow. Our structure also may impede our ability to engage in certain corporate acquisitive transactions because we generally intend to hold all of our assets through the Och-Ziff Operating Group. In addition, we may be unable to participate in certain corporate reorganization transactions that would be tax free to our holders if we were a corporation. To the extent we hold assets other than through the Och-Ziff Operating Group, we will make appropriate adjustments to the Och-Ziff Operating Group agreements so that distributions to partners and us would be the same as if such assets were held at that level.

We may not be able to invest in certain assets, other than through a taxable corporation.

In certain circumstances, we or one of our subsidiaries may have an opportunity to invest in certain assets through an entity that is characterized as a partnership for U.S. federal income tax purposes, where the income of such entity may not be “qualifying income” for purposes of the publicly traded partnership rules. See “Material U.S. Federal Tax Considerations—Taxation of Our Company”. In order to manage our affairs so that we will meet the qualifying income exception, we may either refrain from investing in such entities or, alternatively, we may structure our investment through an entity classified as a corporation for U.S. federal income tax purposes. If the entity were a U.S. corporation, it would be subject to U.S. federal income tax on its operating income, including any gain recognized on its disposal of its interest in the entity in which the opportunistic investment has been made, as the case may be, and such income taxes would reduce the return on that investment.

Our intermediate holding company, Och-Ziff Corp, will be subject to corporate income taxation in the United States.

In light of the publicly traded partnership rules, a significant portion of our investments and activities may be made or conducted through Och-Ziff Corp, which will be treated as a corporation for U.S. federal income tax purposes. Och-Ziff Corp could be liable for significant U.S. federal income taxes and applicable state, local and other taxes that would not otherwise be incurred if it were subject to tax on a flow-through basis, which could adversely affect the value of your investment. Dividends paid by Och-Ziff Corp from time to time will then be included in our income. Income received as a result of investments made or activities conducted through Och-Ziff Holding (but excluding through its taxable corporate affiliates) will not be subject to corporate income taxation in our structure.

 

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The IRS could assert that we are engaged in a U.S. trade or business, with the result that some portion of our income is properly treated as effectively connected income, or ECI, with respect to non-U.S. holders of Class A shares. Moreover, certain REIT dividends and other stock gains may be treated as effectively connected income with respect to non-U.S. holders of Class A shares.

While we expect that our method of operation will not result in a determination that we are engaged in a U.S. trade or business, there can be no assurance that the IRS will not assert successfully that we are engaged in a U.S. trade or business, with the result that some portion of our income is properly treated as ECI with respect to non-U.S. holders. Moreover, dividends paid by an investment that we make in a REIT that is attributable to gains from the sale of U.S. real property interests will, and sales of certain investments in the stock of U.S. corporations owning significant U.S. real property may, be treated as effectively connected income with respect to non-U.S. holders. In addition, certain income of non-U.S. holders from U.S. sources not connected to any such U.S. trade or business conducted by us could be treated as ECI. To the extent our income is treated as ECI, non-U.S. holders generally would be subject to withholding tax on their allocable shares of such income, would be required to file a U.S. federal income tax return for such year reporting their allocable shares of income effectively connected with such trade or business and any other income treated as ECI, and would be subject to U.S. federal income tax at regular U.S. tax rates on any such income (state and local income taxes and filings may also apply in that event). Non-U.S. holders may also be subject to a 30% branch profits tax on such income in the hands of non-U.S. holders that are corporations.

Class A shareholders may be subject to foreign, state and local taxes and return filing requirements as a result of investing in our Class A shares.

While it is expected that our method of operation will not result in a determination that the holders of our Class A shares, solely on account of their ownership of Class A shares, are engaged in trade or business so as to be taxed on any part of their allocable shares of our income or subjected to tax return filing requirements in any jurisdiction in which we conduct activities or own property, there can be no assurance that the Class A shareholders, on account of owning Class A shares, will not be subject to certain taxes, including foreign, state and local income taxes, unincorporated business taxes and estate, inheritance or intangible taxes, imposed by the various jurisdictions in which we conduct activities or own property now or in the future, even if the Class A shareholders do not reside, or are not otherwise subject to such taxes, in any of those jurisdictions. Consequently, Class A shareholders also may be required to file foreign, state and local income tax returns in some or all of these jurisdictions. Furthermore, Class A shareholders may be subject to penalties for failure to comply with those requirements. It is the responsibility of each Class A shareholder to file all United States federal, foreign, state and local tax returns that may be required of such Class A shareholder. See “Material U.S. Federal Tax Considerations—Administrative Matters” and “Material U.S. Federal Tax Considerations—Taxes in Other State, Local, and Non-U.S. Jurisdictions”.

Our delivery of required tax information for a taxable year may be subject to delay, which may require a Class A shareholder to request an extension of the due date for their income tax return.

We have agreed to use reasonable efforts to furnish to you tax information (including Schedule K-1) which describes your allocable share of our income, gains, losses and deductions for our preceding taxable year. Delivery of this information by us will be subject to delay in the event of, among other reasons, the late receipt of any necessary tax information from lower-tier entities. It is therefore possible that, in any taxable year, our shareholders will need to apply for extensions of time to file their tax returns. See “Material U.S. Federal Tax Considerations—Administrative Matters—Information Returns”.

 

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An investment in Class A shares will give rise to UBTI to certain tax-exempt holders of Class A shares.

Due to ownership interests we will hold in entities that are treated as partnerships, or are otherwise subject to tax on a flow-through basis, which will incur indebtedness, we will derive unrelated business taxable income, or UBTI, from “debt-financed” property and, thus, an investment in Class A shares will give rise to UBTI to certain tax-exempt holders of Class A shares. Och-Ziff Holding may borrow funds from Och-Ziff Corp or third parties from time to time to make investments. These investments will give rise to UBTI from “debt-financed” property.

We may hold or acquire certain investments through an entity classified as a PFIC or CFC for U.S. federal income tax purposes.

Certain of our investments may be in foreign corporations or may be acquired through a foreign subsidiary that would be classified as a corporation for U.S. federal income tax purposes. Such an entity may be a PFIC or a CFC for U.S. federal income tax purposes. U.S. holders of Class A shares indirectly owning an interest in a PFIC or a CFC may experience adverse U.S. tax consequences. See “Material U.S. Federal Tax Considerations—Taxation of Holders of Class A Shares—Passive Foreign Investment Companies” and “—Controlled Foreign Corporations”.

WE STRONGLY URGE YOU TO REVIEW CAREFULLY THE DISCUSSION UNDER “MATERIAL U.S. FEDERAL TAX CONSIDERATIONS” AND TO SEEK ADVICE BASED ON YOUR PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR.

 

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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Some of the statements under “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Industry,” “Business” and elsewhere in this prospectus may contain forward-looking statements that reflect our current views with respect to, among other things, future events and financial performance. We generally identify forward-looking statements by terminology such as “outlook,” “believe,” “expect,” “potential,” “continue,” “may,” “will,” “should,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of those words or other comparable words. Any forward-looking statements contained in this prospectus are based upon the historical performance of us and our subsidiaries and on our current plans, estimates and expectations. The inclusion of this forward-looking information should not be regarded as a representation by us, the underwriters or any other person that the future plans, estimates or expectations contemplated by us will be achieved. Such forward-looking statements are subject to various risks and uncertainties and assumptions relating to our operations, financial results, financial condition, business prospects, growth strategy and liquidity. If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, our actual results may vary materially from those indicated in these statements. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this prospectus. We do not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.

MARKET AND INDUSTRY DATA

This prospectus includes market and industry data derived from independent consultant reports, publicly available information, various industry publications and other published industry sources. Independent consultant reports, industry publications and other published industry sources generally indicate that the information contained therein was obtained from sources believed to be reliable, but do not guarantee the accuracy and completeness of such information. Although we believe that the publications and reports are reliable, neither we nor the underwriters have independently verified the data.

 

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OUR STRUCTURE

Overview

Our business was founded in 1994 by Daniel Och together with the Ziffs. Prior to this offering, we will continue to conduct our business through the Och-Ziff Operating Group, which consists of separate entities owned and operated by our existing owners, and through our real estate business, which is a joint venture between entities owned and operated by all of our existing owners and unrelated third parties. Prior to the completion of this offering, we will reorganize our company through the transactions described below, and the Och-Ziff Operating Group will acquire the interests of our existing owners in our real estate business. As a result, upon completion of this offering, Och-Ziff Capital Management Group LLC will be a holding company, and its primary assets will be its indirect ownership interest in the Och-Ziff Operating Group.

The Transactions

Och-Ziff Capital Management Group LLC

Och-Ziff Capital Management Group LLC was formed as a Delaware limited liability company on June 6, 2007 for the purposes of effecting this offering and the related transactions and has engaged in no other business activities since its formation. Prior to this offering, we will amend and restate our operating agreement to, among other things, provide for the reclassification of the outstanding limited liability company interests held by our existing owners into Class B shares and for the issuance of Class A shares, including those being offered in this offering. The Class A shares and Class B shares will have the respective rights and privileges described under “Description of Shares”.

Och-Ziff Operating Group

Our business is presently conducted by the Och-Ziff Operating Group. Our existing owners will own the same proportionate interest in each Och-Ziff Operating Group entity and immediately prior to this offering, such interests will be reclassified as described below.

With respect to each of our existing partners, such interests will be reclassified as both Och-Ziff Operating Group Class A operating group units, which will represent residual equity interests in our business, and Och-Ziff Operating Group Class C operating group units, which will represent interests in our business pursuant to which the Partner Management Committee in conjunction with the Och-Ziff Compensation Committee may from time to time determine to make discretionary income allocations to our partners, including new partners, in the future. Any such discretionary income allocations would be made in accordance with our compensation philosophy of rewarding performance that increases long-term shareholder value and attracting and retaining the highest quality professionals. Any discretionary income allocations made pursuant to the Och-Ziff Operating Group Class C operating group units would reduce amounts available for distribution to us, our partners and the Ziffs in our respective capacities as owners of the residual equity interests in the Och-Ziff Operating Group after this offering. See “Certain Relationships and Related Party Transactions—Limited Partnership Agreements of Och-Ziff Operating Group Entities—Distributions”. The Ziffs’ existing interest in our business will be reclassified as Class A operating group units only, representing an approximately 10% interest in the residual equity of our business immediately prior to this offering. The Ziffs’ residual equity interest in our business will be economically identical to our existing partners’ residual equity interests. The Ziffs will not hold any of our Class B shares.

As described more fully below, all of our interests in OZ Management and OZ Advisors I will be held through Och-Ziff Corp, which will be taxed as a corporation, and all of our interests in

 

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OZ Advisors II will be held through Och-Ziff Holding, which will be a disregarded entity for U.S. federal income tax purposes. Och-Ziff Corp will hold Class B operating group units in each of OZ Management and OZ Advisors I, and Och-Ziff Holding will hold Class B operating group units in OZ Advisors II. The Class B operating group units will be economically identical to the Class A operating group units held by our existing owners, representing residual equity interests in our business. The applicable intermediate holding company will be the sole general partner of the applicable Och-Ziff Operating Group entity and will, therefore, generally control the business and affairs of such entity.

One Class A operating group unit in each Och-Ziff Operating Group entity collectively represents one “Och-Ziff Operating Group A Unit” and one Class B operating group unit in each Och-Ziff Operating Group entity collectively represents one “Och-Ziff Operating Group B Unit”. In this prospectus, we refer to the Och-Ziff Operating Group A Units and the Och-Ziff Operating Group B Units, which together represent all of the residual equity interests in the Och-Ziff Operating Group entities, collectively as the “Och-Ziff Operating Group Units”.

Our existing owners will be entitled to exchange their Och-Ziff Operating Group A Units with the Och-Ziff Operating Group entities for our Class A shares on a one-for-one basis (or, at our option, a cash equivalent), subject to customary conversion rate adjustments for splits, unit distributions and reclassifications and subject to vesting, minimum retained ownership requirements and transfer restrictions. Upon any such exchange, the corresponding Class B shares of Och-Ziff, if any, held by the exchanging owner will be cancelled, and such exchanging owner may be entitled to certain payments under the tax receivables agreement described below. The Class B operating group units will not be exchangeable for our Class A shares. See “Certain Relationships and Related Party Transactions—Exchange Agreement” for additional information regarding our existing owners’ exchange rights. In addition, we intend to grant to our existing partners certain rights to cause us to register for resale the Class A shares received by them as a result of any such exchange and we intend to grant our existing partners and the Ziffs rights to include such Class A shares in future offerings by us.

The Och-Ziff Operating Group A Units received by our existing owners in the Reorganization will be reflected in our financial statements at fair value based on the initial public offering price of our Class A shares. The unvested Och-Ziff Operating Group A Units will be charged to compensation expense as they vest over the vesting period. Future payments to all existing owners in respect of their Och-Ziff Operating Group A Units will be treated as equity distributions.

Historically, we have used more than one Och-Ziff Operating Group entity to segregate operations for business, financial, tax and other reasons. Going forward, we may increase or decrease the number of our Och-Ziff Operating Group entities based on our views as to the appropriate balance between administrative convenience and continued business, financial, tax and other considerations.

As a result of the foregoing, the operating entities of the Och-Ziff Operating Group will continue to be entitled to all of the management fees and incentive income earned with respect to our funds. We have historically paid, and intend to continue to pay, a portion of our profits to our non-partner professionals as compensation in order to better align their interests with our own and with those of the investors in our funds. In addition, as noted above, the Partner Management Committee in conjunction with the Och-Ziff Compensation Committee may determine to allocate a portion of our net profits to our existing and future partners as discretionary income allocations on the Och-Ziff Operating Group Class C operating group units that they hold. We may also determine to pay our partners additional annual cash amounts in the future and issue equity incentive awards to some or all of our partners and employees. Any such actions would reduce the income of the Och-Ziff Operating Group allocable to Och-Ziff Capital Management Group LLC, which benefits only to the extent of its equity interest in the Och-Ziff Operating Group.

 

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The Och-Ziff Operating Group is considered our predecessor for accounting purposes, and its combined financial statements will be our historical financial statements following this offering. Because Daniel Och controls the Och-Ziff Operating Group before the Transactions and will control us after the Transactions, the Transactions are to be accounted for as a reorganization of entities under common control. Accordingly, except as described below in respect of the deconsolidation of our funds, we will carry forward unchanged the value of the assets and liabilities of the Och-Ziff Operating Group reflected in its historical combined financial statements into our future consolidated financial statements.

Intermediate Holding Companies

Upon consummation of this offering, Och-Ziff Capital Management Group LLC will own 100% of:

 

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Och-Ziff Corp, a Delaware corporation, which will be the sole general partner of and will own an approximately         % interest in the residual equity of OZ Management and OZ Advisors I; and

 

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Och-Ziff Holding, a Delaware limited liability company that is a disregarded entity for U.S. federal income tax purposes, which will be the sole general partner of and will own an approximately         % interest in the residual equity of OZ Advisors II.

Under the operating group limited partnership agreements, management and control rights will be vested in our intermediate holding companies as the general partners. These general partner interests possess no economic interest in such entities and are not entitled to any allocation of gains or losses of, or any distributions from, the Och-Ziff Operating Group. As a result, Och-Ziff, through these general partner entities, will control the Och-Ziff Operating Group. In addition, as described in more detail below, our existing partners, by virtue of their ownership of the Och-Ziff Class B shares, will control all matters submitted to a vote of our shareholders and, therefore, will indirectly control the Och-Ziff Operating Group. Our existing partners will grant to the members of the Class B shareholder committee (which initially consists solely of Mr. Och) an irrevocable proxy to vote their Class B shares, which proxy will terminate upon the later of Mr. Och’s withdrawal, death or disability or such time as our partners hold less than 40% of the total combined voting power of our company.

Deconsolidation of the Och-Ziff Funds

In accordance with GAAP, certain of our funds have historically been consolidated into our combined financial statements notwithstanding the fact that we have only a minority interest in these funds. As a result, our historical combined financial statements reflect the assets, liabilities, revenues, expenses and cash flows of these funds on a gross basis rather than reflecting only the value of our investments in such funds. As of December 31, 2006, the assets of the Och-Ziff funds consolidated on our balance sheet were $36.0 billion, while the net asset value of our investments in these consolidated funds was approximately $414.5 million. All management fees and incentive income earned by us from these funds were eliminated as a result of the consolidation of these funds and are reflected on our historical financial statements as an increase in our allocated share of the net income from these funds.

Effective January 1, 2007, we no longer consolidate most of our domestic funds due to changes in the substantive rights afforded to the unaffiliated limited partners of those funds and, accordingly, our results for the first quarter of 2007 reflect the deconsolidation of those funds. We made similar changes to the rights of unaffiliated shareholders in our offshore funds that became effective on June 30, 2007, which resulted in the deconsolidation of most of those funds as of June 30, 2007. Accordingly, the fund investors’ interest in these funds, reflected as “non-controlling interests in consolidated subsidiaries” on our historical balance sheets and as “non-controlling interests in income of consolidated subsidiaries” on our historical income statements, will be eliminated. We believe that the changes to our financial

 

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reporting resulting from the deconsolidation of these funds will reflect our financial condition and results of operations in a manner that is consistent with how our management evaluates our business and the related risks and will provide shareholders with a better understanding of our business.

The deconsolidation of these funds will have a material effect on certain components of our combined financial statements, but will not have an effect on our net income or equity. The following describes the major effects on our combined financial statements:

 

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We will not record on our balance sheet or statements of income the assets, liabilities, revenues, expenses and other income of the deconsolidated Och-Ziff funds, along with the related non-controlling interests of our fund investors in the equity and income of these funds. For example, if we had deconsolidated the offshore funds as of and for the three months ended March 31, 2007, the following line items would have decreased by the following percentages as compared to our reported results for such period: total assets (91)%; total liabilities (80)%; total revenues (64)%; total expenses (57)%; other income (90)%; non-controlling interests in consolidated subsidiaries (99)% and non-controlling interests in income of consolidated subsidiaries (99)%.

 

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We will reflect our investments and our equity in the income of these funds on our balance sheet and statement of income using the equity method of accounting, rather than eliminating the investments in consolidation.

 

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We will include the management fees and incentive income earned from these funds on our statements of income rather than eliminating the revenue in consolidation.

 

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We will update the footnotes to the combined financial statements to remove disclosures related to amounts no longer reflected on our combined financial statements, including, but not limited to:

 

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the accounting policies of the Och-Ziff funds that do not pertain to us following deconsolidation, and

 

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detailed disclosure of the investments activities of the Och-Ziff funds.

 

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We will update the footnotes to our combined financial statements to include required disclosures regarding our investments in these funds using the equity method of accounting, including, as applicable, summarized financial information of these funds.

 

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We will continue to provide information regarding our management agreements with, and fees and income earned from, these funds.

 

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We will evaluate on an ongoing basis whether we will need to provide separate financial statements for investments in majority-owned unconsolidated subsidiaries and investments accounted for using the equity method of accounting pursuant to Regulation S-X Rule 3-09.

Please refer to “Unaudited Pro Forma Financial Information” for a more detailed description of the deconsolidation of our funds and the effects on our financial statements as a result thereof.

Throughout this prospectus, we refer to the reorganization of the Och-Ziff Operating Group, the acquisition of the real estate business and the deconsolidation, collectively as the “Reorganization”.

Offering Transactions

Och-Ziff Capital Management Group LLC will issue              Class A shares in this offering (or              Class A shares if the underwriters exercise their option to purchase additional Class A shares in

 

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full). Och-Ziff will then contribute the proceeds from this offering to its intermediate holding companies, based on the relative value of those entities. The intermediate holding companies may enter into credit arrangements with one another with respect to a portion of such proceeds, depending upon the relative need and other business considerations. The intermediate holding companies will then contribute all of the proceeds received from us to the Och-Ziff Operating Group in exchange for newly issued Och-Ziff Operating Group B Units such that the intermediate holding companies will hold that number of Och-Ziff Operating Group B Units equal to the number of Class A shares issued in this offering. As a result, our existing owners’ ownership interests in the Och-Ziff Operating Group will be correspondingly reduced. Och-Ziff Operating Group B Units held by the intermediate holding companies will be economically identical in all respects to Och-Ziff Operating Group A Units that our existing owners will hold.

The Och-Ziff Operating Group will then use all of the offering proceeds (including any proceeds received from the underwriters’ exercise of their option to purchase additional Class A shares) to purchase Och-Ziff Operating Group A Units from our existing owners and to pay fees and expenses related to this offering and the other transactions. As a result, we will not retain any of the net proceeds from this offering. Each of our existing partners will invest all of his after-tax proceeds received in connection with this offering initially into our OZ Global Special Investments funds. These investments may be transferred to other Och-Ziff funds or new opportunities, but will otherwise not be redeemable by them for a period of five years following this offering without the approval of the general partner or board of directors of such funds, as applicable.

All of the currently outstanding limited liability company interests of Och-Ziff Capital Management Group LLC are held by our existing partners. These interests will be reclassified as the Class B shares prior to this offering and will be adjusted so that our partners will hold              Class B shares (which may be reduced to              Class B shares if the underwriters exercise their option to purchase additional Class A shares) which will be equal to the number of Och-Ziff Operating Group A Units held by each such partner. The Ziffs will not hold any of our Class B shares. The Class B shares will have no economic rights but will entitle our existing partners to voting rights proportionate to their ownership of Och-Ziff Operating Group A Units. The Class B shares are not expected to be registered for public sale or listed on any securities exchange and will only be transferable by a holder in connection with a transfer of such holder’s Och-Ziff Operating Group A Units. The Class A shares will also entitle the holder to one vote per share, and holders of Class A shares and Class B shares will vote together as a single class on all matters submitted to a vote of our shareholders. Pursuant to our shareholders’ agreement, our existing partners will grant an irrevocable proxy to the members of the Class B shareholder committee (which initially consists solely of Mr. Och) to vote all of such shares as such members may determine in their sole discretion, which proxy will terminate upon the later of Mr. Och’s withdrawal, death or disability or such time as our partners hold less than 40% of the total combined voting power of our company. As a result, Mr. Och initially will control the outcome of any matter submitted to a vote of our shareholders.

IPO Equity Awards

At the time of this offering, we intend to grant to all of our employees (which do not include our partners) an aggregate of              Class A restricted share units under our 2007 equity incentive plan. These units will vest in equal installments on each anniversary date of this offering for four years, beginning on the first anniversary date of this offering. If an employee leaves or is terminated for any reason, such employee will forfeit all unvested units. Upon vesting, we will issue registered Class A shares in respect of such vested units. As a result, such Class A shares will be freely transferable by non-affiliates upon issuance and by affiliates under Rule 144, without regard to holding period limitations.

 

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Tax Receivable Agreement

The purchase by the Och-Ziff Operating Group of Och-Ziff Operating Group A Units from our existing owners with the net proceeds from this offering, as well as future taxable exchanges by our existing owners of Och-Ziff Operating Group A Units for our Class A shares on a one-for-one basis (or, at our option, a cash equivalent), is expected to result in an increase in the tax basis of the tangible and intangible assets of the Och-Ziff Operating Group that would not otherwise have been available. This increase in tax basis will increase, for tax purposes, our depreciation and amortization expense and will therefore reduce the amount of tax that Och-Ziff Corp and our other corporate taxpayer intermediate holding companies that acquire Och-Ziff Operating Group A Units in connection with an exchange, if any, would otherwise be required to pay in the future. As a result, such intermediate holding companies will enter into a tax receivable agreement with our existing owners whereby they will agree to pay to our existing owners 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that these entities actually realize as a result of this increase in tax basis. No payments will be made if a partner elects to exchange his Och-Ziff Operating Group A Units in a tax-free transaction. See “Certain Relationships and Related Party Transactions—Tax Receivable Agreement” for a more detailed description of our tax receivable agreement.

Throughout this prospectus we refer to the above-described offering transactions, including the use of proceeds therefrom, and the IPO equity awards, collectively as the “Offering Transactions,” and the Offering Transactions, together with the Reorganization, as the “Transactions”.

Operating Group Limited Partnership Agreements, Shareholders’ Agreement and Partner Agreements

Vesting; Forfeiture; Transfer and Other Restrictions Applicable to Our Partners.    In connection with this offering, we will enter into the operating group limited partnership agreements and the partner agreements with our existing partners. Pursuant to the operating group limited partnership agreements, the Och-Ziff Operating Group A Units received by our partners in the Reorganization will vest, subject to their continued association with us, in equal installments on each anniversary date of this offering for five years, beginning on the first anniversary date of this offering. The unvested Och-Ziff Operating Group A Units of Mr. Och will be subject to forfeiture to the other partners if Mr. Och voluntarily terminates his association with us. The unvested Och-Ziff Operating Group A Units of any partner other than Mr. Och will be subject to forfeiture to the other partners if such partner voluntarily terminates his association with us or is required to withdraw for cause or if the Partner Performance Committee makes a non-performance determination with respect to such partner as described further under “Certain Relationships and Related Party Transactions—Limited Partnership Agreements of Och-Ziff Operating Group Entities—Vesting; Forfeiture”. The operating group limited partnership agreements will also restrict transfers by our partners of their interests in our business, permitting transfers of their vested interests generally only as permitted by the Chairman of the Partner Management Committee and, on and after the fifth anniversary of this offering, as also permitted by the full Partner Management Committee acting by majority vote. Any transfers will be further subject to a requirement that each partner, while he is associated with us, maintains a minimum ownership of 25% of the vested interests in our business received by him, without reduction for dispositions. Each of our partners will also be required to enter into a partner agreement with us that will place certain restrictions on them with respect to competing with us, soliciting our employees and fund investors and disclosing confidential information about our business. Our managing directors will be required to enter into similar agreements.

Restrictions on Transfer of the Ziffs’ Interest in Our Business.    The operating group limited partnership agreements will provide that the Och-Ziff Operating Group A Units received by the Ziffs in the reorganization will vest in equal installments on each anniversary date of this offering for five years, beginning on the first anniversary of this offering. The Ziffs’ Och-Ziff Operating Group A Units will not

 

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be subject to forfeiture. The Ziffs will not have any demand registration rights with respect to any Class A shares acquired by them upon exchange of their Och-Ziff Operating Group A Units but will have the same “piggyback” registration rights as our existing partners. In addition, following the first anniversary of this offering, the Ziffs will generally be entitled, in any given fiscal quarter, to exchange their Och-Ziff Operating Group A Units for Class A shares in an amount up to the lesser of (i) 3.3% of the total issued and outstanding Class A shares at the time of such disposition and (ii) 5% of the Class A shares that would have been held by them had they converted all of their Och-Ziff Operating Group A Units into Class A shares immediately prior to this offering. The Ziffs will generally be entitled to sell any such Class A shares received on any such exchange, subject to applicable law. The Ziffs will invest approximately 50% of the after-tax proceeds received by them in connection with this offering into our funds, which investments will be subject to the lock-up period applicable to the funds in which the Ziffs choose to invest. The Ziffs will also be permitted to contribute their Och-Ziff Operating Group A Units to charities, subject to the approval of the Chairman of the Partner Management Committee.

Voting and Approval Rights.    In connection with this offering, we will enter into a shareholders’ agreement with our Class B shareholders. Pursuant to the shareholders’ agreement, so long as our partners continue to own more than 40% of the total combined voting power of our company, the Class B shareholder committee will have approval rights with respect to certain actions of our board of directors, including such matters as distributions, significant investments, certain borrowings and other extraordinary matters and structural changes with respect to our business. Also pursuant to the shareholders’ agreement, the Class B shareholder committee will have the right to designate five of the seven nominees for election to our board of directors, with such number of designees decreasing as our partners’ ownership interest in our business decreases. In addition, pursuant to the shareholders’ agreement, each partner will grant to the members of the Class B shareholder committee an irrevocable proxy to vote all of that partner’s Class B shares as determined by such members in their sole discretion, which proxy will terminate upon the later of Mr. Och’s withdrawal, death or disability or such time as our partners hold less than 40% of the total combined voting power of our company. As a result of this proxy, Mr. Och will control all matters submitted to a vote of our shareholders. Moreover, under our operating agreement, the Class B shareholder committee will have certain consent rights with respect to structural and other changes involving our company. See “Certain Relationships and Related Party Transactions—Shareholders’ Agreement—Class B Shareholder Committee; Proxy and Approval Rights” and “—Board Representation”.

Partner Management Committee.    The operating group limited partnership agreements will provide for the establishment of a “Partner Management Committee”. The Partner Management Committee will be a committee comprised of six partners, which shall consist initially of Messrs. Och, Windreich, Frank, Cohen, Varga and Brown, with Mr. Och serving as Chairman. The Partner Management Committee shall act by majority approval, with Mr. Och’s vote breaking any deadlock. Each member of the Partner Management Committee shall serve until such partner’s withdrawal, death, disability or, other than with respect to Mr. Och, removal by the Partner Performance Committee. Upon Mr. Och’s withdrawal, death or disability, the remaining members of the Partner Management Committee shall act by majority vote to either (1) replace Mr. Och with a partner to serve as Chairman, until such partner’s withdrawal, death, disability or removal by the other members of the Partner Management Committee or (2) reduce the size of the committee to the remaining members (in which event, there shall be no Chairman of the Partner Management Committee, and the remaining members will act by majority vote). Upon the withdrawal, death, disability or removal of any of the members of the Partner Management Committee other than the Chairman, the remaining members of the committee shall act by majority vote to fill such vacancy. Upon a reconstitution as provided in clause (1) above, the Partner Management Committee shall have the same rights of reconstitution in the event of the new partner’s withdrawal, death, disability or removal. The Partner Management Committee will have authority to make determinations with respect to distributions on the Och-Ziff Operating Group Class C operating group units, subject to the authority of the Och-Ziff Compensation Committee as described under “Management—Committees of the Board of Directors—Compensation

 

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Committee”. In addition, the Chairman of the Partner Management Committee (or, in the event there is no Chairman, the full committee) will have authority to approve transfers of Och-Ziff Operating Group units and the full committee will have authority to reconstitute the Class B shareholder committee as provided under “Certain Relationships and Related Party Transactions—Shareholders’ Agreement—Class B Shareholder Committee; Proxy and Approval Rights”.

Partner Performance Committee.    The operating group limited partnership agreements will provide for the establishment of a “Partner Performance Committee”. The Partner Performance Committee will be a committee comprised of five partners, which shall consist initially of Messrs. Och, Windreich, Frank, Cohen and Varga, with Mr. Och serving as Chairman. Each member of the Partner Performance Committee shall serve until such partner’s withdrawal, death, disability or, other than with respect to Mr. Och, removal by the other members of the Partner Performance Committee. Upon Mr. Och’s withdrawal, death or disability, the remaining members of the Partner Performance Committee shall act by majority vote to replace Mr. Och with a partner (who may or may not serve as Chairman) until such partner’s withdrawal, death, disability or removal by the other members of the Partner Performance Committee. Upon the withdrawal, death, disability or removal of any of the members of the Partner Performance Committee other than the Chairman, the remaining members of the committee shall act by majority vote to fill such vacancy. Upon a reconstitution as provided above, the Partner Performance Committee shall have the same rights of reconstitution in the event of the new partner’s withdrawal, death, disability or removal. The Partner Performance Committee will have authority to make partner non-performance determinations as provided under “Certain Relationships and Related Party Transactions—Limited Partnership Agreements of Och-Ziff Operating Group Entities—Vesting; Forfeiture”.

Class B Shareholder Committee.    The shareholders’ agreement will provide for the establishment of the “Class B shareholder committee”. The Class B shareholder committee initially will be a committee of one, consisting solely of Daniel Och until his withdrawal, death or disability. Upon Mr. Och’s withdrawal, death or disability, the Partner Management Committee shall act by majority vote to reconstitute the Class B shareholder committee either by (1) appointing a new partner to serve as the sole member of the Class B shareholder committee until such partner’s withdrawal, death, disability or removal by the Partner Management Committee, or (2) appointing the remaining members of the Partner Management Committee as the members of the Class B shareholder committee (in which event such members would act by majority vote in their capacity as the Class B shareholder committee). Upon a reconstitution as provided by clause (1) above, the Partner Management Committee shall have the same rights of reconstitution in the event of the new partner’s withdrawal, death, disability or removal. The Class B shareholder committee will have authority to vote all of the Class B shares, pursuant to a proxy, and will have certain approval rights over significant transactions as described below and under “Certain Relationships and Related Party Transactions—Shareholders’ Agreement—Class B Shareholder Committee; Proxy and Approval Rights” in each case so long as our partners continue to hold at least 40% of the total combined voting power of our company. In addition, under our operating agreement, the Class B shareholder committee will have certain consent rights with respect to structural and other changes involving our company as described under “Description of Shares—Och-Ziff Capital Management Group LLC Limited Liability Company Agreement—Relationship with Och-Ziff Operating Group Entities”. The Class B shareholder committee will also have the right initially to designate five of the seven nominees for election to our board of directors, with such number of nominees decreasing as our partners’ ownership interest in our business decreases. See “Certain Relationships and Related Party Transactions—Shareholders’ Agreement—Board Representation”.

Effects of Transactions

As a result of our structure, we will be a holding company with our Class A shares widely held and publicly traded, but our existing owners will retain their economic interests in us in the form of

 

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direct interests in the Och-Ziff Operating Group. All of the businesses operated by the Och-Ziff Operating Group prior to this offering and our real estate business, and all of the interests therein held by us or our existing owners prior to this offering, will be operated or held, as the case may be, by the Och-Ziff Operating Group following this offering.

As a result of the foregoing, and assuming the issuance of              Class A shares in this offering at an assumed initial offering price of $             per Class A share (the midpoint of the price range set forth on the cover page of this prospectus), immediately following the Transactions:

 

  Ÿ  

Och-Ziff Capital Management Group LLC, through its wholly owned subsidiaries, will hold Och-Ziff Operating Group B Units (or              Och-Ziff Operating Group B Units if the underwriters exercise their option to purchase additional Class A shares in full), representing         % of the residual equity interest in our business (or         % if the underwriters exercise their option to purchase additional Class A shares in full);

 

  Ÿ  

Och-Ziff Capital Management Group LLC, through its wholly owned subsidiaries, will be the sole general partner of each Och-Ziff Operating Group entity and will operate and generally control all of the business and affairs of the Och-Ziff Operating Group;

 

  Ÿ  

Investors in this offering will own              Class A shares, representing indirectly         % of the residual equity and voting power in our business (or              Class A shares, representing indirectly         % of the residual equity and voting power in our business if the underwriters exercise their option to purchase additional Class A shares in full);

 

  Ÿ  

Our existing partners will own              Och-Ziff Operating Group A Units and Class B shares, representing         % of the residual equity and voting power in our business (or              Och-Ziff Operating Group A Units and Class B shares of Och-Ziff, representing         % of the residual equity and voting power in our business if the underwriters exercise their option to purchase additional Class A shares in full) as well as Och-Ziff Operating Group Class C operating group units pursuant to which the Partner Management Committee in conjunction with the Och-Ziff Compensation Committee may from time to time determine to make discretionary income allocations to our existing or future partners on these units in accordance with our compensation philosophy as described under “Management—Compensation Discussion and Analysis”.

 

  Ÿ  

The Ziffs will own              Och-Ziff Operating Group A Units, representing         % of the residual equity in our business (or              Och-Ziff Operating Group A Units representing         % of the residual equity in our business if the underwriters exercise their option to purchase additional Class A shares in full), and no Class B shares of Och-Ziff;

 

  Ÿ  

Through the irrevocable proxy granted by our existing partners to the members of the Class B shareholder committee, such committee will control the vote of the Class B shares and, therefore, the outcome of any matter submitted to a vote of our shareholders;

 

  Ÿ  

Through the operating group limited partnership agreements, our partners’ interests in our business will be subject to forfeiture to one another, vesting and minimum ownership requirements and transfer restrictions over the respective time periods set forth therein;

 

  Ÿ  

Through the operating group limited partnership agreements, the Ziffs’ interest in our business will be subject to vesting and transfer restrictions over the respective time periods set forth therein; and

 

  Ÿ  

Our existing owners will be entitled, subject to vesting, minimum ownership requirements and transfer restrictions, to exchange their Och-Ziff Operating Group A Units with the Och-Ziff Operating Group entities for our Class A shares on a one-for-one basis (or, at our option, a cash equivalent), which will correspondingly decrease an exchanging owner’s ownership of our Class B shares and entitle them to rights to receive payments under the tax receivable agreement.

 

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The diagram below(1) depicts our organizational structure immediately following the Transactions:

LOGO

 


(1) This diagram does not give effect to              Class A restricted share units to be granted under our 2007 equity incentive plan to all of our employees in connection with this offering or the issuance of any Class A shares upon exercise of the underwriters’ option to purchase additional Class A shares.
(2) Our existing partners will grant to the members of the Class B shareholder committee an irrevocable proxy to vote all of such shares. The Ziffs will not hold any of our Class B shares.
(3) Och-Ziff Operating Group A Units and Och-Ziff Operating Group B Units together represent all of the residual equity interests in the Och-Ziff Operating Group.
(4) Held solely by existing partners for potential future discretionary income payments.

 

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Tax Consequences and Distributions

We believe that under existing law we will be treated, for U.S. federal income tax purposes, as a partnership and not as an association or a publicly traded partnership taxable as a corporation. Accordingly, holders of Class A shares will be required to report their allocable share of our income for U.S. federal income tax purposes, regardless of whether any cash or other distributions are paid to them. See “Material U.S. Federal Tax Considerations—Taxation of Our Company—Federal Income Tax Opinion Regarding Partnership Status”. Income will be allocable to holders of Class A shares as a result of dividends and interest from Och-Ziff Corp and Och-Ziff Holding’s income, which will be based on the operations of the Och-Ziff Operating Group.

Och-Ziff Corp, our wholly owned subsidiary and the general partner of OZ Management and OZ Advisors I, will incur U.S. federal, state, local and foreign income taxes on its proportionate share of any net taxable income of such entities. Och-Ziff Holding, our wholly owned subsidiary and the general partner of OZ Advisors II, will be, for U.S. federal income tax purposes, an entity disregarded as an entity separate from its owner, and not as an association taxable as a corporation. Accordingly, income will be allocable to holders of Class A shares as a result of dividends and interest from Och-Ziff Corp and Och-Ziff Holding’s income, which will be based on the operations of the Och-Ziff Operating Group.

We believe that the Och-Ziff Operating Group entities will also be treated as partnerships and not as corporations for U.S. federal income tax purposes. Accordingly, the direct holders of Och-Ziff Operating Group Units that are not taxed on a flow-through basis, including Och-Ziff Corp and our existing owners, will incur U.S. federal, state and local income taxes on their proportionate share of any net taxable income of the Och-Ziff Operating Group. Net profits and net losses of the Och-Ziff Operating Group (after distributions, if any, on the Och-Ziff Operating Group Class C operating group units) will generally be allocated to holders of Och-Ziff Operating Group Units pro rata in accordance with the percentages of their respective interests in the residual equity of such entities. Because we will indirectly own         % of the Och-Ziff Operating Group Units (or         % if the underwriters exercise in full their option to purchase additional Class A shares), we will indirectly be allocated         % of such net profits and net losses of the Och-Ziff Operating Group (or         % if the underwriters exercise in full their option to purchase additional Class A shares). The remaining such net profits and net losses will be allocated to the other limited partners of the Och-Ziff Operating Group, which initially will consist of our existing owners.

After this offering, we intend to cause the Och-Ziff Operating Group to make distributions to holders of Och-Ziff Operating Group Units in order to fund any distributions we may declare on the Class A shares. However any such distributions will be at the sole discretion of our board of directors. If the Och-Ziff Operating Group makes such distributions, the holders of Och-Ziff Operating Group Units will be entitled to receive distributions pro rata, based on their partnership interests. No similar distributions will be made on the corresponding Class B shares of Och-Ziff held by our partners. In addition, in accordance with the operating group limited partnership agreements, we will cause the applicable Och-Ziff Operating Group entities to distribute cash on a pro rata basis to direct holders of Och-Ziff Operating Group Units in an amount at least equal to the maximum tax liabilities arising from the ownership of such units, if any. Because the purpose of such tax distributions is to enable Och-Ziff Corp and the existing owners to satisfy their respective tax liabilities, no such distribution will necessarily be required to be distributed by our intermediate holding companies to us, and we may determine not to pay cash distributions on the Class A shares. The declaration and payment of distributions on the Class A shares will be at the discretion of our board of directors. A holder of Class A shares will be required to report its share of our taxable income even if the board of directors does not pay distributions. See “Risk Factors—Risk Related to Taxation—You may be subject to U.S. federal income tax on your share of our taxable income, regardless of whether you receive any cash dividends from us”.

 

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Members of the United States Congress have introduced legislation that would, if enacted, preclude us from qualifying for treatment as a partnership for U.S. federal income tax purposes under the publicly traded partnership rules. If this or any similar legislation were to be enacted and to apply to us, Class A shareholders would be negatively impacted because we would incur a material increase in our tax liability, which could result in a reduction in the value of our Class A shares. See “Risk Factors—Risks Related to Taxation—Members of the United States Congress have introduced legislation that would, if enacted, preclude us from qualifying for treatment as a partnership for U.S. federal income tax purposes under the publicly traded partnership rules”. It is unclear whether any such legislation will be enacted and, if enacted, how the legislation would apply to us. Our structure also is subject to potential judicial or administrative change and differing interpretations, possibly on a retroactive basis. We may determine not to proceed with this offering if our ability to qualify as a partnership for U.S. federal income tax purposes remains uncertain, or if any other legislative or executive branch actions occur which would materially affect our ability to move ahead with the offering.

Term Loan and Pre-Offering Distribution

We expect to enter into a new $750 million term loan prior to this offering. We presently intend to use the full amount of the proceeds to make a pro rata distribution to our existing owners prior to this offering. Throughout this prospectus we refer to this borrowing and the distribution to our existing owners as the “Pre-Offering Distribution”. The new term loan is expected to have a term of six years and bear interest at an annual rate of LIBOR plus 0.75%. The new term loan is expected to contain customary representations, warranties and covenants as well as customary events of default. For a more detailed description of our new term loan, please refer to “Description of New Term Loan”.

 

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USE OF PROCEEDS

We estimate that we will receive net proceeds of approximately $             billion from the sale of our Class A shares in this offering at an assumed initial public offering price of $             per share, the midpoint of the range set forth on the cover of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us in this offering. If the underwriters exercise their option to purchase additional Class A shares in full, then we estimate that the net proceeds to us will be approximately $             billion.

We intend to contribute all of the net proceeds from this offering, including any proceeds from the exercise of the underwriters’ option to purchase additional Class A shares, to the Och-Ziff Operating Group, which in turn will apply all of those proceeds to purchase              Och-Ziff Operating Group A Units (or              Och-Ziff Operating Group A Units if the underwriters exercise their option to purchase additional Class A shares in full) from our existing owners, including members of our senior management, and to pay fees and expenses in connection with the Transactions. Accordingly, we will not retain any of the proceeds from this offering.

Each of our existing partners will invest all of his after-tax proceeds received in connection with this offering initially into our OZ Global Special Investments funds. These investments may be transferred to other Och-Ziff funds or new opportunities, but will otherwise not be redeemable by them for a period of five years following this offering without the approval of the general partner or board of directors of such funds, as applicable. The Ziffs will invest approximately 50% of the after-tax proceeds received by them in connection with this offering into our funds, which investments will be subject to the lock-up period applicable to the funds in which the Ziffs choose to invest.

 

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CASH DISTRIBUTION POLICY

Historically, we have had a policy of distributing substantially all of our economic income to our existing partners. Our intention is to distribute to our Class A shareholders on a quarterly basis substantially all of Och-Ziff’s net after-tax share of our annual economic income in excess of amounts determined by us to be necessary or appropriate to provide for the conduct of our business, to compensate our employees, to make discretionary income allocations to our partners on our Class C operating group units, to make appropriate investments in our business and our funds, to comply with applicable law, to service our new term loan and any of our other debt instruments or agreements or to provide for future distributions to our Class A shareholders for any one or more of the ensuing four quarters. We expect that our first quarterly distribution will be paid in the              quarter of 2007 in respect of the prior quarter. Incentive income has a significant impact on our economic income and these amounts are not determinable until completion of our fiscal year and are therefore not reflected in our interim financial results, except for incentive income actually earned as a result of investor redemptions during the period. Though our board of directors will have broad discretion in determining our future distribution policy, we currently anticipate that quarterly distributions in respect of our first three fiscal quarters will be based on actual performance, but will not reflect any assumption as to incentive income that may or may not be recorded at year end. Accordingly, if our performance for a given year enables us to earn incentive income, the distributions made in respect of our first three fiscal quarters will be smaller than the distribution we make in respect of our fourth fiscal quarter, which will be paid in the first fiscal quarter of the following year. We would expect that these differences will be substantial in years in which our funds achieve favorable investment performance.

The declaration and payment of any future distributions will be at the sole discretion of our board of directors, which may change our distribution policy at any time. Any payments made to our partners and compensatory payments made to our employees, including any discretionary income allocations on the Och-Ziff Operating Group Class C operating group units as determined by the Partner Management Committee in conjunction with the Och-Ziff Compensation Committee, will reduce amounts available for distribution to our Class A shareholders. Our ability to make such distributions may be limited by, among other things, contractual restrictions and legal, tax and regulatory restrictions.

We will be a holding company and, as such, our ability to pay distributions on our Class A shares will be subject to the ability of our subsidiaries to provide cash to us, which may be limited by, among other things, contractual restrictions and legal, tax and regulatory restrictions. See “Description of New Term Loan” for a description of such restrictions under our new term loan in the event of default thereunder. We will fund any such distribution by causing our subsidiaries to make corresponding distributions. More specifically, first, we will cause the Och-Ziff Operating Group to make a distribution to all of its unitholders (consisting of our existing owners and our intermediate holding companies) holding Och-Ziff Operating Group Units, whether or not vested, on a pro rata basis and, second, we will cause our intermediate holding companies to distribute the proceeds of such distributions to us in an amount sufficient to pay aggregate distributions declared by our board of directors on our Class A shares. No such distributions will be paid in respect of our Class B shares.

In addition, in accordance with the operating group limited partnership agreements, we will cause the applicable Och-Ziff Operating Group entities to distribute cash on a pro rata basis to direct holders of Och-Ziff Operating Group Units in an amount at least equal to the maximum tax liabilities arising from the direct ownership of such units, if any. Och-Ziff Operating Group will distribute to such unitholders, on a pro rata basis, tax distributions based upon the maximum income allocable to any such unitholder at the maximum combined U.S. federal, New York State and New York City tax rates. Holders of our Class A shares will not be entitled to these distributions. Such tax distributions will take into account the disproportionate income allocation (but not a disproportionate cash allocation) to the

 

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unitholders with respect to “built-in gain assets” at the time of the offering. Consequently, Och-Ziff Operating Group tax distributions will be greater than if such assets had a tax basis equal to their value at the time of this offering.

In addition, the Och-Ziff Operating Group’s cash flow from operations may be insufficient to enable it to make required minimum tax distributions to its unitholders, in which case the Och-Ziff Operating Group may have to borrow funds or sell assets, and thus our liquidity and financial condition could be materially adversely affected. Furthermore, by paying cash distributions rather than investing that cash in our businesses, we might risk slowing the pace of our growth, or not having a sufficient amount of cash to fund our operations, new investments or unanticipated capital expenditures, should the need arise.

Cash distributions to our existing owners in respect of the fiscal and tax year ended December 31, 2005 were approximately $             in the aggregate. Cash distributions to our existing owners in respect of the fiscal and tax year ended December 31, 2006 were approximately $             in the aggregate (of which approximately $             has been distributed to date). Cash distributions to our existing owners in respect of the current fiscal and tax year have aggregated approximately $             to date. We expect to enter into a new $750 million term loan prior to this offering. We presently intend to use the full amount of the proceeds to make a pro rata distribution to our existing owners prior to this offering. See “Our Structure—Term Loan and Pre-Offering Distribution”.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and our capitalization as of March 31, 2007:

 

  Ÿ  

on a historical basis based on the combined Och-Ziff Operating Group as our accounting predecessor;

 

  Ÿ  

on a pro forma basis, after giving effect to the Pre-Offering Distribution and the Reorganization; and

 

  Ÿ  

on a pro forma as adjusted basis, after giving effect to the foregoing pro forma adjustments and this offering at an assumed initial public offering price of $             per Class A share (the midpoint of the price range set forth on the cover page of this prospectus).

This table should be read in conjunction with “Our Structure—The Transactions,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Unaudited Pro Forma Financial Information,” and the financial statements and notes thereto included in this prospectus.

 

     As of March 31, 2007
     Och-Ziff
Operating
Group
Combined
Historical
   Pro
Forma
before
this
Offering
   Och-Ziff Capital
Management
Group LLC
Consolidated
Pro Forma as
Adjusted
     (Unaudited)
     (dollars in thousands)

Cash and cash equivalents

   $ 44,450    $                 $             
                    

Term loan

   $ —      $      $  

Non-controlling interests in consolidated subsidiaries

     18,160,034      

Equity

        

Paid-in-capital

     —        

Retained earnings

     1,258,384      

Distributions in excess of earnings and capital

     —        
                    

Total equity (deficit)

     1,258,384      
                    

Total capitalization

   $ 19,418,418    $      $  
                    

 

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DILUTION

If you invest in our Class A shares, your interest will be diluted to the extent of the difference between the initial public offering price per share of our Class A shares and the pro forma net tangible book value per share of our Class A shares after this offering. Dilution results from the fact that the per share offering price of the Class A shares is substantially in excess of the net tangible book value per share attributable to the existing equity holders (i.e. the partners). Net tangible book value represents net book equity excluding intangible assets, if any.

Our pro forma net tangible book value before this offering as of March 31, 2007 would have been $             million or $             per Class A share. Pro forma net tangible book value per Class A share represents the amount of total tangible assets less total liabilities, after giving effect to the Pre-Offering Distribution and the Reorganization and related tax adjustments divided by the number of Class A shares outstanding, assuming our existing owners had exchanged all of their Och-Ziff Operating Group A Units for Class A shares on a one-for-one basis, as of the date of the Reorganization.

On a pro forma as adjusted basis, after giving effect to the sale of                      Class A shares in this offering at an assumed initial public offering price of $             per Class A share (the midpoint of the price range set forth on the cover page of this prospectus) after deducting estimated underwriting discounts and commissions and estimated offering expenses and other related transaction costs payable by us, and the impact of the other Transactions, our pro forma as adjusted net tangible book value as of March 31, 2007 would have been $             million or $             per Class A share, assuming our existing owners had exchanged all of their Och-Ziff Operating Group A Units for our Class A shares on a one-for-one basis, as of the date of this offering.

The following table illustrates the immediate dilution of $             per share to new shareholders purchasing Class A shares in this offering, assuming the underwriters do not exercise their option to purchase additional Class A shares.

 

Assumed initial public offering price per share

      $             

Pro forma as adjusted net tangible book value per Class A share as of March 31, 2007

     
         

Dilution to new Class A shareholders per share

      $  
         

The following table summarizes, on the same pro forma as adjusted basis as of March 31, 2007, the differences between the existing owners and the new Class A shareholders purchasing in this offering with respect to the number of shares purchased from us, the total consideration paid to us, and the average price per share paid before deducting the estimated underwriting discount and commissions and estimated offering expenses and assuming our existing owners had exchanged all of their Och-Ziff Operating Group A Units for our Class A shares on a one-for-one basis, as of the date of this offering.

 

    

Shares Purchased

   

Total Consideration

    Average
Price
Per Share
      Number    Percentage     Amount    Percentage    

Existing owners

           %   $                   %   $             

New investors

           %   $                   %   $  
                          

Total

      100.0 %   $                 100.0 %  
                          

 

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A $1.00 increase (decrease) in the assumed initial public offering price of $             per Class A share (the midpoint of the price range set forth on the cover page of this prospectus) would increase (decrease) total consideration paid by new investors in this offering and by all investors by $             million, and would increase (decrease) the average price per share paid by new investors by $            , assuming the number of Class A shares offered by us, as set forth on the cover page of this prospectus, remains the same and without deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us in connection with this offering.

If the underwriters’ option to purchase additional Class A shares is exercised in full, the pro forma as adjusted net tangible book value per share as of March 31, 2007 would be approximately $             per Class A share and the dilution in pro forma as adjusted net tangible book value per share to new Class A shareholders would be $             per Class A share. Furthermore, the percentage of our Class A shares held by existing owners (assuming our existing owners had exchanged all of their Och-Ziff Operating Group A Units for our Class A shares on a one-for-one basis, as of the date of this offering) would decrease to approximately         % and the percentage of our Class A shares held by new Class A shareholders would increase to approximately         %.

 

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UNAUDITED PRO FORMA FINANCIAL INFORMATION

The unaudited pro forma financial information presented below was derived from the application of pro forma adjustments to the combined financial statements of Och-Ziff Operating Group, the predecessor for accounting purposes of Och-Ziff Capital Management Group LLC, to give effect to the Pre-Offering Distribution and the Transactions. The unaudited pro forma statements of operations information has been prepared as if the Pre-Offering Distribution and the Transactions occurred on January 1, 2006. The unaudited pro forma balance sheet information has been prepared as if the Pre-Offering Distribution and the Transactions had occurred as of March 31, 2007. The unaudited pro forma financial information should be read in conjunction with “Our Structure,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our combined financial statements and the related notes included elsewhere in this prospectus.

As a result of the Transactions, investors in this offering and our existing owners will acquire 100% of our Class A and Class B shares, respectively. We will acquire, through two intermediate holding companies, an approximately             % limited partner interest in each Och-Ziff Operating Group entity and will become the sole general partner of each. Due to the fact that Daniel Och currently controls the Och-Ziff Operating Group and will control us after the Transactions, the Transactions will be accounted for as a reorganization of entities under common control. Accordingly, the value of assets and liabilities recorded on the Och-Ziff Operating Group’s combined financial statements, after giving effect to the deconsolidation, will be carried forward without further adjustment of our combined financial statements.

The pro forma adjustments are based upon available information and methodologies that we believe are reasonable. The unaudited pro forma statements of operations information and unaudited pro forma balance sheet information are presented solely for illustrative and informational purposes and are not necessarily indicative of what our actual operations or financial position would have been had the Pre-Offering Distribution and the Transactions taken place on the dates indicated, or during the periods presented, nor does it purport to represent our results for any future period.

In December 2006 and June 2007, we amended and supplemented our fund offering documents to enable a simple majority of the funds’ unaffiliated limited partners or shareholders to remove us, as general partner or investment manager with decision making rights, without cause, in accordance with certain procedures. The amendments resulted in the deconsolidation of most of our domestic funds in the first quarter of 2007, and in the deconsolidation of most of our offshore funds as of June 30, 2007.

The deconsolidation of these funds will have a material effect on certain components of our combined financial statements, but will not have an effect on our net income or equity.

 

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The following describes the significant effects of the deconsolidation of most of our domestic and offshore funds on our combined financial statements. The applicable adjustments are reflected in the accompanying consolidated pro forma financial information presented below:

 

  Ÿ  

These adjustments increase (decrease) our financial statement line items as of March 31, 2007 and for the three-month period then ended and for the year ended December 31, 2006 as follows (based on comparing our combined historical financial information for these periods to our pro forma financial information for the comparable periods).

 

     Three Months Ended
March 31, 2007
    Year Ended
December 31,
2006
 

Statement of Operations

    

Total revenues

   (64 )%   (3 )%

Total expenses

   (57 )%   (45 )%

Other income

   (90 )%   (91 )%

Non-controlling interest in income of consolidated subsidiaries

   (99 )%   (98 )%
     As of
March 31, 2007
       

Balance Sheet

    

Total assets

   (91 )%  

Total liabilities

   (80 )%  

Non-controlling interests in consolidated subsidiaries

   (99 )%  

The funds that will continue to be consolidated in our financial statements for reporting periods as of and after June 30, 2007 comprised approximately $537 million, or 2% of our assets under management at March 31, 2007.

 

  Ÿ  

We will reflect our investments and our equity in the income of these funds on our balance sheet and statement of income using the equity method of accounting, rather than eliminating the investments in consolidation.

 

  Ÿ  

We will include the management fees and incentive income earned from these funds on our statements of income rather than eliminating the revenue in consolidation.

 

  Ÿ  

We will update the footnotes to our combined financial statements to remove disclosures related to amounts no longer reflected on our combined financial statements, including, but not limited to:

 

  Ÿ  

the accounting policies of the Och-Ziff funds that do not pertain to us following deconsolidation, and

 

  Ÿ  

detailed disclosure of the investment activities of the Och-Ziff funds.

 

  Ÿ  

We will update the footnotes to our combined financial statements to include required disclosures regarding our investments in these funds using the equity method of accounting, including, as applicable, summarized financial information of these funds.

 

  Ÿ  

We will continue to provide information regarding our management agreements with, and fees and income earned from, these funds.

 

  Ÿ  

We will evaluate on an ongoing basis whether we will need to provide separate financial statements for investments in majority-owned unconsolidated subsidiaries and investments accounted for using the equity method of accounting pursuant to Regulation S-X Rule 3-09.

 

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The pro forma adjustments are described in the notes to the unaudited pro forma financial information and principally include the matters set forth below:

 

  Ÿ  

The effects of our deconsolidation of certain Och-Ziff funds that we consolidated historically;

 

  Ÿ  

Compensation expense as a result of our issuance of Och-Ziff Operating Group A Units in connection with this offering and the reversal of previous compensation expense;

 

  Ÿ  

Compensation expense as a result of our grant of Class A restricted share units to all of our employees in connection with this offering;

 

  Ÿ  

Compensation payable as a result of immediate vesting of our partners’ and certain employees’ previously deferred income amounts;

 

  Ÿ  

Reversal of the Ziff profit-sharing expense that was previously recognized;

 

  Ÿ  

Our anticipated borrowings under a new term loan, the proceeds of which we presently intend to use to make a distribution to our existing owners on or prior to this offering;

 

  Ÿ  

Our reorganization in connection with this offering and our receipt and use of the net proceeds from this offering; and

 

  Ÿ  

The impact of federal, state and local income taxes that our wholly owned subsidiary Och-Ziff Corp, as a taxable corporation, will incur on income allocated to it from Och-Ziff Operating Group.

Tax Receivable Agreement

We may also be required to make payments under the tax receivable agreement that we will enter into in connection with this offering. The purchase by the Och-Ziff Operating Group of Och-Ziff Operating Group A Units from our existing owners with the net proceeds from this offering, as well as future taxable exchanges by our existing owners of Och-Ziff Operating Group A Units for our Class A shares on a one-for-one basis (or, at our option, a cash equivalent), is expected to result in an increase in the tax basis of the tangible and intangible assets of the Och-Ziff Operating Group that would not otherwise have been available. This increase in tax basis will increase, for tax purposes, our depreciation and amortization expense and will therefore reduce the amount of tax that Och-Ziff Corp and our other corporate taxpayer intermediate holding companies that acquire Och-Ziff Operating Group A Units in connection with an exchange, if any, would otherwise be required to pay in the future. As a result, such intermediate holding companies will enter into a tax receivable agreement with our existing owners whereby they will agree to pay to our existing owners 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that these entities actually realize as a result of this increase in tax basis. This payment obligation is an obligation of the corporate taxpayers and not of the Och-Ziff Operating Group entities. While the actual increase in tax basis, as well as the amount and timing of any payments under this agreement, will vary depending upon a number of factors, including the timing of exchanges, the price of our Class A shares at the time of any exchange, the extent to which such exchanges are taxable and the amount and timing of our income, we expect that as a result of the size of the increase in the tax basis, the payments that we may make to our existing owners will be substantial.

Any payments made under the tax receivable agreement will give rise to additional tax benefits and additional potential payments under the tax receivable agreement.

 

  Ÿ  

We anticipate that we will account for the income tax effects and corresponding tax receivable agreement effects as a result of future pay-outs to Och-Ziff Operating Group by recognizing an increase in our deferred tax assets, based on enacted tax rates at the date of the Transaction;

 

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  Ÿ  

We will evaluate the likelihood that we will realize the benefit represented by the deferred tax asset and, to the extent we estimate that it is not more likely than not that we will not realize the benefit, we will reduce the carrying amount of the deferred tax asset with a valuation allowance;

 

  Ÿ  

We will include the estimated amount of the increase in deferred tax assets, net of any valuation allowance, directly in equity; and

 

  Ÿ  

We will record a liability for the expected amount we will pay to our existing partners under the tax receivable agreement (85% of tax savings realized), estimated using assumptions consistent with those we use in estimating the net deferred tax assets.

Therefore, at the date of the Transactions, on a cumulative basis, the net effect of accounting for income taxes and the tax receivable agreement on our financial statements will be a net increase in equity of 15% of the estimated realizable tax benefit. All of the effects of changes in any of our estimates after the date of the Transactions will be included in net income. Similarly, the effect of subsequent changes in the enacted tax rates will be included in net income.

 

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Unaudited Pro Forma Balance Sheet Information

as of March 31, 2007

 

    Och-Ziff
Operating
Group
Combined
Historical
 

Deconsolidation
Adjustments(a)

   

Och-Ziff
Operating
Group
Deconsoli-

dated

  Other
Pro Forma
Adjustments(k)
    Och-Ziff
Capital
Management
Group LLC
Consolidated
Pro Forma
  Offering
Adjustments(k)
    Och-Ziff
Capital
Management
Group LLC
Consolidated
Pro Forma
as Adjusted
    (dollars in thousands)

Assets

             

Cash and cash equivalents

  $ 44,450   $ —       $ 44,450   $                  $                $                  $             

Income and fees receivable

    1,567     1,427,839       1,429,406        

Due from affiliates

    12,473     19,839       32,312        

Deferred tax asset

                 (h)(i)  

Other assets, net

    48,959     —         48,959        

Investments in affiliated Och-Ziff funds

    354,878     18,580       373,458        

Och-Ziff funds assets:

             

Securities owned, at fair value

    2,310,524     (2,300,739 )     9,785        

Due from brokers

    325,800     (325,621 )     179        

Securities purchased under agreement to resell

    717,514     (717,514 )     —          

Derivative assets, at fair value

    135,415     (135,415 )     —          

Other investments, at fair value

    18,486,292     (18,296,426 )     189,866        

Interest and dividends receivable

    53,640     (53,338 )     302        

Other Och-Ziff funds assets

    276,498     (274,906 )     1,592        
                                               

Total Assets

  $ 22,768,010   $ (20,637,701 )   $ 2,130,309   $       $     $       $  
                                               

Liabilities and Equity

             

Compensation payable

  $ 533,415   $ —       $ 533,415   $   (d)(e)   $        (i )   $  

Profit-sharing payable

    72,709     —         72,709        

Term loan

    —       —         —         (d)      

Other liabilities

    67,952     —         67,952        

Och-Ziff funds liabilities:

             

Securities sold, not yet purchased, at fair value

    894,111     (894,001 )     110        

Securities sold under agreements to repurchase

    962,887     (962,887 )     —          

Payable upon return of securities loaned

    286,455     (286,455 )     —          

Redemptions payable

    277,400     (277,235 )     165        

Contributions and subscriptions received in advance

    30     (30 )     —          

Derivative liabilities, at fair value

    68,297     (68,297 )     —          

Due to brokers

    126,751     (126,751 )     —          

Other Och-Ziff funds liabilities

    59,585     (59,554 )     31        
                                               

Total Liabilities

    3,349,592     (2,675,210 )     674,382        
                                               

Non-Controlling Interests in Consolidated Subsidiaries

    18,160,034     (17,962,491 )     197,543       (f)      

Equity

             

Paid-in-capital

              (g )  

Retained earnings (deficit)

    1,258,384     —         1,258,384       (d)(e)(f)      

Distributions in excess of earnings and capital

             

Total Equity (Deficit)

    1,258,384     —         1,258,384        
                                               

Total Liabilities and Equity

  $ 22,768,010   $ (20,637,701 )   $ 2,130,309   $       $     $       $  
                                               

See notes to the unaudited pro forma financial information.

 

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Unaudited Pro Forma Statement of Operations Information

for the Three Months Ended March 31, 2007

 

   

Och-Ziff Operating

Group Combined

Historical

   

Deconsolidation

Adjustments(a)

    Och-Ziff
Operating
Group
Deconsolidated
   

Other Pro Forma

Adjustments(k)

   

Och-Ziff Capital

Management Group LLC

Consolidated Pro Forma

 
    (dollars in thousands, except share data)  

Revenues

         

Management fees

  $ 23,450     $ 75,375     $ 98,825     $       $                       

Incentive income

    67       1,014       1,081      

Other revenues

    922       (1 )     921      

Och-Ziff funds income:

         

Interest income

    205,521       (204,339 )     1,182      

Dividend income

    29,882       (29,643 )     239      

Other Och-Ziff funds revenues

    24,524       (24,508 )     16      
                                       

Total Revenues

    284,366       (182,102 )     102,264      
                                       

Expenses

         

Compensation and benefits

    87,801       —         87,801         (b)(e)  

Profit-sharing

    13,544       —         13,544         (c)  

Professional services

    3,314       —         3,314      

Occupancy and equipment

    3,653       —         3,653      

Business development

    1,849       —         1,849      

Information processing and communication

    1,840       —         1,840      

Interest expense

    —         —         —           (d)  

Other expenses

    1,467       —         1,467      

Och-Ziff funds expenses:

         

Interest expense

    79,600       (79,348 )     252      

Dividend expense

    29,114       (29,023 )     91      

Other Och-Ziff funds expenses

    41,346       (40,872 )     474      
                                       

Total Expenses

    263,528       (149,243 )     114,285      
                                       

Other Income

         

Equity in earnings on investments in affiliated Och-Ziff funds

    19,883       81,046       100,929      

Och-Ziff funds net gains (losses):

         

Net realized gains on investments

    647,280       (645,026 )     2,254      

Net unrealized gains (losses) on investments

    270,532       (266,400 )     4,132      

Net realized and unrealized foreign currency gains (losses)

    (9,120 )     8,979       (141 )    

Net realized and unrealized gains (losses) on derivative contracts

    101,592       (100,780 )     812      
                                       

Total Other Income

    1,030,167       (922,181 )     107,986      
                                       

Income (Loss) Before Non-Controlling Interests in Income of Consolidated Subsidiaries and Income Taxes

    1,051,005       (955,040 )     95,965      

Non-controlling interests in income of consolidated subsidiaries

    (962,177 )     955,040       (7,137 )       (f)  
                                       

Income (Loss) Before Income Taxes

    88,828       —         88,828      

Income taxes

    3,640       —         3,640         (d)(h)  
                                       

Net Income (Loss)

  $ 85,188     $ —       $ 85,188     $                      $    
                                       

Net Income (Loss) per Share (basic and diluted)

          $   (j)
               

Weighted Average Common Shares

              (j)
               

See notes to the unaudited pro forma financial information.

 

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Unaudited Pro Forma Statement of Operations Information

for the Three Months Ended March 31, 2006

 

   

Och-Ziff

Operating
Group
Combined
Historical

    Deconsolidation
Adjustments(a)
    Och-Ziff
Operating
Group
Deconsolidated
    Other Pro
Forma
Adjustments(k)
    Och-Ziff Capital
Management
Group LLC
Consolidated
Pro Forma
 
    (dollars in thousands, except share data)  

Revenues

         

Management fees

  $ 3,428     $ 61,015     $ 64,443     $                   $                

Incentive income

    —         662       662      

Other revenues

    525       —         525      

Och-Ziff funds income:

         

Interest income

    161,285       (161,010 )     275      

Dividend income

    25,944       (25,898 )     46      

Other Och-Ziff funds revenues

    7,572       (6,711 )     861      
                                       

Total Revenues

    198,754       (131,942 )     66,812      
                                       

Expenses

         

Compensation and benefits

    59,775       —         59,775       (b )(e)  

Profit-sharing

    7,550       —         7,550       (c )  

Professional services

    2,331       —         2,331      

Occupancy and equipment

    2,823       —         2,823      

Business development

    1,623       —         1,623      

Information processing and communication

    1,027       —         1,027      

Interest expense

    —         —         —         (d )  

Other expenses

    1,113       —         1,113      

Och-Ziff funds expenses:

        —        

Interest expense

    77,517       (77,429 )     88      

Dividend expense

    26,671       (26,625 )     46      

Other Och-Ziff funds expenses

    26,004       (25,783 )     221      
                                       

Total Expenses

    206,434       (129,837 )     76,597      
                                       

Other Income

         

Equity in earnings on investments in affiliated Och-Ziff funds

    —         58,241       58,241      

Och-Ziff funds net gains (losses):

         

Net realized gains on investments

    1,070,328       (1,070,195 )     133      

Net unrealized gains (losses) on investments

    89,713       (89,176 )     537      

Net realized and unrealized foreign currency gains (losses)

    15,224       (15,272 )     (48 )    

Net realized and unrealized gains (losses) on derivative contracts

    (292,433 )     292,502       69      
                                       

Total Other Income

    882,832       (823,900 )     58,932      
                                       

Income (Loss) Before Non-Controlling Interests in Income of Consolidated Subsidiaries and Income Taxes

    875,152       (826,005 )     49,147      

Non-controlling interests in income of consolidated subsidiaries

    (827,558 )     826,005       (1,553 )     (f )  
                                       

Income (Loss) Before Income Taxes

    47,594       —         47,594      

Income taxes

    1,684       —         1,684       (d )(h)  
                                       

Net Income (Loss)

  $ 45,910     $ —       $ 45,910     $       $                
                                       

Net Income (Loss) per Share (basic and diluted)

          $             (j)
               

Weighted Average Common Shares

              (j)
               

See notes to the unaudited pro forma financial information.

 

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Unaudited Pro Forma Statement of Operations Information

for the Year Ended December 31, 2006

 

    Och-Ziff
Operating
Group
Combined
Historical
    Deconsolidation
Adjustments(a)
    Och-Ziff
Operating
Group
Deconsolidated
    Other Pro
Forma
Adjustments(k)
      Och-Ziff
Capital
Management
Group LLC
Consolidated
Pro Forma
   
   

(dollars in thousands, except share data)

Revenues

             

Management fees

  $ 13,739     $ 293,390     $ 307,129     $                  $               

Incentive income

    15,851       635,647       651,498          

Other revenues

    3,801       —         3,801          

Och-Ziff funds income:

             

Interest income

    768,503       (766,264 )     2,239          

Dividend income

    154,963       (154,429 )     534          

Other Och-Ziff funds revenues

    48,976       (40,463 )     8,513          
                                       

Total Revenues

    1,005,833       (32,119 )     973,714          
                                       

Expenses

             

Compensation and benefits

    446,672       —         446,672       (b)(e)    

Profit-sharing

    97,977       —         97,977       (c)    

Professional services

    12,522       —         12,522          

Occupancy and equipment

    13,443       —         13,443          

Business development

    7,696       —         7,696          

Information processing and communication

    5,463       —         5,463          

Interest expense

    —         —         —         (d)    

Other expenses

    10,574       —         10,574          

Och-Ziff funds expenses:

             

Interest expense

    210,919       (210,429 )     490          

Dividend expense

    139,245       (138,874 )     371          

Other Och-Ziff funds expenses

    145,457       (143,066 )     2,391          
                                       

Total Expenses

    1,089,968       (492,369 )     597,599          
                                       

Other Income

             

Equity in earnings on investments in affiliated Och-Ziff funds

    —         240,374       240,374          

Och-Ziff funds net gains (losses):

             

Net realized gains on investments

    3,294,632       (3,264,062 )     30,570          

Net unrealized gains (losses) on investments

    442,148       (425,407 )     16,741          

Net realized and unrealized foreign currency gains (losses)

    (50,079 )     49,589       (490 )        

Net realized and unrealized gains (losses) on derivative contracts

    (396,526 )     396,664       138          
                                       

Total Other Income

    3,290,175       (3,002,842 )     287,333          
                                       

Income (Loss) Before Non-Controlling Interests in Income of Consolidated Subsidiaries and Income Taxes

    3,206,040       (2,542,592 )     663,448          

Non-controlling interests in income of consolidated subsidiaries

    (2,594,706 )     2,542,592       (52,114 )     (f)    
                                       

Income (Loss) Before Income Taxes

    611,334       —         611,334          

Income taxes

    23,327       —         23,327       (d) (h)    
                                       

Net Income (Loss)

  $ 588,007     $ —       $ 588,007     $       $    
                                       

Net Income (Loss) per Share (basic and diluted)

            $     (j)
                 

Weighted Average Common Shares

              (j)
                 

See notes to the unaudited pro forma financial information.

 

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Notes to the Unaudited Pro Forma Financial Information

(a) This adjustment reflects the deconsolidation of certain Och-Ziff funds. The deconsolidation of the offshore funds is reflected in the unaudited pro forma balance sheet information as if it had occurred on March 31, 2007 and the deconsolidation of the domestic and offshore funds is reflected in the unaudited pro forma statements of operations information as if it had occurred on January 1, 2006, based on Och-Ziff Capital Management Group LLC’s accounting for our interests in the funds using the equity method of accounting.

(b) These adjustments represent the effects on compensation expense of the issuance of the Och-Ziff Operating Group A Units and the grant of Class A restricted share units to our employees in connection with the Transactions as a result of new agreements with our existing partners and certain of our employees following this offering. The following table summarizes the results of each of these transactions on our unaudited pro forma statements of operations information:

 

    

For the Three Months
Ended

  

For the

Year Ended

     March 31,
2007
   March 31,
2006
   December 31,
2006
     (dollars in thousands)

Compensation expense for Och-Ziff Operating Group A Units issued to existing partners (i)

   $                 $                 $             

Reversal of compensation to existing partners (ii)

        

Compensation expense for Class A restricted share Units granted to employees (iii)

        
                    

Total compensation expense adjustments

   $      $      $  
                    

(i) This adjustment represents compensation expense recognized during the periods for Och-Ziff Operating Group A Units issued to existing partners. As part of the Transactions, each of our partners’ existing interests in our business will be reclassified into both Och-Ziff Operating Group A Units, which will represent residual equity interests in our business, and Och-Ziff Operating Group Class C Units, which will represent interests in our business pursuant to which the Partner Compensation Committee in conjunction with the Och-Ziff Compensation Committee may from time to time determine to make discretionary income allocations to our partners, including new partners, in the future. The Och-Ziff Operating Group A Units received by our existing partners will vest, subject to their continued employment, in equal installments on each anniversary date of this offering for five years, beginning on the first anniversary of this offering.

(ii) This adjustment represents the reversal of income allocation expense recognized during the periods for our existing partners as a result of the equity issuances to our existing partners discussed in note (i) above.

(iii) This adjustment represents compensation expense arising as a result of grants of Class A restricted share units to our employees in connection with this offering. These units will vest in equal installments over a four-year period beginning on the first anniversary of this offering.

For a description of our 2007 equity incentive plans, see “Management — Equity Incentive Plan”.

(c) This adjustment reflects the reversal of expense recognized during the periods for the Ziffs’ profits interest. As the Ziffs’ profits interests will have been reclassified into Och-Ziff Operating Group A Units representing an approximate 10% interest in the residual equity of the Och-Ziff Operating Group prior to the offering, we will no longer incur profit-sharing expense relating to the Ziffs. Therefore, profit-sharing expense has been reversed for amounts that were previously recognized for payments to the Ziffs.

 

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(d) This adjustment reflects the net increase in interest expense of $             million for the three months ended March 31, 2007 and 2006 and $             million for the year ended December 31, 2006 as a result of the borrowings under our new $750 million term loan facility. The adjustment includes amortization of debt issuance costs using the effective interest method of $            for the three months ended March 31, 2007 and 2006 and $            for the year ended December 31, 2006. We presently intend to use the proceeds of the term loan to make a distribution to our existing partners of $750 million.

The borrowings under the new term loan facility will bear interest at the three-month average LIBOR (5.35% at March 31, 2007) plus 0.75% per annum. In the event the interest rate increases or decreases by 0.125%, our annual interest expense would increase or decrease by $938,000 on the $750 million term loan.

(e) This adjustment represents the recognition of income payments to partners and compensation to certain employees, which was mandatorily deferred for a period of two years. In connection with the consummation of the Transactions, all deferred income payments and deferred compensation will immediately vest.

(f) This adjustment of $            , $            and $            for the three months ended March 31, 2007 and 2006 and the year ended December 31, 2006, respectively, to allocate a portion of our pro forma loss to our partners’ non-controlling interests in income of consolidated subsidiaries is based on our partners’ approximately             % interest in Och-Ziff Operating Group upon completion of this offering. This adjustment is based on pre-tax income because income taxes on income allocated to our partners by Och-Ziff Operating Group will be incurred directly by our partners.

During each of the periods for which we are presenting unaudited pro forma statements of operations information, we have an income (loss) before non-controlling interests in income of consolidated subsidiaries and income taxes of $            , $            and $            for the three months ended March 31, 2007 and 2006 and for the year ended December 31, 2006, respectively, and the balance of non-controlling interests is zero, which generally would result in no allocation being made to non-controlling interests. However, these amounts include equity-based compensation expense with respect to which there is a corresponding paid-in capital and non-controlling interest contribution. Notwithstanding the general rule, we allocate equity-based compensation expense between controlling and non-controlling interests to the extent of the corresponding contribution. The remaining income is positive for all periods presented and, therefore, was also allocated to the non-controlling interests proportionally.

(g) This adjustment represents the effects of this offering.

The Pre-Offering Distribution and the Transactions, which are described under “Our Structure—The Transactions” and “—Term Loan and Pre-Offering Distribution,” will result in investors in this Offering and our existing partners holding 100% of our Class A and Class B outstanding shares, respectively. We will acquire, through two intermediate holding companies, an approximately             % limited partner interest in, and become the sole general partner of, each Och-Ziff Operating Group entity. Due to the fact that Daniel Och currently controls the Och-Ziff Operating Group and will control us after the Transactions, the Transactions will be accounted for as a reorganization of entities under common control. Accordingly, the value of assets and liabilities recorded on Och-Ziff Operating Group’s historical combined financial statements, after giving effect to the deconsolidation, will be carried forward without further adjustment to our combined financial statements. As a consequence of this treatment, the pro forma effects of this offering are:

(i) Recognition of the proceeds of this offering of Class A shares of $            , less costs of $            , assuming an initial public offering price of $             per Class A share (the midpoint of the price range set forth on the cover page of this prospectus), as our paid-in capital; and

 

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(ii) Use of the proceeds from this offering to indirectly acquire Och-Ziff Operating Group A Units from our existing owners, as described under “Use of Proceeds”.

(h) This adjustment represents the impact of federal, state and local income taxes that we will incur on income allocated to us from Och-Ziff Operating Group. Och-Ziff Holding is a limited liability company and is not subject to U.S. federal and certain state income taxes. It is, however, subject to City of New York Unincorporated Business Tax. Following the Reorganization, Och-Ziff Corp will be subject to income tax on income allocated to it from the Och-Ziff Operating Group.

(i) This adjustment represents the impact of the tax receivable agreement as a result of the purchase of Och-Ziff Operating Group A Units from our existing owners as described in “Our Structure—The Transactions—Offering Transactions” of an increase of $            million in deferred tax assets, $            million in liability to existing owners and $            million in retained earnings (deficit).

The effects of the tax receivable agreement as a result of the purchase of interests in our business from our existing owners in our combined statement of operations are as follows:

 

  Ÿ  

We will record an increase in deferred tax assets for the estimated income tax effects of the increase in the tax basis of the purchased interests, based on enacted federal, state and city tax rates at the date of the transaction;

 

  Ÿ  

To the extent we estimate that it is more likely than not that we will not realize the full benefit represented by the deferred tax asset, based on an analysis of expected future earnings, we will reduce the deferred tax asset with a valuation allowance; and

 

  Ÿ  

We will record 85% of the estimated realizable tax benefit (which is the recorded deferred tax asset less any recorded valuation allowance) as an increase to the liability due to existing owners under the tax receivable agreement and the remaining 15% of the estimated realizable tax benefit as an increase to equity (deficit). See “Certain Relationships and Related Party Transactions—Tax Receivable Agreement”.

The estimated amounts have been derived as follows:

 

  Ÿ  

Approximately             % of the $            billion purchase of Och-Ziff Operating Group A Units from our existing owners, or $            million, relates to the purchase of interests by Och-Ziff Corp and, therefore, subject to corporate income taxes. For tax purposes, depending on the existing tax basis of the underlying assets held within the acquired interests, such purchases could result in step-up of an amount up to the purchase price of $            ;

 

  Ÿ  

We have calculated a preliminary future tax benefit attributable to the step-up of $            million. This is a preliminary result because it does not take into consideration the additional tax benefits created by the anticipated future payments under the tax receivable agreement. The preliminary benefit was calculated using an estimate of the combined federal, state and local tax rate of             %, which is based on the weighted average tax rates applicable to Och-Ziff Corp;

 

  Ÿ  

The liability to the existing owners pursuant to the tax receivable agreement is 85% of the total future tax benefits asset resulting from the step-up, or $            million;

 

  Ÿ  

The deferred tax asset of $            million, which includes the effects of the additional tax benefits created by the anticipated future payments to the existing owners, represents the fully accreted future tax benefit. The amount is derived by multiplying the anticipated future payments of $            million by the estimated combined tax rate of             % and adding this to the preliminary tax benefit of $            million; and

 

  Ÿ  

The difference between the deferred tax asset of $            million and the liability to owners of $            million results in an adjustment to equity (deficit) of $            million.

 

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Therefore, as of the date of the Reorganization, on a cumulative basis, the net effect of accounting for the tax receivable agreement on our consolidated financial statements will be a net increase in equity of 15% of the estimated realizable tax benefit. The amounts recorded for both the deferred tax asset and the liability for our obligations under the tax receivable agreement have been estimated, reflecting the fact that payments under the tax receivable agreement further increase the tax benefits and the estimated payments due under the tax receivable agreement. No valuation allowance has been recorded against the deferred tax asset. All of the effects of changes in any estimates after the date of the purchase will be included in net income. Similarly, the effect of subsequent changes in the enacted tax rates will be included in net income (loss). Future exchanges of Och-Ziff Operating Group A Units for our Class A shares will be accounted for in a similar manner.

(j) For the purposes of pro forma net income (loss) per Class A share, the weighted average shares outstanding and the pro forma net income (loss) available to Class A shareholders on a basic and diluted basis are calculated as follows:

 

     Och Ziff Capital Management
Group LLC Class A Shares
Outstanding
     Year Ended
December 31,
2006
   Three Months
Ended
March 31, 2007

Class A shares from which proceeds will be used to purchase interests in our business

     

Class A shares from which proceeds will be used to pay costs associated with the offering

     

Och-Ziff Operating Group A Units that may be exchanged for Class A shares within one year of completion of the offering

     

Class A restricted share units vesting one year subsequent to completion of the offering

     
         

Total pro forma Class A shares outstanding

     
         

The weighted average Class A shares outstanding, basic and diluted, are calculated as follows:

 

     Year Ended
December 31,
2006
   Three Months
Ended March 31,
2007

Total Pro Forma Class A shares outstanding

     

Class A share equivalents

     

Och Ziff Operating Group A Units

     
         

Weighted average Class A shares outstanding

     
         

Holders of Och-Ziff Operating Group A Units will be entitled to exchange their Och-Ziff Operating Group A Units for our Class A shares on a one-for-one basis (or, at our option, a cash equivalent), subject to customary conversion rate adjustments for splits, unit distributions and reclassifications and subject to vesting, minimum retained ownership requirements and transfer restrictions.

We apply the “if converted method” to determine the dilutive effect, if any, that exchange of all Och-Ziff Operating Group A Units would have on basic earnings per Class A share. We compare this calculation to the calculation of diluted earnings per Class A share using the treasury stock method of securities of a subsidiary, as detailed within Illustration 7 of FASB Statement No. 128, Earnings Per Share, and disclose the earnings per Class A share under the more dilutive method. The assumed exchange of Och-Ziff Operating Group A Units results in an assumed tax effect resulting from the

 

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increased income allocated to us on the elimination of non-controlling interests in income of consolidated subsidiaries upon conversion.

We apply the treasury stock method to calculate the dilutive effect of Class A restricted share units for purposes of the calculation of diluted earnings per Class A share.

Basic and diluted net income (loss) per Class A share are calculated as follows:

 

     Year Ended
December 31,
2006
   Three Months
Ended March 31,
2007
     (dollars in thousands, except
share data)

Pro forma net income (loss)

   $                             $                         

Add back non-controlling interests in income

     

Effect of income taxes

     
             

Pro forma net income available to Class A shareholders

   $      $  
             

Weighted average Class A shares outstanding

     
             

Basic and diluted net income (loss) per Class A share

   $                             $                         
             

For the year ended December 31, 2006, and for the three months ended March 31, 2007, we have presented identical basic and diluted income (loss) per Class A share, as application of both the treasury stock method and the “if converted” method are anti-dilutive. For the year ended December 31, 2006, we have excluded                              Class A restricted share units and                  unvested Och-Ziff Operating Group A Units from our calculation of diluted earnings per Class A share. For the three months ended March 31, 2007, we have excluded                  Class A restricted share units,                  vested Och-Ziff Operating Group Class A Units and                  unvested Class A shares from our calculation of diluted earnings per Class A share.

We have not made any pro forma adjustments relating to reporting and compliance costs and investor relation costs that we will incur as a public company. Following completion of this offering, substantially all of our expenses, including substantially all expenses incurred by or attributable solely to Och-Ziff Capital Management Group LLC such as expenses incurred in connection with this offering, will be accounted for as expenses of the Och-Ziff Operating Group. No pro forma adjustment has been made for these additional expenses as an estimate of the expenses is not objectively determinable.

(k) These amounts have not yet been recorded in the unaudited pro forma financial statements as all of the adjustments related to such columns are not yet determinable.

 

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SELECTED COMBINED FINANCIAL AND OPERATING DATA

The following tables set forth certain selected financial information on a historical basis. The Och-Ziff Operating Group is considered our predecessor for accounting purposes, and its combined financial statements will be our historical financial statements following this offering. The selected historical combined financial information set forth below as of December 31, 2006 and 2005, and for the years ended December 31, 2006, 2005 and 2004, has been derived from our audited combined financial statements included elsewhere in this prospectus. The selected historical combined financial information set forth below as of December 31, 2004, 2003 and 2002, and for the years ended December 31, 2003 and 2002, has been derived from our unaudited accounting records prepared on a consistent basis with the financial statements described above.

The selected historical combined financial information set forth below as of March 31, 2007 and for the three months ended March 31, 2007 and 2006, has been derived from our unaudited interim combined financial statements included elsewhere in this prospectus. The unaudited interim combined financial statements include all normal and recurring adjustments that are, in the opinion of management, necessary for a fair presentation of our financial position and results of operations for the periods presented. Effective January 1, 2004, the Och-Ziff Operating Group adopted FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities, an interpretation of ARB No. 51, which required us to consolidate variable interest entities in which we were determined to be the primary beneficiary. As a result, amounts presented for 2002 and 2003 are not comparable to amounts presented in subsequent periods.

In addition, as of January 1, 2007, the Och-Ziff Operating Group no longer consolidates most of its domestic funds due to changes in the substantive rights afforded to the unaffiliated limited partners of those funds. Similar changes to the rights of unaffiliated shareholders in its offshore funds were made in June 2007 and resulted in the deconsolidation of most of these offshore funds as of June 30, 2007. As a result, the financial information presented for the three months ended March 31, 2007 is not comparable to the financial information presented for the three months ended March 31, 2006.

In addition, incentive income, which has a significant impact on our results of operations, is determined on an annual basis at the end of our fiscal year and is not reflected in our interim financial results, other than incentive income actually earned during a given interim period as a result of investor redemptions during the period. Accordingly, our interim results are not indicative of the results we expect for a full fiscal year.

Compensation and benefits for all periods presented does not include any payments to Daniel Och, which were accounted for as equity distributions, but includes compensation for all other partners. For periods following the completion of the Reorganization, payments to all of our existing owners in respect of their Och-Ziff Operating Group A Units will be treated as equity distributions. After completion of this offering, compensation expense will reflect the amortization of significant non-cash equity-based compensation expense relating to the vesting of the Och-Ziff Operating Group A Units to be issued to all existing partners, including Daniel Och, as well as the vesting of Class A restricted share units granted to employees in connection with this offering. Accordingly, compensation and benefits expense reflected in our historical results is not indicative of future compensation and benefits expense.

 

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The information below should be read in conjunction with “Our Structure,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the combined financial statements and notes thereto included elsewhere in this prospectus.

 

   

Three Months

Ended March 31,

    Year Ended December 31,  
    2007     2006     2006     2005     2004     2003     2002  
    (dollars in thousands)  

Selected Operating Data

             

Revenues

             

Management fees, incentive income and other revenues

  $ 24,439     $ 3,953     $ 33,391     $ 22,456     $ 18,280     $ 233,053     $ 70,089  

Och-Ziff funds income

    259,927       194,801       972,442       489,352       267,646       133,911       148,362  
                                                       

Total Revenues

    284,366       198,754       1,005,833       511,808       285,926       366,964       218,451  
                                                       

Expenses

             

Compensation and benefits

    87,801       59,775       446,672       239,466       153,503       125,949       46,303  

Non-compensation expenses

    25,667       16,467       147,675       88,962       60,825       52,145       22,848  

Och-Ziff funds expenses

    150,060       130,192       495,621       418,705       199,782       138,824       115,279  
                                                       

Total Expenses

    263,528       206,434       1,089,968       747,133       414,110       316,918       184,430  
                                                       

Total Other Income

    1,030,167       882,832       3,290,175       1,640,983       1,167,756       423,822       (29,046 )
                                                       

Income Before Non-Controlling Interests in Income of Consolidated Subsidiaries and Income Taxes

    1,051,005       875,152       3,206,040       1,405,658       1,039,572       473,868       4,975  

Non-controlling interests in income of consolidated subsidiaries

    (962,177 )     (827,558 )     (2,594,706 )     (1,134,869 )     (836,007 )     (268,274 )     19,449  
                                                       

Income Before Income Taxes

    88,828       47,594       611,334       270,789       203,565       205,594       24,424  
                                                       

Income taxes

    3,640       1,684       23,327       9,898       9,785       7,655       3,175  
                                                       

Net Income

  $ 85,188     $ 45,910     $ 588,007     $ 260,891     $ 193,780     $ 197,939     $ 21,249  
                                                       
   

As of
March 31,

2007

  As of December 31,
      2006   2005   2004   2003   2002
    (dollars in thousands)

Selected Balance Sheet Data

           

Cash and cash equivalents

  $ 44,450   $ 23,590   $ 69,550   $ 27,800   $ 12,680   $ 20,824

Och-Ziff funds assets

  $ 22,305,683   $ 35,967,024   $ 24,184,369   $ 16,002,932   $ 1,592,526   $ 1,670,934

Total assets

  $ 22,768,010   $ 36,075,049   $ 24,305,342   $ 16,076,195   $ 2,139,652   $ 1,971,648

Och-Ziff funds liabilities

  $ 2,675,516   $ 14,260,142   $ 9,543,812   $ 5,264,619   $ 130,183   $ 402,769

Total liabilities

  $ 3,349,592   $ 15,050,088   $ 10,021,681   $ 5,608,569   $ 404,621   $ 546,078

Non-controlling interests in consolidated subsidiaries

  $ 18,160,034   $ 19,777,297   $ 13,544,966   $ 9,972,112   $ 1,372,853   $ 1,230,224

Total equity

  $ 1,258,384   $ 1,247,664   $ 738,695   $ 495,514   $ 362,178   $ 195,346

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis together with the historical combined financial statements and related notes included elsewhere in this prospectus. The historical combined financial data discussed below reflect the historical results of operations and financial position of Och-Ziff Operating Group. Och-Ziff Operating Group is considered our predecessor for accounting purposes, and its combined financial statements will be our historical financial statements following this offering. The historical combined financial data discussed below relate to periods prior to the Transactions and do not give effect to the Reorganization, the Pre-Offering Distribution or the Offering Transactions. As a result, the following discussion does not reflect the significant impact that the Transactions will have on us. See “Our Structure” and “Unaudited Pro Forma Financial Information” for more information about the Transactions and the Pre-Offering Distributions. This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in the “Risk Factors” and other sections of this prospectus. Actual results may differ materially from those contained in any forward-looking statements.

As a result of the Transactions, the public and our existing owners will acquire 100% of our Class A and Class B shares, respectively. We will acquire, through two intermediate holding companies, an approximately     % limited partner interest in, and will be the sole general partner of, each Och-Ziff Operating Group entity. Due to the fact that Daniel Och currently controls the Och-Ziff Operating Group and will control us after the Transactions, the Transactions will be accounted for as a reorganization of entities under common control. Accordingly, the value of assets and liabilities recorded on the Och-Ziff Operating Group’s combined financial statements, after giving effect to the deconsolidation, will be carried forward without further adjustment of our combined financial statements.

Overview

We are a leading international institutional, alternative asset management firm, founded in 1994 by Daniel Och together with the Ziffs. We provide investment management and advisory services to the Och-Ziff funds and managed accounts. Our business is comprised of our one reportable operating segment, “Institutional Investment Funds,” and our other operations. Institutional Investment Funds is comprised of the management and advisory services provided to the Och-Ziff funds and managed accounts, and other operations are currently comprised primarily of our real estate business. Today, we are one of the largest institutional, alternative asset managers in the world. As of April 30, 2007, we had approximately:

 

  Ÿ  

$26.8 billion of assets under management;

 

  Ÿ  

300 personnel, with over 125 investment professionals, including 18 partners, located in our New York headquarters and offices in London, Hong Kong, Tokyo and Bangalore, with an office opening expected in Beijing later this year; and

 

  Ÿ  

700 fund investors.

We seek to deliver consistent positive, risk-adjusted returns throughout market cycles, with a focus on risk management and capital preservation. Our diversified, multi-strategy approach combines global investment strategies, including merger arbitrage, convertible arbitrage, equity restructuring, credit and distressed credit investments, private equity and real estate. We base our investment decisions on detailed, research-based, bottom-up analysis, and our investment philosophy focuses on opportunities for long-term value. Since our inception in 1994, our global multi-strategy fund, OZ Master Fund, which constituted approximately 65% of our AUM at April 30, 2007, generated a net annualized return of 17%, which was achieved with significantly lower statistical volatility than that of the S&P 500 Index and a relatively low statistical correlation to the performance of the S&P 500 Index.

 

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Past performance is not indicative of future results. Performance results for our other funds vary from that of OZ Master Fund and such variances may be material. Net annualized return represents a composite of the average annual return of the feeder funds that comprise OZ Master Fund. Net annualized return is calculated on a total return basis, net of all fees and expenses, and includes the reinvestment of all dividends and income. Performance from inception includes actual total return for the partial year beginning in April 1994. For the period from April 1994 through December 1997, performance represents the performance of Och-Ziff Capital Management, L.P., a Delaware limited partnership that was managed by Daniel Och following an investment strategy that is substantially similar to that of OZ Master Fund. In addition, during this period, performance was calculated by deducting management fees on a quarterly basis and incentive income on a monthly basis. Starting from January 1998, performance has been calculated by deducting both management fees and incentive income on a monthly basis from the composite returns of the fund. See “Business—Investment Performance”.

Our investment processes are designed to incorporate risk management into every investment decision: our portfolio managers meet with our analysts daily to review the inherent risks associated with the funds’ positions. In addition, our risk management committee conducts a weekly review of the risk profile of our fund portfolio. Risk management has been a core foundation of our business since inception and remains a critical part of our investment process.

During our 13-year history, we have been a pioneer in our industry in international expansion, and today over 50% of our assets under management is invested outside of the United States. We established our European office in London in December 1998 and our first Asian office in Hong Kong in December 2001. We have also been a leader in expanding into new investment opportunities. We first offered our flagship global, multi-strategy fund in January 1998, and we first offered our European dedicated multi-strategy fund in April 2000. During the past three years, we have:

 

  Ÿ  

Launched a capital structure arbitrage fund in October 2004;

 

  Ÿ  

Offered an Asian-dedicated multi-strategy fund in February 2005;

 

  Ÿ  

Established a local presence in the following international markets:

 

  Ÿ  

Bangalore, India in August 2005;

 

  Ÿ  

Tokyo, Japan in December 2006;

 

  Ÿ  

Taken steps to open an office in Beijing, China in 2007; and

 

  Ÿ  

Launched investment platforms in other geographic markets, such as Latin America and Central Europe, and in emerging investment opportunities, such as alternative energy and carbon trading.

We believe the following elements are key to understanding our business and financial results:

Balancing risks with opportunities.    Our goal is to continue our expansion and growth of assets under management by expanding our capabilities and exploring and identifying new investment strategies and opportunities across multiple asset classes and geographies. We maintain a highly diversified portfolio, while retaining a great degree of flexibility in allocating our investments across multiple strategies and geographic regions. We work to appropriately hedge the portfolio to limit losses from market dislocations. We have established numerous standby commitments to provide our funds with liquidity at competitive rates in order to maximize our flexibility in responding to investment opportunities. We pride ourselves on our ability to recognize investment opportunities and dynamically deploy capital. Although we seek to be the first to identify opportunities where we believe we have a competitive advantage, we take advantage of those opportunities only when we believe we have the expertise to understand and manage the associated risks.

 

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Managing our growth.    Our assets under management have grown from approximately $5.8 billion as of December 31, 2002 to approximately $26.8 billion as of April 30, 2007. This represents a compound annual growth rate of approximately 42%. We have successfully managed this growth by maintaining our risk profile and attracting and retaining some of the leading investment and business talent in the industry. We believe this strategy will permit us to continue to identify and take advantage of new opportunities. To achieve our goal of continued expansion, our investment team and infrastructure must be able to successfully manage growth by deploying and monitoring new investment platforms efficiently and effectively. Our growth has always been based on developing and enhancing investment platforms to benefit our fund investors.

Use of leverage.     We believe we have historically been conservative in the use of leverage in managing our funds’ investment portfolio. For example, as of April 30, 2007, the ratio of gross assets to net asset value, or NAV, was approximately 1.4 to 1.0 on the long side, and 0.8 to 1.0 on the short side, respectively, in OZ Master Fund. We may seek to employ greater financial leverage in future periods. The forms of leverage we typically employ include purchasing securities on margin or through other collateralized financing arrangements and the use of derivative instruments.

Market Factors

Our ability to expand our business and increase revenues depends on our ability to attract new investors and capital to our funds and to generate consistent positive, risk-adjusted returns on invested capital, which may be impacted by market factors, some of which are beyond our control.

Market conditions in recent periods have fostered a favorable investment environment for our funds and helped our growth during the periods for which financial statements are presented. However, we cannot predict whether favorable market trends will continue or whether our future growth will meet or exceed prior period growth rates. In addition, we may not be able to react appropriately to market conditions.

Alternative asset management, in general, involves a variety of investment strategies where the common goal is to produce investment returns that have a lower correlation to the broader market than do traditional asset management strategies.

International market conditions affect our business. Against the global backdrop in which we operate, we take numerous active steps to protect our fund portfolios and prepare for the future. First, we monitor portfolio diversification and risk-based hedging activities daily. Second, we believe that when markets face dislocations, many markets and securities will correlate to the downside in ways that differ from the past. As a result, models and other statistical measurements of risk may not be effective. We strive to implement hedging strategies and positions specifically designed to profit from these dislocations, including short positions in the high-yield credit markets. Third, we have established numerous standby liquidity arrangements with financial institutions that have committed to provide our funds with access to a significant amount of liquidity. The price of liquidity has been at historically low levels, which may not continue in future periods. We believe other asset managers have been using readily available liquidity in recent years to increase leverage, while we have sought to preserve our ability to access liquidity in the future. By taking these steps and continuously monitoring our portfolio, we believe we can appropriately react to market conditions and prepare for the future by properly structuring our portfolio to produce positive returns under any market conditions.

Market factors that characterize our industry and significantly influence the success of our business include the following:

Worldwide Market Characteristics.    Growth in worldwide markets, such as has been experienced in the United States, Europe and Asia in recent years, provides us with the ability to identify new investment opportunities, strategies and products to raise, deploy and diversify capital.

 

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Due to our returns, reputation, and relationships worldwide, we believe we are well positioned to take advantage of opportunities as they arise. However, weak or volatile market conditions and geopolitical events can adversely affect our business in many ways, including limiting opportunities and performance. Additionally, there is significant competition worldwide for investment opportunities.

Investor Demand.    Competition for assets is intense, and alternative asset managers historically have realized only a small portion of institutional investor demand. We expect institutional demand for alternative asset management services to increase, driven by several factors, including: the pursuit of higher returns compared to those of traditional equity and fixed income strategies; the desire to increase the diversification of investment portfolios by investing in assets with low correlation to traditional asset classes; and an apparent greater acceptance of hedge fund strategies and services due to the maturation and enhanced understanding of the hedge fund industry.

Interest Rate Environment.    Interest rates and credit spreads affect the value of fixed income instruments in the portfolio, income generated from these instruments, return on excess cash, investment opportunities, and the financial markets in general. We seek to hedge our interest rate and credit risks to mitigate any deterioration in our equity portfolio due to the movement of rates in a volatile interest rate environment.

Worldwide Geopolitical Environment.    Political risks across geographies affect worldwide markets, which in turn may also impact our fund portfolios. These risks can be difficult to predict and are outside our control. Therefore, we typically employ portfolio hedges in an effort to maintain a level of protection for unpredictable events that affect the financial markets, such as an adverse geopolitical development. As a part of our risk process, we adjust our hedging activities based on our assessment of risk in the world in general.

Financial Information Overview

In accordance with U.S. generally accepted accounting principles (“GAAP”), substantially all of the Och-Ziff funds are consolidated into our results through December 31, 2006. As a result of the consolidation, all of the management fees and incentive income earned from the funds are eliminated in consolidation. The consolidation has no impact on net income, as the elimination of management fees and incentive income is offset by the inclusion of investment company income, expenses and net gains and losses from the funds. See “Segment Analysis” for more information regarding the impact of consolidation on our results. As of January 1, 2007, we no longer consolidate most of our domestic funds, and we will no longer consolidate most of our offshore funds as of June 30, 2007.

Revenues

We generate revenue through two principal sources: management fees and incentive income. The amount of revenues earned through those sources is directly related to the amount of third-party assets under management and performance of the fund portfolios.

Management fees.    Generally, management fees range from 1.5% to 2.5% of assets under management on an annual basis. Management fees are billed to each of our funds and managed accounts on a quarterly or monthly basis, in advance at the beginning of the quarter or in arrears at the end of the quarter, based on the fund’s or managed account’s assets under management. The $26.8 billion assets under management as of April 30, 2007 includes approximately $1.8 billion of assets relating to investments by our partners and our qualified employees in our funds and deferred balances payable by our funds to the Och-Ziff Operating Group. Following this offering we expect to receive approximately $             of additional assets from such persons (or $             if the underwriters elect to exercise their option to purchase additional Class A shares in full), reflecting the estimated after-tax proceeds of this offering based on the midpoint of the range set forth on the cover of this prospectus.

 

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We do not charge any management fees to our partners and qualified employees with respect to the management of their assets to further incentivize them and more closely align their interests with those of our fund investors.

We accept new investors and additional investments from existing investors into our funds on a regular basis in accordance with the terms of the organizational documents of our funds. Investors have the right to redeem their interests in a fund in accordance with the terms of such organizational documents. The ability of investors to enter and exit our funds causes our assets under management to fluctuate from period to period, depending on the amount of investor contributions relative to investor redemptions. Fluctuations in assets under management also result from a fund’s actual performance.

Incentive income.    We earn incentive income equal to 20% of realized and unrealized profits relating to capital, based on the fair value of the fund’s assets, subject to certain net loss carry-forward provisions (known as “high-water marks”). Incentive income is realized at the end of the year and then distributed to the Och-Ziff Operating Group annually based on fund performance attributable to each fund investor during the year. We do not receive any incentive income on investments of our partners or qualified employees. Due to the contingent and uncertain nature of our annually earned incentive income, we do not record incentive income in interim periods, other than incentive income earned as a result of fund investor redemption events during interim periods.

Och-Ziff funds income.    Our historical results include the results of operations of certain Och-Ziff funds in which we have only a minority economic interest on a consolidated basis. We expect that these revenues will be significantly lower in our future financial statements as the result of the deconsolidation of certain Och-Ziff funds. Och-Ziff funds income includes:

 

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Interest income. Interest income in our funds increases or decreases based on the number, type and size of credit investments, performance of those investments and the reinvestment of excess cash, as well as the interest rate environment.

 

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Dividend income. Dividend income is influenced by the number, type and size of investments in dividend yielding securities.

 

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Other Och-Ziff funds revenues. Our funds earn other revenues from the lending of securities and various other sources.

Expenses

Our primary expenses are compensation and benefits, profit-sharing expenses and expenses of the consolidated Och-Ziff funds.

Compensation and benefits.    Includes discretionary incentive compensation, primarily based on company-wide profits, guaranteed bonuses, base salaries, and all related employee benefits and taxes. All personnel other than partners are eligible to receive a base salary and annual discretionary incentive compensation, which is generally based on company-wide profits. Distributions to our partners, other than distributions to Daniel Och (which have been treated as distributions on equity), have been recognized as compensation expenses in our historical financial statements. For periods following our Reorganization, payments to all partners in respect of their Och-Ziff Operating Group A Units will be treated as equity distributions. For periods following completion of the offering, compensation and benefits will also reflect the amortization of significant non-cash equity-based compensation expense associated with the vesting of the Och-Ziff Operating Group A Units to be issued to our partners (including Mr. Och) and the Class A restricted share units to be granted to our employees in connection with this offering. As a result of these additional non-cash compensation expenses, we expect to report net losses throughout the five-year vesting period of the Och-Ziff Operating Group A Units.

 

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Profit-sharing.    Consists of payments to the Ziffs equal to 12.5% of management fees and incentive income earned from the Och-Ziff funds, managed accounts and our real estate business, net of certain expenses, in respect of their profit-sharing interest in our business. Prior to the closing of this offering, the Ziff profit-sharing interest will be converted into a 10% interest in the residual equity in our business and, therefore, we will not incur this expense in future periods. As a result, we will incur a significant one-time charge in the period in which the conversion is completed. See “Our Structure—The Transactions—Och-Ziff Operating Group.”

Interest expense.    We intend to enter into a $750 million term loan and borrow the full amount thereunder prior to this offering. The loan will have a term of six years and bear interest at an annual rate of LIBOR plus 0.75%. The full principal amount of the term loan will be due at maturity. We expect to incur interest expense in future periods due to the outstanding balance on the term loan. Currently, our interest expenses, other than those arising from our Och-Ziff funds, are not significant.

Other expenses.    We also incur administrative and other expenses relating to our operations, including professional and consulting fees, occupancy and equipment costs, business development expenses, information processing and communications, and other administrative costs.

Och-Ziff funds expenses.    Our consolidated Och-Ziff funds incur interest expense, dividend expense and other expenses. Interest expense primarily relates to borrowed cash and securities and generally increases or decreases based on volume and borrowing rates. Dividend expense relates to payments on securities sold short and generally increases or decreases based on the volume of short positions in dividend paying securities. Other Och-Ziff funds expenses primarily include professional services and other miscellaneous expenses. We expect that these expenses will be significantly lower in our future financial statements as we continue to deconsolidate additional Och-Ziff funds.

Income taxes.    We also incur tax expenses based on the location, legal structure and jurisdictional taxation of our subsidiaries. Prior to the Reorganization, the Och-Ziff Operating Group entities were taxed as Delaware limited liability companies and some of the income was subject to the Unincorporated Business Tax, or UBT, in the City of New York for which we recorded an income tax provision. Additionally, certain of our subsidiaries are subject to tax in foreign jurisdictions. Under applicable U.S. federal and state laws, the taxable income or loss of a partnership is allocated to each partner based upon the partner’s ownership interest. Each partner’s tax status, in turn, determines the appropriate income tax for the partner’s allocated share of taxable income or loss.

Following the offering, the Och-Ziff Operating Group entities and subsidiaries will operate as Delaware limited partnerships for U.S. federal income tax purposes, and some income will continue to be subject to UBT in the City of New York. In addition, due to the addition to our structure of Och-Ziff Corp, a Delaware corporation, U.S. federal corporate-level income tax expense is expected to be incurred for taxable periods following this offering and, accordingly, we expect a higher effective income tax rate.

Other Income

Equity in earnings on investments in affiliates.    As of January 1, 2007, most of our domestic funds are no longer consolidated in our financial statements. As a result, our equity method investments in these funds and the related earnings included in other income are no longer eliminated in consolidation.

Och-Ziff funds net gains (losses).    Realized and unrealized gains (losses) from the consolidated Och-Ziff funds are influenced by a number of internal and external factors, such as sales and dispositions of investments and changes in the fair market value of portfolio investments, which

 

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result from market conditions and all factors that impact performance of the underlying investment assets. Gains and losses are largely influenced by market conditions, our investment performance and the amount of assets under management.

Our diversified, multi-strategy approach combines global investment strategies, including merger arbitrage, convertible arbitrage, equity restructuring, credit and distressed credit investments, private equity and real estate. We base our investment decisions on detailed, research-based, bottom-up analysis, and our investment philosophy focuses on opportunities for long-term value.

Results of Operations

The following is a detailed discussion of our combined results of operations for the three months ended March 31, 2007 and 2006 and the years ended December 31, 2006, 2005 and 2004. This information is derived from our accompanying combined financial statements prepared in accordance with GAAP.

Our results of operations are driven by the amount of assets under management, which directly impacts management fees earned by the Och-Ziff Operating Group, and by the annual performance of our funds and managed accounts, which directly impacts incentive income earned by the Och-Ziff Operating Group. General and specific market conditions affect the investment environment for our funds as described below.

Three months ended March 31, 2007 compared to three months ended March 31, 2006

 

     Three Months Ended March 31,  
     2007     2006    

Amount

Change

    Percentage
Change
 
     (dollars in thousands)  

Revenues

        

Management fees

   $ 23,450     $ 3,428     $ 20,022     584 %

Incentive income

     67       —         67