Sculptor Capital Management, Inc. - Quarter Report: 2016 September (Form 10-Q)

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Accelerated filer

Non-accelerated filer

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Smaller reporting company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2016

Commission File Number 001-33805

OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC

(Exact Name of Registrant as Specified in its Charter)



Delaware		26-0354783
(State of Incorporation)		(I.R.S. Employer Identification Number)

9 West 57th Street, New York, New York 10019

(Address of Principal Executive Offices)

Registrant’s telephone number: (212) 790-0000

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

As of October 28, 2016, there were 181,706,272 Class A Shares and 297,317,019 Class B Shares outstanding.

OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC

TABLE OF CONTENTS



		Page
PART I — FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	4

	Consolidated Balance Sheets as of September 30, 2016, and December 31, 2015	4

	Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2016 and 2015	5

	Consolidated Statement of Changes in Shareholders’ (Deficit) Equity for the Nine Months Ended September 30, 2016	6

	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2016 and 2015	7

	Notes to Consolidated Financial Statements	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	41

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	81

Item 4.	Controls and Procedures	82

PART II — OTHER INFORMATION

Item 1.	Legal Proceedings	84

Item 1A.	Risk Factors	84

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	88

Item 3.	Defaults upon Senior Securities	88

Item 4.	Mine Safety Disclosures	89

Item 5.	Other Information	89

Item 6.	Exhibits	89

Signatures		90

Defined Terms



2007 Offerings		Refers collectively to our IPO and the concurrent private offering of approximately 38.1 million Class A Shares to DIC Sahir Limited, a wholly owned indirect subsidiary of Dubai Holding LLC

2011 Offering		Our public offering of 33.3 million Class A Shares in November 2011

active executive managing directors		Executive managing directors who remain active in our business

Annual Report		Our annual report on Form 10-K for the year ended December 31, 2015, dated February 11, 2016 and filed with the SEC

Class A Shares		Our Class A Shares, representing Class A limited liability company interests of Och-Ziff Capital Management Group LLC, which are publicly traded and listed on the NYSE

Class B Shares		Class B Shares of Och-Ziff Capital Management Group LLC, which are not publicly traded, are currently held solely by our executive managing directors and have no economic rights but entitle the holders thereof to one vote per share together with the holders of our Class A Shares

CLOs		Collateralized loan obligations

Exchange Act		Securities Exchange Act of 1934, as amended

executive managing directors		The current limited partners of the Och-Ziff Operating Group entities other than our intermediate holding companies, including our founder, Daniel S. Och, and, except where the context requires otherwise, include certain limited partners who are no longer active in the business of the Company

GAAP		U.S. generally accepted accounting principles

intermediate holding companies		Refers collectively to Och-Ziff Corp and Och-Ziff Holding, both of which are wholly owned subsidiaries of Och-Ziff Capital Management Group LLC

Institutional Credit Strategies		Our asset management platform that invests in performing credits, including leveraged loans, high-yield bonds, private credit/bespoke financing and investment grade credit via CLOs and other customized solutions

IPO		Our initial public offering of 36.0 million Class A Shares that occurred in November 2007

NYSE		New York Stock Exchange

Och-Ziff, the Company, the firm, we, us, our		Refers, unless the context requires otherwise, to Och-Ziff Capital Management Group LLC, a Delaware limited liability company, and its consolidated subsidiaries, including the Och-Ziff Operating Group

Och-Ziff Corp		Och-Ziff Holding Corporation, a Delaware corporation

Och-Ziff funds, funds		The multi-strategy, opportunistic credit, real estate and equity funds, Institutional Credit Strategies products and other alternative investment vehicles for which we provide asset management services



Och-Ziff Holding		Och-Ziff Holding LLC, a Delaware limited liability company

Och-Ziff Operating Group		Refers collectively to OZ Management, OZ Advisors I and OZ Advisors II, and their consolidated subsidiaries

OZ Advisors I		OZ Advisors LP, a Delaware limited partnership

OZ Advisors II		OZ Advisors II LP, a Delaware limited partnership

OZ Management		OZ Management LP, a Delaware limited partnership

Registrant		Och-Ziff Capital Management Group LLC, a Delaware limited liability company

Reorganization		The reorganization of our business that took place prior to the 2007 Offerings

SEC		U.S. Securities and Exchange Commission

Securities Act		Securities Act of 1933, as amended

Special Investments		Investments that we, as investment manager, believe lack a readily ascertainable market value, are illiquid or should be held until the resolution of a special event or circumstance

Ziffs		Refers collectively to Ziff Investors Partnership, L.P. II and certain of its affiliates and control persons

Available Information

Och-Ziff Capital Management Group LLC files annual, quarterly and current reports, proxy statements and other information required by the Exchange Act with the SEC. We make available free of charge on our website (www.ozcap.com) our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and any amendments to those filings as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. Also posted on our website in the “Public Investors – Corporate Governance” section are charters for our Audit Committee; Compensation Committee; and Nominating, Corporate Governance and Conflicts Committee, as well as our Corporate Governance Guidelines and Code of Business Conduct and Ethics governing our directors, officers and employees. Information on, or accessible through, our website is not a part of, and is not incorporated into, this report or any other SEC filing. Copies of our SEC filings or corporate governance materials are available without charge upon written request to Och-Ziff Capital Management Group LLC, 9 West 57th Street, New York, New York 10019, Attention: Office of the Secretary.

Any materials we file with the SEC are also publicly available through the SEC’s website (www.sec.gov) or may be read and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.

No statements herein, available on our website or in any of the materials we file with the SEC under the Exchange Act constitute, or should be viewed as constituting, an offer of any Och-Ziff fund.

Forward-Looking Statements

Some of the statements under “Part I — Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which we refer to as the “MD&A,” “Part I — Item 3. Quantitative and Qualitative Disclosures About Market Risk,” “Part II — Item 1A. Risk Factors” and elsewhere in this quarterly report may contain forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act 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,” “could,” “seek,” “approximately,” “predict,” “intend,” “plan,” “estimate,” “anticipate,” “opportunity,” “comfortable,” “assume,” “remain,” “maintain,” “sustain,” “achieve,” “see,” “think,” “position” or the negative version of those words or other comparable words.

Any forward-looking statements contained herein are based upon historical information and on our current plans, estimates and expectations. The inclusion of this or other forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved.

We caution that forward-looking statements are subject to numerous assumptions, estimates, risks and uncertainties, including but not limited to the following: global economic, business, market and geopolitical conditions; U.S. and foreign regulatory developments relating to, among other things, financial institutions and markets, government oversight, fiscal and tax policy; the outcome of third-party litigation involving us; the consequences of the Foreign Corrupt Practices Act (the "FCPA") settlements with the SEC and the U.S. Department of Justice (the "DOJ"); conditions impacting the alternative asset management industry; our ability to retain existing fund investor capital; our ability to successfully compete for fund investors, assets, professional talent and investment opportunities; our ability to retain our active executive managing directors, managing directors and other investment professionals; our successful formulation and execution of our business and growth strategies; our ability to appropriately manage conflicts of interest and tax and other regulatory factors relevant to our business; and assumptions relating to our operations, investment performance, 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 assumptions or estimates prove to be incorrect, our actual results may vary materially from those indicated in these statements. These factors are not and should not be construed as exhaustive and should be read in conjunction with the other cautionary statements and risks that are included in our filings with the SEC, including but not limited to our Annual Report.

There may be additional risks, uncertainties and factors that we do not currently view as material or that are not known. The forward-looking statements contained in this report are made only as of the date of this report. We do not undertake to update any forward-looking statement because of new information, future developments or otherwise.

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC

CONSOLIDATED BALANCE SHEETS — UNAUDITED



	September 30, 2016			December 31, 2015

	(dollars in thousands)
Assets
Cash and cash equivalents	$	430,470		$	254,070
Income and fees receivable	24,801			93,846
Due from related parties	19,880			8,096
Deferred income tax assets	669,691			719,954
Other assets, net (includes assets measured at fair value of $29,994 and $18,501 as of September 30, 2016 and December 31, 2015, respectively)	203,952			192,975
Assets of consolidated Och-Ziff funds:
Investments, at fair value	36,830			9,071,933
Other assets of Och-Ziff funds	2,633			344,769
Total Assets	$	1,388,257		$	10,685,643

Liabilities and Shareholders' (Deficit) Equity
Liabilities
Due to related parties	$	490,249		$	593,390
Debt obligations	561,757			443,069
Compensation payable	22,716			176,602
Other liabilities	564,214			83,813
Liabilities of consolidated Och-Ziff funds:
Notes and loans payable of consolidated CLOs, at fair value	—			7,077,679
Securities sold under agreements to repurchase	—			190,751
Other liabilities of Och-Ziff funds	653			47,487
Total Liabilities	1,639,589			8,612,791

Commitments and Contingencies (Note 15)

Redeemable Noncontrolling Interests (Note 4)	20,973			832,284

Shareholders' (Deficit) Equity
Class A Shares, no par value, 1,000,000,000 shares authorized, 181,544,024 and 181,026,455 shares issued and outstanding as of September 30, 2016 and December 31, 2015, respectively	—			—
Class B Shares, no par value, 750,000,000 shares authorized, 297,317,019 and 297,317,400 shares issued and outstanding as of September 30, 2016 and December 31, 2015, respectively	—			—
Paid-in capital	3,118,479			3,040,655
Appropriated retained deficit	—			(59,663		)
Accumulated deficit	(3,569,970		)	(3,396,822		)
Shareholders' deficit attributable to Class A Shareholders	(451,491		)	(415,830		)
Shareholders' equity attributable to noncontrolling interests	179,186			1,656,398
Total Shareholders' (Deficit) Equity	(272,305		)	1,240,568
Total Liabilities, Redeemable Noncontrolling Interests and Shareholders' (Deficit) Equity	$	1,388,257		$	10,685,643

See notes to consolidated financial statements.

OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) — UNAUDITED



	Three Months Ended September 30,					Nine Months Ended September 30,
	2016		2015			2016			2015

	(dollars in thousands)
Revenues
Management fees	$	128,513	$	162,778		$	428,822		$	496,207
Incentive income	18,754		35,615			57,477			121,262
Other revenues	380		579			1,544			1,548
Income of consolidated Och-Ziff funds	458		126,931			1,262			361,136
Total Revenues	148,105		325,903			489,105			980,153

Expenses
Compensation and benefits	57,758		70,602			169,762			211,895
Reorganization expenses	—		4,018			—			12,052
Interest expense	6,129		5,383			17,452			16,033
General, administrative and other	44,306		65,484			584,331			127,332
Expenses of consolidated Och-Ziff funds	17		82,576			316			220,847
Total Expenses	108,210		228,063			771,861			588,159

Other Income (Loss)
Net gains (losses) on investments in Och-Ziff funds and joint ventures	803		(146		)	1,302			43
Net gains (losses) of consolidated Och-Ziff funds	821		(20,627		)	2,182			21,859
Total Other Income (Loss)	1,624		(20,773		)	3,484			21,902

Income (Loss) Before Income Taxes	41,519		77,067			(279,272		)	413,896
Income taxes	9,986		12,422			39,436			119,607
Consolidated and Comprehensive Net Income (Loss)	$	31,533	$	64,645		$	(318,708	)	$	294,289

Allocation of Consolidated and Comprehensive Net Income (Loss)
Class A Shareholders	$	14,285	$	17,417		$	(133,642	)	$	48,048
Noncontrolling interests	16,570		78,971			(186,867		)	270,346
Redeemable noncontrolling interests	678		(31,743		)	1,801			(24,105		)
	$	31,533	$	64,645		$	(318,708	)	$	294,289

Earnings (Loss) Per Class A Share
Basic	$	0.08	$	0.10		$	(0.73	)	$	0.27
Diluted	$	0.05	$	0.06		$	(0.75	)	$	0.26

Weighted-Average Class A Shares Outstanding
Basic	182,521,225		177,805,122			182,508,296			177,711,669
Diluted	479,838,244		484,171,524			479,825,416			181,517,750

Dividends Paid per Class A Share	$	—	$	0.14		$	—		$	0.83

See notes to consolidated financial statements.

OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ (DEFICIT) EQUITY — UNAUDITED



	Och-Ziff Capital Management Group LLC Shareholders
	Number of Class A Shares	Number of Class B Shares		Paid-in Capital			Appropriated Retained Deficit			Accumulated Deficit			Shareholders' Deficit Attributable to Class A Shareholders			Shareholders' Equity Attributable to Noncontrolling Interests			Total Shareholders' (Deficit) Equity

				(dollars in thousands)
As of December 31, 2015	181,026,455	297,317,400		$	3,040,655		$	(59,663	)	$	(3,396,822	)	$	(415,830	)	$	1,656,398		$	1,240,568
Deconsolidation of Och-Ziff funds on adoption of ASU 2015-02 (See Note 3)	—	—		—			59,663			(39,887		)	19,776			(1,321,488		)	(1,301,712		)
Capital contributions	—	—		—			—			—			—			2,547			2,547
Capital distributions	—	—		—			—			—			—			(225		)	(225		)
Dividend equivalents on Class A restricted share units	—	—		(381		)	—			381			—			—			—
Equity-based compensation	517,569	(381	)	19,469			—			—			19,469			33,445			52,914
Impact of changes in Och-Ziff Operating Group ownership (See Note 4)	—	—		(182		)	—			—			(182		)	182			—
Waiver of payments under tax receivable agreement (Note 15)	—	—		58,918			—			—			58,918			(4,806		)	54,112
Comprehensive net loss, excluding amounts allocated to redeemable noncontrolling interests	—	—		—			—			(133,642		)	(133,642		)	(186,867		)	(320,509		)
As of September 30, 2016	181,544,024	297,317,019		$	3,118,479		$	—		$	(3,569,970	)	$	(451,491	)	$	179,186		$	(272,305	)

See notes to consolidated financial statements.

OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS — UNAUDITED



	Nine Months Ended September 30,
	2016			2015

	(dollars in thousands)
Cash Flows from Operating Activities
Consolidated net (loss) income	$	(318,708	)	$	294,289
Adjustments to reconcile consolidated net income to net cash provided by operating activities:
Reorganization expenses	—			12,052
Amortization of equity-based compensation	56,311			86,590
Depreciation, amortization and loss on asset held for sale	14,947			8,135
Deferred income taxes	31,038			105,263
Operating cash flows due to changes in:
Income and fees receivable	77,760			388,350
Due from related parties	(9,888		)	(2,771		)
Other assets, net	8,460			37,211
Due to related parties	(12,133		)	(48,059		)
Compensation payable	(153,875		)	(211,617		)
Other liabilities	398,686			(9,514		)
Consolidated Och-Ziff funds related items:
Net gains of consolidated Och-Ziff funds	(2,182		)	(21,859		)
Purchases of investments	(185,940		)	(3,273,867		)
Proceeds from sale of investments	175,131			3,241,032
Other assets of consolidated Och-Ziff funds	9,078			(119,007		)
Securities sold under agreements to repurchase	—			(71,716		)
Other liabilities of consolidated Och-Ziff funds	558			(2,313		)
Net Cash Provided by Operating Activities	89,243			412,199

Cash Flows from Investing Activities
Purchases of fixed assets	(7,559		)	(36,118		)
Purchases of United States government obligations	(29,915		)	—
Maturities of United States government obligations	18,500			—
Investment in Och-Ziff funds	(12,734		)	(2,777		)
Return of investment in Och-Ziff funds	1,493			296
Other, net	(17		)	—
Net Cash Used in Investing Activities	(30,232		)	(38,599		)

OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC

CONSOLIDATED STATEMENTS OF CASH FLOWS — (continued)



	Nine Months Ended September 30,
	2016			2015

	(dollars in thousands)
Cash Flows from Financing Activities
Contributions from noncontrolling and redeemable noncontrolling interests	2,551			580,080
Distributions to noncontrolling and redeemable noncontrolling interests	(225		)	(743,887		)
Dividends on Class A Shares	—			(146,346		)
Proceeds from debt obligations	120,000			3,606
Repayment of debt obligations	(2,738		)	(2,192		)
Withholding taxes paid on vested RSUs	(2,340		)	(5,341		)
Other, net	141			1,222
Net Cash Provided (Used) by Financing Activities	117,389			(312,858		)
Net Change in Cash and Cash Equivalents	176,400			60,742
Cash and Cash Equivalents, Beginning of Period	254,070			250,603
Cash and Cash Equivalents, End of Period	$	430,470		$	311,345


Supplemental Disclosure of Cash Flow Information
Cash paid during the period:
Interest	$	10,374		$	10,019
Income taxes	$	10,563		$	17,003
Non-cash transactions:
Increase in paid in capital as a result of waiver of payments under tax receivable agreement (Note 15)	$	54,112		$	—
Assets related to the initial consolidation of CLOs	$	—		$	1,551,028
Liabilities related to the initial consolidation of CLOs	$	—		$	1,572,801

See Note 3 for non-cash impact of the deconsolidation of Och-Ziff funds upon the adoption of ASU 2015-02.

See notes to consolidated financial statements.

OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

SEPTEMBER 30, 2016

1. OVERVIEW

Och-Ziff Capital Management Group LLC (the “Registrant”), a Delaware limited liability company, together with its consolidated subsidiaries (collectively, the “Company”), is a global alternative asset management firm with offices in New York, London, Hong Kong, Mumbai, Beijing, Dubai, Shanghai and Houston. The Company provides asset management services to its investment funds (the “Och-Ziff funds” or the “funds”), which pursue a broad range of global investment opportunities. The Company currently manages multi-strategy funds, dedicated credit funds, including opportunistic credit funds and Institutional Credit Strategies products, real estate funds and other alternative investment vehicles. Through Institutional Credit Strategies, the Company’s asset management platform that invests in performing credits, the Company manages collateralized loan obligations (“CLOs”) and other customized solutions for its clients.

The Company’s primary sources of revenues are management fees, which are based on the amount of the Company’s assets under management, and incentive income, which is based on the investment performance of its funds. Accordingly, for any given period, the Company’s revenues will be driven by the combination of assets under management and the investment performance of the Och-Ziff funds.

The Company currently has two operating segments: the Och-Ziff Funds segment and the Company’s real estate business. The Och-Ziff Funds segment is currently the Company’s only reportable operating segment under U.S. generally accepted accounting principles (“GAAP”) and provides asset management services to the Company’s multi-strategy funds, dedicated credit funds and other alternative investment vehicles. The Company’s real estate business, which provides asset management services to its real estate funds, is included within Other Operations, as it does not meet the threshold of a reportable operating segment under GAAP.

The Company generates substantially all of its revenues in the United States. The liability of the Company’s Class A Shareholders is limited to the extent of their capital contributions.

The Company conducts its operations through OZ Management LP (“OZ Management”), OZ Advisors LP (“OZ Advisors I”) and OZ Advisors II LP (“OZ Advisors II”) and their consolidated subsidiaries (collectively, the “Och-Ziff Operating Group”). References to the Company’s “executive managing directors” refer to the current limited partners of OZ Management, OZ Advisors and OZ Advisors II other than the Company’s intermediate holding companies, including the Company’s founder, Daniel S. Och, and, except where the context requires otherwise, include certain limited partners who are no longer active in the business of the Company. References to the Company’s “active executive managing directors” refer to executive managing directors who remain active in the Company’s business. References to the “Ziffs” refer collectively to Ziff Investors Partnership, L.P. II and certain of its affiliates and control persons. References to the Company’s “intermediate holding companies” refer, collectively, to Och-Ziff Holding Corporation (“Och-Ziff Corp”) and Och-Ziff Holding LLC, both of which are wholly owned subsidiaries of the Registrant.

During the first quarter of 2016, the Company adopted Accounting Standards Update (“ASU”) 2015-02, Amendments to the Consolidation Analysis. As a result of this update, the Company no longer consolidates the majority of the previously consolidated Och-Ziff funds. See Notes 2 and 3 for additional information.

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

These unaudited, interim, consolidated financial statements are prepared in accordance with GAAP as set forth in the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”), and should be read in conjunction with the audited consolidated financial statements included in the Company’s annual report on Form 10-K for the year ended December 31, 2015 (the “Annual Report”). In the opinion of management, all adjustments considered necessary for a fair presentation of the Company’s unaudited, interim, consolidated financial statements have been included and are of a normal and recurring nature. The results of operations presented for the interim periods are not necessarily indicative of the results that may

OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

SEPTEMBER 30, 2016

be expected for any other interim period or for the entire year, primarily because of the majority of incentive income and discretionary cash bonuses being recorded in the fourth quarter each year. All significant intercompany transactions and balances have been eliminated in consolidation.

The Company adopted ASU 2015-02 as of January 1, 2016 using the modified retrospective method of transition, which resulted in a cumulative effect adjustment to opening equity. The Company did not restate prior-period results. The impact to the Company’s opening retained earnings was driven by the cumulative effect of a change in incentive income recognition for the funds no longer consolidated, net of deferred income tax effects. As described in Note 2 of the Company’s Annual Report, incentive income from funds not consolidated is recognized at the end of the applicable commitment period when the amounts are contractually payable and when no longer subject to clawback. Prior to deconsolidation, incentive income from these previously consolidated funds was recognized by allocating a portion of the net income of these funds to the Company rather than to the fund investors (noncontrolling interests) based on the contractual terms of the relevant fund agreements. This resulted in incentive income being recognized that was subject to clawback in the event of future losses in the respective funds.

The deconsolidation of the majority of its previously consolidated funds resulted in a substantial decrease in assets of consolidated Och-Ziff funds, liabilities of consolidated Och-Ziff funds, redeemable noncontrolling interests, appropriated retained deficit and shareholders’ equity attributable to non-controlling interests in the Company’s consolidated balance sheet. Additionally, the deconsolidation has caused a significant decrease in the amount of income of consolidated Och-Ziff funds, expenses of consolidated Och-Ziff funds, and net gains of consolidated Och-Ziff funds in the Company’s consolidated statements of comprehensive income (loss).

As a result of the adoption of ASU 2015-02, the Company modified its consolidation policies, resulting in the deconsolidation of the majority of the previously consolidated Och-Ziff funds. The Company’s updated consolidation policies are presented below.

Consolidation Policies

The Company’s funds are typically organized using a “master-feeder” structure. Fund investors, including the Company’s executive managing directors, employees and other related parties to the extent they invest in a given fund, generally invest directly into the feeder funds. These feeder funds are typically limited partnerships or limited companies that hold direct or indirect interests in a master fund. The master fund, together with its subsidiaries, is the primary investment vehicle for its feeder funds. The Company generally collects its management fees and incentive income from the feeder funds or subsidiaries of the feeder funds (“intermediate funds”), and does not collect any management fees or incentive income directly from the master funds. However, the Company also organizes certain funds (e.g., its real estate funds and certain opportunistic credit funds) without the use of a master-feeder structure. These are typically organized as limited partnerships, in which the Company is the general partner and collects management fees and incentive income directly from these entities; however, in the case of the real estate funds, the Company collects management fees directly from the funds’ investors. The Company generally directs the activities of its funds through its role as general partner or as the investment or CLO collateral manager with decision-making rights.

The consolidated financial statements include the accounts of the Registrant and entities in which it, directly or indirectly, is determined to have a controlling financial interest under the following set of guidelines:

•

Variable Interest Entities (“VIEs”)—The Company determines whether, if by design, an entity has any of the following characteristics: (i) equity investors who lack the characteristics of a controlling financial interest; (ii) the entity does not have sufficient equity at risk to finance its expected activities without additional subordinated financial support from other parties; or (iii) substantially all of the activities of the entity are performed on behalf of a party with disproportionately few voting rights. An entity with any one of these characteristics is a VIE. Partnerships, and similarly structured entities, will be considered as VIEs where a simple majority of third party investors with equity at risk are not able to exercise substantive kick-out or participating rights over the general partner.


•	Voting Interest Entities (“VOEs”)—Where an entity does not have the characteristics of a VIE, it will be a VOE.

OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

SEPTEMBER 30, 2016

The determination of whether a fund is a VIE or a VOE is based on the facts and circumstances for each individual fund in accordance with the guidelines described below. Classification of such entities is reassessed where there is a substantive change in the governing documents or contractual arrangements of the entity, to the capital structure of the entity or in the activities of the entity. The Company continuously reassesses whether it should consolidate a VIE or VOE.

Prior to the Adoption of ASU 2015-02

Prior to the adoption of ASU 2015-02, the Company used two models for determining whether it was the primary beneficiary of a VIE depending on the nature and characteristics of the entity.

In the case of fund vehicles classified as VIEs that qualified for the deferral under ASU 2010-10, Amendments to Statement 167 for Certain Investment Funds, the primary beneficiary was the party that absorbed a majority of a VIEs’ expected losses or received a majority of the expected residual returns as a result of holding variable interests. The Company was identified as the primary beneficiary of a fund where the Company’s related party group absorbed a majority of the variability of the fund, and where the Company was determined to be most closely associated to the fund within that related party group.

In the case of the Company’s CLOs and a certain joint venture that were classified as VIEs and did not qualify for the deferral under ASU 2010-10, the primary beneficiary was the party that had both (i) the power to direct the activities of the entity that most significantly impact the entity’s economic performance; and (ii) the obligation to absorb losses or the right to receive benefits from the entity that could potentially be significant to the entity. The Company was identified as the primary beneficiary of the CLOs because it directed the investment activities of the CLOs and had the right to receive benefits from the CLOs that could potentially be significant as a result of its fee arrangements.

Finally, certain partnerships that were not determined to be VIEs in which the Company held a substantive equity investment and was determined to be the controlling general partner were classified as voting interest entities (“VOEs”) and consolidated by the Company because the limited partners did not have substantive rights to participate in the ongoing governance and operating activities of the partnership.

Upon the Adoption of ASU 2015-02

Where the Company holds a variable interest in an entity, it is required to determine whether it should consolidate the entity. Under ASU 2015-02, fee arrangements are no longer considered variable interests when they are commensurate with the level of effort required to provide services and include only terms, conditions, or amounts that are customarily present in arrangements for similar services negotiated at arm’s length, and where the Company does not hold other interests in the entity that would absorb more than an insignificant amount of the variability of the entity.

Where the Company does not have a variable interest in the entity, it will not consolidate the entity. Where the Company has a variable interest, it is required to determine whether the entity will be considered as a VIE or VOE, the classification of which will determine the analysis that the Company is required to perform when determining whether it should consolidate the entity.

Funds that are VIEs

Funds that the Company has determined to be VIEs are generally VIEs because fund investors are deemed to lack the characteristics of a controlling financial interest or the entity does not have sufficient equity.

The party identified as the primary beneficiary of a VIE is required to consolidate the entity. The Company is the primary beneficiary of a VIE where it has a controlling financial interest in the entity, which is defined as (i) the power to direct the activities of the entity that most significantly impact the entity’s economic performance; and (ii) the obligation to absorb losses or the right to receive benefits from the entity that could potentially be significant to the entity. Where the Company does not have a controlling financial interest, but is part of a related party group under common control that collectively has power and

OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

SEPTEMBER 30, 2016

benefits, an assessment as to which party within the related party group is more closely associated with the VIE and would therefore consolidate a VIE. This assessment would also be performed where power is shared within the related party group.

The types of funds that are VIEs and not consolidated are generally (i) master funds and intermediate fund vehicles for the Company’s multi-strategy funds, as well as credit, real estate and similar fund vehicles, as third party investors in these entities have not been granted substantive removal rights and (ii) CLOs, as they lack sufficient equity at risk to finance their expected activities without additional subordinated financial support from other parties. The Company does not consolidate VIEs where it does not have a controlling financial interest.

The types of funds that are VIEs consolidated by the Company are certain new funds that the Company has seeded and generally expects to deconsolidate when the fund has a certain level of additional third party capital.

Funds that are VOEs

Funds that are corporations, or similarly structured entities that are not VIEs, are consolidated by the Company where the Company has an equity investment of greater than 50% and has control over significant operating, financial and investing decisions of the entity. The Company will consolidate partnerships, or similarly structured entities that are not VIEs, where a single investor or simple majority of third party investors with equity cannot exercise substantive kick-out or participating rights over the entity.

The types of funds that are VOEs and not consolidated by the Company are generally feeder funds of the Company’s multi-strategy funds, as third party fund investors in these entities have been granted substantive removal rights.

Recently Adopted Accounting Pronouncements

In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis. ASU 2015-02 significantly changes the consolidation analysis required under GAAP. The impact of adoption and the Company’s revised consolidation policies incorporating the changes made by ASU 2015-02 are presented above.

In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance costs. ASU 2015-03 simplifies the presentation of debt issuance costs by requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The requirements of ASU 2015-03 were effective for the Company beginning in first quarter of 2016. The Company reclassified $5.8 million of debt issuance costs in its December 31, 2015 balance sheet from other assets to debt obligations upon the adoption of ASU 2015-03.

In May 2015, the FASB issued ASU 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent). ASU 2015-07 removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The requirements of ASU 2015-07 were effective for the Company beginning in the first quarter of 2016, and are applied retrospectively. The impact of ASU 2015-07 was limited to disclosure of the level in the fair value hierarchy of investments held by the Company that are measured using net asset value per share during the periods presented.

None of the other changes to GAAP that went into effect in the nine months ended September 30, 2016 has had a material effect on the Company’s consolidated financial statements.

Future Adoption of Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. ASU 2014-09 supersedes the revenue recognition requirements in ASC 605—Revenue Recognition and most industry-specific revenue recognition guidance throughout the ASC. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those

OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

SEPTEMBER 30, 2016

goods or services. The requirements of ASU 2014-09 are effective for the Company beginning in the first quarter of 2018. Entities are permitted to apply the guidance in ASU 2014-09 using one of the following methods: (i) full retrospective application to each prior period presented, or (ii) modified retrospective application with a cumulative effect adjustment to opening retained earnings in the annual reporting period that includes that date of initial application. The Company is currently evaluating the impact, if any, that this update will have on its consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02 significantly changes accounting for lease arrangements, in particular from the perspective of the lessee. The Company is not currently a lessor in any significant lease arrangements, but is a lessee in several lease arrangements that would be impacted by the ASU. Upon adoption of the ASU, where the Company is lessee, the Company will likely be required to recognize certain lease arrangements on its balance sheet for the first time, but will continue to recognize associated expenses on its statement of comprehensive income in a manner similar to existing accounting principles. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. The requirements of ASU 2016-02 are effective for the Company beginning in the first quarter of 2019.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 will change how companies account for certain aspects of share-based payments to employees. Specifically, the ASU will require companies to recognize the income tax effects of awards in the statement of comprehensive income when the awards vest or are settled, increases the amount companies can withhold to cover income taxes on awards and still qualify for the exception to liability classification for shares used to satisfy the employer’s statutory income tax withholding obligation, and will require companies to elect whether to account for forfeitures of share-based payments by either recognizing forfeitures of awards as they occur or by estimating the number of awards expected to be forfeited and adjusting the estimate when it is likely to change, as is currently required. Entities are required to apply amendments related to the timing of when excess tax benefits are recognized, minimum statutory withholding requirements, and forfeitures using a modified retrospective transition method, while amendments related to the recognition of excess tax benefits and tax deficiencies in the statement of comprehensive income should be applied prospectively. The requirements of ASU 2016-09 are effective for the Company beginning in the first quarter of 2017 with early adoption permitted. The Company is currently evaluating the impact that this update will have on its consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows and should be applied retrospectively. ASU 2016-15 is effective for the Company in the first quarter of 2018 with earlier adoption permitted. The Company is currently in the process of evaluating the impact of adoption on its consolidated financial statements.

None of the other changes to GAAP that are not yet effective are expected to have a material effect on the Company’s consolidated financial statements.

OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

SEPTEMBER 30, 2016

3. DECONSOLIDATION OF CERTAIN OCH-ZIFF FUNDS

As a result of the adoption of ASU 2015-02 on January 1, 2016, the Company is no longer required to consolidate the majority of the Och-Ziff funds previously consolidated. The table below presents the non-cash adjustments to the Company’s balance sheet as a result of the deconsolidation upon the adoption of ASU 2015-02.



	(dollars in thousands)
Assets
Income and fees receivable	$	8,715
Due from related parties	1,896
Deferred income tax assets	18,532
Other assets, net	3,331
Assets of consolidated Och-Ziff funds:
Investments, at fair value	(9,036,433		)
Other assets of Och-Ziff funds	(344,719		)
Total Assets	$	(9,348,678	)

Liabilities and Shareholders' Equity
Liabilities
Other liabilities	$	81,972
Liabilities of consolidated Och-Ziff funds:
Notes and loans payable of consolidated CLOs, at fair value	(7,077,679		)
Securities sold under agreements to repurchase	(190,751		)
Other liabilities of Och-Ziff funds	(47,392		)
Total Liabilities	(7,233,850		)

Redeemable Noncontrolling Interests	(813,116		)

Shareholders' Equity
Appropriated retained deficit	59,663
Accumulated deficit	(39,887		)
Shareholders' deficit attributable to Class A Shareholders	19,776
Shareholders' equity attributable to noncontrolling interests	(1,321,488		)
Total Shareholders' Equity	(1,301,712		)
Total Liabilities, Redeemable Noncontrolling Interests and Shareholders' Equity	$	(9,348,678	)

4. NONCONTROLLING INTERESTS

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, as well as fund investors’ interests in the consolidated Och-Ziff funds. Net income (loss) allocated to the Och-Ziff Operating Group A Units is driven by the earnings (losses) of the Och-Ziff Operating Group. Net income allocated to fund investors’ interests in consolidated Och-Ziff funds is driven by the earnings of those funds, including the net difference in the fair value of CLO assets and liabilities that are subsequently reclassified to appropriated retained earnings on the consolidated balance sheets.

OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

SEPTEMBER 30, 2016

As discussed in Notes 2 and 3, the Company deconsolidated the majority of the previously consolidated Och-Ziff funds, including all of the CLOs. As a result, noncontrolling interests and redeemable noncontrolling interests related to fund investors presented in the tables below decreased substantially from the prior year.

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



	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016			2015

	(dollars in thousands)
Och-Ziff Operating Group A Units	$	16,313	$	43,505	$	(187,338	)	$	175,239
Consolidated Och-Ziff funds	—		35,266		262			94,723
Other	257		200		209			384
	$	16,570	$	78,971	$	(186,867	)	$	270,346

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



	September 30, 2016		December 31, 2015

	(dollars in thousands)
Och-Ziff Operating Group A Units	$	174,838	$	429,312
Consolidated Och-Ziff funds	—		1,224,996
Other	4,348		2,090
	$	179,186	$	1,656,398

The following table presents the activity in redeemable noncontrolling interests as presented in the consolidated balance sheets:



	Nine Months Ended September 30,
	2016

	(dollars in thousands)
Beginning balance	$	832,284
Deconsolidation of Och-Ziff funds on adoption of ASU 2015-02 (See Note 3)	(813,116		)
Capital contributions	4
Comprehensive income	1,801
Ending Balance	$	20,973

Och-Ziff Operating Group Ownership

The Company’s interest in the Och-Ziff Operating Group increased to 37.9% as of September 30, 2016, from 37.8% as of December 31, 2015. 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 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 Class A restricted share units (“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

OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

SEPTEMBER 30, 2016

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.

5. FAIR VALUE DISCLOSURES

Fair value represents the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date (i.e., an exit price). Due to the inherent uncertainty of valuations of investments that are determined to be illiquid or do not have readily ascertainable fair values, the estimates of fair value may differ from the values ultimately realized, and those differences can be material.

Assets and liabilities measured at fair value are classified into one of the following categories:


•	Level I – Fair value is determined using quoted prices that are available in active markets for identical assets or liabilities. The types of assets and liabilities that would generally be included in this category are certain listed equities, U.S. government obligations and certain listed derivatives.

•

Level II – Fair value is determined using quotations received from dealers making a market for these assets or liabilities (“broker quotes”), valuations obtained from independent third-party pricing services, the use of models or other valuation methodologies based on pricing inputs that are either directly or indirectly market observable as of the measurement date. The types of assets and liabilities that would generally be included in this category are certain corporate bonds, certain credit default swap contracts, certain bank debt securities, certain commercial real estate debt, less liquid equity securities, forward contracts and certain over the-counter (“OTC”) derivatives.

•

Level III – Fair value is determined using pricing inputs that are unobservable in the market and includes situations where there is little, if any, market activity for the asset or liability. The fair value of assets and liabilities in this category may require significant judgment or estimation in determining fair value of the assets or liabilities. The fair value of these assets and liabilities may be estimated using a combination of observed transaction prices, independent pricing services, relevant broker quotes, models or other valuation methodologies based on pricing inputs that are neither directly or indirectly market observable. The types of assets and liabilities that would generally be included in this category include real estate investments, equity and debt securities issued by private entities, limited partnerships, certain corporate bonds, certain credit default swap contracts, certain bank debt securities, certain commercial real estate debt, certain OTC derivatives, residential and commercial mortgage-backed securities, asset-backed securities, collateralized debt obligations, investments in affiliated credit funds, as well as the notes and loans payable of consolidated CLOs.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an asset or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

SEPTEMBER 30, 2016

Fair Value Measurements Categorized within the Fair Value Hierarchy

The following table summarizes the Company’s assets and liabilities (excluding the assets and liabilities of the consolidated funds) measured at fair value on a recurring basis within the fair value hierarchy as of September 30, 2016 and December 31, 2015:



	Fair Value
	September 30, 2016		December 31, 2015		Fair Value Hierarchy

	(dollars in thousands)
United States government obligations included within:
Cash and cash equivalents	$	20,000	$	—	Level I
Other assets	$	29,994	$	18,501	Level I

Consolidated Funds

As a result of the adoption of ASU 2015-02, the Company no longer consolidates the majority of the previously consolidated Och-Ziff funds as of January 1, 2016. In addition, as a result of the adoption of ASU 2015-07, the Company no longer categorizes within the fair value hierarchy investments held at net asset value. Prior year amounts were restated upon the adoption of ASU 2015-07. See Notes 2 and 3 for additional information regarding these ASUs.

The following table summarizes the consolidated funds’ assets measured at fair value on a recurring basis within the fair value hierarchy as of September 30, 2016:



	As of September 30, 2016
	Level I		Level II		Level III		Total

	(dollars in thousands)
Bank debt	$	—	$	20,580	$	16,250	$	36,830
Total Investments, at Fair Value	$	—	$	20,580	$	16,250	$	36,830

OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

SEPTEMBER 30, 2016

The following table summarizes the consolidated funds’ assets and liabilities measured at fair value on a recurring basis within the fair value hierarchy as of December 31, 2015:



	As of December 31, 2015
	Level I		Level II		Level III		Total

	(dollars in thousands)
Bank debt	$	—	$	4,809,367	$	1,998,423	$	6,807,790
Real estate investments	—		—		719,957		719,957
Residential mortgage-backed securities	—		—		323,571		323,571
Collateralized debt obligations	—		—		83,759		83,759
Energy and natural resources limited partnerships	2,100		—		70,604		72,704
Commercial real estate debt	—		—		18,295		18,295
Corporate bonds	—		75,149		—		75,149
United States government obligations	40,672		—		—		40,672
Asset-backed securities	—		—		23,739		23,739
Commercial mortgage-backed securities	—		—		13,803		13,803
Other investments	316		9		1,938		2,263
Financial Assets, at Fair Value	$	43,088	$	4,884,525	$	3,254,089	$	8,181,702
Investments held at net asset value							890,231
Total Investments, at Fair Value							$	9,071,933

Senior secured notes and loans payable of consolidated CLOs	$	—	$	—	$	6,636,838	$	6,636,838
Subordinated notes payable of consolidated CLOs	—		—		440,841		440,841
Notes and loans payable of consolidated CLOs, at fair value	—		—		7,077,679		7,077,679
Other liabilities, included within other liabilities of Och-Ziff funds	2,527		298		—		2,825
Financial Liabilities, at Fair Value	$	2,527	$	298	$	7,077,679	$	7,080,504

OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

SEPTEMBER 30, 2016

Reconciliation of Fair Value Measurements Categorized within Level III

The Company assumes that any transfers between Level I, Level II or Level III occur at the beginning of the reporting period presented. Amounts related to the initial consolidation of the Company’s CLOs or other funds are included within investment purchases.

The following table summarizes the changes in the Company’s Level III assets and liabilities for the three months ended September 30, 2016:



	June 30, 2016		Transfers In		Transfers Out			Investment Purchases		Investment Sales			Derivative Settlements		Net Gains of Consolidated Och-Ziff Funds		September 30, 2016

	(dollars in thousands)
Bank debt	$	8,868	$	—	$	(925	)	$	19,317	$	(11,325	)	$	—	$	315	$	16,250

The following table summarizes the changes in the Company’s Level III assets and liabilities (excluding notes and loans payable of consolidated CLOs) for the three months ended September 30, 2015:



	June 30, 2015		Transfers In		Transfers Out			Investment Purchases		Investment Sales			Derivative Settlements			Net Gains (Losses) of Consolidated Och-Ziff Funds			September 30, 2015

	(dollars in thousands)
Bank debt	$	1,802,755	$	585,086	$	(302,180	)	$	249,177	$	(273,840	)	$	—		$	(43,452	)	$	2,017,546
Real estate investments	737,478		—		—			46,425		(109,908		)	—			23,478			697,473
Residential mortgage-backed securities	414,331		—		—			6,433		(25,643		)	—			(10,280		)	384,841
Collateralized debt obligations	119,162		—		—			54		(10,187		)	—			2,032			111,061
Energy and natural resources limited partnerships	77,865		—		—			435		—			—			(6,351		)	71,949
Commercial real estate debt	61,267		—		—			—		(45,686		)	—			2,402			17,983
Corporate bonds	14		—		—			—		—			—			(13		)	1
Asset-backed securities	23,259		—		—			2,320		(878		)	—			941			25,642
Commercial mortgage-backed securities	679		—		—			13,599		(761		)	—			84			13,601
Other investments (including derivatives, net)	2,005		—		—			—		—			(298		)	261			1,968
	$	3,238,815	$	585,086	$	(302,180	)	$	318,443	$	(466,903	)	$	(298	)	$	(30,898	)	$	3,342,065

OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

SEPTEMBER 30, 2016

The following table summarizes the changes in the Company’s Level III assets and liabilities (excluding notes and loans payable of consolidated CLOs) for the nine months ended September 30, 2016:



	December 31, 2015		Transfers In		Transfers Out			Investment Purchases		Investment Sales ⁽¹⁾			Derivative Settlements		Net Gains of Consolidated Och-Ziff Funds		September 30, 2016

	(dollars in thousands)
Bank debt	$	1,998,423	$	—	$	(466	)	$	66,545	$	(2,049,067	)	$	—	$	815	$	16,250
Real estate investments	719,957		—		—			—		(719,957		)	—		—		—
Residential mortgage-backed securities	323,571		—		—			—		(323,571		)	—		—		—
Collateralized debt obligations	83,759		—		—			—		(83,759		)	—		—		—
Energy and natural resources limited partnerships	70,604		—		—			—		(70,604		)	—		—		—
Commercial real estate debt	18,295		—		—			—		(18,295		)	—		—		—
Corporate bonds	—		—		—			—		—			—		—		—
Asset-backed securities	23,739		—		—			—		(23,739		)	—		—		—
Commercial mortgage-backed securities	13,803		—		—			—		(13,803		)	—		—		—
Other investments (including derivatives, net)	1,938		—		—			—		(1,938		)	—		—		—
	$	3,254,089	$	—	$	(466	)	$	66,545	$	(3,304,733	)	$	—	$	815	$	16,250

_______________


(1)	Amounts related to the deconsolidation of the Company’s funds upon the adoption of ASU 2015-02 are included within investment sales.

The following table summarizes the changes in the Company’s Level III assets and liabilities (excluding notes and loans payable of consolidated CLOs) for the nine months ended September 30, 2015:



	December 31, 2014		Transfers In		Transfers Out			Investment Purchases		Investment Sales			Derivative Settlements			Net Gains (Losses) of Consolidated Och-Ziff Funds			September 30, 2015

	(dollars in thousands)
Bank debt	$	2,224,032	$	395,995	$	(642,790	)	$	1,000,120	$	(937,128	)	$	—		$	(22,683	)	$	2,017,546
Real estate investments	645,916		—		—			184,535		(207,955		)	—			74,977			697,473
Residential mortgage-backed securities	462,927		—		—			33,048		(98,020		)	—			(13,114		)	384,841
Collateralized debt obligations	173,746		—		—			7,478		(84,103		)	—			13,940			111,061
Energy and natural resources limited partnerships	65,909		—		—			15,707		(3,467		)	—			(6,200		)	71,949
Commercial real estate debt	29,815		—		—			33,891		(48,849		)	—			3,126			17,983
Corporate bonds	656		—		—			147		(521		)	—			(281		)	1
Asset-backed securities	21,368		—		—			6,141		(2,844		)	—			977			25,642
Commercial mortgage-backed securities	3,287		—		—			13,598		(3,665		)	—			381			13,601
Other investments (including derivatives, net)	2,144		—		—			—		(233		)	(668		)	725			1,968
	$	3,629,800	$	395,995	$	(642,790	)	$	1,294,665	$	(1,386,785	)	$	(668	)	$	51,848		$	3,342,065

OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

SEPTEMBER 30, 2016

Transfers out of Level III presented in the tables above resulted from the fair values of certain securities becoming market observable, with fair value determined using independent pricing services. Transfers into Level III presented in the table above resulted from the valuation of certain investments with decreased market observability, with fair values determined using broker quotes or independent pricing services. There were no transfers between Levels I and II during the periods presented above.

The table below summarizes the net change in unrealized gains and losses on the Company’s Level III assets and liabilities (excluding notes and loans payable of consolidated CLOs) held as of the reporting date. These gains and losses are included within net gains of consolidated Och-Ziff funds in the Company’s consolidated statements of comprehensive income (loss):



	Three Months Ended September 30,					Nine Months Ended September 30,
	2016		2015			2016		2015

	(dollars in thousands)
Bank debt	$	242	$	(42,491	)	$	322	$	(27,838	)
Real estate investments	—		(4,892		)	—		25,920
Residential mortgage-backed securities	—		(14,072		)	—		(20,252		)
Collateralized debt obligations	—		(2,239		)	—		(1,194		)
Energy and natural resources limited partnerships	—		(6,352		)	—		(6,200		)
Commercial real estate debt	—		(99		)	—		623
Corporate bonds	—		(13		)	—		(252		)
Asset-backed securities	—		993			—		1,187
Commercial mortgage-backed securities	—		(34		)	—		(337		)
Other investments (including derivatives, net)	—		(46		)	—		47
	$	242	$	(69,245	)	$	322	$	(28,295	)

The table below summarizes the changes in the notes and loans payable of consolidated CLOs for the three and nine months ended September 30, 2015. As a result of the adoption of ASU 2015-02, the Company no longer consolidates any of its CLOs as of January 1, 2016. Accordingly, no tables are presented for the three and nine months ended September 30, 2016.

For the three and nine months ended September 30, 2015, the Company recorded net unrealized gains of $130.1 million and $93.5 million for notes and loans payable of consolidated CLOs still outstanding as of September 30, 2015. Amounts related to the initial consolidation of the Company’s CLOs are included within issuances in the table below.



	June 30, 2015		Issuances		Settlements			Net Gains of Consolidated Och-Ziff Funds			September 30, 2015

	(dollars in thousands)
Senior secured notes and loans payable of consolidated CLOs	$	5,827,658	$	924,526	$	(459,000	)	$	(64,878	)	$	6,228,306
Subordinated notes payable of consolidated CLOs	500,423		40,999		—			(65,172		)	476,250
	$	6,328,081	$	965,525	$	(459,000	)	$	(130,050	)	$	6,704,556

OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

SEPTEMBER 30, 2016



	December 31, 2014		Issuances		Settlements			Net Losses (Gains) of Consolidated Och-Ziff Funds			September 30, 2015

	(dollars in thousands)
Senior secured notes and loans payable of consolidated CLOs	$	4,784,134	$	1,900,069	$	(459,000	)	$	3,103		$	6,228,306
Subordinated notes payable of consolidated CLOs	443,277		127,633		—			(94,660		)	476,250
	$	5,227,411	$	2,027,702	$	(459,000	)	$	(91,557	)	$	6,704,556

Valuation Methodologies for Fair Value Measurements Categorized within Levels II and III

Bank Debt; Residential and Commercial Mortgage-Backed Securities; Collateralized Debt Obligations; Commercial Real Estate Debt; Corporate Bonds; Asset-Backed Securities; Notes and Loans Payable of Consolidated CLOs

The fair value of investments in bank debt, residential and commercial mortgage-backed securities, collateralized debt obligations, commercial real estate debt, corporate bonds, asset-backed securities, and notes and loans payable of consolidated CLOs that do not have readily ascertainable fair values is generally determined using broker quotes or independent pricing services. For month-end valuations, the Company generally receives one to four broker quotes for each security, depending on the type of security being valued. These broker quotes are generally non-binding or indicative in nature. The Company verifies that these broker quotes are reflective of fair value as defined in GAAP generally through procedures such as comparison to independent pricing services, back testing procedures, review of stale pricing reports and performance of other due diligence procedures as may be deemed necessary. Historically, the Company has only adjusted a small number of broker quotes when used in determining final valuations for securities as a result of these procedures.

To the extent broker quotes are not available or deemed unreliable, the methods and procedures to value these investments may include, but are not limited to: obtaining and using other additional broker quotes deemed reliable; using independent pricing services; performing comparisons with prices of comparable or similar securities; obtaining valuation-related information from the issuers; calculating the present value of future cash flows; assessing other analytical data and information relating to these investments that is an indication of their value; obtaining information provided by third parties; reviewing the amounts invested in these investments; and evaluating financial information provided by the management of these investments. Market data is used to the extent that it is observable and considered reliable.

The significant unobservable inputs used in the fair value measurement of the Company’s bank debt, residential and commercial mortgage-backed securities, commercial real estate debt, corporate bonds and asset-backed securities that are not valued using broker quotes or independent pricing services are discount rates and yields. Significant increases (decreases) in the discount rates and yields in isolation would be expected to result in a significantly lower (higher) fair value measurement.

Real Estate Investments

Real estate investments are generally structured as equity, preferred equity, mezzanine debt, and participating debt in entities domiciled primarily in the United States and include investments in lodging, gaming, multifamily properties, retail, healthcare, distressed residential, senior housing, golf, parking, office buildings and land. The fair values of these investments are generally based upon discounting the expected cash flows from the investment or a cash flow multiple. In reaching the determination of fair value for investments, the Company considers many factors including, but not limited to: the operating cash flows and financial performance of the real estate investments relative to budgets or projections; property types; geographic locations; the physical condition of the asset; prevailing market capitalization rates; prevailing market discount rates; general economic conditions; economic conditions specific to the market in which the assets are located; the prevailing interest rate environment; the prevailing state of the debt markets; comparable public company trading multiples; independent third-party appraisals; available pricing data on comparable properties in the specific market in which the asset is located; expected exit timing and strategy; and any specific rights or terms associated with the investment.

OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

SEPTEMBER 30, 2016

The significant unobservable inputs used in the fair value measurement of the Company’s real estate investments are discount rates, cash flow growth rates, capitalization rates, the price per square foot, the absorption percentage per year and exit multiples. Significant increases (decreases) in the discount rates and capitalization rates in isolation would be expected to result in a significantly lower (higher) fair value measurement. Significant increases (decreases) in the cash flow growth rates, the price per square foot, the absorption rate per year and exit multiples in isolation would be expected to result in a significantly higher (lower) fair value measurement. A change in the assumption used for price per square foot is generally accompanied by a directionally inverse change in the absorption percentage per year.

Energy and Natural Resources Limited Partnerships

The fair value of energy and natural resources limited partnerships is generally determined using discounted cash flows when assets are producing oil or gas, or when it is reasonably certain that an asset will be capable of producing oil or gas, or using recent financing for certain investments. Acreage with proven undeveloped, probable or possible reserves are valued using prevailing prices of comparable properties, and may include adjustments for other assets or liabilities such as seismic data, equipment, and cash held by the investee. Certain natural resource assets may also be valued using scenario analyses and sum of the parts analyses.

The significant unobservable inputs used in the fair value measurement of the Company’s energy and natural resources limited partnerships that are not measured using net asset value are discount rates, EBITDA multiples, price per acre and production multiples. Significant increases (decreases) in the discount rates in isolation would be expected to result in a lower (higher) fair value measurement. Significant increases (decreases) in the EBITDA multiples, price per acre, price per square foot and production multiples in isolation would be expected to result in a significantly higher (lower) fair value measurement.

Information about Significant Inputs Used in Fair Value Measurements Categorized within Level III

The table below summarizes information about the significant unobservable inputs used in determining the fair value of the Level III assets held by the consolidated funds as of September 30, 2016.



Type of Investment or Liability	Fair Value at September 30, 2016		Valuation Technique	Unobservable Input	Range (Weighted-Average)
Type of Investment or Liability	(in thousands)		Valuation Technique	Unobservable Input	Range (Weighted-Average)
Bank debt	$	16,250	Independent pricing services	n/a

The table below summarizes information about the significant unobservable inputs used in determining the fair value of the Level III assets and liabilities held by the consolidated funds as of December 31, 2015.



Type of Investment or Liability	Fair Value at December 31, 2015		Valuation Technique	Unobservable Input	Range (Weighted-Average)
Type of Investment or Liability	(in thousands)		Valuation Technique	Unobservable Input	Range (Weighted-Average)
Bank debt	$	1,949,227	Independent pricing services	n/a
	49,196		Yield analysis	Yield	14% to 23% (16%)
Real estate investments	$	719,957	Discounted cash flow	Discount rate	10% to 30% (19%)
				Cash flow growth rate	-24% to 36% (3%)
				Capitalization rate	6% to 12% (8%)
				Price per square foot	$50 to $187 ($159)
				Absorption rate per year	0% to 27% (8%)
				Exit multiple	5.9x to 18.9x (10.3x)
Residential mortgage-backed securities	$	312,839	Broker quotes	n/a
	10,732		Independent pricing services	n/a

OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

SEPTEMBER 30, 2016



Type of Investment or Liability	Fair Value at December 31, 2015		Valuation Technique	Unobservable Input	Range (Weighted-Average)
Type of Investment or Liability	(in thousands)		Valuation Technique	Unobservable Input	Range (Weighted-Average)
Collateralized debt obligations	$	83,759	Broker quotes	n/a
Energy and natural resources limited partnerships	$	49,326	Scenario analysis	Discount rate	10% to 25% (19%)
				EBITDA multiple	5.5x to 7.3x (6.4x)
				Price per acre	$1,750
				Production multiple (price per thousand cubic feet equivalent per day)	$6,750 to $9,167 ($7,662)
	18,672		Sum of the parts	Discount rate	15	%
				Price per acre	$437
	2,606		Discounted cash flow	Discount rate	15	%
Commercial real estate debt	$	7,010	Yield analysis	Yield	13% to 18% (16%)
	$	11,285	Discounted cash flow	Discount rate	15	%
Asset-backed securities	$	22,428	Broker quotes	n/a
	1,311		Discounted cash flow	Discount rate	14	%
Commercial mortgaged-backed securities	$	13,803	Broker quotes	n/a
Senior secured notes and loans payable of consolidated CLOs	$	6,636,838	Broker quotes	n/a
Subordinated notes payable of consolidated CLOs	$	440,841	Broker quotes	n/a

Valuation Process for Fair Value Measurements Categorized within Level III

The Company has established an internal control infrastructure over the valuation of financial instruments that includes ongoing oversight by its Financial Controls Group and Valuation Committee, as well as periodic audits by the Company’s Internal Audit Group. These control functions are segregated from the trading and investing functions.

The Valuation Committee is responsible for establishing the valuation policy and monitors compliance with the valuation policy, ensuring that all of the funds’ investments reflect fair value, as well as providing oversight of the valuation process. These valuation policies and procedures include, but are not limited to the following: determining the pricing sources used to value specific investment classes; the selection of independent pricing services; the periodic review of due diligence materials of independent pricing services; and the fair value hierarchy coding of the funds’ investments. The Valuation Committee reviews a variety of reports on a monthly basis, which include, but are not limited to the following: summaries of the sources used to determine the value of the funds’ investments; summaries of the fair value hierarchy of the funds’ investments; and variance reports that compare the values of investments to independent pricing services. The Valuation Committee is comprised of non-investment professionals and may obtain input from investment professionals for consideration in carrying out its responsibilities.

The Financial Controls Group is responsible for complying with the valuation policies, performing price verification and preparing the monthly valuation reports reviewed by the Valuation Committee. The Financial Controls Group’s other responsibilities include, but are not limited to the following: overseeing the collection and evaluation of counterparty prices, broker-dealer quotations, exchange prices and third party pricing feeds; performing back testing by comparing prices observed in executed transactions to previous day valuations and/or valuations provided by independent pricing service providers on a bi-weekly and monthly basis; performing due diligence reviews on independent pricing services on an annual or as needed basis; and recommending changes in valuation policies to the Valuation Committee.

OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

SEPTEMBER 30, 2016

The Internal Audit Group employs a risk-based program of audit coverage that is designed to provide an assessment of the design and effectiveness of controls over the Company’s operations, regulatory compliance, valuation of financial instruments and reporting. Additionally, the Internal Audit Group meets periodically with management and the Audit Committee of the Company’s Board of Directors to evaluate and provide guidance on the existing risk framework and control environment assessments.

Monthly procedures have been established for Level III investments, which include comparing unobservable inputs to observable inputs for similar positions, reviewing subsequent market activities, performing comparisons of actual versus projected performance indicators, and discussing the valuation methodology, including pricing techniques when applicable, with investment professionals. Independent pricing services may be used to corroborate the Company’s internal valuations. Investment professionals and members of the Financial Controls Group review a daily profit and loss report, as well as other periodic reports that analyze the profit and loss and related asset class exposure of the funds’ investments.

Fair Value of Other Financial Instruments

Management estimates that the carrying value of the Company’s other financial instruments, mainly its Senior Notes, as well as the Revolving Credit Facility and the Aircraft Loan (each as defined in Note 10), approximated their fair values as of September 30, 2016. The Senior Notes are categorized as Level II and the Revolving Credit Facility and the Aircraft Loan are categorized as Level III within the fair value hierarchy.

6. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

In the ordinary course of business, certain consolidated funds have entered into certain repurchase agreements that are subject to master agreements that provide for payment netting and that, in the case of a default or similar event with respect to the counterparty to the master agreement, provide for netting across transactions. Generally, upon a counterparty default, the fund can terminate all transactions under the master agreement and set off amounts it owes across all transactions under a particular master agreement against collateral it has received under such master agreement; provided, however, that in the case of certain defaults, the fund may only be able to terminate and set off solely with respect to the transactions affected by the default. Generally, the funds party to these agreements manage cash and securities collateral on a counterparty basis as permitted under each master agreement.

The table below presents the repurchase agreements that are set off, if any, as well as securities transferred to counterparties related to those repurchase agreements (capped so that the net amount presented will not be reduced below zero). No other material financial instruments were subject to master netting agreements or other similar agreements. As a result of the adoption of ASU 2015-02, the Company no longer consolidates the majority of the previously consolidated Och-Ziff funds as of January 1, 2016. The deconsolidation resulted in no amounts being reportable as of September 30, 2016.



Securities Sold Under Agreements to Repurchase	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Consolidated Balance Sheet		Net Amounts of Liabilities in the Consolidated Balance Sheet		Securities Transferred		Net Amount

	(dollars in thousands)
As of December 31, 2015	$	190,751	$	—	$	190,751	$	190,751	$	—

OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

SEPTEMBER 30, 2016

The table below presents the remaining contractual maturity of the repurchase agreements by class of collateral pledged.



	As of December 31, 2015
Securities Sold Under Agreements to Repurchase	Overnight and Continuous		Up to 30 Days		30-90 Days		Greater Than 90 Days		Total

	(dollars in thousands)
Collateralized debt obligations	$	—	$	9,004	$	20,418	$	—	$	29,422
Residential mortgage-backed securities	—		87,719		6,605		59,242		153,566
United States government obligations	7,763		—		—		—		7,763
Total	$	7,763	$	96,723	$	27,023	$	59,242	$	190,751

The repurchase agreements entered into by certain of the consolidated funds may result in credit exposure to those funds in the event the counterparty to the transaction is unable to fulfill its contractual obligations. The funds minimize the credit risk associated with these activities by monitoring counterparty credit exposure and collateral values on a daily basis and requiring additional collateral where appropriate.

7. VARIABLE INTEREST ENTITIES

In the ordinary course of business, the Company sponsors the formation of funds that are considered VIEs. See Note 2 for a discussion of entities that are VIEs and the evaluation of those entities for consolidation by the Company.

The table below presents the assets and liabilities of VIEs consolidated by the Company. As a result of the adoption of ASU 2015-02 on January 1, 2016, the Company is no longer required to consolidate the majority of the Och-Ziff funds that were previously consolidated, including all CLOs.



	September 30, 2016		December 31, 2015
	Other Funds		CLOs		Other Funds

	(dollars in thousands)
Assets
Assets of consolidated Och-Ziff funds:
Investments, at fair value	$	36,830	$	6,750,296	$	1,199,633
Other assets of Och-Ziff funds	2,633		308,917		19,647
Total Assets	$	39,463	$	7,059,213	$	1,219,280
Liabilities
Liabilities of consolidated Och-Ziff funds:
Notes and loans payable of consolidated CLOs, at fair value	$	—	$	7,077,679	$	—
Securities sold under agreements to repurchase	—		—		3,583
Other liabilities of Och-Ziff funds	653		34,197		9,840
Total Liabilities	$	653	$	7,111,876	$	13,423

The assets presented in the table above belong to the investors in those funds, are available for use only by the fund to which they belong, and are not available for use by the Company. The consolidated funds have no recourse to the general credit of the Company with respect to any liability.

The Company’s direct involvement with funds that are VIEs and not consolidated by the Company is generally limited to providing asset management services and, in certain cases, insignificant equity investments in the VIEs. The maximum

OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

SEPTEMBER 30, 2016

exposure to loss represents the potential loss of current investments or income and fees receivables from these entities, as well as the obligation to repay unearned revenues, primarily incentive income subject to clawback, in the event of any future fund losses. The Company has commitments to fund certain funds that are VIEs as discussed in Note 15. The Company does not provide, nor is it required to provide, any type of non-contractual financial or other support to its VIEs that are not consolidated.

The table below presents the net assets of VIEs in which the Company has variable interests as of September 30, 2016 and December 31, 2015, respectively.



	September 30, 2016		December 31, 2015
	(dollars in thousands)
Net assets of unconsolidated VIEs in which the Company has a variable interest⁽¹⁾	$	3,216,329	$	32,878,450

Variable interest in assets and liabilities related to unconsolidated VIEs:
Unearned revenues	93,535		314
Income and fees receivable	3,123		66,215
Investments in Och-Ziff funds	18,773		4,924
Maximum Exposure to Loss	$	115,431	$	71,453

_______________

(1)

The significant decline in the net assets period over period was due to the adoption of ASU 2015-02 on January 1, 2016. Prior to adoption of ASU 2015-02, management fees and incentive income were considered to be direct variable interests in the Company’s funds. Subsequent to the adoption of ASU 2015-02, these fees were no longer considered to be variable interests when they were deemed customary and commensurate with the services being performed, and therefore only entities in which the Company holds other direct variable interests are included in the disclosure.

8. OTHER ASSETS, NET

The following table presents the components of other assets, net as reported in the consolidated balance sheets:



	September 30, 2016			December 31, 2015

	(dollars in thousands)
Fixed Assets:
Aircraft held for sale	$	53,665		$	—
Corporate aircraft	23,020			85,840
Leasehold improvements	52,646			51,814
Computer hardware and software	39,039			33,485
Furniture, fixtures and equipment	8,852			8,765
Accumulated depreciation and amortization	(65,604		)	(60,899		)
Fixed assets, net	111,618			119,005
United States government obligations, at fair value	29,994			18,501
Goodwill	22,691			22,691
Investments in Och-Ziff funds	20,870			6,019
Prepaid expenses	9,725			21,472
Other	9,054			5,287
Total Other Assets, Net	$	203,952		$	192,975

OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

SEPTEMBER 30, 2016

In the third quarter of 2016, the Company reclassified one of its corporate aircraft as held for sale, as it expects to complete the sale of this aircraft in the following 12 months. As a result, the Company recorded a loss of $4.4 million to reduce the carrying value to the aircraft’s current estimated fair value less expected selling costs. The Company reported the loss within general, administrative and other expenses in the Company’s consolidated statements of comprehensive income (loss).

9. OTHER LIABILITIES

The following table presents the components of other liabilities as reported in the consolidated balance sheets:



	September 30, 2016		December 31, 2015

	(dollars in thousands)
FCPA settlements liability (Note 15)	$	412,101	$	—
Unearned revenues⁽¹⁾	93,721		314
Accrued expenses	28,534		54,692
Deferred rent credit	14,615		17,436
Other	15,243		11,371
Total Other Liabilities	$	564,214	$	83,813

_______________


(1)	The significant increase in unearned revenues was the result of the deconsolidation of the majority of the Company’s funds upon the adoption of ASU 2015-02 on January 1, 2016. Prior to the deconsolidation, incentive income from the consolidated funds was eliminated in consolidation.

10. DEBT OBLIGATIONS

As of September 30, 2016, the Company’s outstanding indebtedness was primarily comprised of senior notes (the “Senior Notes”), borrowings under a revolving credit facility (the “Revolving Credit Facility”) and a secured term loan to finance the purchase of a new corporate aircraft (the “Aircraft Loan”).

Senior Notes

On November 20, 2014, the Company issued $400.0 million of Senior Notes due November 20, 2019, unless earlier redeemed or repurchased. The Senior Notes were issued at a price of 99.417% of the aggregate principal amount and bear interest at a rate per annum of 4.50% payable semiannually in arrears. The Senior Notes are unsecured and unsubordinated obligations issued by a subsidiary of the Company, Och-Ziff Finance Co. LLC (“Och-Ziff Finance”), and are fully and unconditionally guaranteed, jointly and severally, on an unsecured and unsubordinated basis by OZ Management, OZ Advisors I and OZ Advisors II (collectively, the “Senior Notes Guarantors”).

The Senior Notes may be redeemed from time to time at the Company’s option, in whole or in part, at a redemption price equal to the greater of 100% of the principal amount to be redeemed and a make-whole redemption price (as defined in the Senior Notes indenture), in either case, plus any accrued and unpaid interest. If a change of control repurchase event occurs, the Company will be required to offer to repurchase the Senior Notes at a price equal to 101% of the aggregate principal amount, plus any accrued and unpaid interest.

The Senior Notes do not have any financial maintenance covenants. However, the Senior Notes include certain covenants, including limitations on Och-Ziff Finance’s and, as applicable, the Senior Notes Guarantors’ ability to, subject to exceptions, incur indebtedness secured by liens on voting stock or profit participating equity interests of their respective subsidiaries or merge, consolidate or sell, transfer or lease all or substantially all assets. The Senior Notes also provide for customary events of default, bankruptcy, insolvency or reorganization that may cause the Senior Notes to become immediately due and payable, plus any accrued and unpaid interest.

OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

SEPTEMBER 30, 2016

Revolving Credit Facility

On November 20, 2014, the Company entered into a $150.0 million, 5-year unsecured Revolving Credit Facility, which was subsequently amended on December 29, 2015, the proceeds of which may be used for working capital, general corporate purposes or other liquidity needs. The facility matures on November 20, 2019. The borrower under the Revolving Credit Facility is OZ Management and the facility is guaranteed by OZ Advisors I, OZ Advisors II and Och-Ziff Finance. The Company is able to increase the maximum amount of credit available under the facility to $225.0 million if certain conditions are satisfied. On April 29, 2016, the Company borrowed $120.0 million pursuant to the Revolving Credit Facility. As of September 30, 2016, the Company had $120.0 million of outstanding borrowings under the facility.

The Company is subject to a fee of 0.10% to 0.25% per annum on undrawn commitments during the term of the Revolving Credit Facility. Outstanding borrowings will bear interest at a rate per annum of LIBOR plus 1.00% to 2.00%, or a base rate plus 0% to 1.00%. The commitment fees and the spreads over LIBOR or the base rate are based on OZ Management’s credit rating throughout the term of the facility. The interest rate on the drawn portion of the commitment as of September 30, 2016 was LIBOR plus 1.75%, and the undrawn commitment fee was 0.20%.

The Revolving Credit Facility includes two financial maintenance covenants. The first covenant prohibits total fee-paying assets under management as of the last day of any fiscal quarter to be less than $22.0 billion for two successive quarters. The second covenant prohibits the economic income leverage ratio (as defined in the Revolving Credit Facility) as of the last day of any fiscal quarter from exceeding 4.0 to 1.0. The Revolving Credit Facility allows a limited right to cure an event of default resulting from noncompliance with the economic income leverage ratio test with an equity contribution made to the borrower, OZ Management. Such cure right may not be used more than two times in any four-quarter period or more than three times during the term of the facility.

The Revolving Credit Facility includes provisions that restrict or limit, among other things, the ability of Och-Ziff Operating Group from:


•	Incurring additional indebtedness or issuing certain equity interest.


•	Creating liens.


•	Paying dividends or making certain other payments when there is a default or event of default under the Revolving Credit Facility.


•	Merging, consolidating, selling or otherwise disposing of its assets.


•	Engaging in certain transactions with shareholders or affiliates.


•	Engaging in a substantially different line of business.


•	Amending its organizational documents in a manner materially adverse to the lenders.

The Revolving Credit Facility permits the Och-Ziff Operating Group to incur, among other things, up to $150.0 million of indebtedness, up to an additional $200.0 million of indebtedness for financing of CLO risk retention investments and additional indebtedness so long as, after giving effect to the incurrence of such indebtedness, it is in compliance with an economic income leverage ratio of 4.0 to 1.0 and no default or event of default has occurred and is continuing. The facility also permits the Och-Ziff Operating Group to create liens to, among other things, secure indebtedness related to financing of CLO risk retention investments, as well as other indebtedness and obligations of up to $50.0 million.

Aircraft Loan

On February 14, 2014, the Company entered into the Aircraft Loan to finance installment payments towards the purchase of a new corporate aircraft that was delivered to the Company in February 2015. The Aircraft Loan is guaranteed by OZ Management, OZ Advisors I and OZ Advisors II. As of September 30, 2016, $47.8 million was outstanding under the Aircraft Loan.

OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

SEPTEMBER 30, 2016

Outstanding borrowings bear interest at a rate of 3.22% per annum, and the balance is payable in equal monthly installments of principal and interest over the term of the facility beginning on the aircraft delivery date, with a balloon payment of $30.8 million due upon maturity on February 4, 2022. There are no financial covenants associated with the Aircraft Loan. The Aircraft Loan includes other customary terms and conditions, including customary events of default and covenants.

Notes and Loans Payable of Consolidated CLOs

Prior to the adoption of ASU 2015-02 on January 1, 2016, the Company consolidated the CLOs it manages. As a result, the senior and subordinated notes and loans issued by the CLOs were included in the Company’s consolidated balance sheet as of December 31, 2015. Notes and loans payable of the consolidated CLOs are collateralized by the assets held by the CLOs and the assets of one CLO may not be used to satisfy the liabilities of another. This collateral generally consists of corporate loans, corporate bonds and other securities. As of December 31, 2015, the fair value of the CLO assets was $7.1 billion.

The Company elected to carry these notes and loans payable at fair value in its consolidated balance sheet to mitigate the accounting mismatch between the carrying values of the assets and liabilities of the consolidated CLOs prior to deconsolidation. The Company recorded net gains of $130.1 million and $91.6 million for the three and nine months ended September 30, 2015. These net losses are included within net gains (losses) of consolidated Och-Ziff funds in the statements of comprehensive income. The majority of these changes relate to changes in instrument specific credit risk, as the majority of these are floating-rate instruments.

The table below presents information related to the CLO notes and loans outstanding as of December 31, 2015. The subordinated notes have no stated interest rate, and are entitled to any excess cash flows after contractual payments are made to the senior secured notes and loans. As a result of the adoption of ASU 2015-02 referenced above, there were no notes or loans payable of consolidated CLOs as of September 30, 2016.



	As of December 31, 2015
	Borrowings Outstanding		Fair Value		Weighted-Average Interest Rate	Weighted-Average Maturity in Years

	(dollars in thousands)
Senior secured notes and loans payable of consolidated CLOs	$	6,810,350	$	6,636,838	2.45%	10.5
Subordinated notes payable of consolidated CLOs	688,578		440,841		N/A	10.5
Total Notes and Loans Payable of Consolidated CLOs	$	7,498,928	$	7,077,679

OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

SEPTEMBER 30, 2016

11. GENERAL, ADMINISTRATIVE AND OTHER

The following table presents the components of general, administrative and other expenses as reported in the consolidated statements of comprehensive income (loss):



	Three Months Ended September 30,					Nine Months Ended September 30,
	2016			2015		2016			2015

	(dollars in thousands)
Professional services	$	18,179		$	23,331	$	61,374		$	51,589
Recurring placement and related service fees	8,808			12,553		31,362			37,427
Occupancy and equipment	9,412			8,724		27,903			25,643
Information processing and communications	7,997			8,577		26,671			22,694
Insurance	3,999			4,213		12,030			12,586
Business development	2,458			3,644		10,916			10,960
Other expenses	7,456			3,909		13,964			14,326
	58,309			64,951		184,220			175,225
FCPA settlements liability accrual (Note 15)	(2,184		)	—		412,101			—
Changes in tax receivable agreement liability	(11,819		)	533		(11,990		)	(47,893		)
Total General, Administrative and Other	$	44,306		$	65,484	$	584,331		$	127,332

12. INCOME TAXES

The computation of the effective tax rate and provision at each interim period requires the use of certain estimates and significant judgment including, but not limited to, the expected operating income for the year, projections of the proportion of income earned and taxed in foreign jurisdictions, permanent differences, and the likelihood of recovering deferred tax assets existing as of the balance sheet date. The estimates used to compute the provision for income taxes may change as new events occur, additional information is obtained or as tax laws and regulations change. Additionally, the Company records the majority of its incentive income and discretionary cash bonuses in the fourth quarter each year. Accordingly, the effective tax rate for interim periods is not indicative of the tax rate expected for a full year.

The Registrant and each of the Och-Ziff Operating Group entities are partnerships for U.S. federal income tax purposes. Due to the Company’s legal structure, only a portion of the income earned by the Company is subject to corporate-level tax rates in the United States and in foreign jurisdictions.

The provision for income taxes includes federal, state and local taxes in the United States and foreign taxes at an approximate effective tax rate of 24.1% and 16.1% for the three months ended September 30, 2016 and 2015, respectively. The provision for income taxes includes federal, state and local taxes in the United States and foreign taxes at an approximate effective tax rate of -14.1% and 28.9% for the nine months ended September 30, 2016 and 2015, respectively. The reconciling items from the Company’s statutory rate to the effective tax rate were driven primarily by the following: (i) a portion of the Company’s consolidated net income is not subject to federal, state and local corporate income taxes in the United States, as these amounts are allocated to the executive managing directors on their Och-Ziff Operating Group A Units or to fund investors in the Company’s consolidated funds (each of which is included within noncontrolling interests); (ii) a portion of the income earned by the Company is subject to the New York City unincorporated business tax; (iii) certain foreign subsidiaries are subject to foreign corporate income taxes; and (iv) substantially all of the accrual related to the Foreign Corrupt Practices Act (the “FCPA”) settlements described in Note 15 was treated as a non-deductible expense when determining income tax expense.

In accordance with GAAP, the Company recognizes tax benefits for amounts that are “more likely than not” to be sustained upon examination by tax authorities. For uncertain tax positions in which the benefit to be realized does not meet the

OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

SEPTEMBER 30, 2016

“more likely than not” threshold, the Company establishes a liability, which is included within other liabilities in the consolidated balance sheets.

As of September 30, 2016 and December 31, 2015, the Company had a liability for unrecognized tax benefits of $7.0 million. As of and for the three and nine months ended September 30, 2016, the Company did not accrue interest or penalties related to uncertain tax positions. As of September 30, 2016, the Company does not believe that there will be a significant change to the uncertain tax positions during the next 12 months. The Company’s total unrecognized tax benefits that, if recognized, would affect its effective tax rate was $4.3 million as of September 30, 2016.

13. EARNINGS (LOSS) PER CLASS A SHARE

Basic earnings (loss) per Class A Share is computed by dividing the net income (loss) allocated to Class A Shareholders by the weighted-average number of Class A Shares outstanding for the period. For the three months ended September 30, 2016, and 2015, the Company included 1,060,924 RSUs and 599,804 RSUs, respectively, that have vested but have not been settled in Class A Shares in the weighted-average Class A Shares outstanding used in the calculation of basic and diluted earnings (loss) per Class A Share. For the nine months ended September 30, 2016, and 2015 the Company included 1,162,390 RSUs and 1,094,730 RSUs, respectively, that have vested but have not been settled in Class A Shares in the weighted-average Class A Shares outstanding used to calculate basic and diluted (loss) earnings per Class A Share.

The following tables present the computation of basic and diluted earnings (loss) per Class A Share:



Three Months Ended September 30, 2016	Net Income Allocated to Class A Shareholders		Weighted-Average Class A Shares Outstanding	Earnings Per Class A Share		Number of Antidilutive Units Excluded from Diluted Calculation

	(dollars in thousands, except per share amounts)
Basic	$	14,285	182,521,225	$	0.08
Effect of dilutive securities:
Och-Ziff Operating Group A Units	9,782		297,317,019			—
RSUs	—		—			14,470,201
Diluted	$	24,067	479,838,244	$	0.05



Three Months Ended September 30, 2015	Net Income Allocated to Class A Shareholders		Weighted-Average Class A Shares Outstanding	Earnings Per Class A Share		Number of Antidilutive Units Excluded from Diluted Calculation

	(dollars in thousands, except per share amounts)
Basic	$	17,417	177,805,122	$	0.10
Effect of dilutive securities:
Och-Ziff Operating Group A Units	13,872		301,874,006			—
RSUs	—		4,492,396			—
Diluted	$	31,289	484,171,524	$	0.06

OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

SEPTEMBER 30, 2016



Nine Months Ended September 30, 2016	Net Loss Allocated to Class A Shareholders			Weighted-Average Class A Shares Outstanding	Loss Per Class A Share			Number of Antidilutive Units Excluded from Diluted Calculation

	(dollars in thousands, except per share amounts)
Basic	$	(133,642	)	182,508,296	$	(0.73	)
Effect of dilutive securities:
Och-Ziff Operating Group A Units	(226,476		)	297,317,120				—
RSUs	—			—				14,092,299
Diluted	$	(360,118	)	479,825,416	$	(0.75	)



Nine Months Ended September 30, 2015	Net Income Allocated to Class A Shareholders		Weighted-Average Class A Shares Outstanding	Earnings Per Class A Share		Number of Antidilutive Units Excluded from Diluted Calculation

	(dollars in thousands, except per share amounts)
Basic	$	48,048	177,711,669	$	0.27
Effect of dilutive securities:
Och-Ziff Operating Group A Units	—		—			301,876,001
RSUs	—		3,806,081			—
Diluted	$	48,048	181,517,750	$	0.26

14. RELATED PARTY TRANSACTIONS

Due from Related Parties

Amounts due from related parties relate primarily to amounts due from the Och-Ziff funds for expenses paid on their behalf. These amounts are reimbursed to the Company on an ongoing basis.

Due to Related Parties

Amounts due to related parties relate primarily to future payments owed to the Company’s executive managing directors and the Ziffs under the tax receivable agreement, as discussed further in Note 15.

Notes and Loans Payable of Consolidated CLOs

As of December 31, 2015, $100.4 million of the notes and loans payable of consolidated CLOs was held by certain funds managed by the Company.

Management Fees and Incentive Income Earned from the Och-Ziff Funds

The Company earns substantially all of its management fees and incentive income from the Och-Ziff funds, which are considered related parties as the Company manages the operations of and makes investment decisions for these funds.

Management Fees and Incentive Income Earned from Related Parties and Waived Fees

Prior to the 2007 Offerings, the Company did not charge management fees or earn incentive income on investments made by the Company’s executive managing directors, employees and other related parties. Following the 2007 Offerings, the Company began charging management fees and earning incentive income on new investments made in the funds by executive managing directors and certain other related parties, including the reinvestment by executive managing directors of the after-tax

OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

SEPTEMBER 30, 2016

proceeds from the 2007 Offerings. However, in January 2015, the Company began to waive management fees and incentive income on new investments by its executive managing directors and certain other related parties. The Company continues to waive fees for employee investments in the funds.

The following table presents management fees and incentive income charged on investments held by related parties and amounts waived by the Company for related parties before the impact of eliminations related to the consolidated funds:



	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015

	(dollars in thousands)
Fees charged on investments held by related parties:
Management fees	$	4,472	$	5,523	$	13,731	$	15,543
Incentive income	$	825	$	86	$	2,825	$	1,795
Fees waived on investments held by related parties:
Management fees	$	4,443	$	4,439	$	13,162	$	12,829
Incentive income	$	397	$	318	$	1,146	$	902

Corporate Aircraft

The Company’s corporate aircraft are used primarily for business purposes. From time to time, certain executive managing directors use the aircraft for personal use. For the three months ended September 30, 2016 and 2015, the Company charged $74 thousand and $322 thousand, respectively, for personal use of the aircraft by certain executive managing directors. For the nine months ended September 30, 2016, and 2015, the Company charged $669 thousand and $890 thousand, respectively, for personal use of the aircraft by certain executive managing directors.

15. COMMITMENTS AND CONTINGENCIES

Tax Receivable Agreement

The purchase of Och-Ziff Operating Group A Units from the executive managing directors and the Ziffs with the proceeds from the 2007 Offerings, and subsequent taxable exchanges by them of Och-Ziff Operating Group A Units for Class A Shares on a one-for-one basis (or, at the Company’s option, a cash equivalent), resulted, and, in the case of future exchanges, are anticipated 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, the Company expects that its future tax liability will be reduced. Pursuant to the tax receivable agreement entered into among the Company, the executive managing directors and the Ziffs, the Company has agreed to pay to the executive managing directors and the Ziffs 85% of the amount of tax savings, if any, actually realized by the Company.

The Company recorded its initial estimate of future payments under the tax receivable agreement as a decrease to paid-in capital and an increase in amounts due to related parties in the consolidated financial statements. Subsequent adjustments to the liability for future payments under the tax receivable agreement related to changes in estimated future tax rates or state income tax apportionment are recognized through current period earnings within general, administrative and other expenses in the consolidated statements of comprehensive income (loss).

In connection with the departure of certain former executive managing directors since the 2007 Offerings, the right to receive payments under the tax receivable agreement by those former executive managing directors was contributed to the Och-Ziff Operating Group. As a result, the Company expects to pay to the remaining executive managing directors and the Ziffs approximately 78% (from 85% at the time of the 2007 Offerings) of the amount of cash savings, if any, in federal, state and local income taxes in the United States that the Company actually realizes as a result of the increases in tax basis.

OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

SEPTEMBER 30, 2016

The estimate of the timing and the amount of future payments under the tax receivable agreement involves several assumptions that do not account for the significant uncertainties associated with these potential payments, including an assumption that Och-Ziff Corp will have sufficient taxable income in the relevant tax years to utilize the tax benefits that would give rise to an obligation to make payments. The actual timing and amount of any actual payments under the tax receivable agreement will vary based upon these and a number of other factors. As of September 30, 2016, the estimated future payment under the tax receivable agreement was $488.8 million, which is recorded in due to related parties on the consolidated balance sheets.

In September 2016, the Company amended the tax receivable agreement to provide that no amounts will be due or payable under the agreement with respect to the 2015 and 2016 taxable years. As a result, the Company released approximately $91.0 million of previously accrued tax receivable agreement liability, which reduced its deferred income tax assets by $36.9 million. The net impact of $54.1 million was treated as an increase to shareholders’ equity.

The table below presents the maximum amounts that would be payable under the tax receivable agreement assuming that the Company will have sufficient taxable income each year to fully realize the expected tax savings. In light of the numerous factors affecting the Company’s obligation to make such payments, the timing and amounts of any such actual payments may differ materially from those presented in the table.



	Potential Payments Under Tax Receivable Agreement
	(dollars in thousands)
October 1, 2016 through December 31, 2016	$	—
2017	—
2018	43,503
2019	45,368
2020	47,958
2021	50,136
Thereafter	301,813
Total Payments	$	488,778

Lease Obligations

The Company has non-cancelable operating leases for its headquarters in New York expiring in 2029 and various other operating leases for its offices in London, Hong Kong, Mumbai, Beijing, Dubai, Shanghai and Houston expiring on various dates through 2024. The Company also has operating leases for other locations, as well as operating leases on computer hardware. Certain operating leases allow for rent holiday periods. The Company recognizes expense related to its operating leases on a straight-line basis over the lease term taking into account these rent holiday periods. The related lease commitments have not changed materially since December 31, 2015.

Litigation

From time to time, the Company is involved in litigation and claims incidental to the conduct of the Company’s business. The Company is also subject to extensive scrutiny by regulatory agencies globally that have, or may in the future have, regulatory authority over the Company and its business activities. This has resulted, or may in the future result, in regulatory agency investigations, litigation and subpoenas and costs related to each.

On September 29, 2016, the Company reached settlements with the DOJ and the SEC, resolving their investigations into the Company’s former private investment business in Africa and a 2007 investment by the Libyan Investment Authority in certain

OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

SEPTEMBER 30, 2016

of the Company’s funds. As part of the settlements, the Company entered into a Deferred Prosecution Agreement with the DOJ, and a Company subsidiary, OZ Africa Management GP, LLC (“OZ Africa”), agreed to plead guilty to one count of conspiracy to violate the FCPA. The Company also agreed to settle an administrative proceeding with the SEC involving violations of the FCPA and the Investment Advisers Act. Pursuant to the settlement agreements with the DOJ and the SEC, the Company agreed to pay $412.1 million in penalties and disgorgement and to implement enhanced internal accounting controls and policies, to separate the chief compliance officer from other officer positions, and to engage an independent compliance monitor for three years, subject to early termination or extension.

On May 5, 2014, a purported class of shareholders filed a lawsuit against the Company in the U.S. District Court for the Southern District of New York (Menaldi v. Och-Ziff Capital Mgmt., et al.). The amended complaint asserts claims on behalf of all purchasers of Company securities from February 9, 2012 to August 22, 2014, and asserts claims under the Securities Exchange Act of 1934. Daniel Och, Joel Frank and Michael Cohen are also named defendants. The amended complaint alleges, among other things, breaches of certain disclosure obligations with respect to matters that were under investigation by the SEC and the DOJ. On March 16, 2015, the Company and Messrs. Och and Frank moved to dismiss the amended complaint. On February 17, 2016, the court entered an order granting the motion to dismiss in part and denying it in part, and dismissed Mr. Cohen from the action. On March 2, 2016, the Company and Messrs. Och and Frank filed a motion for reconsideration requesting that the court reconsider its ruling insofar as it denied the motion to dismiss and further requesting that the court dismiss the amended complaint in its entirety. The motion for reconsideration was denied on May 6, 2016. On March 23, 2016, the Company and Messrs. Och and Frank filed their answer to the amended complaint. Plaintiffs have until November 17, 2016, to file a second amended complaint.

On May 30, 2014, a shareholder derivative action was filed against the Company in the Supreme Court of the State of New York, County of New York (Stokes v. Och, et al.). The amended complaint asserts claims derivatively on behalf of the Company against all of the Company’s directors and alleges that the directors breached their fiduciary duties and other disclosure obligations with respect to the matters described above. On July 27, 2015, the Supreme Court of the State of New York ruled from the bench that it was granting defendants’ motion to dismiss the amended complaint for failure to plead demand futility. On August 10, 2015, the court in the Stokes matter entered a written order dismissing the action. The plaintiff’s time to appeal the court’s decision on the motion to dismiss has lapsed.

On September 2, 2015, a shareholder derivative action was filed in the Supreme Court of the State of New York, County of New York (Kumari v. Och, et al.). The complaint asserts derivative claims on behalf of the Company against all of the Company’s directors and alleges breaches of fiduciary duty and other misconduct with respect to matters that were under investigation by the SEC and the DOJ. On October 23, 2015, the Company’s directors moved to dismiss the complaint. On September 23, 2016, the court entered an order granting the motion to dismiss and dismissing the case in its entirety. The plaintiff’s time to appeal the court’s decision on the motion to dismiss has lapsed.

The Company believes these cases are without merit and intends to defend them vigorously. The Company is unable to reasonably estimate the amount of loss or range of loss possible for these cases.

Investment Commitments

From time to time, certain funds consolidated by the Company may have commitments to fund investments. These commitments are funded through contributions from investors in those funds, including the Company if it is an investor in the relevant fund.

The Company has unfunded capital commitments of $19.5 million to certain funds it manages. It expects to fund these commitments over the next five years. In addition, certain of the Company’s executive managing directors, collectively, have capital commitments to funds managed by the Company of up to $39.9 million. The Company has guaranteed these commitments in the event any executive managing director fails to fund any portion when called by the fund. The Company has historically not funded any of these commitments and does not expect to in the future, as these commitments are expected to be funded by the Company’s executive managing directors individually.

OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

SEPTEMBER 30, 2016

The Company has committed to fund a portion of the operating budget for a joint venture. The amount of the commitment will be equal to the actual costs incurred in the projects the joint venture manages, as determined by the Company and its joint venture partner. The joint venture periodically returns substantially all of the cash that is contributed by the Company, as expenses incurred by the joint venture are generally reimbursed by the projects it manages.

Other Contingencies

In the normal course of business, the Company enters into contracts that provide a variety of general indemnifications. Such contracts include those with certain service providers, brokers and trading counterparties. Any exposure to the Company under these arrangements could involve future claims that may be made against the Company. Currently, no such claims exist or are expected to arise and, accordingly, the Company has not accrued any liability in connection with such indemnifications.

16. SEGMENT INFORMATION

The Company’s operating segments are the Och-Ziff Funds segment and the Company’s real estate business. The Och-Ziff Funds, which provides asset management services to the Company’s multi-strategy funds, dedicated credit funds and other alternative investment vehicles, is currently the Company’s only reportable operating segment under GAAP. The Company’s real estate business, which provides asset management services to its real estate funds, is included in the Other Operations, as it does not meet the threshold of a reportable operating segment under GAAP.

In addition to analyzing the Company’s results on a GAAP basis, management also reviews its results on an “Economic Income” basis. Economic Income excludes the adjustments described below that are required for presentation of the Company’s results on a GAAP basis, but that management does not consider when evaluating operating performance in any given period. Management uses Economic Income as the basis on which it evaluates the Company’s financial performance and makes resource allocation and other operating decisions. Management considers it important that investors review the same operating information that it uses.

Economic Income is a measure of pre-tax operating performance that excludes the following from the Company’s results on a GAAP basis:


•	Income allocations to the Company’s executive managing directors on their direct interests in the Och-Ziff Operating Group. Management reviews operating performance at the Och-Ziff Operating Group level, where the Company’s operations are performed, prior to making any income allocations.

•

Reorganization expenses related to the 2007 Offerings, equity-based compensation expenses, depreciation and amortization expenses, and loss on asset held for sale, as management does not consider these non-cash expenses to be reflective of operating performance. However, the fair value of RSUs that are settled in cash to employees or executive managing directors is included as an expense at the time of settlement.


•	Changes in the tax receivable agreement liability and net gains on investments in Och-Ziff funds, as management does not consider these to be reflective of operating performance.

•

Amounts related to the consolidated Och-Ziff funds, including the related eliminations of management fees and incentive income, as management reviews the total amount of management fees and incentive income earned in relation to total assets under management and fund performance. The Company also defers the recognition of incentive income allocations from the consolidated Och-Ziff funds until all clawback contingencies are resolved, consistent with the revenue recognition policy for the funds the Company does not consolidate.

In addition, expenses related to compensation and profit-sharing arrangements based on fund investment performance are recognized at the end of the relevant commitment period, as management reviews the total compensation expense related to these arrangements in relation to any incentive income earned by the relevant fund.

OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

SEPTEMBER 30, 2016

Finally, management reviews Economic Income revenues by presenting management fees net of recurring placement and related service fees, rather than considering these fees an expense, and by excluding the impact of eliminations related to the consolidated Och-Ziff funds.

Management does not regularly review assets by operating segment in assessing operating segment performance and the allocation of company resources; therefore, the Company does not present total assets by operating segment. All interest expense related to outstanding indebtedness is allocated to the Och-Ziff Funds segment.

Och-Ziff Funds Segment Results



	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016			2015

	(dollars in thousands)
Och-Ziff Funds Segment:
Economic Income Revenues	$	131,101	$	194,825	$	433,542		$	610,092
Economic Income	$	52,725	$	106,780	$	(229,800	)	$	369,954

Reconciliation of Och-Ziff Funds Segment Revenues to Consolidated Revenues



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015

	(dollars in thousands)
Total consolidated revenues	$	148,105		$	325,903		$	489,105		$	980,153
Adjustment to management fees⁽¹⁾	(8,808		)	(75		)	(31,362		)	(2,652		)
Adjustment to incentive income⁽²⁾	—			3,338			—			14,511
Other Operations revenues	(7,738		)	(7,410		)	(22,939		)	(20,784		)
Income of consolidated Och-Ziff funds	(458		)	(126,931		)	(1,262		)	(361,136		)
Economic Income Revenues - Och-Ziff Funds Segment	$	131,101		$	194,825		$	433,542		$	610,092

_______________


(1)	Adjustment to present management fees net of recurring placement and related service fees, as management considers these fees a reduction in management fees, not an expense. The impact of eliminations related to the consolidated Och-Ziff funds is also removed.


(2)	Adjustment to exclude the impact of eliminations related to the consolidated Och-Ziff funds.

OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

SEPTEMBER 30, 2016

Reconciliation of Och-Ziff Funds Economic Income to Net Income (Loss) Allocated to Class A Shareholders



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015

	(dollars in thousands)
Net income (loss) allocated to Class A Shareholders—GAAP	$	14,285		$	17,417		$	(133,642	)	$	48,048
Net income (loss) allocated to the Och-Ziff Operating Group A Units	16,313			43,505			(187,338		)	175,239
Equity-based compensation, net of RSUs settled in cash	18,298			27,547			56,311			86,590
Income taxes	9,986			12,422			39,436			119,607
Adjustment for incentive income allocations from consolidated funds subject to clawback	—			(3,384		)	—			(40,662		)
Allocations to Och-Ziff Operating Group D Units	950			3,247			2,850			14,696
Adjustment for expenses related to compensation and profit-sharing arrangements based on fund investment performance	2,741			3,813			5,430			7,407
Reorganization expenses	—			4,018			—			12,052
Changes in tax receivable agreement liability	(11,819		)	533			(11,990		)	(47,893		)
Depreciation, amortization and loss on asset held for sale	7,965			2,986			14,947			8,135
Other adjustments	(1,299		)	(556		)	(2,672		)	(446		)
Other Operations	(4,695		)	(4,768		)	(13,132		)	(12,819		)
Economic Income - Och-Ziff Funds Segment	$	52,725		$	106,780		$	(229,800	)	$	369,954

17. SUBSEQUENT EVENTS

Preferred Units Offering

On October 5, 2016, the Company completed a $250.0 million issuance and sale of 250,000 Class A Cumulative Preferred Units (the “Preferred Units”) in each of OZ Management LP, OZ Advisors LP and OZ Advisors II LP (each, a subsidiary of the Company and an “Operating Group Entity”), pursuant to a securities purchase agreement, dated September 29, 2016 (the “Purchase Agreement”), to certain of the Company’s executive managing directors, including Daniel S. Och (“the EMD Purchasers”). Pursuant to the Purchase Agreement, the EMD Purchasers agreed to purchase up to a total of 400,000 Preferred Units for an aggregate amount of up to $400.0 million. Up to an additional $150.0 million of Preferred Units are expected to be sold to the EMD Purchasers in January 2017, subject to the satisfaction of certain conditions, including the absence of a material adverse change, the absence of a default or an event of default with respect to the Company’s material agreements and instruments, the receipt by the EMD Purchasers of redemption proceeds from one or more Och-Ziff funds sufficient to purchase the Preferred Units in the subsequent closing, and certain other conditions.

The Preferred Units are a new class of non-voting preferred equity interests in the Operating Group Entities and have an aggregate liquidation preference of $1,000, plus accrued and unpaid distributions. Subject to certain exceptions, unless distributions on the Preferred Units are declared and paid in cash for the then current distribution period and all preceding periods after the initial closing, the Operating Group Entities may not declare or pay distributions on or repurchase any of their equity securities that rank equal with or junior to the Preferred Units. The Company used the proceeds from the Preferred Units issued in October 2016, as well as cash on hand, to pay the $412.1 million in penalties and disgorgement in October 2016 related to the settlements with the SEC and the DOJ discussed in Note 15. The Company expects to use the proceeds from the second closing of the Preferred Units in January 2017 for working capital and general corporate purposes.

Pursuant to the terms of the Preferred Units, distributions on the Preferred Units are payable on the liquidation preference amount on a cumulative basis at an initial distribution rate of 0% per annum until February 19, 2020 (the “Step Up Date”), after which the distribution rate will increase in stages thereafter to a maximum of 10% per annum on and after the

OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — UNAUDITED

SEPTEMBER 30, 2016

eighth anniversary of the Step Up Date. In addition, following the occurrence of a change of control event, the Operating Group Entities will redeem the Preferred Units at a redemption price equal to the liquidation preference plus all accumulated but unpaid distributions (collectively, the “liquidation value”). For so long as the Operating Group Entities do not redeem all of the outstanding Preferred Units, the distribution rate will increase by 7% per annum, beginning on the 31st day following such change in control. Pursuant to the terms of the Preferred Units, the Operating Group Entities will not be required to effect such redemption until the earlier of (i) 91 days after the maturity date of the Revolving Credit Facility and (ii) the payment in full of all loans and other obligations and the termination of all commitments thereunder.

The Operating Group Entities may, at their option, redeem the Preferred Units at a price equal to: (i) 105% of the liquidation value until the day immediately prior to the Step Up Date; (ii) 103% of the liquidation value thereafter until the day immediately prior to the first anniversary of the Step Up Date; (iii) 101% of the liquidation value thereafter until the day immediately prior to the second anniversary of the Step Up Date; and (iv) thereafter at a price equal to the liquidation value. In addition, from and after March 31, 2020, if the amounts that were distributed to partners of the Operating Group Entities in respect of their equity interests in the Operating Group Entities (other than amounts distributed in respect of tax distributions or certain other distributions) or utilized for repurchase of units by such entities (or which were available but not used for such purposes) for the immediately preceding fiscal year were in excess of $100 million in the aggregate, then an amount equal to 20% of such excess shall be utilized to redeem Preferred Units on a pro rata basis for an amount equal to the liquidation value.

Furthermore, if the average closing price of the Company’s Class A Shares exceeds $15.00 per share for the previous 20 trading days from and after the initial closing date, the Operating Group Entities have agreed to use their reasonable best efforts to redeem all of the outstanding Preferred Units as promptly as practicable. If such event occurs prior to February 19, 2020, the Company has agreed to use its reasonable best efforts to obtain consents from its lenders in order to redeem the Preferred Units as promptly as practicable.

Although the Preferred Units do not have voting rights, the consent of the holders’ committee, which initially consists of Daniel S. Och as sole member, is required to effect (i) any amendment to or waiver of the terms of the Preferred Units or (ii) any amendment to the limited partnership agreement of an Operating Group Entity that would have an adverse effect on any holder of the Preferred Units. Under the terms of the Preferred Units, each Operating Group Entity is prohibited from issuing any equity securities of such Operating Group Entity (or any debt or other securities convertible into equity securities of such Operating Group Entity) the terms of which expressly provide that such securities shall rank equally with, or senior to, the Preferred Units, without the prior written consent of the holders’ committee.

Pursuant to the Purchase Agreement, the Company agreed to reimburse Daniel S. Och and his related entities for their reasonable out-of-pocket legal fees and expenses incurred in connection with the negotiation and execution of the transactions contemplated thereby. These fees totaled $537 thousand, are included within other assets in the Company’s consolidated balance sheets, and were netted against the proceeds of the sale of Preferred Units in October 2016.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described in “Part II—Item 1A. Risk Factors” of this report. Actual results may differ materially from those contained in any forward-looking statements. This MD&A should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this quarterly report. An investment in our Class A Shares is not an investment in any of our funds.

Overview

FCPA Settlements

As part of the settlements, we entered into a Deferred Prosecution Agreement with the DOJ, and our subsidiary OZ Africa agreed to plead guilty to one count of conspiracy to violate the FCPA. We also agreed to settle an administrative proceeding with the SEC involving violations of the FCPA and the Investment Advisers Act. We paid a total of $412.1 million in penalties and disgorgement. This amount was paid in October 2016 using cash on hand and proceeds from the sale of Preferred Units discussed below.

Preferred Units Offering

As discussed in Note 17 to our consolidated financial statements, on September 29, 2016, we entered into the Purchase Agreement with the EMD Purchasers. Pursuant to the Purchase Agreement, the EMD Purchasers agreed to purchase up to $400.0 million of Preferred Units. On October 5, 2016, we sold $250.0 million of the Preferred Units to the EMD Purchasers. Up to an additional $150.0 million of Preferred Units are expected to be sold to the EMD Purchasers in January 2017, subject to the satisfaction of certain conditions. We used the proceeds from the Preferred Units issued in October 2016, as well as cash on hand, to pay the $412.1 million in penalties and disgorgement related to the settlements with the SEC and the DOJ discussed above. We expect to use the proceeds from the second sale of the Preferred Units in January 2017 for working capital and general corporate purposes. See Note 17 for details regarding the terms of the Preferred Units.

Deconsolidation on Adoption of ASU 2015-02

As a result of the adoption of ASU 2015-02, we deconsolidated the majority of our previously consolidated funds. This resulted in a substantial decrease in assets of consolidated Och-Ziff funds, liabilities of consolidated Och-Ziff funds, redeemable noncontrolling interests, appropriated retained deficit and shareholders’ equity attributable to non-controlling interests in our consolidated balance sheet. Additionally, the deconsolidation has caused a significant decrease in the amount of income of consolidated Och-Ziff funds, expenses of consolidated Och-Ziff funds, and net gains of consolidated Och-Ziff funds in our consolidated statement of comprehensive income (loss). Management fees and incentive income from the previously consolidated funds are also no longer eliminated in consolidation.

We adopted ASU 2015-02 using the modified retrospective method of transition, which resulted in an effective date of adoption of January 1, 2016, and a cumulative effect adjustment to opening equity to reflect the impacts of adoption. We did not restate prior-period results. The impact to our opening retained earnings was driven by the cumulative effect of a change in incentive income recognition for the funds no longer consolidated as further discussed below.

The net impact on our results is that incentive income from these funds will now be recognized when such amounts are no longer subject to clawback. Prior to deconsolidation, incentive income from these previously consolidated funds was recognized by allocating a portion of the net income of these funds to us rather than to the fund investors (noncontrolling interests) based on the contractual terms of the relevant fund agreements. This resulted in incentive income being recognized that was subject to clawback in the event of future losses in the respective funds.

The adoption of ASU 2015-02 and the resulting deconsolidation of the majority of the previously consolidated funds had no impact on our Economic Income or other non-GAAP measures discussed throughout this MD&A.

Overview of Our Financial Results

For the third quarter of 2016, we reported GAAP net income allocated to Class A Shareholders of $14.3 million, compared to net income of $17.4 million for the third quarter of 2015, and net loss of $133.6 million for the first nine months of 2016, compared to net income of $48.0 million for the first nine months of 2015. The decrease for the quarter to date period was driven by lower management fees and incentive income, partially offset by a decrease in operating expenses and income taxes. The decrease for the year to date period was primarily driven by the FCPA settlements liability of $412.1 million accrued in the first nine months of 2016. In addition, lower management fees and incentive income and higher non-compensation expenses, partially offset by lower income taxes and lower compensation and benefits, also contributed to the year-over-year decrease.

For the third quarter of 2016, we reported Economic Income for the Company of $57.4 million, compared to $111.5 million for the third quarter of 2015, and a net loss on an Economic Income basis of $216.7 million for the first nine months of 2016, compared to net income of $382.8 million for the first nine months of 2015. The decrease for the quarter to date period was driven by lower management fees and incentive income, partially offset by lower non-compensation expenses. The decrease for the year to date period was primarily driven by the FCPA settlements liability of $412.1 million accrued in the first nine months of 2016. In addition, lower management fees and incentive income, as well as higher operating expenses also contributed to the year-over-year decrease. Economic Income for the Company is a non-GAAP measure. For additional information regarding non-GAAP measures, as well as for a discussion of the drivers of the year-over-year change in Economic Income, please see “—Economic Income Analysis.”

Overview of Assets Under Management and Fund Performance

Assets under management totaled $39.3 billion as of September 30, 2016. Longer-dated assets under management, which are those subject to initial commitment periods of three years or longer, were $16.4 billion, or 42%, of our total assets under management as of September 30, 2016. Assets under management in our dedicated credit, real estate and other strategy-specific funds were $15.9 billion, comprising 41% of assets under management as of September 30, 2016.

Assets under management in our multi-strategy products totaled $23.4 billion as of September 30, 2016. OZ Master Fund, our largest multi-strategy fund, generated a gross return of 2.7% and a net return of 1.1% year-to-date through September 30, 2016. On a gross basis, performance-related depreciation in long/short equity special situations was more than offset by strong positive performance in merger arbitrage, convertible and derivative arbitrage and credit-related strategies. Assets under management for the fund were $19.8 billion as of September 30, 2016. Please see “—Assets Under Management and Fund Performance—Multi-Strategy Funds” for additional information regarding the returns of the OZ Master Fund.

Assets under management in our dedicated credit products totaled $12.5 billion as of September 30, 2016. Assets under management in our opportunistic credit funds were $5.3 billion as of September 30, 2016. OZ Credit Opportunities Master Fund, our global opportunistic credit fund, generated a gross return of 13.1% and a net return of 11.4% year-to-date through September 30, 2016. On a gross basis, performance was driven by the fund’s U.S. portfolio. Assets under management for the fund were $1.7 billion as of September 30, 2016. Assets under management in Institutional Credit Strategies, our asset management platform that invests in performing credits, were $7.3 billion as of September 30, 2016.

Assets under management in our real estate funds totaled $2.1 billion as of September 30, 2016. Since inception, Och-Ziff Real Estate Fund II, which finished its investment period in 2014, has generated a net internal rate of return (“IRR”) of 21.8% through September 30, 2016 and a gross multiple of invested capital (“MOIC”) of 1.8x.

Market Environment

Our ability to successfully generate consistent, positive, absolute returns is dependent on our ability to execute each fund’s investment strategy or strategies. Each strategy may be materially affected by conditions in the global markets.

Financial markets rallied sharply at the beginning of the third quarter of 2016 after the period of uncertainty leading up to and following the outcome of the U.K. referendum on E.U. membership at the end of the second quarter. In general, global financial markets rose during the third quarter of 2016, with the MSCI World Index generating positive performance. Regional equity market performance was also positive during the third quarter of 2016, with major indices in the U.S., Europe and Asia all posting gains.

In the U.S., equity markets rallied sharply to begin the third quarter, with the S&P 500 closing at a new record high in July and the yield on the 10-year U.S. Treasury reaching an all-time low early in the month. July saw U.S. macroeconomic data and second quarter corporate earnings were generally better than expected. August was far calmer than July, which was reflected in the low realized volatility during the month. U.S. equity markets remained heavily influenced by interest rates in August. While the S&P 500 barely moved during August, the sell-off in the 10-year U.S. Treasury drove notable sector dispersion, as yield-sensitive sectors, such as Utilities and Telecommunications, underperformed and Financials outperformed. September proved to be another volatile month for U.S. equity markets, in terms of both macroeconomic news and price action, but by month-end the S&P 500 and the yield on the 10-year U.S. Treasury were effectively unchanged.

In Europe, financial markets rallied sharply in July, largely brushing off the period of macroeconomic volatility following the outcome of the U.K. referendum. August and September proved to be much more volatile months in Europe, with major indices in the region experiencing sharp swings. The post-U.K. referendum investing environment in Europe is expected to be fraught with political risks and uncertainty over the next 12 months, particularly with the anticipated referendum in Italy and the general elections in Germany and France.

Similar to the U.S. and Europe, equity markets in Asia rose sharply in July as concerns surrounding the U.K. referendum were ultimately shrugged off amidst improving global economic data and the generally dovish policy outlook. In August, the economic environment in China was comparably stable, as we observed steady consumer data and a rebound in industrial activity in the region. Consequently, equity markets in China continued to rally sharply in August. Markets in Japan also remained strong in August, attributable in part to the ETF buying program implemented by the Bank of Japan in late July. In September, the Bank of Japan announced that it would target rates while keeping its negative interest rate policy (NIRP) unchanged - a notable shift in policy and a significant macroeconomic development in the region.

Assets Under Management and Fund Performance

Our financial results are primarily driven by the combination of our assets under management and the investment performance of our funds. Both of these factors directly affect the revenues we earn from management fees and incentive income. Growth in assets under management due to capital placed with us by investors in our funds and positive investment performance of our funds drive growth in our revenues and earnings. Conversely, poor investment performance slows our growth by decreasing our assets under management and increasing the potential for redemptions from our funds, which would have a negative effect on our revenues and earnings.

We typically accept capital from new and existing investors in our funds on a monthly basis on the first day of each month. Investors in our funds (other than investors in our real estate funds, certain opportunistic credit funds, our Institutional Credit Strategies products and certain other alternative investment vehicles we manage and other than with respect to capital invested in Special Investments) typically have the right to redeem their interests in a fund following an initial lock-up period of one to three years. Following the expiration of these lock-up periods, subject to certain limitations, investors may redeem capital generally on a quarterly or annual basis upon giving 30 to 90 days’ prior written notice. However, upon the payment of a redemption fee to the applicable fund and upon giving 30 days’ prior written notice, certain investors may redeem capital during the lock-up period. The lock-up requirements for our funds may generally be waived or modified at the sole discretion of each fund’s general partner or board of directors, as applicable.

With respect to investors with quarterly redemption rights, requests for redemptions submitted during a quarter generally are paid on the first day of the following quarter. Accordingly, quarterly redemptions generally will have no impact on management fees during the quarter in which they are submitted. Instead, these redemptions will decrease assets under management as of the first day of the following quarter, which reduces management fees for that quarter. With respect to investors with annual redemption rights, redemptions paid prior to the end of a quarter impact assets under management in the quarter in which they are paid, and therefore impact management fees for that quarter.

In a declining market, during periods when the hedge fund industry generally experiences outflows, or in response to specific events that occur at the Company, we could experience increased redemptions and a consequent reduction in our assets under management. Recently, our assets under management have declined and we believe this trend will likely continue to some extent for some period of time in light of the recently settled FCPA matter, as well as the current redemption trend in the hedge fund industry.

Information with respect to our assets under management throughout this report, including the tables set forth below, includes investments by us, our executive managing directors, employees and certain other related parties. Prior to our IPO, we did not charge management fees or earn incentive income on these investments. Following our IPO, we began charging management fees and earning incentive income on new investments made in our funds by our executive managing directors and certain other related parties, including the reinvestment by our executive managing directors of their after-tax proceeds from the 2007 Offerings. However, in January 2015, we began to waive management fees and incentive income on new investments by our executive managing directors and certain other related parties. As of September 30, 2016, approximately 7% of our assets under management represented investments by us, our executive managing directors, employees and certain other related parties in our funds. As of that date, approximately 51% of these affiliated assets under management are not charged management fees and are not subject to an incentive income calculation. Additionally, to the extent that an Och-Ziff fund is an investor in another Och-Ziff fund, we waive or rebate a corresponding portion of the management fees charged to the fund.

As further discussed below in “—Understanding Our Results—Revenues,” we generally calculate management fees based on assets under management as of the beginning of each quarter. The assets under management in the tables below are presented net of management fees and incentive income as of the end of the period. Accordingly, the assets under management presented in the tables below are not the amounts used to calculate management fees for the respective periods.

Summary of Changes in Assets Under Management

The tables below present the changes to our assets under management for the respective periods based on the type of funds or investment vehicles we manage.



	Three Months Ended September 30, 2016
	June 30, 2016		Inflows / (Outflows)			Distributions / Other Reductions			Appreciation / (Depreciation)			September 30, 2016

	(dollars in thousands)
Multi-strategy funds	$	26,094,394	$	(3,452,066	)	$	—		$	735,076		$	23,377,404
Credit
Opportunistic credit funds	5,192,756		(11,375		)	(206,973		)	301,937			5,276,345
Institutional Credit Strategies	7,245,508		15,432			—			4,871			7,265,811
Real estate funds	2,213,821		8,494			(76,620		)	(838		)	2,144,857
Other	1,233,959		20,895			(50,284		)	34,794			1,239,364
Total	$	41,980,438	$	(3,418,620	)	$	(333,877	)	$	1,075,840		$	39,303,781



	Three Months Ended September 30, 2015
	June 30, 2015		Inflows / (Outflows)			Distributions / Other Reductions			Appreciation / (Depreciation)			September 30, 2015

	(dollars in thousands)
Multi-strategy funds	$	32,990,458	$	(1,583,355	)	$	—		$	(1,926,127	)	$	29,480,976
Credit
Opportunistic credit funds	5,084,611		7,860			(99,100		)	(136,027		)	4,857,344
Institutional Credit Strategies	6,567,980		489,567			—			2,571			7,060,118
Real estate funds	2,003,552		13,246			(72,363		)	(3,678		)	1,940,757
Other	1,323,313		(3,475		)	—			(81,092		)	1,238,746
Total	$	47,969,914	$	(1,076,157	)	$	(171,463	)	$	(2,144,353	)	$	44,577,941



	Nine Months Ended September 30, 2016
	December 31, 2015		Inflows / (Outflows)			Distributions / Other Reductions			Appreciation / (Depreciation)			September 30, 2016

	(dollars in thousands)
Multi-strategy funds	$	29,510,248	$	(6,213,273	)	$	—		$	80,429		$	23,377,404
Credit
Opportunistic credit funds	5,383,629		(54,727		)	(495,373		)	442,816			5,276,345
Institutional Credit Strategies	7,241,680		29,608			—			(5,477		)	7,265,811
Real estate funds	2,048,559		239,489			(137,985		)	(5,206		)	2,144,857
Other	1,310,745		(553		)	(50,284		)	(20,544		)	1,239,364
Total	$	45,494,861	$	(5,999,456	)	$	(683,642	)	$	492,018		$	39,303,781



	Nine Months Ended September 30, 2015
	December 31, 2014		Inflows / (Outflows)			Distributions / Other Reductions			Appreciation / (Depreciation)			September 30, 2015

	(dollars in thousands)
Multi-strategy funds	$	34,100,390	$	(4,184,040	)	$	—		$	(435,374	)	$	29,480,976
Credit
Opportunistic credit funds	5,098,600		424,314			(636,290		)	(29,280		)	4,857,344
Institutional Credit Strategies	5,166,734		1,884,714			—			8,670			7,060,118
Real estate funds	2,022,399		77,247			(155,304		)	(3,585		)	1,940,757
Other	1,146,292		87,657			(1		)	4,798			1,238,746
Total	$	47,534,415	$	(1,710,108	)	$	(791,595	)	$	(454,771	)	$	44,577,941

In the nine months ended September 30, 2016, our funds experienced performance-related appreciation of $492.0 million and net outflows of $6.0 billion, which was comprised of $732.6 million of gross inflows and $6.7 billion of gross outflows due to redemptions. We also had $683.6 million in distributions and other reductions, which were primarily related to investors in our closed-end opportunistic credit and real estate funds. Excluding CLOs, pensions and fund-of-funds were the largest sources of our gross inflows, while fund-of-funds, pensions and private banks were our largest sources of gross outflows during the first nine months of 2016. While we expect fourth quarter redemptions to remain somewhat elevated due to the FCPA settlements, there are several other factors that we believe will likely influence redemptions beyond just the settlements. The hedge fund industry overall is in the midst of a redemption cycle and there is also seasonality that can cause year-end redemptions to be higher as fund investors rebalance their investment portfolio allocations.

In the nine months ended September 30, 2015, our funds experienced performance-related depreciation of $454.8 million and net outflows of $1.7 billion, which was comprised of $4.0 billion of gross inflows and $5.7 billion of gross outflows due to redemptions. Distributions and other reductions were $791.6 million, which was driven by $639.2 million in distributions to investors in our closed-end opportunistic credit and real estate funds, and a $152.4 million reduction in the OZ European Credit Opportunities Fund as a result of the expiration of the fund's investment period. Our gross inflows included $2.0 billion within Institutional Credit Strategies primarily related to three CLOs that closed during the first nine months of 2015. Excluding CLOs, private banks were the largest source of our gross inflows during the first nine months of 2015, while pension funds were the largest source of our gross outflows.

Weighted-Average Assets Under Management and Average Management Fee Rate

The table below presents our weighted-average assets under management and the average management fee rate. Weighted-average assets under management exclude the impact of third quarter investment performance for the periods presented, as these amounts do not impact management fees calculated for the periods presented. The average management fee rate takes into account the effect of non-fee paying assets under management, as well as our opportunistic credit funds, Institutional Credit Strategies products, real estate funds and the other alternative investment vehicles we manage, which generally pay lower management fees than our multi-strategy products, consistent with the market convention for these asset classes. Please see the respective sections below for average management fee rates by fund type.



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015

	(dollars in thousands)
Weighted-average assets under management	$	38,794,212		$	46,650,675		$	41,640,771		$	46,780,723
Average management fee rate	1.23		%	1.38		%	1.27		%	1.41		%

The decline in our average management fee rate for the periods presented occurred primarily because of a change in the mix of products that comprise our assets under management. Specifically, the rate decline was driven primarily by lower assets under management in our multi-strategy funds as a percentage of our total assets under management. Our average management fee will vary from period to period based on the mix of products that comprise our assets under management.

Effective October 1, 2016, we reduced the management fee rate for existing fund investors in virtually all of our multi-strategy assets under management. We began the fourth quarter with an average management fee rate of approximately 1.01% of our total assets under management, which is also reflective of the change in mix of products that comprise our assets under management due to redemptions from our multi-strategy funds during the third quarter of 2016. As a result, we expect management fees to decline in the near-term. We made this change to our management fee rates to further strengthen the relationships we have with our clients, with whom we have built a strong partnership over many years. We also want to ensure that we remain competitive on management fees, which have been gradually trending down for the hedge fund industry. We did not adjust our incentive income rate, which remains unchanged at 20%.

Fund Performance Information

The tables below present performance information for the funds we manage. All of our funds are managed by the Och-Ziff Funds segment with the exception of our real estate funds, which are managed by the real estate management business included in Other Operations.

The performance information presented in this report is not indicative of the performance of our Class A Shares and is not necessarily indicative of the future results of any particular fund, including the accrued unrecognized amounts of incentive income. An investment in our Class A Shares is not an investment in any of our funds. There can be no assurance that any of our existing or future funds will achieve similar results. The timing and amount of incentive income generated from our funds are inherently uncertain. Incentive income is a function of investment performance and realizations of investments, which vary period-to-period based on market conditions and other factors. We cannot predict when, or if, any realization of investments will occur. Incentive income recognized for any particular period is not a reliable indicator of incentive income that may be earned in subsequent periods.

The return information presented in this report represents, where applicable, the composite performance of all feeder funds that comprise each of the master funds presented. Gross return information is generally calculated using the total return of all feeder funds, net of all fees and expenses except management fees and incentive income of such feeder funds and master funds and the returns of each feeder fund include the reinvestment of all dividends and other income. Net return information is generally calculated as the gross returns less management fees and incentive income (except incentive income on unrealized gains attributable to Special Investments in certain funds that could reduce returns on these investments at the time of realization). Return information also includes realized and unrealized gains and losses attributable to Special Investments and initial public offering investments that are not allocated to all investors in the feeder funds. Investors that were not allocated Special Investments and initial public offering investments may experience materially different returns.

Multi-Strategy Funds

The table below presents assets under management and investment performance for our multi-strategy funds. Assets under management are generally based on the net asset value of these products. Management fees generally range from 1.00% to 2.50% of assets under management. For the three months ended September 30, 2016, our multi-strategy funds had an average management fee rate of 1.61%. We expect this rate to decline in the fourth quarter of 2016 due to the management fee rate reductions for existing investors in our multi-strategy funds. See “—Weighted-Average Assets Under Management and Average Management Fee Rate” above for additional information.

We generally crystallize incentive income from the majority of our multi-strategy funds on an annual basis. Incentive income is generally equal to 20% of the realized and unrealized profits attributable to each investor. A portion of the assets under management in each of the OZ Master Fund and our other multi-strategy funds is subject to initial commitment periods of three years, and certain of these assets are subject to hurdle rates (generally equal to the 3-month T-bill or LIBOR rate). However, once the investment performance has exceeded the hurdle rate for a portion of these assets, we may receive a preferential “catch-up” allocation, resulting in a potential recognition by us of a full 20% of the net profits attributable to investors in these assets. See “—Understanding Our Results—Incentive Income” for additional information.



	Assets Under Management as of September 30,				Returns for the Nine Months Ended September 30,								Annualized Returns Since Inception Through September 30, 2016
	Assets Under Management as of September 30,				2016				2015
	2016		2015		Gross		Net		Gross		Net		Gross			Net

Fund	(dollars in thousands)
OZ Master Fund⁽¹⁾	$	19,777,558	$	24,307,461	2.7	%	1.1	%	-0.7	%	-2.1	%	16.9	%	⁽¹⁾	11.8	%	⁽¹⁾
OZ Asia Master Fund	1,018,175		1,135,619		-2.1	%	-3.4	%	4.6	%	2.8	%	9.3	%		5.3	%
OZ Europe Master Fund	467,741		886,764		2.5	%	1.2	%	5.9	%	3.7	%	11.7	%		7.7	%
OZ Enhanced Master Fund	824,597		1,116,080		4.0	%	2.3	%	-2.7	%	-4.1	%	10.9	%		7.0	%
Och-Ziff European Multi-Strategy UCITS Fund	149,286		373,139		-3.5	%	-4.9	%	6.7	%	4.1	%	4.4	%		1.6	%
Other funds	1,140,047		1,661,913		n/m		n/m		n/m		n/m		n/m			n/m
	$	23,377,404	$	29,480,976

_______________

n/m not meaningful

(1)

The annualized returns since inception are those of the Och-Ziff Multi-Strategy Composite, which represents the composite performance of all accounts that were managed in accordance with our broad multi-strategy mandate that were not subject to portfolio investment restrictions or other factors that limited our investment discretion since inception on April 1, 1994. Performance is calculated using the total return of all such accounts net of all investment fees and expenses of such accounts, except incentive income on unrealized gains attributable to Special Investments that could reduce returns in these investments at the time of realization, and the returns include the reinvestment of all dividends and other income. The performance calculation for the OZ Master Fund excludes realized and unrealized gains and losses attributable to currency hedging specific to certain investors investing in OZ Master Fund in currencies other than the U.S. Dollar. For the period from April 1, 1994 through December 31, 1997, the returns are gross of certain overhead expenses that were reimbursed by the accounts. Such reimbursement arrangements were terminated at the inception of the OZ Master Fund on January 1, 1998. The size of the accounts comprising the composite during the time period shown vary materially. Such differences impacted our investment decisions and the diversity of the investment strategies followed. Furthermore, the composition of the investment strategies we follow is subject to our discretion, has varied materially since inception and is expected to vary materially in the future. As of September 30, 2016, the gross and net annualized returns since the OZ Master Fund’s inception on January 1, 1998 were 12.9% and 8.7%, respectively.

The $6.1 billion, or 21%, year-over-year decrease in assets under management in our multi-strategy funds was primarily due to capital net outflows of $6.7 billion, primarily from the OZ Master Fund. Partially offsetting the decrease was $644.9 million of performance-related appreciation. The largest sources of gross outflows from our multi-strategy funds were attributable to fund-of-funds, pensions and private banks. As discussed above, while we expect fourth quarter redemptions to remain somewhat elevated due to the FCPA settlements, there are several other factors that we believe will likely influence redemptions beyond just the settlements. The hedge fund industry overall is in the midst of a redemption cycle and there is also seasonality that can cause year-end redemptions to be higher as fund investors rebalance their investment portfolio allocations.

For the first nine months of 2016, the OZ Master Fund generated a gross return of 2.7% and a net return of 1.1%. On a gross basis, performance-related depreciation in long/short equity special situations was more than offset by strong positive performance in merger arbitrage, convertible and derivative arbitrage and credit-related strategies.

Despite a challenging start to 2016, OZ Master Fund saw the positive momentum that began in the second quarter carry into the third quarter. In particular, we saw share prices continue to react sensibly to fundamental news and events, a dynamic that contributed to improved performance in OZ Master Fund’s long/short equity special situations strategy during the third quarter. While market dynamics could shift again, the environment appears to be more accommodating to fundamental investing.

OZ Master Fund’s merger arbitrage, convertible and derivative arbitrage, corporate credit and structured credit strategies have each generated strong year-to-date gains through September 30, 2016. In merger arbitrage, certain transactions in which OZ Master Fund participated closed during the third quarter, contributing to the strategy’s year-to-date gross return of +1.3%. Convertible and derivative arbitrage generated a gross return of +0.5% during the third quarter, driven by gains in convertible arbitrage positions, commodity-related volatility, commodity spreads and index volatility spread trades. Year-to-date, convertible and derivative arbitrage has generated a gross return of +1.3%. In OZ Master Fund’s credit-related strategies, widening credit spreads and certain event-driven situations added +0.4% to the gross return within corporate credit during the third quarter, while in structured credit, a +0.9% gross return during the quarter was attributable to the realization of recoveries in certain of our idiosyncratic situations. Year-to-date, the corporate credit and structured credit strategies are each up +1.2% on a gross basis. Long/short equity special situations generated a gross return of +1.9% during the quarter, recovering some of its year-to-date

losses, with gains being driven largely by favorable, idiosyncratic catalysts and developments in a number of positions, rather than by market factors. Year-to-date, performance in long/short equity special situations was -2.3%.

We continue to actively monitor OZ Master Fund’s capital allocations across investment strategies and geographies. Long/short equity special situations strategy has remained the largest allocation in OZ Master Fund this year. This allocation is not reflective of a strong directional view of the current market. We believe this is an environment in which disciplined, bottom-up investment selection is the best approach to generating returns.

For the first nine months of 2015, the OZ Master Fund generated a gross return of -0.7% and net return of -2.1%, driven primarily by performance in credit-related strategies and long/short equity special situations.

Credit



	Assets Under Management as of September 30,
	2016		2015

	(dollars in thousands)
Opportunistic credit funds	$	5,276,345	$	4,857,344
Institutional Credit Strategies	7,265,811		7,060,118
	$	12,542,156	$	11,917,462

Opportunistic Credit Funds

Our opportunistic credit funds seek to generate risk-adjusted returns by capturing value in mispriced investments across disrupted, dislocated and distressed corporate, structured and private credit markets globally.

Certain of our opportunistic credit funds are open-end and allow for contributions and redemptions (subject to initial lock-up and notice periods) on a periodic basis similar to our multi-strategy funds. Our remaining opportunistic credit funds are closed-end, whereby investors make a commitment that is funded over an investment period. Upon the expiration of an investment period, the investments are then sold or realized over a period of time, and distributions are made to the investors in the fund.

Assets under management for our opportunistic credit funds are generally based on the net asset value of those funds plus any unfunded commitments. Management fees for our opportunistic credit funds generally range from 0.50% to 1.75% of the net asset value of these funds. See “—Understanding Our Results—Incentive Income” for additional information, including the recognition of incentive income for funds that we consolidate. For the three months ended September 30, 2016, our opportunistic credit funds had an average management fee rate of 0.88%.

The table below presents assets under management and investment performance information for certain of our opportunistic credit funds. Incentive income related to these funds is generally equal to 20% of realized and unrealized profits attributable to each investor, and a portion of these assets under management is subject to hurdle rates (generally 5% to 8%). However, once the investment performance has exceeded the hurdle rate, we may receive a preferential “catch-up” allocation, resulting in a potential recognition by us of a full 20% of the net profits attributable to investors in these funds. The measurement periods for these assets under management generally range from one to five years.



	Assets Under Management as of September 30,				Returns for the Nine Months Ended September 30,								Annualized Returns Since Inception Through September 30, 2016
	2016		2015		2016				2015
					Gross		Net		Gross		Net		Gross		Net

Fund	(dollars in thousands)
OZ Credit Opportunities Master Fund	$	1,728,712	$	1,527,555	13.1	%	11.4	%	-1.8	%	-2.5	%	16.9	%	12.5	%
Customized Credit Focused Platform	2,630,186		1,775,852		15.6	%	11.8	%	0.8	%	0.4	%	19.4	%	14.6	%
Closed-end opportunistic credit funds	458,102		1,013,205		See below for return information on our closed-end opportunistic credit funds.
Other funds	459,345		540,732		n/m		n/m		n/m		n/m		n/m		n/m
	$	5,276,345	$	4,857,344

_______________

n/m not meaningful

The $419.0 million year-over-year increase in our opportunistic credit funds was due to capital net inflows of $642.1 million, primarily into the Customized Credit Focused Platform, and $363.2 million of performance-related appreciation, partially offset by distributions and other reductions of $586.3 million related to our closed-end opportunistic credit funds. For the first nine months of 2016, the OZ Credit Opportunities Master Fund, our global opportunistic credit fund, generated a gross return of 13.1% and a net return of 11.4%. On a gross basis, performance was driven by the fund’s U.S. portfolio.

The table below presents assets under management, investment performance and other information for our closed-end opportunistic credit funds. Incentive income related to these funds is generally equal to 20% of the cumulative realized profits attributable to each investor over the life of the fund, subject to hurdle rates (generally 5% to 6%), and is recognized at or near the end of the life of the fund when it is no longer subject to clawback. However, once the investment performance has exceeded the hurdle rate, we may receive a preferential “catch-up” allocation, resulting in a potential recognition by us of a full 20% of the net profits attributable to investors in these funds. The investment periods for these funds may generally be extended for an additional one to two years.



	Assets Under Management as of September 30,				Inception to Date as of September 30, 2016
									IRR
	2016		2015		Total Commitments		Total Invested Capital⁽¹⁾		Gross⁽²⁾		Net⁽³⁾		Gross MOIC⁽⁴⁾

Fund (Investment Period)	(dollars in thousands)
OZ European Credit Opportunities Fund (2012-2015)⁽⁵⁾	$	110,418	$	283,881	$	459,600	$	305,487	16.6	%	12.5	%	1.5 x
OZ Structured Products Domestic Fund II (2011-2014)⁽⁵⁾	156,860		307,138		326,850		326,850		18.7	%	14.4	%	1.8 x
OZ Structured Products Offshore Fund II (2011-2014)⁽⁵⁾	158,404		274,577		304,531		304,531		15.8	%	11.9	%	1.6 x
OZ Structured Products Offshore Fund I (2010-2013)⁽⁵⁾	11,573		25,365		155,098		155,098		24.0	%	19.2	%	2.1 x
OZ Structured Products Domestic Fund I (2010-2013)⁽⁵⁾	7,901		15,534		99,986		99,986		22.9	%	18.3	%	2.0 x
Other funds	12,946		106,710		298,250		268,250		n/m		n/m		n/m
	$	458,102	$	1,013,205	$	1,644,315	$	1,460,202

_______________

n/m not meaningful


(1)	Represents funded capital commitments net of recallable distributions to investors.

(2)

Gross IRR for our closed-end opportunistic credit funds represents the estimated, unaudited, annualized return based on the timing of cash inflows and outflows for the fund as of September 30, 2016, including the fair value of unrealized investments as of such date, together with any appreciation or depreciation from related hedging activity. Gross IRR does not include the effects of management fees or incentive income, which would reduce the return, and includes the reinvestment of all fund income.

(3)

Net IRR is calculated as described in footnote (2), but is reduced by all management fees, as well as paid incentive and accrued incentive income that will be payable upon the distribution of each fund’s capital in accordance with the terms of the relevant fund. Accrued incentive income may be higher or lower at such time. The net IRR represents a composite rate of return for a fund and does not reflect the net IRR specific to any individual investor.


(4)	Gross MOIC for our closed-end opportunistic credit funds is calculated by dividing the sum of the net asset value of the fund, accrued incentive income, life-to-date incentive income and management fees paid and any non-recallable distributions made from the fund by the invested capital.


(5)	These funds have concluded their investment periods, and therefore we expect assets under management for these funds to decrease as investments are sold and the related proceeds are distributed to the investors in these funds.

Institutional Credit Strategies

Institutional Credit Strategies is our asset management platform that invests in performing credits, including leveraged loans, high-yield bonds, private credit/bespoke financing and investment grade credit via CLOs and other customized solutions for clients. For the three months ended September 30, 2016, our Institutional Credit Strategies products had an average management fee rate of 0.39%.



				Assets Under Management as of September 30,
	Closing Date	Initial Deal Size		2016		2015

		(dollars in thousands)
CLOs:
OZLM I	July 19, 2012	$	510,700	$	497,908	$	506,324
OZLM II	November 1, 2012	560,100		513,343		517,966
OZLM III	February 20, 2013	653,250		612,283		614,150
OZLM IV	June 27, 2013	600,000		541,515		543,673
OZLM V	December 17, 2013	501,250		469,042		471,084
OZLM VI	April 16, 2014	621,250		597,638		593,404
OZLM VII	June 26, 2014	824,750		796,600		796,767
OZLM VIII	September 9, 2014	622,250		596,991		596,580
OZLM IX	December 22, 2014	510,208		495,255		495,900
OZLM XI	March 12, 2015	510,500		491,540		491,450
OZLM XII	May 28, 2015	565,650		547,914		546,435
OZLM XIII	August 6, 2015	511,600		496,370		493,012
OZLM XIV	December 21, 2015	507,420		497,179		—
		7,498,928		7,153,578		6,666,745
Other funds	n/a	n/a		112,233		393,373
		$	7,498,928	$	7,265,811	$	7,060,118

Assets under management for our CLOs are generally based on the par value of the collateral and cash held in the CLOs. However, assets under management are reduced for any investments in our CLOs held by our other funds in order to avoid double counting these assets. Management fees for the CLOs are generally 0.50% of assets under management. Incentive income from our CLOs is generally equal to 20% of the excess cash flows due to the holders of the subordinated notes issued by the CLOs, subject to a 12% hurdle rate. See “—Understanding Our Results—Incentive Income” for additional information. Because of the hurdle rate and structure of our CLOs, we do not expect to earn a meaningful amount of incentive income from these entities, and therefore no return information is presented for these vehicles.

The year-over-year increase in assets under management was driven primarily by the launch of an additional CLO.

Real Estate Funds

Our real estate funds generally make investments in commercial and residential real estate, including real property, multi-property portfolios, real estate-related joint ventures, real estate operating companies and other real estate-related assets.

Assets under management for our real estate funds are generally based on the amount of capital committed by our fund investors during the investment period and the amount of actual capital invested for periods following the investment period. However, assets under management are reduced for unfunded commitments by our executive managing directors that will be

funded through transfers from other funds in order to avoid double counting these assets. Management fees for our real estate funds generally range from 0.75% to 1.50% of assets under management. For the three months ended September 30, 2016, our real estate funds had an average management fee rate of 0.97%.

The tables below present assets under management, investment performance and other information for our real estate funds. Incentive income related to these funds is equal to 20% of the cumulative realized profits attributable to each investor over the life of the fund, subject to hurdle rates (generally 6% to 10%). However, once the investment performance has exceeded the hurdle rate, we may receive a preferential “catch-up” allocation, resulting in a potential recognition by us of a full 20% of the net profits attributable to investors in these funds.



	Assets Under Management as of September 30,
	2016		2015

Fund	(dollars in thousands)
Och-Ziff Real Estate Fund I	$	16,554	$	35,664
Och-Ziff Real Estate Fund II	307,108		349,860
Och-Ziff Real Estate Fund III	1,455,032		1,447,096
Och-Ziff Real Estate Credit Fund I	285,522		—
Other funds	80,641		108,137
	$	2,144,857	$	1,940,757



	Inception to Date as of September 30, 2016
			Total Investments									Realized/Partially Realized Investments⁽¹⁾
	Total Commitments		Invested Capital⁽²⁾		Total Value⁽³⁾		Gross IRR⁽⁴⁾		Net IRR⁽⁵⁾		Gross MOIC⁽⁶⁾	Invested Capital		Total Value		Gross IRR⁽⁴⁾		Gross MOIC⁽⁶⁾

Fund (Investment Period)	(dollars in thousands)
Och-Ziff Real Estate Fund I⁽⁷⁾ (2005-2010)	$	408,081	$	385,351	$	796,888	25.2	%	15.6	%	2.1x	$	372,720	$	790,662	26.5	%	2.1x
Och-Ziff Real Estate Fund II⁽⁷⁾ (2011-2014)	839,508		735,695		1,327,828		33.8	%	21.8	%	1.8x	552,240		1,106,207		39.6	%	2.0x
Och-Ziff Real Estate Fund III⁽⁸⁾ (2014-2019)	1,500,000		415,154		480,495		n/m		n/m		n/m	—		—		n/m		n/m
Och-Ziff Real Estate Credit Fund I⁽⁸⁾(2015-2019)	323,225		76,969		81,033		n/m		n/m		n/m	22,419		26,483		n/m		n/m
Other funds	215,348		65,095		111,011		n/m		n/m		n/m	39,848		92,436		n/m		n/m
	$	3,286,162	$	1,678,264	$	2,797,255						$	987,227	$	2,015,788



	Unrealized Investments as of September 30, 2016
	Invested Capital		Total Value		Gross MOIC⁽⁶⁾

Fund (Investment Period)	(dollars in thousands)
Och-Ziff Real Estate Fund I (2005-2010)⁽⁷⁾	$	12,631	$	6,226	0.5x
Och-Ziff Real Estate Fund II (2011-2014)⁽⁷⁾	183,455		221,621		1.2x
Och-Ziff Real Estate Fund III (2014-2019)⁽⁸⁾	415,154		480,495		n/m
Och-Ziff Real Estate Credit Fund I (2015-2019)⁽⁸⁾	54,550		54,550		n/m
Other funds	25,247		18,575		n/m
	$	691,037	$	781,467

_______________

n/m not meaningful


(1)	An investment is considered partially realized when the total amount of proceeds received, including dividends, interest or other distributions of income and return of capital, represents at least 50% of invested capital.


(2)	Invested capital represents total aggregate contributions made for investments by the fund.


(3)	Total value represents the sum of realized distributions and the fair value of unrealized and partially realized investments as of September 30, 2016. Total value will be impacted (either positively or negatively) by future economic and other factors. Accordingly, the total value ultimately realized will likely be higher or lower than the amounts presented as of September 30, 2016.

(4)

Gross IRR for our real estate funds represents the estimated, unaudited, annualized return based on the timing of cash inflows and outflows for the aggregated investments as of September 30, 2016, including the fair value of unrealized and partially realized investments as of such date, together with any unrealized appreciation or depreciation from related hedging activity. Gross IRR is not adjusted for estimated management fees, incentive income or other fees or expenses to be paid by the fund, which would reduce the return.

(5)

Net IRR is calculated as described in footnote (4), but is reduced by all management fees and other fund-level fees and expenses not adjusted for in the calculation of gross IRR. Net IRR is further reduced by paid incentive and accrued incentive income that will be payable upon the distribution of each fund’s capital in accordance with the terms of the relevant fund. Accrued incentive income may be higher or lower at such time. The net IRR represents a composite rate of return for a fund and does not reflect the net IRR specific to any individual investor.


(6)	Gross MOIC for our real estate funds is calculated by dividing the value of a fund’s investments by the invested capital, prior to adjustments for incentive income, management fees or other expenses to be paid by the fund.


(7)	These funds have concluded their investment periods, and therefore we expect assets under management for these funds to decrease as investments are sold and the related proceeds are distributed to the investors in these funds.


(8)	This fund recently launched and has only invested a small portion of its committed capital; therefore, IRR and MOIC information is not presented, as it is not meaningful.

The $204.1 million year-over-year increase in assets under management in our real estate funds was driven primarily by additional commitments to Och-Ziff Real Estate Credit Fund I, partially offset by distributions primarily related to Och-Ziff Real Estate Fund II.

Other

Our other assets under management are comprised of funds that are generally strategy-specific, including our equity, Africa and energy funds. Management fees for these funds range from 0.75% to 2.25% of assets under management, generally based on the amount of capital committed to these platforms by our fund investors. For the three months ended September 30, 2016, our other funds had an average management fee rate of 0.97%. Incentive income for our equity funds is generally 20% of realized and unrealized annual profits attributable to each investor. Incentive income related to the Africa and energy funds is generally 20% of cumulative realized profits attributable to each investor, and is subject to hurdle rates (generally 8%). Incentive income for the Africa and energy funds is generally not recognized as revenue until at or near the end of the life of the fund when it is no longer subject to clawback. See “—Understanding Our Results—Incentive Income” for additional information.

Longer-Term Assets Under Management

As of September 30, 2016, approximately 42% of our assets under management were subject to initial commitment periods of three years or longer. We earn incentive income on these assets based on the cumulative investment performance generated over this commitment period. The table below presents the amount of these assets under management, as well as the gross amount of incentive income accrued at the fund level but for which the commitment period has not concluded. These amounts have not yet been recognized in our revenues, as we recognize incentive income at the end of the commitment period when amounts are no longer subject to clawback. Further, these amounts may ultimately not be recognized as revenue by us in the event of future losses in the respective funds. See “—Understanding Our Results—Incentive Income” for additional information.



	September 30, 2016
	Longer-Term Assets Under Management		Accrued Unrecognized Incentive Income

	(dollars in thousands)
Multi-strategy funds	$	2,623,669	$	23,029
Credit
Opportunistic credit funds	4,147,836		155,823
Institutional Credit Strategies	7,223,923		—
Real estate funds	2,144,857		121,079
Other	289,667		337
	$	16,429,952	$	300,268

We recognize incentive income on our longer-term assets under management in our multi-strategy funds and open-end opportunistic credit funds at the end of their respective commitment periods, which are generally three to five years. We expect the commitment period with respect to approximately 13% and 10% of the longer-term assets under management in our multi-strategy and open-end opportunistic credit funds, respectively, to mature during the fourth quarter of 2016. Incentive income related to assets under management in our closed-end opportunistic credit funds and our real estate funds is generally recognized at or near the end of the life of each fund. These funds generally begin to make distributions after the conclusion of their respective investment period, as presented in the tables above. However, these investment periods may generally be extended for an additional one to two years.

Understanding Our Results

Revenues

Our operations have been financed primarily by cash flows generated by our business. Our principal sources of revenues are management fees and incentive income. For any given period, our revenues are influenced by the amount of our assets under management, the investment performance of our funds and the timing of when we recognize incentive income for certain assets under management as discussed below.

The ability of investors to contribute capital to and redeem capital from our funds causes our assets under management to fluctuate from period to period. Fluctuations in assets under management also result from our funds’ investment performance. Both of these factors directly impact the revenues we earn from management fees and incentive income. For example, a $1 billion increase or decrease in assets under management subject to a 2% management fee would generally increase or decrease annual management fees by $20 million. If net profits attributable to a fee-paying fund investor were $10 million in a given year, we generally would earn incentive income equal to $2 million, assuming a 20% incentive income rate, a one-year commitment period, no hurdle rate and no high-water marks from prior years.

For any given quarter, our revenues are influenced by the combination of assets under management and the investment performance of our funds. For the first three quarters of each year, our revenues are primarily comprised of the management fees we have earned for each respective quarter. In addition, we may recognize incentive income for assets under management for which the measurement period expired in that quarter, such as assets subject to three-year commitment periods, or incentive income related to fund investor redemptions, and these amounts may be significant. In the fourth quarter, our revenues are primarily comprised of the management fees we have earned for the quarter, as well as incentive income related to the full-year investment performance generated on assets under management that are subject to one-year commitment periods, or for other assets under management for which the commitment period expired in that quarter.

Management Fees. Management fees are generally calculated and paid to us on a quarterly basis in advance, based on the amount of assets under management at the beginning of the quarter. Management fees are prorated for capital inflows and redemptions during the quarter. Accordingly, changes in our management fee revenues from quarter to quarter are driven by changes in the quarterly opening balances of assets under management, the relative magnitude and timing of inflows and redemptions during the respective quarter, as well as the impact of differing management fee rates charged on those inflows and redemptions. See “—Weighted-Average Assets Under Management and Average Management Fee Rate” for information on our average management fee rate.

Incentive Income. We earn incentive income based on the cumulative performance of our funds over a commitment period. Incentive income is typically equal to 20% of the net realized and unrealized profits attributable to each fund investor in our multi-strategy funds, open-end opportunistic credit funds and certain other funds, but it excludes unrealized gains and losses attributable to Special Investments. For our closed-end opportunistic credit funds, real estate funds and certain other funds, incentive income is typically equal to 20% of the realized profits attributable to each fund investor. For our CLOs within Institutional Credit Strategies, incentive income is typically 20% of the excess cash flows available to the holders of the subordinated notes. Our ability to earn incentive income from some of our funds may be impacted by hurdle rates as further discussed below.

For funds that we do not consolidate, incentive income is recognized at the end of the applicable commitment period when the amounts are contractually payable, or “crystallized.” Additionally, all of our multi-strategy funds and open-end

opportunistic credit funds are subject to a perpetual loss carry forward, or a perpetual “high-water mark,” meaning we would not be able to earn incentive income with respect to positive investment performance we generate for a fund investor in any year following negative investment performance until that loss is recouped, at which point a fund investor’s investment surpasses the high-water mark. We earn incentive income on any net profits in excess of the high-water mark.

For funds that we consolidate, incentive income is recognized by allocating a portion of the net income of the consolidated Och-Ziff funds to us rather than to the fund investors (noncontrolling interests). Incentive income allocated to us is not reflected as incentive income in our consolidated revenues, as these amounts are eliminated in consolidation. The allocation of incentive income to us is based on the contractual terms of the relevant fund agreements. As a result, we may recognize earnings related to our incentive income allocation from the consolidated Och-Ziff funds prior to the end of their respective commitment periods, and therefore we may recognize earnings that are subject to clawback to the extent a consolidated fund generates subsequent losses. For Economic Income purposes, we defer recognition of these earnings until they are no longer subject to clawback.

The commitment period for most of our assets under management is for a period of one year on a calendar-year basis, and therefore we generally crystallize incentive income annually on December 31. We may also recognize incentive income related to fund investor redemptions at other times during the year. Additionally, we may recognize a material amount of incentive income during the year related to assets subject to three-year commitment periods for which such period has expired (including the rollover of a portion of these assets into one-year commitment periods upon the conclusion of the initial three-year period), as well as assets in certain of our opportunistic credit funds, real estate funds and certain other funds we manage, which typically have commitment periods of three years or longer. We may also recognize incentive income for tax distributions related to these assets. Tax distributions are amounts distributed to us to cover tax liabilities related to incentive income that has been accrued at the fund level but will not be recognized by us until the end of the relevant commitment period (if at all).

In addition to assets under management subject to one-year commitment periods, approximately $16.4 billion, or 42%, of our assets under management as of September 30, 2016 were subject to initial commitment periods of three years or longer. These assets under management include assets subject to three-year commitment periods in the OZ Master Fund and certain other multi-strategy funds, as well as assets in our opportunistic credit funds, Institutional Credit Strategies products, real estate funds and other alternative investment vehicles we manage. Incentive income related to these assets is based on the cumulative investment performance over a specified commitment period (in the case of CLOs within Institutional Credit Strategies, based on the excess cash flows available to the holders of the subordinated notes), and, to the extent a fund is not consolidated, is not earned until it is no longer subject to repayment to the respective fund. Our ability to earn incentive income on these longer-term assets is also subject to hurdle rates whereby we do not earn any incentive income until the investment returns exceed an agreed upon benchmark. However, for a portion of these assets subject to hurdle rates, once the investment performance has exceeded the hurdle rate, we may receive a preferential “catch-up” allocation, resulting in a potential recognition by us of a full 20% of the net profits attributable to investors in these assets.

Income of Consolidated Och-Ziff Funds. Revenues recorded as income of consolidated Och-Ziff funds consist of interest income, dividend income and other miscellaneous items.

Expenses

Compensation and Benefits. Compensation and benefits consist of salaries, benefits, payroll taxes, and discretionary and guaranteed cash bonus expenses. On an annual basis, compensation and benefits comprise a significant portion of total expenses, with discretionary cash bonuses generally comprising a significant portion of total compensation and benefits. These cash bonuses are based on total annual revenues, which are significantly influenced by the amount of incentive income we earn in the year. Annual discretionary cash bonuses are generally determined and expensed in the fourth quarter of each year. Compensation and benefits also includes equity-based compensation expense, which is primarily in the form of RSUs granted to our independent board members, employees and executive managing directors, as well as Och-Ziff Operating Group A Units granted to executive managing directors subsequent to the 2007 Offerings.

We also issue Och-Ziff Operating Group D Units to executive managing directors. The Och-Ziff Operating Group D Units are not considered equity under GAAP and no equity-based compensation expense is recognized related to these units when they are granted. Distributions made to holders of these units are recognized within compensation and benefits in the

consolidated statements of comprehensive income (loss), and are done on a pro rata basis with the Och-Ziff Operating Group A Units (held by our executive managing directors) and the Och-Ziff Operating Group B Units (held by our intermediate holding companies). An Och-Ziff Operating Group D Unit converts into an Och-Ziff Operating Group A Unit to the extent the Company determines that it has become economically equivalent to an Och-Ziff Operating Group A Unit, at which point it is considered a grant of equity-based compensation for GAAP purposes. Upon the conversion of Och-Ziff Operating Group D Units into Och-Ziff Operating Group A Units, we recognize a one-time charge for the grant-date fair value of the vested units and begin to amortize the grant-date fair value of the unvested units over the vesting period. As additional Och-Ziff Operating Group D Units are converted into Och-Ziff Operating Group A Units in the future, we may see increasing non-cash equity-based compensation expense related to these units.

We also have profit-sharing arrangements whereby certain employees or executive managing directors are entitled to a share of incentive income distributed by certain funds. This incentive income is typically paid to us, and a portion is paid to the participant, as investments held by these funds are realized. We defer the recognition of any portion of this incentive income to the extent it is subject to clawback and relates to a fund that is not consolidated. See “—Incentive Income” above. To the extent that the payments to the employees or executive managing directors are probable and reasonably estimable, we accrue these payments as compensation expense for GAAP purposes, which may occur prior to the recognition of the related incentive income.

In August 2012, we adopted the Och-Ziff Capital Management Group LLC 2012 Partner Incentive Plan (the “PIP”), under which certain of our executive managing directors at the time of the IPO may be eligible to receive discretionary cash awards and discretionary grants of Och-Ziff Operating Group D Units over a five-year period that commenced in 2013. Each year, an aggregate of up to 2,770,749 Och-Ziff Operating Group D Units may be granted under the PIP to the participating executive managing directors. Aggregate discretionary cash awards for each year under the PIP will be capped at 10% of our incentive income earned during such year, up to a maximum of $39.6 million. In addition to awards under the PIP, we may also issue additional performance-related Och-Ziff Operating Group D Units or make discretionary performance cash payments to our executive managing directors.

Reorganization Expenses. As part of the Reorganization, interests in the Och-Ziff Operating Group held by our executive managing directors and the Ziffs were reclassified as Och-Ziff Operating Group A Units, resulting in significant non-cash Reorganization expenses. Substantially all of those Och-Ziff Operating Group A Units were expensed on a straight-line basis over a five-year vesting period following the 2007 Offerings, which concluded in November 2012. However, certain of these units had vesting periods through 2015.

Interest Expense. Amounts included within interest expense relate primarily to indebtedness outstanding under the 4.50% Senior Notes issued in November 2014 (the “Senior Notes”). We also have indebtedness outstanding under a secured multiple draw term loan agreement entered into in February 2014 to finance installment payments made toward the purchase of a new corporate aircraft that was delivered to us in February 2015 (the “Aircraft Loan”). Interest expense related to the Aircraft Loan was capitalized and, therefore, not included in interest expense prior to aircraft delivery. Following aircraft delivery in 2015, interest on the Aircraft Loan is fixed at 3.22% per annum. In April 2016, we borrowed $120.0 million pursuant to our revolving credit facility (the “Revolving Credit Facility”) at a rate per annum of LIBOR plus 1.00% to 2.00%, or a base rate plus 0% to 1.00%. See “—Liquidity and Capital Resources—Debt Obligations” for additional information.

General, Administrative and Other. General, administrative and other expenses are related to recurring placement and related service fees, occupancy and equipment, professional services, information processing and communications, insurance, business development, changes in our tax receivable agreement liability and other miscellaneous expenses. In addition, the $412.1 million FCPA settlements liability accrued for in the first nine months of 2016 is also included in this line item.

Expenses of Consolidated Och-Ziff Funds. Expenses recorded as expenses of consolidated Och-Ziff funds consist of interest expense and other miscellaneous expenses.

Other Income (Loss)

Net Gains on Investments in Och-Ziff Funds and Joint Ventures. Net gains on investments in Och-Ziff funds and joint ventures primarily consist of net gains and losses on investments in our funds made by us and net gains and losses on investments in joint ventures established to expand certain of our private investments platforms.

Net Gains of Consolidated Och-Ziff Funds. Net gains of consolidated Och-Ziff funds consist of net realized and unrealized gains and losses on investments held by the consolidated Och-Ziff funds.

Income Taxes

Income taxes consist of our provision for federal, state and local income taxes in the United States and foreign income taxes, including provisions for deferred income taxes resulting from temporary differences between the tax and GAAP basis. The computation of the provision requires certain estimates and significant judgment, including, but not limited to, the expected taxable income for the year, projections of the proportion of income earned and taxed in foreign jurisdictions, permanent differences between the tax and GAAP basis and the likelihood of being able to fully utilize deferred income tax assets existing as of the end of the period.

The Registrant and the Och-Ziff Operating Group entities are partnerships for U.S. federal income tax purposes. Due to our legal structure, only a portion of the income we earn is subject to corporate-level income taxes in the United States and foreign jurisdictions. The amount of incentive income we earn in a given year, the resultant flow of revenues and expenses through our legal entity structure, the effect that changes in our Class A Share price may have on the ultimate deduction we are able to take related to the settlement of RSUs, and any changes in future enacted income tax rates may have a significant impact on our income tax provision and effective income tax rate.

Net Income (Loss) Allocated to Noncontrolling Interests

Noncontrolling interests represent ownership interests in our subsidiaries held by parties other than us and are primarily made up of Och-Ziff Operating Group A Units and fund investors’ interests in the consolidated Och-Ziff funds. Increases or decreases in net income (loss) allocated to the Och-Ziff Operating Group A Units are driven by the earnings of the Och-Ziff Operating Group. Increases or decreases in the net income allocated to fund investors’ interests in consolidated Och-Ziff funds are driven by the earnings of those funds as allocated under the contractual terms of the relevant fund agreements.

Our 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 the conversion of Och-Ziff Operating Group D Units, which are not considered equity for GAAP purposes, into Och-Ziff Operating Group A Units.

Additionally, we consolidate certain of our credit funds, wherein investors are able to redeem their interests after an initial lock-up period of up to three years. Allocations of earnings to these interests are reflected within net income allocated to redeemable noncontrolling interests in the consolidated statements of comprehensive income (loss).

Results of Operations

As previously discussed, the deconsolidation of the majority of our funds upon the adoption of ASU 2015-02 on January 1, 2016, caused a significant decrease in the amount of income of consolidated Och-Ziff funds, expenses of consolidated Och-Ziff funds, and net gains of consolidated Och-Ziff funds in our consolidated statements of comprehensive income (loss). Management fees and incentive income from the previously consolidated funds are also no longer eliminated in consolidation. The net impact to our results is that incentive income from these funds will now be recognized when such amounts are no longer subject to clawback. Prior to deconsolidation, incentive income from these previously consolidated funds was recognized by allocating a portion of the net income of these funds to us rather than to the fund investors (noncontrolling interests) based on the contractual terms of the relevant fund agreements. This resulted in incentive income being recognized that was subject to clawback in the event of future losses in the respective funds.

See “—Economic Income Analysis” for a discussion of our results on an Economic Income basis, which excludes the effects of the consolidated funds.

Revenues



	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
	(dollars in thousands)
Management fees	$	128,513	$	162,778	$	428,822	$	496,207
Incentive income	18,754		35,615		57,477		121,262
Other revenues	380		579		1,544		1,548
Income of consolidated Och-Ziff funds	458		126,931		1,262		361,136
Total Revenues	$	148,105	$	325,903	$	489,105	$	980,153

Total revenues for the quarter-to-date period decreased by $177.8 million, primarily due to the following:


•	A $126.5 million decrease in income of consolidated Och-Ziff funds, primarily as a result of the deconsolidation of the majority of our funds during the first quarter of 2016.

•

A $34.3 million decrease in management fees, driven primarily by lower assets under management in our multi-strategy funds. This decline in our multi-strategy funds impacted the mix of products that comprise our assets under management, resulting in a lower year-over-year average management fee rate. See “Assets Under Management and Fund Performance—Weighted-Average Assets Under Management and Average Management Fee Rate” above for information regarding our average management fee rate. Also affecting the year-over-year variance are management fees for certain previously consolidated funds that were eliminated in consolidation in the prior-year period. See “Economic Income Analysis” for a discussion of our management fees that excludes the effects of eliminations in consolidation.


•	A $16.9 million decrease in incentive income, primarily due to the following:


◦	Multi-strategy funds. A $33.3 million decrease in incentive income from our multi-strategy funds was due to: (i) a $14.5 million decrease related to fund investor redemptions; (ii) an $11.0 million decrease related to assets subject to a one-year measurement period; and (iii) a $7.8 million decrease related to longer-term assets under management.


◦	Opportunistic credit funds. A $5.6 million increase in incentive income from our opportunistic credit funds, primarily due to realizations from our closed-end opportunistic credit funds.


◦	Real estate funds. A $10.2 million increase in incentive income from our real estate funds, primarily due to a realization event in one of our real estate co-investment vehicles.

Total revenues for the year-to-date period decreased by $491.0 million, primarily due to the following:


•	A $359.9 million decrease in income of consolidated Och-Ziff funds, primarily as a result of the deconsolidation of the majority of our funds during the first quarter of 2016.

•

A $67.4 million decrease in management fees, driven primarily by lower assets under management in our multi-strategy funds. This decline in our multi-strategy funds impacted the mix of products that comprise our assets under management, resulting in a lower year-over-year average management fee rate. See “Assets Under Management and Fund Performance—Weighted-Average Assets Under Management and Average Management Fee Rate” above for information regarding our average management fee rate. Also affecting the year-over-year variance are management fees for certain previously consolidated funds that were eliminated in consolidation in the prior-year period. See “Economic Income Analysis” for a discussion of our management fees that excludes the effects of eliminations in consolidation.


•	A $63.8 million decrease in incentive income, primarily due to the following:

◦

Multi-strategy funds. A $77.3 million decrease in incentive income from our multi-strategy funds was due to: (i) a $29.9 million decrease related to fund investor redemptions; (ii) a $21.7 million decrease related to assets subject to a one-year measurement period; (iii) a $15.5 million decrease related to lower tax distributions taken to cover tax liabilities on incentive income that has been accrued on certain longer-term assets under management, but that will not be realized until the end of the relevant commitment period; and (iv) a $10.2 million decrease related to longer-term assets under management.


◦	Opportunistic credit funds. Incentive income from our opportunistic credit funds remained relatively flat period over period.

◦

Real estate funds. A $13.5 million increase in incentive income from our real estate funds due a realization event in one of our real estate co-investment vehicles, as well as an increase in incentive income from Och-Ziff Real Estate Fund I. Amounts earned from Och-Ziff Real Estate Fund I were eliminated in consolidation in the prior year period. This fund was deconsolidated on January 1, 2016 upon the adoption of ASU 2015-02.

Expenses



	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
	(dollars in thousands)
Compensation and benefits	$	57,758	$	70,602	$	169,762	$	211,895
Reorganization expenses	—		4,018		—		12,052
Interest expense	6,129		5,383		17,452		16,033
General, administrative and other	44,306		65,484		584,331		127,332
Expenses of consolidated Och-Ziff funds	17		82,576		316		220,847
Total Expenses	$	108,210	$	228,063	$	771,861	$	588,159

Total expenses for the quarter-to-date period decreased by $119.9 million, primarily due to the following:


•	An $82.6 million decrease in expenses of consolidated Och-Ziff funds, primarily as a result of the deconsolidation of the majority of our funds during the first quarter of 2016.

•

A $21.2 million decrease in general, administrative and other expenses driven primarily by the following: (i) $12.4 million decrease in change in tax receivable agreement liability expense due to updated estimated future income tax savings at the state and local level resulting from an enacted change in tax law (see income tax discussion below); (ii) a $5.2 million decrease in professional fees; (iii) a $3.7 million decrease in recurring placement and related service fees due to lower assets under management subject to these arrangements; (iv) a $2.2 million decrease in the estimated FCPA settlements liability; and (v) an offsetting $4.4 million loss in the current year period related to one of our corporate aircraft that was reclassified as held for sale during the third quarter of 2016 (see Note 8 of our consolidated financial statements).

•

A $12.8 million decrease in compensation and benefits expenses, primarily driven by the following: (i) a $9.2 million decrease in equity-based compensation expense due to a lower average grant date fair value and a lower number of RSUs being amortized; (ii) a $2.3 million decrease in allocations to Och-Ziff Operating Group D Units due to lower profitability of the Och-Ziff Operating Group; and (iii) a $1.6 million decrease in salaries and benefits, primarily due to a lower number of employees in the current year period. Our global headcount was 548 as of September 30, 2016, as compared to 657 as of September 30, 2015.

Total expenses for the year-to-date period increased by $183.7 million, primarily due to the following:


•	A $457.0 million increase in general, administrative and other expenses, primarily driven by: (i) the $412.1 million FCPA settlements liability accrued over the first nine months of 2016; (ii) a $35.9 million increase in change in tax receivable agreement liability expense due to updated estimated future income tax savings at the state and local level

(see income tax discussion below); (iii) a $9.8 million increase in professional fees primarily due to increased expenses associated with the FCPA investigation; (iv) a $4.4 million loss in the current year period related to one of our corporate aircraft that was reclassified as held for sale during the third quarter of 2016 (see Note 8 of our consolidated financial statements); and (v) an offsetting $6.1 million decrease in recurring placement and related service fees due to lower assets under management subject to these arrangements.


•	A $220.5 million offsetting decrease in expenses of consolidated Och-Ziff funds, primarily as a result of the deconsolidation of the majority of our funds during the first quarter of 2016.

•

A $42.1 million offsetting decrease in compensation and benefits expenses, driven by the following: (i) a $30.3 million decrease in equity-based compensation expense due to a lower average grant date fair value and a lower number of RSUs being amortized; and (ii) an $11.8 million decrease in allocations to Och-Ziff Operating Group D Units due to lower profitability of the Och-Ziff Operating Group.

Other Income (Loss)



	Three Months Ended September 30,					Nine Months Ended September 30,
	2016		2015			2016		2015
	(dollars in thousands)
Net gains (losses) on investments in Och-Ziff funds and joint ventures	$	803	$	(146	)	$	1,302	$	43
Net gains (losses) of consolidated Och-Ziff funds	821		(20,627		)	2,182		21,859
Total Other Income (Loss)	$	1,624	$	(20,773	)	$	3,484	$	21,902

Total other income for the quarter-to-date and year-to-date periods increased by $22.4 million and decreased by $18.4 million, respectively, primarily due to the deconsolidation of the majority of our funds during the first quarter of 2016.

Income Taxes



	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016		2015
	(dollars in thousands)
Income taxes	$	9,986	$	12,422	$	39,436	$	119,607

Income tax expense for the quarter-to-date period decreased by $2.4 million, primarily due to lower management fees and incentive income generated during the 2016 comparative period. Income tax expenses for the year-to-date period decreased by $80.2 million, primarily due to higher deferred tax expense in the prior year, resulting from an enacted change in tax law that changed the methodology used for local income tax apportionment, which resulted in a revaluation of our deferred income tax assets.

Net Income (Loss) Allocated to Noncontrolling Interests

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



	Three Months Ended September 30,					Nine Months Ended September 30,
	2016		2015			2016			2015
	(dollars in thousands)
Och-Ziff Operating Group A Units	$	16,313	$	43,505		$	(187,338	)	$	175,239
Consolidated Och-Ziff funds	—		35,266			262			94,723
Other	257		200			209			384
Total	$	16,570	$	78,971		$	(186,867	)	$	270,346

Redeemable noncontrolling interests	$	678	$	(31,743	)	$	1,801		$	(24,105	)

Net income allocated to noncontrolling interests for the quarter-to-date period decreased by $62.4 million, primarily due to the following:


•	A $35.3 million decrease in the net income allocated to the consolidated Och-Ziff funds due to the deconsolidation of the majority of our funds during the first quarter of 2016.


•	A $27.2 million decrease in the net income allocated to the Och-Ziff Operating Group A Units, primarily due to lower management fees and incentive income, partially offset by lower operating expenses.

Net (loss) income allocated to noncontrolling interests for the year-to-date period decreased by $457.2 million, primarily due to the following:


•	A $362.6 million decrease in the net (loss) income allocated to the Och-Ziff Operating Group A Units, primarily driven by the $412.1 million FCPA settlements liability accrual recorded in the first nine months of 2016. In addition, lower management fees and incentive income and higher non-compensation expenses, partially offset by lower compensation and benefits, also contributed to the decrease.


•	A $94.5 million decrease in the net income allocated to the consolidated Och-Ziff funds due to the deconsolidation of the majority of our funds during the first quarter of 2016.

Net Income (Loss) Allocated to Class A Shareholders



	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016			2015
	(dollars in thousands)
Net income (loss) allocated to Class A Shareholders	$	14,285	$	17,417	$	(133,642	)	$	48,048

Net income allocated to Class A Shareholders for the quarter-to-date period decreased by $3.1 million, primarily driven by the lower management fees and incentive income, partially offset by a decrease in operating expenses and income taxes in the third quarter of 2016.

Net (loss) income allocated to Class A Shareholders for the year-to-date period decreased by $181.7 million, primarily driven by the $412.1 million FCPA settlements liability accrual recorded in the first nine months of 2016. In addition, lower management fees and incentive income and higher non-compensation expenses, partially offset by lower income taxes and lower compensation and benefits, also contributed to the year-over-year decrease.

Economic Income Analysis

In addition to analyzing our results on a GAAP basis, management also reviews our results on an “Economic Income” basis. Economic Income excludes the adjustments described below that are required for presentation of our results on a GAAP

basis, but that management does not consider when evaluating operating performance in any given period. Management uses Economic Income as the basis on which it evaluates our financial performance and makes resource allocation and other operating decisions. Management considers it important that investors review the same operating information that it uses.

Economic Income is a measure of pre-tax operating performance that excludes the following from our results on a GAAP basis:


•	Income allocations to our executive managing directors on their direct interests in the Och-Ziff Operating Group. Management reviews operating performance at the Och-Ziff Operating Group level, where our operations are performed, prior to making any income allocations.


•	Reorganization expenses related to the 2007 Offerings, equity-based compensation expenses and depreciation and amortization expenses, as management does not consider these non-cash expenses to be reflective of operating performance. However, the fair value of RSUs that are settled in cash to employees or executive managing directors is included as an expense at the time of settlement.


•	Changes in the tax receivable agreement liability and net gains on investments in Och-Ziff funds, as management does not consider these items to be reflective of operating performance.

•

Amounts related to the consolidated Och-Ziff funds, including the related eliminations of management fees and incentive income, as management reviews the total amount of management fees and incentive income earned in relation to total assets under management and fund performance. We also defer the recognition of incentive income allocations from the consolidated Och-Ziff funds until all clawback contingencies are resolved, consistent with the revenue recognition policy for the funds we do not consolidate.

As a result of the adjustments described above, as well as an adjustment to present management fees net of recurring placement and related service fees (rather than considering these fees an expense), management fees, incentive income, compensation and benefits, non-compensation expenses and net income (loss) allocated to noncontrolling interests as presented on an Economic Income basis are also non-GAAP measures. No adjustments to the GAAP basis have been made for other revenues and net gains (losses) on joint ventures. For reconciliations of our non-GAAP measures to the respective GAAP measures, please see “—Economic Income Reconciliations” at the end of this MD&A.

Our non-GAAP financial measures should not be considered as alternatives to our GAAP net income allocated to Class A Shareholders or cash flow from operations, or as indicative of liquidity or the cash available to fund operations. Our non-GAAP measures may not be comparable to similarly titled measures used by other companies.

We currently have two operating segments: the Och-Ziff Funds segment and our real estate business. The Och-Ziff Funds segment, which provides asset management services to our multi-strategy funds, dedicated credit funds and other alternative investment vehicles, is currently our only reportable operating segment under GAAP. Our real estate business, which provides asset management services to our real estate funds, is included within Other Operations as it does not meet the threshold of a reportable operating segment under GAAP.

Economic Income Revenues (Non-GAAP)



	Three Months Ended September 30, 2016						Three Months Ended September 30, 2015
	Och-Ziff Funds Segment		Other Operations		Total Company		Och-Ziff Funds Segment		Other Operations		Total Company
	(dollars in thousands)
Economic Income Basis
Management fees	$	114,521	$	5,184	$	119,705	$	157,346	$	5,357	$	162,703
Incentive income	16,202		2,552		18,754		36,907		2,046		38,953
Other revenues	378		2		380		572		7		579
Total Economic Income Revenues	$	131,101	$	7,738	$	138,839	$	194,825	$	7,410	$	202,235

Economic Income revenues for the quarter-to-date period decreased by $63.4 million, primarily due to the following:

•

A $43.0 million decrease in management fees, driven primarily by lower assets under management in our multi-strategy funds. This decline in our multi-strategy funds impacted the mix of products that comprise our assets under management, resulting in a lower year-over-year average management fee rate. See “Assets Under Management and Fund Performance—Weighted-Average Assets Under Management and Average Management Fee Rate” above for information regarding our average management fee rate.


•	A $20.2 million decrease in incentive income, primarily due to the following:


◦	Multi-strategy funds. A $33.3 million decrease in incentive income from our multi-strategy funds was due to: (i) a $14.5 million decrease related to fund investor redemptions; (ii) an $11.0 million decrease related to assets subject to a one-year measurement period; and (iii) a $7.8 million decrease related to longer-term assets under management.


◦	Opportunistic credit funds. A $5.6 million increase in incentive income from our opportunistic credit funds, primarily due to realizations from our closed-end opportunistic credit funds.


◦	Real estate funds. An $8.2 million increase in incentive income from our real estate funds, primarily due to a realization event in one of our real estate co-investment vehicles.



	Nine Months Ended September 30, 2016						Nine Months Ended September 30, 2015
	Och-Ziff Funds Segment		Other Operations		Total Company		Och-Ziff Funds Segment		Other Operations		Total Company
	(dollars in thousands)
Economic Income Basis
Management fees	$	381,904	$	15,556	$	397,460	$	478,597	$	14,958	$	493,555
Incentive income	50,105		7,372		57,477		129,972		5,801		135,773
Other revenues	1,533		11		1,544		1,523		25		1,548
Total Economic Income Revenues	$	433,542	$	22,939	$	456,481	$	610,092	$	20,784	$	630,876

Economic Income revenues for the year-to-date period decreased by $174.4 million, primarily due to the following:

•

A $96.1 million decrease in management fees, driven primarily by lower assets under management in our multi-strategy funds. This decline in our multi-strategy funds impacted the mix of products that comprise our assets under management, resulting in a lower year-over-year average management fee rate. See “Assets Under Management and Fund Performance—Weighted-Average Assets Under Management and Average Management Fee Rate” above for information regarding our average management fee rate.


•	A $78.3 million decrease in incentive income, primarily due to the following:


◦	Multi-strategy funds. A $77.3 million decrease in incentive income from our multi-strategy funds was due to: (i) a $29.9 million decrease related to fund investor redemptions; (ii) a $21.7 million decrease related to

assets subject to one-year measurement period; (iii) a $15.5 million decrease related to lower tax distributions taken to cover tax liabilities on incentive income that has been accrued on certain longer-term assets under management, but that will not be realized until the end of the relevant commitment period; and (iv) a $10.2 million decrease related to longer-term assets under management.


◦	Opportunistic credit funds. A $7.4 million decrease in incentive income from our opportunistic credit funds, driven primarily by lower tax distributions on certain longer-term assets under management.


◦	Real estate funds. A $7.7 million increase in incentive income from our real estate funds due to a realization event in one of our real estate co-investment vehicles.

Economic Income Expenses (Non-GAAP)



	Three Months Ended September 30, 2016						Three Months Ended September 30, 2015
	Och-Ziff Funds Segment		Other Operations		Total Company		Och-Ziff Funds Segment		Other Operations		Total Company
	(dollars in thousands)
Economic Income Basis
Compensation and benefits	$	33,506	$	2,438	$	35,944	$	33,749	$	2,176	$	35,925
Non-compensation expenses	44,877		605		45,482		54,299		466		54,765
Total Economic Income Expenses	$	78,383	$	3,043	$	81,426	$	88,048	$	2,642	$	90,690

Economic Income expenses for the quarter-to-date period decreased by $9.3 million, primarily due to the following:

•

A $9.3 million decrease in non-compensation expenses, primarily driven by the following: (i) a $5.2 million decrease in professional services; (ii) a $2.2 million decrease in estimated FCPA settlements liability accrual; and (iii) a $1.2 million decrease in business development costs, as well as reductions across a number of other expense categories. The ratio of non-compensation expense, excluding the FCPA settlements liability accrual, to management fees was 40% for the third quarter of 2016, compared to 34% for the third quarter of 2015.

•

Compensation and benefit expenses remained relatively flat period over period due to a $1.6 million decrease in salaries and benefits resulting from a lower number of employees in the current year period and an offsetting increase of $1.7 million in bonus expense. The ratio of salaries and benefits to management fees was 23% for the third quarter of 2016, compared to 18% for the third quarter of 2015.



	Nine Months Ended September 30, 2016						Nine Months Ended September 30, 2015
	Och-Ziff Funds Segment		Other Operations		Total Company		Och-Ziff Funds Segment		Other Operations		Total Company
	(dollars in thousands)
Economic Income Basis
Compensation and benefits	$	98,604	$	7,092	$	105,696	$	95,820	$	6,524	$	102,344
Non-compensation expenses	564,750		2,715		567,465		144,328		1,441		145,769
Total Economic Income Expenses	$	663,354	$	9,807	$	673,161	$	240,148	$	7,965	$	248,113

Economic Income expenses for the year-to-date period increased by $425.0 million, primarily due to the following:

•

A $421.7 million increase in non-compensation expenses, driven by the $412.1 million FCPA settlements liability accrued in 2016, as well as a $9.8 million increase in professional fees primarily due to increased legal expenses relating to the investigation. The ratio of non-compensation expense, excluding the FCPA settlements liability accrual, to management fees was 39% for the first nine months of 2016, compared to 30% for the first nine months of 2015.


•	A $3.4 million increase in compensation and benefit expenses driven by the following: (i) a $1.7 million increase in salaries and benefits due to a higher average number of employees in the current year period; and (ii) a $1.6 million

increase in bonus. The ratio of salaries and benefits to management fees was 22% for the first nine months of 2016, compared to 17% for the first nine months of 2015.

We expect our operating expenses to trend downward in 2017 as the result of recent reductions in our headcount, as well as lower expenses related to our cost saving initiatives and the winding down of legal expenses related to the FCPA investigation.

Other Economic Income Items (Non-GAAP)



	Three Months Ended September 30, 2016								Three Months Ended September 30, 2015
	Och-Ziff Funds Segment			Other Operations		Total Company			Och-Ziff Funds Segment			Other Operations		Total Company
	(dollars in thousands)
Economic Income Basis
Net loss allocated to noncontrolling interests	$	(7	)	$	—	$	(7	)	$	(3	)	$	—	$	(3	)



	Nine Months Ended September 30, 2016								Nine Months Ended September 30, 2015
	Och-Ziff Funds Segment			Other Operations		Total Company			Och-Ziff Funds Segment			Other Operations		Total Company
	(dollars in thousands)
Economic Income Basis
Net loss allocated to noncontrolling interests	$	(12	)	$	—	$	(12	)	$	(10	)	$	—	$	(10	)

Net loss allocated to noncontrolling interests represents amounts that were reduced from Economic Income and allocated to residual interests in certain businesses not owned by us.

Economic Income (Non-GAAP)



	Three Months Ended September 30,				Nine Months Ended September 30,
	2016		2015		2016			2015
	(dollars in thousands)
Economic Income:
Och-Ziff Funds segment	$	52,725	$	106,780	$	(229,800	)	$	369,954
Other Operations	4,695		4,768		13,132			12,819
Total Company	$	57,420	$	111,548	$	(216,668	)	$	382,773

Economic Income for the quarter-to-date period decreased by $54.1 million, primarily due to lower management fees and incentive income, partially offset by lower non-compensation expenses.

Economic Income for the year-to-date period decreased by $599.4 million, primarily due to the $412.1 million FCPA settlements liability accrual recorded in the first nine months of 2016. In addition, lower management fees and incentive income, as well as higher operating expenses also contributed to the year-over-year decrease.

Liquidity and Capital Resources

In September 2016, we entered into the Purchase Agreement with the EMD Purchasers, including Daniel S. Och, to issue up to $400.0 million of Preferred Units. Pursuant to the agreement, in October 2016, we completed a $250.0 million issuance and sale of Preferred Units to the EMD Purchasers and expect to issue and sell to the EMD Purchasers up to an additional $150.0 million of Preferred Units in January 2017, subject to the satisfaction of certain conditions. We used the proceeds from the Preferred Units issued in October 2016, as well as cash on hand, to pay the $412.1 million of penalties and

disgorgement related to the FCPA investigation settlements discussed in Note 15 to our consolidated financial statements included in this report. We expect to use the proceeds from the second sale of the Preferred Units in January 2017 for working capital and general corporate purposes. See Note 17 to our consolidated financial statements for details regarding the terms of the Preferred Units.

The working capital needs of our business have historically been met, and we anticipate will continue to be met, through cash generated from management fees and incentive income earned by the Och-Ziff Operating Group from our funds, as well as other sources of liquidity noted above and below.

Over the next 12 months, we expect that our primary liquidity needs will be to:


•	Pay our operating expenses, primarily consisting of compensation and benefits, as well as any related tax withholding obligations, and non-compensation expenses.


•	Pay interest on our debt obligations.


•	Provide capital to facilitate the growth of our business.


•	Pay income taxes.


•	Make cash distributions in accordance with our distribution policy as discussed below under “—Dividends and Distributions.”

In September 2016, we amended our tax receivable agreement to provide that no amounts will be due or payable under the agreement with respect to the 2015 and 2016 taxable years. See Note 15 to our consolidated financial statements for additional information.

Historically, management fees have been more than sufficient to cover all of our “fixed” operating expenses, which we define as salaries and benefits and our non-compensation costs incurred in the ordinary course of business. While we recently reduced our management fee rates for existing investors in virtually all of our multi-strategy assets under management, we continue to believe that management fees will be sufficient to cover our fixed operating expenses. See “—Weighted-Average Assets Under Management and Average Management Fee Rate” above for additional information on these management fee rate reductions.

We cannot predict the amount of incentive income, if any, which we may earn in any given year. Accordingly, we do not rely on incentive income to meet our fixed operating expenses. Total annual revenues, which are heavily influenced by the amount of annual incentive income we earn, historically have been sufficient to fund all of our other working capital needs, including annual discretionary cash bonuses. These cash bonuses, which historically have comprised our largest cash operating expense, are variable such that in any year where total annual revenues are greater or less than the prior year, cash bonuses may be adjusted accordingly. Our ability to scale our largest cash operating expense to our total annual revenues helps us manage our cash flow and liquidity position from year to year.

Executive managing directors participating in the PIP may be eligible to receive discretionary annual cash awards each year for a five-year period that commenced in 2013, if we earn incentive income in the relevant year. The maximum aggregate amount of cash that may be awarded for each year under the PIP to the participating executive managing directors, collectively, will be capped at 10% of our incentive income earned during that year, up to a maximum aggregate amount of $39.6 million. Whether any cash is awarded under the PIP in a particular year, and the amount of such awards, will be determined by the Compensation Committee of the Board in its sole discretion, based on recommendations from Mr. Och for that year.

Based on our past results, management’s experience and our current level of assets under management, we believe that our existing cash resources, together with the cash generated from management fees, will be sufficient to meet our anticipated fixed operating expenses and other working capital needs for at least the next 12 months. As we have done historically, we will determine the amount of discretionary cash bonuses, including discretionary annual cash awards under the PIP described above, during the fourth quarter of each year, based on our total annual revenues. We intend to fund this amount through fourth quarter management fees and incentive income crystallized on December 31, which represents the majority of the incentive income we typically earn each year. Although we cannot predict the amount, if any, of incentive income we may earn, we are able to regularly

monitor expected management fees and we believe that we will be able to adjust our expense infrastructure, including discretionary cash bonuses, as needed to meet the requirements of our business and in order to maintain positive operating cash flows. Nevertheless, if we generate insufficient cash flows from operations to meet our short-term liquidity needs, we may have to borrow funds or sell assets, subject to existing contractual arrangements.

We may use cash on hand to repay all or a portion of our Senior Notes, the Aircraft Loan and any current or future drawings under the Revolving Credit Facility prior to their respective maturity dates, which would reduce amounts available to distribute to our Class A Shareholders. For any amounts unpaid as of the maturity date, we will be required to repay the remaining balance by using cash on hand, refinancing the remaining balance by issuing new notes or entering into new credit facilities, which could result in higher borrowing costs, or by raising cash by issuing equity or other securities, which would dilute existing shareholders. No assurance can be given that we will be able to issue new notes, enter into new credit facilities or issue equity or other securities in the future on attractive terms or at all. Any new notes or new credit facilities that we may be able to issue or enter into may have covenants that impose additional limitations on us, including with respect to making distributions, entering into business transactions or other matters, and may result in increased interest expense. If we are unable to meet our debt obligations on terms that are favorable to us, our business may be adversely impacted. See “—Debt Obligations” for more information.

For our other longer-term liquidity requirements, we expect to continue to fund our fixed operating expenses through management fees and to fund discretionary cash bonuses and the repayment of our debt obligations through a combination of management fees and incentive income. We may also decide to meet these requirements by borrowing funds under our Revolving Credit Facility or by issuing additional debt, equity or other securities.

Over the long term, we believe we will be able to grow our assets under management and generate positive investment performance in our funds, which we expect will allow us to grow our management fees and incentive income in amounts sufficient to cover our long-term liquidity requirements.

To maintain maximum flexibility to meet demands and opportunities both in the short and long term, and subject to existing contractual arrangements, we may want to retain cash, issue additional equity or borrow additional funds to:


•	Support the future growth in our business.


•	Create new or enhance existing products and investment platforms.


•	Repay borrowings.


•	Pursue new investment opportunities.


•	Develop new distribution channels.


•	Cover potential costs incurred in connection with the legal and regulatory matters described in the notes to our consolidated financial statements included in this report.

Market conditions and other factors may make it more difficult or costly to raise or borrow additional funds. Excessive costs or other significant market barriers may limit or prevent us from maximizing our growth potential and flexibility.

Debt Obligations

Senior Notes

On November 20, 2014, we issued $400.0 million of 4.50% Senior Notes due November 20, 2019, unless earlier redeemed or repurchased. The Senior Notes were issued at a price equal to 99.417% of the aggregate principal amount and bear interest at a rate per annum of 4.50% payable semiannually in arrears. The Senior Notes are unsecured and unsubordinated obligations of the issuer, Och-Ziff Finance, and are fully and unconditionally guaranteed, jointly and severally, on an unsecured and unsubordinated basis by the Och-Ziff Operating Group entities.

Please see Note 10 to our consolidated financial statements included in this report for a description of the redemption provisions and restrictions under the Senior Notes.

Revolving Credit Facility

On November 20, 2014, we entered into the $150.0 million, five-year unsecured Revolving Credit Facility, which was subsequently amended on December 29, 2015, the proceeds of which may be used for working capital, general corporate purposes or other liquidity needs. The facility matures on November 20, 2019. The borrower under the Revolving Credit Facility is OZ Management and the facility is guaranteed by OZ Advisors I, OZ Advisors II and Och-Ziff Finance. We are able to increase the maximum amount of credit available under the facility to $225.0 million if certain conditions are satisfied. As of September 30, 2016, we had $120.0 million of outstanding borrowings under the facility.

We are subject to a fee of 0.10% to 0.25% per annum on undrawn commitments during the term of the Revolving Credit Facility. Outstanding borrowings will bear interest at a rate per annum of LIBOR plus 1.00% to 2.00%, or a base rate plus zero to 1.00%. The commitment fees and the spreads over LIBOR or the base rate are based on OZ Management’s credit rating throughout the term of the facility. The interest rate on the drawn portion of the commitment as of September 30, 2016 was LIBOR plus 1.75%, and the undrawn commitment fee was 0.20%.

Please see Note 10 to our consolidated financial statements included in this report for a description of the financial covenants and restrictions under the Revolving Credit Facility.

Aircraft Loan

On February 14, 2014, we entered into the Aircraft Loan to finance installment payments towards the purchase of a new corporate aircraft that was delivered to us in February 2015. The Aircraft Loan is guaranteed by OZ Management, OZ Advisors I and OZ Advisors II. As of September 30, 2016, $47.8 million was outstanding under the Aircraft Loan.

Tax Receivable Agreement

We have made, and may in the future be required to make, payments under the tax receivable agreement that we entered into with our executive managing directors and the Ziffs. The purchase by the Och-Ziff Operating Group of Och-Ziff Operating Group A Units from our executive managing directors and the Ziffs with proceeds from the 2007 Offerings, and subsequent taxable exchanges by them 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), resulted, and, in the case of future exchanges, are anticipated to result, in an increase in the tax basis of the assets of the Och-Ziff Operating Group that would not otherwise have been available. We anticipate that any such tax basis adjustment resulting from an exchange will be allocated principally to certain intangible assets of the Och-Ziff Operating Group, and we will derive our tax benefits principally through amortization of these intangibles over a 15-year period from the date of the 2007 Offerings or the date of any subsequent exchange. Consequently, these tax basis adjustments will increase, for tax purposes, our depreciation and amortization expenses and will therefore reduce the amount of tax that Och-Ziff Corp and any other corporate taxpaying entities that hold Och-Ziff Operating Group B Units in connection with an exchange, if any, would otherwise be required to pay in the future. Accordingly, pursuant to the tax receivable agreement, such corporate taxpaying entities (including Och-Ziff Capital Management Group LLC if it is treated as a corporate taxpayer) have agreed to pay our executive managing directors and the Ziffs 85% of the amount of cash savings, if any, in federal, state and local income taxes in the United States that these entities actually realize related to their units as a result of such increases in tax basis.

In connection with the departure of certain former executive managing directors since the 2007 Offerings, the right to receive payments under the tax receivable agreement by those former executive managing directors was contributed to the Och-Ziff Operating Group. As a result, we expect to pay to the other executive managing directors and the Ziffs approximately 78% (from 85% at the time of the 2007 Offerings) of the amount of cash savings, if any, in federal, state and local income taxes in the United States that we actually realize as a result of such increases in tax basis. To the extent that we do not realize any cash savings, we would not be required to make corresponding payments under the tax receivable agreement.

Payments under the tax receivable agreement are anticipated to increase the tax basis adjustment of intangible assets resulting from a prior exchange, with such increase being amortized over the remainder of the amortization period applicable to the original basis adjustment of such intangible assets resulting from such prior exchange. It is anticipated that this will result in increasing annual amortization deductions in the taxable years of and after such increases to the original basis adjustments, and potentially will give rise to increasing tax savings with respect to such years and correspondingly increasing payments under the tax receivable agreement.

Assuming no material changes in the relevant tax law and that we generate sufficient taxable income to realize the full tax benefit of the increased amortization resulting from the increase in tax basis of our assets, we will be obligated to make payments, except as noted otherwise, to our executive managing directors and the Ziffs as a result of the cash savings to our intermediate holding companies from the purchase of Och-Ziff Operating Group A Units from our executive managing directors and the Ziffs with proceeds from the 2007 Offerings and the exchange of Och-Ziff Operating Group A Units for Class A Shares. Future cash savings and related payments to our executive managing directors under the tax receivable agreement in respect of subsequent exchanges would be in addition to these amounts. The obligation to make payments under the tax receivable agreement is an obligation of Och-Ziff Corp, and any other corporate taxpaying entities that hold Och-Ziff Operating Group B Units, and not of the Och-Ziff Operating Group entities. We may need to incur debt to finance payments under the tax receivable agreement to the extent the entities within the Och-Ziff Operating Group do not distribute cash to our intermediate corporate tax paying entities in an amount sufficient to meet our obligations under the tax receivable agreement.

The actual increase in tax basis of the Och-Ziff Operating Group assets resulting from an exchange or from payments under the tax receivable agreement, as well as the amortization thereof and the timing and amount of payments under the tax receivable agreement, will vary based upon a number of factors, including the following:


•	The amount and timing of the income of Och-Ziff Corp will impact the payments to be made under the tax receivable agreement. To the extent that Och-Ziff Corp does not have sufficient taxable income to utilize the amortization deductions available as a result of the increased tax basis in the Och-Ziff Operating Group assets, payments required under the tax receivable agreement would be reduced.


•	The price of our Class A Shares at the time of any exchange will determine the actual increase in tax basis of the Och-Ziff Operating Group assets resulting from such exchange; payments under the tax receivable agreement resulting from future exchanges, if any, will be dependent in part upon such actual increase in tax basis.


•	The composition of the Och-Ziff Operating Group’s assets at the time of any exchange will determine the extent to which Och-Ziff Corp may benefit from amortizing its increased tax basis in such assets and thus will impact the amount of future payments under the tax receivable agreement resulting from any future exchanges.


•	The extent to which future exchanges are taxable will impact the extent to which Och-Ziff Corp will receive an increase in tax basis of the Och-Ziff Operating Group assets as a result of such exchanges, and thus will impact the benefit derived by Och-Ziff Corp and the resulting payments, if any, to be made under the tax receivable agreement.


•	The tax rates in effect at the time any potential tax savings are realized, which would affect the amount of any future payments under the tax receivable agreement.

Depending upon the outcome of these factors, payments that we may be obligated to make to our executive managing directors and the Ziffs under the tax receivable agreement in respect of exchanges could be substantial. In light of the numerous factors affecting our obligation to make payments under the tax receivable agreement, the timing and amounts of any such actual payments are not reasonably ascertainable.

In September 2016, we amended the tax receivable agreement to provide that no amounts will be due or payable under the agreement with respect to the 2015 and 2016 taxable years. As a result, we released approximately $91.0 million of previously accrued tax receivable agreement liability.

Dividends and Distributions

We intend to distribute to our Class A Shareholders substantially all of their pro rata share of our annual Economic Income (as described above under “—Economic Income Analysis”) in excess of amounts determined by us to be necessary or appropriate to provide for the conduct of our business, to pay income taxes, to pay any amounts owed under the tax receivable agreement, to make appropriate investments in our business and our funds, to make payments on any of our other obligations, to fund the repurchase of Class A Shares or interests in the Och-Ziff Operating Group, as well as to fund distributions on the Preferred Units starting in 2020.

Pursuant to the terms of the Preferred Units, distributions will be payable on the liquidation preference amount on a cumulative basis at an initial distribution rate of 0% per annum until February 19, 2020 (the “Step Up Date”), after which the distribution rate will increase in stages thereafter to a maximum of 10% per annum on and after the eighth anniversary of the Step Up Date. Subject to certain exceptions, unless distributions on the Preferred Units are declared and paid in cash for the then current distribution period and all preceding periods after the initial closing of the Preferred Units, the Operating Group Entities may not declare or pay distributions on or repurchase any of their equity securities that rank equal with or junior to the Preferred Units.

When we pay dividends on our Class A Shares, we also intend to make distributions to our executive managing directors on their interests in the Och-Ziff Operating Group, subject to the terms of the limited partnership agreements of the Och-Ziff Operating Group entities.

The declaration and payment of future distributions will be at the sole discretion of our Board of Directors, which may change our distribution policy or reduce or eliminate our distributions at any time in its discretion. Our Board of Directors will take into account such factors as it may deem relevant, including 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 term loan; legal, tax and regulatory restrictions; other restrictions and limitations 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.

The declaration and payment of any distribution may be subject to legal, contractual or other restrictions. For example, as a Delaware limited liability company, Och-Ziff Capital Management Group LLC is not permitted to make distributions if and to the extent that after giving effect to such distributions, its liabilities would exceed the fair value of its assets. Our cash needs and payment obligations may fluctuate significantly from quarter to quarter, and we may have material unexpected expenses in any period. This may cause amounts available for distribution to significantly fluctuate from quarter to quarter or may reduce or eliminate such amounts.

Additionally, RSUs outstanding accrue dividend equivalents equal to the dividend amounts paid on our Class A Shares. To date, these dividend equivalents have been awarded in the form of additional RSUs, which accrue additional dividend equivalents. The dividend equivalents will only be paid if the related RSUs vest and will be settled at the same time as the underlying RSUs. Our Board of Directors has the right to determine whether the RSUs and any related dividend equivalents will be settled in Class A Shares or in cash. We currently withhold shares to satisfy the tax withholding obligations related to vested RSUs and dividend equivalents held by our employees, which results in the use of cash from operations or borrowings to satisfy these tax-withholding payments.

In accordance with the Och-Ziff Operating Group entities’ limited partnership agreements, we may cause the applicable Och-Ziff Operating Group entities to distribute cash to the intermediate holding companies and our executive managing directors in an amount at least equal to the presumed maximum tax liabilities arising from their direct ownership in these entities. The presumed maximum tax liabilities are based upon the presumed maximum income allocable to any such unit holder at the maximum combined U.S. federal, New York State and New York City tax rates. Holders of our Class A Shares may not always receive distributions at a time when our intermediate holding companies and our executive managing directors are receiving distributions on their interests, as distributions to our intermediate holding companies may be used to settle tax liabilities, if any, or other obligations. Such tax distributions will take into account the disproportionate income allocation (but not a disproportionate cash allocation) to the unit holders with respect to “built-in gain assets,” if any, at the time of the 2007

Offerings. Consequently, Och-Ziff Operating Group tax distributions may be greater than if such assets had a tax basis equal to their value at the time of the 2007 Offerings.

Our cash distribution policy has certain risks and limitations, particularly with respect to our liquidity. Although we expect to pay distributions according to our policy, we may not make distributions according to our policy, or at all, if, among other things, we do not have the cash necessary to pay the distribution. Moreover, if the Och-Ziff Operating Group’s cash flows from operations are insufficient to enable it to make required minimum tax distributions discussed above, 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 obligations, operations, new investments or unanticipated capital expenditures, should the need arise. In such event, we may not be able to execute our business and growth strategy to the extent intended.

Our Funds’ Liquidity and Capital Resources

Our funds have access to liquidity from our prime brokers and other counterparties. Additionally, our funds may have committed facilities in addition to regular financing from our counterparties. These sources of liquidity provide our funds with additional financing resources, allowing them to take advantage of opportunities in the global marketplace.

Our funds’ current liquidity position could be adversely impacted by any substantial, unanticipated investor redemptions from our funds that are made within a short time period. As discussed above in “—Assets Under Management and Fund Performance,” capital contributions from investors in our multi-strategy and open-end opportunistic credit funds generally are subject to initial lock-up periods of one to three years. Following the expiration of these lock-up periods, subject to certain limitations, investors may redeem capital generally on a quarterly or annual basis upon giving 30 to 90 days’ prior written notice. These lock-ups and redemption notice periods help us to manage our liquidity position. However, upon the payment of a redemption fee to the applicable fund and upon giving 30 days’ prior written notice, certain investors may redeem capital during the lock-up period. Investors in our other funds are generally not allowed to redeem until the end of the life of the fund.

We also follow a rigorous risk management process and regularly monitor the liquidity of our funds’ portfolios in relation to economic and market factors and the timing of potential investor redemptions. As a result of this process, we may determine to reduce exposure or increase the liquidity of our funds’ portfolios at any time, whether in response to global economic and market conditions, redemption requests or otherwise. For these reasons, we believe we will be well prepared to address market conditions and redemption requests, as well as any other events, with limited impact on our funds’ liquidity position. Nevertheless, significant redemptions made during a single quarter could adversely affect our funds’ liquidity position, as we may meet redemptions by using our funds’ available cash or selling assets (possibly at a loss). Such actions would result in lower assets under management, which would reduce the amount of management fees and incentive income we may earn. Our funds could also meet redemption requests by increasing leverage, provided we are able to obtain financing on reasonable terms, if at all. We believe our funds have sufficient liquidity to meet any anticipated redemptions for the foreseeable future.

Cash Flows Analysis

Operating Activities. Net cash from operating activities for the nine months ended September 30, 2016 and 2015 was $89.2 million and $412.2 million, respectively. Our net cash flows from operating activities are generally comprised of current-year management fees, the collection of incentive income earned during the fourth quarter of the previous year, less cash operating expenses. Additionally, net cash from operating activities also includes the investment activities of the funds we consolidate. These investment-related cash flows are of the consolidated funds and do not directly impact the cash flows related to our Class A Shareholders.

The decrease in net cash from operating activities was primarily due to lower earnings in the first nine months of 2016 compared to the first nine months of 2015, as well as lower incentive income earned in 2015 compared to 2014, partially offset by lower discretionary bonuses in 2015 compared to 2014. The majority of our incentive income is generally collected and the related bonus payments are paid out during the first quarter of the following year. Partially offsetting these decreases were lower cash outflows in 2016 related to the investment activities of the consolidated funds, which was the result of the deconsolidation of the majority of our funds upon the adoption of ASU 2015-02 on January 1, 2016.

In October 2016, we paid $412.1 million of penalties and disgorgement related to the FCPA settlements with the SEC and the DOJ. The payments were made using proceeds from the sale of Preferred Units, as well as cash on hand. For additional information on Preferred Units, see Note 17 to our consolidated financial statements included in this report.

Investing Activities. Net cash used in investing activities for the nine months ended September 30, 2016 and 2015 was $30.2 million and $38.6 million, respectively. Investing cash flows in 2016 primarily related to the purchases and maturities of U.S. government obligations to manage excess liquidity. Investing cash flows in 2015 primarily related to leasehold improvements in our New York headquarters. Investment-related cash flows of the consolidated Och-Ziff funds are classified within operating activities.

Financing Activities. Net cash from financing activities for the nine months ended September 30, 2016 and 2015 was $117.4 million and $(312.9) million, respectively. Our net cash from financing activities are generally comprised of dividends paid to our Class A Shareholders and borrowings and repayments related to our debt obligations. Contributions from noncontrolling interests, which relate to fund investor contributions into the consolidated funds, and distributions to noncontrolling interests, which relate to fund investor redemptions and distributions to our executive managing directors on their Och-Ziff Operating Group A Units, are also included in net cash from financing activities.

On April 29, 2016, we borrowed $120.0 million pursuant to our Revolving Credit Facility.

We paid dividends to our Class A Shareholders of $146.3 million and paid distributions to our executive managing directors on the Och-Ziff Operating Group A Units of $304.9 million for the nine months ended September 30, 2015. We did not pay any dividends or distributions on our Class A Shares or Och-Ziff Operating Group A Units in the first nine months of 2016.

In October 2016, we sold $250.0 million of Preferred Units to certain executive managing directors. We expect to sell up to an additional $150.0 million of Preferred Units in January 2017. See Note 17 to our consolidated financial statements included in this report for additional information.

Contractual Obligations

The following are the only material changes to the contractual obligations as presented in our Annual Report:


•	During the second quarter of 2016, we borrowed $120.0 million pursuant to our Revolving Credit Facility, as discussed above.


•	In September 2016, we amended the tax receivable agreement to provide that no amounts will be due or payable under the agreement with respect to the 2015 and 2016 taxable years. As a result, we released approximately $91.0 million of previously accrued tax receivable agreement liability.


•	Notes and loans payable of consolidated CLOs are no longer on our balance sheet as a result of the deconsolidation of the majority of our funds upon the adoption of ASU 2015-02 on January 1, 2016, as discussed in Note 3 to our consolidated financial statements included in this report.

Off-Balance Sheet Arrangements

As of September 30, 2016, we did not have any off-balance sheet arrangements.

Critical Accounting Policies and Estimates

Critical accounting policies are those that require us to make significant judgments, estimates or assumptions that affect amounts reported in our financial statements or the notes thereto. We base our judgments, estimates and assumptions on current facts, historical experience and various other factors that we believe to be reasonable and prudent. Actual results may differ materially from these estimates. See Note 2 to our consolidated financial statements included in our Annual Report for a description of our accounting policies. Set forth below is a summary of what we believe to be our most critical accounting policies and estimates.

Fair Value of Investments

The valuation of investments held by our funds is the most critical estimate made by management impacting our results. Pursuant to specialized accounting for investment companies under GAAP, investments held by the Och-Ziff funds are carried at their estimated fair values. The valuation of investments held by our funds has a significant impact on our results, as our management fees and incentive income are generally determined based on the fair value of these investments.

GAAP prioritizes the level of market price observability used in measuring assets and liabilities at fair value. Market price observability is impacted by a number of factors, including the type of assets and liabilities and the specific characteristics of the assets and liabilities. Assets and liabilities with readily available, actively quoted prices (Level I) or for which fair value can be measured from actively quoted prices (Level II) generally will have a higher degree of market price observability and lesser degree of judgment used in measuring fair value than those measured using pricing inputs that are unobservable in the market (Level III). See Note 5 to our consolidated financial statements included in this report for additional information regarding fair value measurements.

As of September 30, 2016, the absolute values of our funds’ invested assets and liabilities (excluding the notes and loans payable of our CLOs) were classified within the fair value hierarchy as follows: approximately 48% within Level I; approximately 30% within Level II; and approximately 22% within Level III. As of December 31, 2015, the absolute values of our funds’ invested assets and liabilities (excluding the notes and loans payable of our CLOs) were classified within the fair value hierarchy as follows: approximately 48% within Level I; approximately 27% within Level II; and approximately 25% within Level III. The percentage of our funds’ assets and liabilities within the fair value hierarchy will fluctuate based on the investments made at any given time and such fluctuations could be significant. A portion of our funds’ Level III assets relate to Special Investments or other investments on which we do not earn any incentive income until such investments are sold or otherwise realized. Upon the sale or realization event of these assets, any realized profits are included in the calculation of incentive income for such year. Accordingly, the estimated fair value of our funds’ Level III assets may not have any relation to the amount of incentive income actually earned with respect to such assets.

Valuation of Investments. Fair value represents the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants as of the measurement date. The fair value of our funds’ investments is based on observable market prices when available. Such values are generally based on the last sales price. We, as the investment manager of the Och-Ziff funds, determine the fair value of investments that are not actively traded on a recognized securities exchange or otherwise lack a readily ascertainable market value. The methods and procedures to value these investments may include, but are not limited to: (i) performing comparisons with prices of comparable or similar securities; (ii) obtaining valuation-related information from the issuers; (iii) calculating the present value of future cash flows; (iv) assessing other analytical data and information relating to the investment that is an indication of value; (v) obtaining information provided by third parties; and (vi) evaluating financial information provided by the management of these investments. See Note 5 to our consolidated financial statements included in this report for additional information.

Significant judgment and estimation goes into the assumptions that drive our valuation methodologies and procedures for assets that are not actively traded on a recognized securities exchange or otherwise lack a readily ascertainable market value. The actual amounts ultimately realized could differ materially from the values estimated based on the use of these methodologies. Realizations at values significantly lower than the values at which investments have been reflected could result in losses at the fund level and a decline in future management fees and incentive income. Such situations may also negatively impact fund investor perception of our valuation policies and procedures, which could result in redemptions and difficulties in raising additional capital.

We have established an internal control infrastructure over the valuation of financial instruments that includes ongoing oversight by our Financial Controls Group and Valuation Committee, as well as periodic audits by our Internal Audit Group. These management control functions are segregated from the trading and investing functions. See Note 5 to our consolidated financial statements included in this report for additional information regarding our valuation procedures and related oversight and controls.

Impact of Fair Value Measurement on Our Results. A 10% change in the estimate of fair value of the investments held by our funds would generally have a 10% change in management fees in the period subsequent to the change in fair value, as

management fees are charged based on the assets under management at the beginning of the period. For our real estate funds and certain other funds, there would be no impact as management fees are generally charged based on committed capital during the original investment period and invested capital thereafter. The impact of a 10% change in unrealized gains and losses of the investments held by our funds would generally have an immediate 10% impact on the amount of profit on which we earn our 20% incentive income if the change continues at the end of the commitment period, at which time incentive income is recognized, and assuming no hurdle rates and no high-water marks from any prior-year losses. For certain opportunistic credit, real estate and certain other funds, there would be no impact, as incentive income is recognized based on realized profits and when no longer subject to clawback.

For additional information regarding the impact that the fair value measurement of assets under management has on our results, please see “Part I—Item 3. Quantitative and Qualitative Disclosures about Market Risk.”

Variable Interest Entities

The determination of whether or not to consolidate a variable interest entity under GAAP requires a significant amount of judgment concerning the degree of control over an entity by its holders of variable interests. To make these judgments, management has conducted an analysis, on a case-by-case basis, of the relationship of the holders of variable interests to each other, the design of the entity, the expected operations of the entity, which holder of variable interests within a related party group is most “closely associated” to the entity and which holder of variable interests is the primary beneficiary required to consolidate the entity. Upon the occurrence of certain events, such as redemptions by unaffiliated investors in any fund or modifications to fund organizational documents and investment management agreements, management reviews and reconsiders its previous conclusion regarding the status of an entity as a variable interest entity. Additionally, management continually reconsiders whether we should consolidate a variable interest entity.

Income Taxes

We use the asset and liability method of accounting for deferred income taxes. Under this method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the carrying amounts of existing assets and liabilities and their respective tax bases. A valuation allowance is established when management believes it is more likely than not that a deferred income tax asset will not be realized.

Substantially all of our deferred income tax assets relate to the goodwill and other intangible assets deductible for tax purposes by Och-Ziff Corp that arose in connection with the purchase of Och-Ziff Operating Group A Units from our executive managing directors and the Ziffs with proceeds from the 2007 Offerings, subsequent exchanges of Och-Ziff Operating Group A Units for Class A Shares and subsequent payments to our executive managing directors and the Ziffs made under the tax receivable agreement, in addition to any related net operating loss carryforward. In accordance with relevant provisions of the Internal Revenue Code, we expect to take these goodwill and other intangible deductions over the 15-year period following the 2007 Offerings, as well as an additional 20-year loss carryforward period available to us in any year a net operating loss is generated as a result. Our analysis of whether we expect to have sufficient future taxable income to realize these deductions is based solely on estimates over this period.

Och-Ziff Corp generated taxable income of $74.9 million for the nine months ended September 30, 2016, before taking into account deductions related to the amortization of the goodwill and other intangible assets. We determined that we would need to generate taxable income of at least $1.6 billion over the remaining seven-year weighted-average amortization period, as well as an additional 20-year loss carryforward period available to us if a net operating loss is generated, in order to fully realize the deferred income tax assets. Using the estimates and assumptions discussed below, we expect to generate sufficient taxable income over the remaining amortization and loss carryforward periods available to us in order to fully realize these deferred income tax assets.

To generate $1.6 billion in taxable income over the remaining amortization and loss carryforward periods available to us, we estimated that, based on assets under management of $36.9 billion as of October 1, 2016, we would need to generate a minimum compound annual growth rate in assets under management of less than 1% over the period for which the taxable income estimate relates to fully realize the deferred income tax assets, assuming no performance-related growth, and therefore no incentive income. The assumed nature and amount of this estimated growth rate are not based on historical results or current

expectations of future growth; however, the other assumptions underlying the taxable income estimate, such as general maintenance of current expense ratios and cost allocation percentages among the Och-Ziff Operating Group entities, which impact the amount of taxable income flowing through our legal structure, are based on our near-term operating budget. If our actual growth rate in assets under management falls below this minimum threshold for any extended time during the period for which these estimates relate and we do not otherwise experience offsetting growth rates in other periods, we may not generate taxable income sufficient to realize the deferred income tax assets and may need to record a valuation allowance.

Management regularly reviews the model used to generate the estimates, including the underlying assumptions. If it determines that a valuation allowance is required for any reason, the amount would be determined based on the relevant circumstances at that time. To the extent we record a valuation allowance against our deferred income tax assets related to the goodwill and other intangible assets, we would record a corresponding decrease in the liability to our executive managing directors and the Ziffs under the tax receivable agreement equal to approximately 78% of such amount; therefore, our net income allocated to Class A Shareholders would only be impacted by 22% of any valuation allowance recorded against the deferred income tax assets.

Actual taxable income may differ from the estimate described above, which was prepared solely for determining whether we currently expect to have sufficient future taxable income to realize the deferred income tax assets. Furthermore, actual or estimated future taxable income may be materially impacted by significant changes in assets under management, whether as a result of fund investment performance or fund investor contributions or redemptions, significant changes to the assumptions underlying our estimates, future changes in income tax law, state income tax apportionment or other factors.

As of September 30, 2016, we had $143.7 million of net operating losses available to offset future taxable income for federal income tax purposes that will expire between 2030 and 2036, and $101.9 million of net operating losses available to offset future taxable income for state income tax purposes and $93.9 million for local income tax purposes that will expire between 2035 and 2036. Based on the analysis set forth above, as of September 30, 2016, we have determined that it is not necessary to record a valuation allowance with respect to our deferred income tax assets related to the goodwill and other intangible assets deductible for tax purposes, and any related net operating loss carryforward. However, we have determined that we may not realize certain foreign income tax credits. Accordingly, a valuation allowance of $7.8 million has been established for these credits.

Impact of Recently Adopted Accounting Pronouncements on Recent and Future Trends

Accounting Standards Updates (“ASU”) 2015-02, Amendments to the Consolidation Analysis. ASU 2015-02 significantly changed the consolidation analysis required under GAAP, and resulted in the deconsolidation of the majority of the previously consolidated Och-Ziff funds, including all of the CLOs. The deconsolidation of the majority of the previously consolidated funds resulted in a substantial decrease in assets of consolidated Och-Ziff funds, liabilities of consolidated Och-Ziff funds, redeemable noncontrolling interests, appropriated retained deficit and shareholders’ equity attributable to noncontrolling interests in our consolidated balance sheet. Additionally, the deconsolidation has caused a significant decrease in the amount of income of consolidated Och-Ziff funds, expenses of consolidated Och-Ziff funds, and net gains (losses) of consolidated Och-Ziff funds in our consolidated statement of comprehensive income (loss). Management fees and incentive income from the previously consolidated funds are also no longer eliminated in consolidation.

The net impact to our results is that incentive income from the previously consolidated funds will now be recognized when such amounts are no longer subject to clawback. Prior to deconsolidation, incentive income from these previously consolidated funds was recognized by allocating a portion of the net income of these funds to us rather than to the fund investors (noncontrolling interests) based on the contractual terms of the relevant fund agreements. This resulted in incentive income being recognized that was subject to clawback in the event of future losses in the respective funds.

The adoption of ASU 2015-02 did not have any effect on Economic Income. See Notes 2 and 3 to our consolidated financial statements included in this report for additional information.

None of the other changes to GAAP that went into effect during the nine months ended September 30, 2016 are expected to have an impact on our future trends.

Expected Impact of Future Adoption of New Accounting Pronouncements on Future Trends

The Financial Accounting Standards Board (the “FASB”) has issued various ASUs that could have an impact on our future trends. For additional details regarding these ASUs, including allowable methods of adoption (e.g., full retrospective or modified retrospective), see Note 2 to our consolidated financial statements included in this report. Below is a summary of ASUs that may have an impact on our future trends upon adoption.

ASU 2014-09, Revenue from Contracts with Customers. ASU 2014-09 supersedes the revenue recognition requirements in ASC 605—Revenue Recognition and most industry-specific guidance throughout the Codification. The requirements of ASU 2014-09 were initially effective for us beginning in the first quarter of 2017; however, the FASB in April 2015 approved a deferral of the effective date to the first quarter of 2018. We are currently evaluating the impact that this update will have on our future trends.

ASU 2016-02, Leases. ASU 2016-02 significantly changes accounting for lease arrangements, in particular from the perspective of the lessee. Upon adoption of the ASU, where we are the lessee, we will likely be required to recognize certain lease arrangements on our balance sheet for the first time, but will continue to recognize associated expenses on our statement of comprehensive income in a manner similar to existing accounting principles. The requirements of ASU 2016-02 are effective for us beginning in the first quarter of 2019. We are currently evaluating the impact that this update will have on our future trends.

ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 will change how companies account for certain aspects of share-based payments to employees. The requirements of ASU 2016-09 are effective for us beginning in the first quarter of 2017 with early adoption permitted. We are currently evaluating the impact that this update will have on our future trends.

The other changes to GAAP that have been issued but that have not yet been adopted are not expected to have an impact on our future trends.

Economic Income Reconciliations

The tables below present the reconciliations of Economic Income and its components to the respective GAAP measures for the periods presented in this MD&A.

Economic Income



	Three Months Ended September 30, 2016
	Och-Ziff Funds Segment			Other Operations			Total Company

	(dollars in thousands)
Net income allocated to Class A Shareholders—GAAP	$	13,160		$	1,125		$	14,285
Net income allocated to the Och-Ziff Operating Group A Units	16,313			—			16,313
Equity-based compensation, net of RSUs settled in cash	17,709			589			18,298
Income taxes	9,887			99			9,986
Allocations to Och-Ziff Operating Group D Units	950			—			950
Adjustment for expenses related to compensation and profit-sharing arrangements based on fund investment performance	—			2,741			2,741
Changes in tax receivable agreement liability	(11,819		)	—			(11,819		)
Depreciation, amortization and loss on asset held for sale	7,776			189			7,965
Other adjustments	(1,251		)	(48		)	(1,299		)
Economic Income—Non-GAAP	$	52,725		$	4,695		$	57,420



	Three Months Ended September 30, 2015
	Och-Ziff Funds Segment		Other Operations			Total Company

	(dollars in thousands)
Net income allocated to Class A Shareholders—GAAP	$	12,640	$	4,777		$	17,417
Net income allocated to the Och-Ziff Operating Group A Units	43,505		—			43,505
Equity-based compensation, net of RSUs settled in cash	26,983		564			27,547
Income taxes	12,422		—			12,422
Adjustment for incentive income allocations from consolidated funds subject to clawback	642		(4,026		)	(3,384		)
Allocations to Och-Ziff Operating Group D Units	3,109		138			3,247
Adjustment for expenses related to compensation and profit-sharing arrangements based on fund investment performance	—		3,813			3,813
Reorganization expenses	4,018		—			4,018
Changes in tax receivable agreement liability	533		—			533
Depreciation, amortization and loss on asset held for sale	2,797		189			2,986
Other adjustments	131		(687		)	(556		)
Economic Income—Non-GAAP	$	106,780	$	4,768		$	111,548



	Nine Months Ended September 30, 2016
	Och-Ziff Funds Segment			Other Operations		Total Company

	(dollars in thousands)
Net (loss) income allocated to Class A Shareholders—GAAP	$	(138,649	)	$	5,007	$	(133,642	)
Net (loss) income allocated to the Och-Ziff Operating Group A Units	(187,338		)	—		(187,338		)
Equity-based compensation, net of RSUs settled in cash	54,364			1,947		56,311
Income taxes	39,337			99		39,436
Allocations to Och-Ziff Operating Group D Units	2,850			—		2,850
Adjustment for expenses related to compensation and profit-sharing arrangements based on fund investment performance	—			5,430		5,430
Changes in tax receivable agreement liability	(11,990		)	—		(11,990		)
Depreciation, amortization and loss on asset held for sale	14,385			562		14,947
Other adjustments	(2,759		)	87		(2,672		)
Economic Income—Non-GAAP	$	(229,800	)	$	13,132	$	(216,668	)



	Nine Months Ended September 30, 2015
	Och-Ziff Funds Segment			Other Operations			Total Company

	(dollars in thousands)
Net income allocated to Class A Shareholders—GAAP	$	4,774		$	43,274		$	48,048
Net income allocated to the Och-Ziff Operating Group A Units	175,239			—			175,239
Equity-based compensation, net of RSUs settled in cash	84,257			2,333			86,590
Income taxes	119,607			—			119,607
Adjustment for incentive income allocations from consolidated funds subject to clawback	(184		)	(40,478		)	(40,662		)
Allocations to Och-Ziff Operating Group D Units	13,995			701			14,696
Adjustment for expenses related to compensation and profit-sharing arrangements based on fund investment performance	—			7,407			7,407
Reorganization expenses	12,052			—			12,052
Changes in tax receivable agreement liability	(47,893		)	—			(47,893		)
Depreciation, amortization and loss on asset held for sale	7,575			560			8,135
Other adjustments	532			(978		)	(446		)
Economic Income—Non-GAAP	$	369,954		$	12,819		$	382,773

Economic Income Revenues



	Three Months Ended September 30, 2016								Three Months Ended September 30, 2015
	Och-Ziff Funds Segment			Other Operations		Total Company			Och-Ziff Funds Segment			Other Operations		Total Company

	(dollars in thousands)
Management fees—GAAP	$	123,329		$	5,184	$	128,513		$	157,421		$	5,357	$	162,778
Adjustment to management fees⁽¹⁾	(8,808		)	—		(8,808		)	(75		)	—		(75		)
Management Fees—Economic Income Basis—Non-GAAP	114,521			5,184		119,705			157,346			5,357		162,703

Incentive income—GAAP	16,202			2,552		18,754			35,615			—		35,615
Adjustment to incentive income⁽²⁾	—			—		—			1,292			2,046		3,338
Incentive Income—Economic Income Basis—Non-GAAP	16,202			2,552		18,754			36,907			2,046		38,953
Other revenues	378			2		380			572			7		579
Total Revenues—Economic Income Basis—Non-GAAP	$	131,101		$	7,738	$	138,839		$	194,825		$	7,410	$	202,235



	Nine Months Ended September 30, 2016								Nine Months Ended September 30, 2015
	Och-Ziff Funds Segment			Other Operations		Total Company			Och-Ziff Funds Segment			Other Operations		Total Company

	(dollars in thousands)
Management fees—GAAP	$	413,266		$	15,556	$	428,822		$	481,249		$	14,958	$	496,207
Adjustment to management fees⁽¹⁾	(31,362		)	—		(31,362		)	(2,652		)	—		(2,652		)
Management Fees—Economic Income Basis—Non-GAAP	381,904			15,556		397,460			478,597			14,958		493,555

Incentive income—GAAP	50,105			7,372		57,477			121,262			—		121,262
Adjustment to incentive income⁽²⁾	—			—		—			8,710			5,801		14,511
Incentive Income—Economic Income Basis—Non-GAAP	50,105			7,372		57,477			129,972			5,801		135,773
Other revenues	1,533			11		1,544			1,523			25		1,548
Total Revenues—Economic Income Basis—Non-GAAP	$	433,542		$	22,939	$	456,481		$	610,092		$	20,784	$	630,876

_______________


(1)	Adjustment to present management fees net of recurring placement and related service fees, as management considers these fees a reduction in management fees, not an expense. The impact of eliminations related to the consolidated Och-Ziff funds is also removed.


(2)	Adjustment to exclude the impact of eliminations related to the consolidated Och-Ziff funds.

Economic Income Expenses



	Three Months Ended September 30, 2016									Three Months Ended September 30, 2015
	Och-Ziff Funds Segment			Other Operations			Total Company			Och-Ziff Funds Segment			Other Operations			Total Company

	(dollars in thousands)
Compensation and benefits—GAAP	$	51,990		$	5,768		$	57,758		$	63,912		$	6,690		$	70,602
Adjustment to compensation and benefits⁽¹⁾	(18,484		)	(3,330		)	(21,814		)	(30,163		)	(4,514		)	(34,677		)
Compensation and Benefits—Economic Income Basis—Non-GAAP	$	33,506		$	2,438		$	35,944		$	33,749		$	2,176		$	35,925

Interest expense and general, administrative and other expenses—GAAP	$	49,641		$	794		$	50,435		$	70,212		$	655		$	70,867
Adjustment to interest expense and general, administrative and other expenses⁽²⁾	(4,764		)	(189		)	(4,953		)	(15,913		)	(189		)	(16,102		)
Non-Compensation Expenses—Economic Income Basis—Non-GAAP	$	44,877		$	605		$	45,482		$	54,299		$	466		$	54,765



	Nine Months Ended September 30, 2016									Nine Months Ended September 30, 2015
	Och-Ziff Funds Segment			Other Operations			Total Company			Och-Ziff Funds Segment			Other Operations			Total Company

	(dollars in thousands)
Compensation and benefits—GAAP	$	155,293		$	14,469		$	169,762		$	194,931		$	16,964		$	211,895
Adjustment to compensation and benefits⁽¹⁾	(56,689		)	(7,377		)	(64,066		)	(99,111		)	(10,440		)	(109,551		)
Compensation and Benefits—Economic Income Basis—Non-GAAP	$	98,604		$	7,092		$	105,696		$	95,820		$	6,524		$	102,344

Interest expense and general, administrative and other expenses—GAAP	$	598,506		$	3,277		$	601,783		$	141,363		$	2,002		$	143,365
Adjustment to interest expense and general, administrative and other expenses⁽²⁾	(33,756		)	(562		)	(34,318		)	2,965			(561		)	2,404
Non-Compensation Expenses—Economic Income Basis—Non-GAAP	$	564,750		$	2,715		$	567,465		$	144,328		$	1,441		$	145,769

_______________

(1)

Adjustment to exclude equity-based compensation, as management does not consider these non-cash expenses to be reflective of our operating performance. However, the fair value of RSUs that are settled in cash to employees or executive managing directors is included as an expense at the time of settlement. Further, expenses related to compensation and profit-sharing arrangements based on fund investment performance are recognized at the end of the relevant commitment period, as management reviews the total compensation expense related to these arrangements in relation to any incentive income earned by the relevant fund. Distributions to the Och-Ziff Operating Group D Units are also excluded, as management reviews operating performance at the Och-Ziff Operating Group level, where our operations are performed, prior to making any income allocations.


(2)	Adjustment to exclude depreciation, amortization and changes in the tax receivable agreement liability, as management does not consider these items to be reflective of our operating performance. Additionally, recurring placement and related service fees are excluded, as management considers these fees a reduction in management fees, not an expense.

Other Economic Income Items



	Three Months Ended September 30, 2016									Three Months Ended September 30, 2015
	Och-Ziff Funds Segment			Other Operations			Total Company			Och-Ziff Funds Segment			Other Operations			Total Company

	(dollars in thousands)
Net income allocated to noncontrolling interests—GAAP	$	16,454		$	116		$	16,570		$	45,962		$	33,009		$	78,971
Adjustment to net income allocated to noncontrolling interests⁽¹⁾	(16,461		)	(116		)	(16,577		)	(45,965		)	(33,009		)	(78,974		)
Net Loss Allocated to Noncontrolling Interests—Economic Income Basis—Non-GAAP	$	(7	)	$	—		$	(7	)	$	(3	)	$	—		$	(3	)



	Nine Months Ended September 30, 2016									Nine Months Ended September 30, 2015
	Och-Ziff Funds Segment			Other Operations			Total Company			Och-Ziff Funds Segment			Other Operations			Total Company

	(dollars in thousands)
Net (loss) income allocated to noncontrolling interests—GAAP	$	(187,213	)	$	346		$	(186,867	)	$	194,563		$	75,783		$	270,346
Adjustment to net (loss) income allocated to noncontrolling interests⁽¹⁾	187,201			(346		)	186,855			(194,573		)	(75,783		)	(270,356		)
Net Loss Allocated to Noncontrolling Interests—Economic Income Basis—Non-GAAP	$	(12	)	$	—		$	(12	)	$	(10	)	$	—		$	(10	)

_______________

(1)

Adjustment to exclude amounts allocated to our executive managing directors on their interests in the Och-Ziff Operating Group, as management reviews operating performance at the Och-Ziff Operating Group level. We conduct substantially all of our activities through the Och-Ziff Operating Group. Additionally, the impact of the consolidated Och-Ziff funds, including the allocation of earnings to investors in those funds, is also removed.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Our predominant exposure to market risk is related to our role as general partner or investment manager for the Och-Ziff funds, and the sensitivities to movements in the fair value of their investments that may adversely affect our management fees and incentive income.

Fair value of the financial assets and liabilities of the Och-Ziff funds may fluctuate in response to changes in the value of investments, foreign currency exchange rates, commodity prices and interest rates. The fair value changes in the assets and liabilities of the Och-Ziff funds affect the management fees and incentive income we may earn from the funds.

With regards to the consolidated Och-Ziff funds, the net effect of these fair value changes primarily impacts the net gains of consolidated Och-Ziff funds in our consolidated statements of comprehensive income (loss); however, a large portion of these fair value changes are absorbed by the investors of these funds (noncontrolling interests). We may also be entitled to a portion of these earnings through our incentive income allocation as general partner of these funds.

Impact on Management Fees

Management fees for our multi-strategy and opportunistic credit funds are generally based on the net asset value of those funds. Accordingly, management fees will generally change in proportion to changes in the fair value of investments held by these funds. Management fees for our real estate funds and certain other funds are generally based on committed capital during the original investment period and invested capital thereafter; therefore, management fees are not impacted by changes in the fair value of investments held by those funds.

Impact on Incentive Income

Incentive income for our funds is generally based on a percentage of profits generated by our funds over a commitment period, which is impacted by global market conditions and other factors. Major factors that influence the degree of impact include how the investments held by our funds are impacted by changes in the market and the extent to which any high-water marks impact our ability to earn incentive income. Consequently, incentive income cannot be readily predicted or estimated.

Market Risk

The amount of our assets under management is generally based on the net asset value of multi-strategy and opportunistic credit funds (plus unfunded commitments for certain closed-end opportunistic credit funds), and committed or invested capital for our real estate funds and certain other funds. A 10% change in the fair value of the net assets held by our funds as of September 30, 2016 and December 31, 2015, would have resulted in a change of approximately $2.8 billion and $3.5 billion, respectively, in our assets under management.

A 10% change in the fair value of the net assets held by our funds as of October 1, 2016 (the date management fees are calculated for the fourth quarter of 2016) would impact management fees charged on that day by approximately $8.1 million. A 10% change in the fair value of the net assets held by our funds as of January 1, 2016, would have impacted management fees charged on that day by approximately $11.4 million.

A 10% change in the fair value of the net assets held by our funds as of the end of any year (excluding unrealized gains and losses in Special Investments or other investments on which we do not earn any incentive income until such investments are sold or otherwise realized), could significantly affect our incentive income, as incentive income is generally based on a percentage of annual profits generated by our funds. We do not earn incentive income on unrealized gains attributable to Special Investments and certain other investments, and therefore a change in the fair value of those investments would have no effect on incentive income.

Exchange Rate Risk

Our funds hold investments denominated in non-U.S. dollar currencies, which may be affected by movements in the rate of exchange between the U.S. dollar and foreign currencies. We estimate that as of September 30, 2016 and December 31, 2015, a 10% weakening or strengthening of the U.S. dollar against all or any combination of currencies to which our funds have exposure to exchange rates would not have a material effect on our revenues, net income allocated to Class A Shareholders or Economic Income.

Interest Rate Risk

Our Senior Notes and Aircraft Loan are fixed-rate borrowings. Our borrowings under the Revolving Credit Facility bear interest at rates indexed to LIBOR. As of September 30, 2016, we had $120.0 million outstanding under the Revolving Credit Facility. We estimate that as of September 30, 2016 and December 31, 2015, a 10% increase or decrease in LIBOR would have no material effect on our annual interest expense, net income allocated to Class A Shareholders or Economic Income.

Our funds have financing arrangements and hold credit instruments that accrue interest at variable rates. Interest rate changes may therefore impact the amount of interest payments, future earnings and cash flows. In the event LIBOR, and rates directly or indirectly indexed to LIBOR, were to increase by 10% over LIBOR as of September 30, 2016 and December 31, 2015, based on our funds’ debt investments and obligations as of such date, we estimate that the net effect on our revenues, net income allocated to Class A Shareholders or Economic Income would not have been material. A tightening of credit and an increase in prevailing interest rates could make it more difficult for us to raise capital and sustain the growth rate of the funds.

Credit Risk

Credit risk is the risk that counterparties or debt issuers may fail to fulfill their obligations or that the collateral value may become inadequate to cover our exposure. We manage credit risk by monitoring the credit exposure to and the creditworthiness of counterparties, requiring additional collateral where appropriate.

Item 4. Controls and Procedures

Effectiveness of Disclosure Controls and Procedures

We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As of September 30, 2016, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective and were operating at a reasonable assurance level as of September 30, 2016.

Changes in Internal Control over Financial Reporting

There were no changes to our internal control over financial reporting, as defined in Rule 13a-15(f) under the Exchange Act, that occurred in the third quarter of 2016 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls.

The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of the effectiveness of controls to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

We are not currently subject to any pending judicial, administrative or arbitration proceedings that we expect to have a material impact on our consolidated financial statements. We are from time to time involved in litigation and claims incidental to the conduct of our business. Like other businesses in our industry, we are subject to extensive scrutiny by regulatory agencies globally that have, or may in the future have, regulatory authority over us and our business activities. This has resulted in, or may in the future result in, regulatory agency investigations, litigation and subpoenas, and related sanctions and costs. See “Item 1A. Risk Factors” below and “Item 1A. Risk Factors—Risks Related to Our Business—Recent regulatory changes in jurisdictions outside the United States could adversely affect our business” in our Annual Report. See Note 15 to our consolidated financial statements included in this Form 10-Q for additional information.

Item 1A. Risk Factors

Please see “Item 1A. Risk Factors” in our Annual Report for a discussion of the risks material to our business. Additionally, the risk factor below has been updated as a result of recent developments.

Investors in our funds have the right to redeem their investments in our funds on a regular basis and could redeem a significant amount of assets under management during any given quarterly period, which would result in significantly decreased revenues.

Subject to any specific redemption provisions applicable to a fund, investors in our multi-strategy hedge funds may generally redeem their investments in our funds on an annual or quarterly basis following the expiration of a specified period of time (typically between one and three years), although certain investors generally may redeem capital during such specified period upon the payment of a redemption fee and upon giving proper notice. In a declining market, during periods when the hedge fund industry generally experiences outflows, or in response to specific events that occur at the Company, we could experience increased redemptions and a consequent reduction in our assets under management. Recently, our assets under management have declined and we believe this trend will likely continue to some extent for some period of time following the settlement of the FCPA investigation as described in Note 15 to our consolidated financial statements. Furthermore, investors in our funds may also invest in funds managed by other alternative asset managers that have restricted or suspended redemptions or may in the future do so. Such investors may redeem capital from our funds, even if our performance is superior to such other alternative asset managers’ performance if they are restricted or prevented from redeeming capital from those other managers.

The decrease in revenues that would result from significant redemptions in our funds could have a material adverse effect on our business, financial condition or results of operations. During 2015, we experienced redemptions of approximately $6.7 billion from our funds, and an additional $6.7 billion during the first nine months of 2016. We may continue to experience elevated redemption levels if economic and market conditions remain uncertain or worsen or pressures on the hedge fund industry continue.

Competitive pressures in the asset management business could materially adversely affect our business, financial condition or results of operations.

The asset management business remains intensely competitive, with competition based on a variety of factors, including investment performance, the quality of service and level of desired information provided to fund investors, brand recognition and business reputation. We compete for fund investors, highly qualified talent, including investment professionals, and for investment opportunities with a number of hedge funds, private equity firms, specialized funds, traditional asset managers, commercial banks, investment banks and other financial institutions. Across the hedge fund industry, management fees are experiencing downward pressure. We are also subject to this pressure and believe it is likely to result in decreased management fees in future periods.

A number of factors create competitive risks for us:


•	We compete in an international arena and, to remain competitive, we may need to further expand our business into new geographic regions or new business areas where our competitors may have a more established presence or greater experience and expertise.


•	A number of our competitors have greater financial, technical, marketing and other resources and more personnel than we do.


•	Several of our competitors have raised and continue to raise significant amounts of capital, and many of them have or may pursue investment objectives that are similar to ours, which would create additional competition for investment opportunities and may reduce the size and duration of pricing inefficiencies that many alternative investment strategies seek to exploit.


•	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 may want to make.


•	Some of our competitors may be subject to less extensive regulation and thus may be better positioned to pursue certain investment objectives and/or be subject to lower expenses related to compliance and regulatory investigations than us.


•	Other industry participants will from time to time seek to recruit our active executive managing directors, investment professionals and other professional talent away from us.

We may lose fund investors in the future if we do not match or provide more attractive management fees, incentive income arrangements, structures and terms than those offered by competitors. However, we may experience decreased revenues if we match or provide more attractive management fees, incentive income arrangements, 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 successful funds, either of which would materially adversely impact our business, financial condition or results of operations.

If our investment performance, including the level and consistency of returns or other performance criteria, does not meet the expectations of our fund investors, it will be difficult for our funds to retain or raise capital and for us to grow our business. Additionally, even if our fund performance is strong, it is possible that we will not be able to attract additional capital. Further, the allocation of increasing amounts of capital to alternative investment strategies over the long term 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, absolute returns.

Competition for fund investors is based on a variety of factors, including:


•	Investment performance.


•	Investor liquidity and willingness to invest.


•	Investor perception of investment managers’ ability, drive, focus and alignment of interest with them.


•	Investor perception of robustness of business infrastructure and financial controls.


•	Transparency with regard to portfolio composition.


•	Investment and risk management processes.


•	Quality of service provided to and duration of relationship with investors.


•	Business reputation, including the reputation of a firm’s investment professionals.


•	Level of fees and incentive income charged for services.

If we are not able to compete successfully based on these and other factors, our assets under management, earnings and revenues may be significantly reduced and our business, financial condition or results of operations may be materially adversely affected. Furthermore, if we are forced to compete with other alternative asset managers on the basis of fees, we may not be able to maintain our current management fee and incentive income structures, which drive our revenues and earnings. We have historically competed for fund investors primarily on the investment performance of our funds and our reputation, and not on the level of our fees or incentive income relative to those of our competitors. However, as the alternative asset management sector continues to mature and addresses current market and competitive conditions, there is increasing downward pressure on management fees and there is a risk that incentive income rates will decline, without regard to the historical performance of a manager. Management fee or incentive income rate reductions on existing or future funds, particularly without corresponding increases in assets under management or decreases in our operating costs, could materially adversely affect our business, financial condition or results of operations.

In addition to the competitive pressures described above, as we diversify by offering new or enhanced products and investment platforms, the average management fee rate we earn on our assets under management may fall as a result of a larger proportion of our assets under management being invested in products that earn lower management fee rates. For example, our average management fee rate has fallen from 1.53% in 2013 to 1.23% in the third quarter of 2016. The decrease is primarily due to lower assets under management in our multi-strategy funds and an increase in our opportunistic credit funds and our Institutional Credit Strategies products as a percentage of total assets under management. These credit funds earn lower management fee rates than our multi-strategy funds, consistent with market convention for these products.

Even if we are able to compete successfully based on the factors noted above, it is possible we could lose assets under management to our competitors. It is possible that similar circumstances could cause us to experience unusually high redemptions or a decrease in inflows, even if our investment performance and other business attributes are otherwise competitive or superior.

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

We face significant risks in our business that subject us to third-party litigation and legal liability. In general, we will be exposed to litigation risk in connection with any allegations of misconduct, negligence, dishonesty or bad faith arising from our management of any fund. We may also be subject to litigation arising from investor dissatisfaction with the performance of our funds, including certain losses due to the failure of a particular investment strategy or improper trading activity, if we violate restrictions in our funds’ organizational documents 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 relating to claims that we have not properly addressed conflicts of interest. Any litigation arising in such circumstances is likely to be protracted, expensive and surrounded by circumstances that could be materially damaging to our reputation and our business. Moreover, in such cases, we would be obligated to bear legal, settlement and other costs, which may be in excess of any 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 any litigation or investigation as a result of inadequate insurance proceeds, if any, or fail to obtain indemnification from our funds, our business, financial condition or results of operations could be materially adversely affected.

Now that the FCPA investigation has been settled, it is possible that we will be exposed to increased civil litigation risk arising out of the events investigated by the SEC and DOJ as part of the FCPA matter.

It is possible that we would be made a party to any lawsuit involving any of the fund-related litigation described above. As with the funds, while we maintain insurance, there can be no assurance that our insurance will prove to be adequate. If we are required to incur all or a portion of the costs arising out of litigation, our business, financial condition or results of operations could be materially adversely affected. Furthermore, any such litigation could be protracted, expensive and highly damaging to our reputation, which could result in a significant decline in our assets under management and revenues, even if the underlying claims are without merit. In addition, we may participate in transactions that involve litigation (including the enforcement of property rights) from time to time, and such transactions may expose us to reputational risk and increased risk from countersuits.

Extensive regulation of our business affects our activities and creates the potential for significant liabilities and penalties. Our reputation, business, financial condition or results of operations could be materially affected by regulatory issues.

Our business is subject to extensive and complex regulation, including periodic examinations and regulatory investigations, by governmental and self-regulatory organizations in the jurisdictions in which we operate and trade around the world. As an investment adviser registered under the Investment Advisers Act of 1940, as amended (the “Advisers Act”) and a company subject to the registration and reporting provisions of the Exchange Act, we are subject to regulation and oversight by the SEC. As a company with a class of securities listed on the NYSE, we are subject to the rules and regulations of the NYSE. As a registered commodity pool operator and a registered commodity trading advisor, we are subject to regulation and oversight by the United States Commodity Futures Trading Commission (“CFTC”) and the National Futures Association. In addition, we are subject to regulation by the Department of Labor under the U.S. Employee Retirement Income Security Act of 1974, as amended (“ERISA”). In the U.K., our U.K. sub-adviser is subject to regulation by the U.K. Financial Conduct Authority. Our Asian operations, and our investment activities around the globe, are subject to a variety of other regulatory regimes that vary country by country, including the Securities and Futures Commission in Hong Kong, the Securities and Exchange Board of India and the Dubai Financial Services Authority.

The regulatory bodies with jurisdiction over us have the authority to grant, and in specific circumstances to cancel, permissions to carry on our business and the authority to conduct investigations and administrative proceedings. Such investigations and administrative proceedings 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 an investment adviser from registration or memberships. For example, a failure to comply with the obligations imposed by the Exchange Act or Advisers Act, including recordkeeping, advertising and operating requirements, disclosure obligations and prohibitions on fraudulent activities, or a failure to maintain our funds’ exemption from compliance with the Investment Company Act of 1940, as amended (the “1940 Act”) could result in investigations, sanctions and reputational damage, which could adversely affect our business, financial condition or results of operations. Our funds are involved regularly in trading activities that implicate a broad number of U.S. and foreign securities law regimes, including laws governing trading on inside information, market manipulation, anti-corruption, including the FCPA, and a broad number of technical trading requirements that implicate fundamental market regulation policies. Even if an investigation or proceeding does 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 to fail to gain new investors. Furthermore, the legal, technology and other costs associated with regulatory investigations could increase to such a level that they could have a material impact on our business, financial condition or results of operations.

These global financial services regulators affect us not only with their regulations, but also with their examination, inspection and enforcement functions as well. We are routinely subject to examination and inspection and, although we make reasonable efforts to maintain effective compliance programs, there can be no assurances that any such inquiry would not result in a finding or sanction that would adversely affect our business, financial condition or results of operations. Likewise, enforcement investigations and administrative inquiries can be sweeping in nature. Cooperating with these investigations, as is our practice, can be expensive and time-consuming and could distract us from our business operations. In particular, U.S. regulators routinely investigate potentially serious matters such as possible insider trading, market manipulation, misleading disclosure, conflicts of interest, fraud, foreign corruption, including under the FCPA; lesser potential violations, such as books and records inaccuracies, weaknesses in internal controls; and compliance with general reporting and advertising regulations. For the past several years, we have cooperated with a number of ongoing regulatory investigations and examinations, both domestically and internationally, and we expect to be the subject of investigations and examinations in the future. There can be no assurances that ongoing or future investigations will not adversely affect our business, financial condition or results of operations. Enforcement actions and administrative proceedings can result in fines, or other sanctions, including censure, the issuance of a cease-and-desist order, suspension or expulsion of persons or firms from the industry. Such sanctions can harm our reputation and cause us to lose existing investors or fail to gain new investors, which could adversely affect our business, financial condition or results of operations.

On September 29, 2016, we reached settlements with the DOJ and the SEC, resolving their investigations into our former private investment business in Africa and a 2007 investment by the Libyan Investment Authority in certain of our funds. As part of the settlements, we entered into a Deferred Prosecution Agreement with the DOJ, and our subsidiary, OZ Africa,

agreed to plead guilty to one count of conspiracy to violate the anti-bribery provisions of the FCPA. We also agreed to settle an administrative proceeding with the SEC involving violations of the FCPA and the Investment Advisers Act.

Pursuant to the settlement agreements with the regulators, we agreed to pay $412.1 million in settlement charges and to implement enhanced internal accounting controls and policies, to separate the chief compliance officer from other officer positions, and to engage an independent compliance monitor for three years, subject to early termination or extension. The settlements could have a material adverse effect on our business, financial condition or results of operations as described below in “—The FCPA settlements could have a material adverse effect on our ability to raise capital for our funds.”

In addition, we regularly rely on exemptions or exclusions from various requirements of the Securities Act, the Exchange Act, the 1940 Act, the Commodity Exchange Act and ERISA in conducting our asset management activities. These exemptions or exclusions 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 or exclusions were to become unavailable to us, we could become subject to regulatory action or third-party claims and our business, financial condition or results of operations could be materially adversely affected. Certain of the requirements imposed under the 1940 Act, the Advisers Act, ERISA and by non-U.S. regulatory authorities 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. At any time, the regulations applicable to us may be amended or expanded by the relevant regulatory authorities. If we are unable to correctly interpret and timely comply with any amended or expanded regulatory requirements, our business, financial condition or results of operations could be adversely impacted in a material way.

We may also be adversely affected if additional legislation or regulations are enacted, or by changes in the interpretation or enforcement of existing rules and regulations imposed by the SEC, other U.S. or foreign governmental regulatory authorities or self-regulatory organizations that supervise the financial markets and their participants. See “Item 1A. Risk Factors—Risks Related to Our Business—Increased regulatory focus in the United States could result in additional burdens on our business” and “Item 1A. Risk Factors—Risks Related to Our Business—Recent regulatory changes in jurisdictions outside the United States could adversely affect our business” in our Annual Report for additional information. It is impossible to determine 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. Compliance with additional new laws or regulations could be difficult and expensive and affect the manner in which we conduct business, and we may be unable to correctly interpret and timely comply with any amended or expanded regulatory requirements, which could have adverse impacts on our business, financial condition or results of operations.

The FCPA settlements could have a material adverse effect on our ability to raise capital for our funds.

As described above under “—Extensive regulation of our business affects our activities and creates the potential for significant liabilities and penalties. Our reputation, business, financial condition or results of operations could be materially affected by regulatory issues,” we recently settled investigations by the SEC and the DOJ concerning violations of the FCPA and other laws, which could have a material adverse effect on our business, financial condition or results of operations. In addition to the financial cost of the settlements, the investigation and settlements may harm our reputation and cause us to lose existing investors or fail to gain new investors, which could further adversely affect our business, financial condition or results of operations. Prior to the settlements, many of our funds raised capital relying on the exemption from registration provided by Rule 506 of Regulation D under the Securities Act (“Rule 506”) in connection with a securities offering structured as a private placement. As a consequence of the settlements, many of our funds are currently disqualified from raising capital using Rule 506 offerings. This could negatively affect our ability to raise capital for these funds, and our ability to offer and sell fund interests to certain investors in certain U.S. states may be impaired. The inability of many of our funds to raise capital in Rule 506 offerings may also result in additional expenses. The potential negative impact of the FCPA settlements on our ability to raise or retain capital for our funds could adversely affect our business, financial condition or results of operations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

Item 6. Exhibits



Exhibit No.		Description
4.1		Form of Unit Designation of the Preferences and Relative, Participating, Optional, and Other Special Rights, Powers and Duties of Class A Cumulative Preferred Units (included in Exhibit 10.1 hereto), incorporated herein by reference to Exhibit 4.1 of our Current Report on Form 8-K, filed on September 29, 2016.
4.2		Unit Designation of the Preferences and Relative, Participating, Optional, and Other Special Rights, Powers and Duties of Class A Cumulative Preferred Units of OZ Management LP, incorporated herein by reference to Exhibit 4.1 of our Current Report on Form 8-K, filed on October 11, 2016.
4.3		Unit Designation of the Preferences and Relative, Participating, Optional, and Other Special Rights, Powers and Duties of Class A Cumulative Preferred Units of OZ Advisors LP, incorporated herein by reference to Exhibit 4.2 of our Current Report on Form 8-K, filed on October 11, 2016.
4.4		Unit Designation of the Preferences and Relative, Participating, Optional, and Other Special Rights, Powers and Duties of Class A Cumulative Preferred Units of OZ Advisors II LP, incorporated herein by reference to Exhibit 4.3 of our Current Report on Form 8-K, filed on October 11, 2016.
10.1		Securities Purchase Agreement, dated September 29, 2016, by and among OZ Management LP, OZ Advisors LP, OZ Advisors II LP and the Purchasers party thereto, incorporated herein by reference to Exhibit 10.1 of our Current Report on Form 8-K, filed on September 29, 2016.
10.2		Amendment to Tax Receivable Agreement, dated as of September 29, 2016, by and among inter alia Och-Ziff Capital Management Group LLC, Och-Ziff Holding Corp., Och-Ziff Holding LLC, OZ Management LP, OZ Advisors LP, and OZ Advisors II LP, incorporated herein by reference to Exhibit 10.1 of our Current Report on Form 8-K, filed on September 29, 2016.
10.3		Plea Agreement, dated as of September 29, 2016, by and among OZ Africa Management GP, LLC, the U.S. Department of Justice and the U.S. Attorney’s Office for the Eastern District of New York.
10.4		Deferred Prosecution Agreement, dated as of September 29, 2016, by and among Och-Ziff Capital Management Group LLC, the U.S. Department of Justice and the U.S. Attorney’s Office for the Eastern District of New York.
10.5		Order Instituting Administrative and Cease-and-Desist Proceedings [pursuant to Section 21C of the Securities Exchange Act of 1934 and Sections 203(e) and (k) of the Investment Advisers Act of 1940], dated as of September 29, 2016, between Och-Ziff Capital Management Group LLC, et. al and the U.S. Securities and Exchange Commission.
31.1		Certificate of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) under the Securities Exchange Act of 1934.
31.2		Certificate of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) under the Securities Exchange Act of 1934.
32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS		XBRL Instance Document
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: November 2, 2016



	OCH-ZIFF CAPITAL MANAGEMENT GROUP LLC

	By:		/s/ Joel M. Frank
			Joel M. Frank
			Chief Financial Officer and Executive Managing Director