NONCONTROLLING INTERESTS AND OCH-ZIFF OPERATING GROUP OWNERSHIP

Noncontrolling interests represent ownership interests in the Company’s subsidiaries held by parties other than the Company, and primarily relate to the Och-Ziff Operating Group A Units held by the Company’s executive managing directors and fund investors’ interests in the consolidated Och-Ziff funds.

Net income (loss) attributable to the Och-Ziff Operating Group A Units is driven by the earnings (losses) of the Och-Ziff Operating Group. Net income attributable to fund investors’ interests in consolidated Och-Ziff funds is driven by the earnings of those funds.

As of March 31, 2017, Och-Ziff Operating Group P Units (as defined below) do not participate in the economics of the Och-Ziff Operating Group and will remain non-participating until certain service and performance conditions are met, as described below.

The following table presents the components of the net income (loss) attributable to noncontrolling interests:



	Three Months Ended March 31,
	2017		2016

	(dollars in thousands)
Och-Ziff Operating Group A Units	$	9,635	$	(88,019	)
Consolidated Och-Ziff funds	—		262
Other	143		(88		)
	$	9,778	$	(87,845	)

The following table presents the components of the shareholders’ equity attributable to noncontrolling interests:



	March 31, 2017		December 31, 2016

	(dollars in thousands)
Och-Ziff Operating Group A Units	$	212,738	$	166,521
Consolidated Och-Ziff funds	—		—
Other	4,222		5,408
	$	216,960	$	171,929

The Preferred Units and fund investors’ interests in certain consolidated Och-Ziff funds are redeemable outside of the Company’s control. These interests are classified within redeemable noncontrolling interests in the consolidated balance sheets. The following table presents the activity in redeemable noncontrolling interests:



	Three Months Ended March 31, 2017
	Consolidated Funds		Preferred Units		Total

	(dollars in thousands)
Beginning balance	$	21,621	$	262,500	$	284,121
Change in redemption value of Preferred Units	—		7,446		7,446
Preferred Units issuance, net of issuance costs	—		150,054		150,054
Comprehensive income	350		—		350
Ending Balance	$	21,971	$	420,000	$	441,971

Och-Ziff Operating Group Ownership

The Company’s equity interest in the Och-Ziff Operating Group increased to 40.9% as of March 31, 2017, from 38.3% as of December 31, 2016. Changes in the Company’s interest in the Och-Ziff Operating Group have historically been, and in the future may be, driven by the following: (i) the exchange of Och-Ziff Operating Group A and P Units for an equal number of Class A Shares, at which time the related Class B Shares are also canceled; (ii) the issuance of Class A Shares under the Company’s Amended and Restated 2007 Equity Incentive Plan and 2013 Incentive Plan, primarily related to the settlement of RSUs; (iii) the forfeiture of Och-Ziff Operating Group A Units and related Class B Shares by a departing executive managing director; and (iv) the repurchase of Class A Shares and Och-Ziff Operating Group A Units. The Company’s interest in the Och-Ziff Operating Group is expected to continue to increase over time as additional Class A Shares are issued upon the exchange of Och-Ziff Operating Group A Units and settlement of RSUs. These increases will be offset upon any conversion by an executive managing director of Och-Ziff Operating Group D Units, which are not considered equity for GAAP purposes, into Och-Ziff Operating Group A Units, at which time an equal number of Class B Shares is also issued to the executive managing director.

Och-Ziff Operating Group P Units, 2017 Incentive Program and Limited Partnership Agreements Amendments

On February 13, 2017, the Company’s board of directors approved the Och-Ziff Capital Management Group LLC 2017 Incentive Program (the “2017 Incentive Program”). Under the terms of the 2017 Incentive Program, the Company granted Class P common units in each Operating Partnership (an “Incentive Award”) to certain executive managing directors. One Class P common unit in each Operating Partnership, collectively, is referred to as an “Och-Ziff Operating Group P Unit.”

The Company granted 71.9 million Och-Ziff Operating Group P Units in March 2017, at the average fair value of $1.25 per unit. The fair value was determined using the Monte-Carlo simulation valuation model, with the following assumptions: volatility of 35.7%, dividend rate of 10.0%, and risk-free discount rate of 2.2%. The requisite service period for these Incentive Awards was estimated to be 3.9 years at the time of the grant. Total unrecognized stock-based compensation expense related to unvested awards was $89.5 million. There were 71.9 million Och-Ziff Operating Group P Units outstanding as of March 31, 2017.

A grant of Och-Ziff Operating Group P Units will conditionally vest upon the applicable executive managing directors satisfying a service condition (the “Service Condition”) and certain market performance-based targets, expressed as percentages (the “Performance Condition”) being satisfied, as follows: 20% of Units vest upon a Performance Condition of 25% being achieved (i.e., total shareholder return from the contractually determined reference price of $3.21); an additional 40% (for a total of 60%) of Units vest upon a Performance Condition of 50% being achieved; an additional 20% (for a total of 80%) of Units vest upon a Performance Condition of 75% being achieved; and an additional 20% (for a total of 100%) of the Units vest upon a Performance Condition of 125% being achieved. Achievement of the applicable Performance Conditions earlier than estimated can materially affect the amount of equity-based compensation expense recognized by the Company in any given period.

Executive managing directors will be entitled to receive distributions on their Och-Ziff Operating Group P Units only after satisfaction of the Service Condition and the Performance Condition, from which time the executive managing director will be entitled to receive the same distributions per Unit on each Och-Ziff Operating Group P Unit as holders of Och-Ziff Operating Group A Units and Och-Ziff Operating Group D Units.

If a holder of an Incentive Award has not satisfied both the Service Condition and the applicable Performance Condition has not been met with respect to the units comprising such Incentive Award by the sixth anniversary of the respective grant date, such units will be forfeited and canceled immediately.

Upon satisfaction of the Service Condition and the Performance Condition, Och-Ziff Operating Group P Units may be exchanged at the executive managing director’s discretion for Class A Shares (or the cash value thereof, as determined by the Board) provided that (i) sufficient Appreciation (as defined in the Limited Partnership Agreements) has occurred for each Och-Ziff Operating Group P Unit to have become economically equivalent to an Och-Ziff Operating Group A Unit, and (ii) shareholders approve an amendment to the Company’s 2013 Incentive Plan to reserve a sufficient number of Class A Shares under the 2013 Incentive Plan. Upon the exchange of an Och-Ziff Operating Group P Unit for a Class A Share (or the cash equivalent), the exchanging executive managing director will have a right to potential future payments owed to him or her under the tax receivable agreement.

Effective March 1, 2017, the Board of Directors approved amendments to the Limited Partnership Agreements of the Operating Partnerships that, in addition to the events discussed above, adjust the measurement thresholds used in determining whether sufficient Appreciation has taken place for Och-Ziff Operating Group D Units issued prior to March 1, 2017, to have become economically equivalent to Och-Ziff Operating Group A Units. This amendment makes it more likely that outstanding Och-Ziff Operating Group D Units will convert to Och-Ziff Operating Group A Units.

Relinquishment of Och-Ziff Operating Group A Units

Och-Ziff Corp and Och-Ziff Holding, as the general partners of the Operating Partnerships, entered into a Relinquishment Agreement with Daniel S. Och and certain family trusts over which Mr. Och has investment control (the “Och Trusts”) effective as of March 1, 2017 (the “Relinquishment Agreement”). Pursuant to the Relinquishment Agreement, Mr. Och and the Och Trusts agreed to cancel, in the aggregate, 30.0 million of their vested Och-Ziff Operating Group A Units. The Relinquishment Agreement provides that if any of the Och-Ziff Operating Group D Units granted to James S. Levin on March 1, 2017 are forfeited, such forfeited units (up to an aggregate amount of 30.0 million) shall be reallocated to Mr. Och and the Och Trusts pursuant to the terms of the Limited Partnership Agreements. The Company accounted for the transaction as a repurchase of Och-Ziff Operating Group A Units for no consideration. A corresponding number of Class B Shares were also canceled.

Dilution of Proceeds from Tax Receivable Agreement Waiver

In September 2016, the Company amended the tax receivable agreement to provide that no amounts will be due or payable under the tax receivable agreement by Och-Ziff Corp, one of the Company’s wholly owned intermediate holding companies, with respect to the 2015 and 2016 taxable years. During the first quarter of 2017, Och-Ziff Corp contributed to the Och-Ziff Operating Group the cash previously set aside for such payments, which resulted in a reallocation of such contribution between the Company’s paid-in capital and the paid-in capital of the Och-Ziff Operating Group A Units (including within noncontrolling interests).