SCULPTOR CAPITAL MANAGEMENT, INC. This discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and the related notes included in Item 1 of this quarterly report and with our audited consolidated financial statements and the related notes included in our Annual Report. In addition, this discussion and analysis contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, those described under the heading "Forward-Looking Statements" in this report, and under the heading "Item 1A. Risk Factors" in this quarterly report and in our Annual Report, and in other reports we file with theSEC , that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. An investment in our Class A Shares is not an investment in any of our funds. Overview COVID-19 Pandemic In the first quarter of 2020, a novel strain of coronavirus ("COVID-19") spread across the world resulting in a wide-spread economic downturn. As a result, our funds experienced significant performance-related depreciation, which has had a negative impact on our incentive income during the first quarter of 2020, as well as on the opening balance of assets under management in the second quarter, and therefore may cause us to recognize lower management fees from these funds in the second quarter. To the extent these losses are not reversed by gains later this year, it will have a material impact on our ability to earn incentive income in 2020, as well as in future years until the losses are recovered for continuing fund investors. In addition, we experienced unrealized losses on our risk retention investments held in certain of the CLOs that we manage. While we are required to hold these investments for the entire duration of the CLOs, to the extent that cash flows in the CLOs deteriorate, we could experience declining interest income and impairments on these investments. We may also experience detrimental impacts to the management fees we earn from the CLOs that we manage if market conditions do not sufficiently recover over the life cycle of these CLOs. We have also evaluated our long-lived assets including operating lease assets and goodwill and have not identified any impairments to these assets as ofMarch 31, 2020 . We have successfully executed a business continuity plan and continued our operations with no material interruptions by implementing a work from home model as necessary to protect the health and well-being of our employees and in response to mandated precautions, where applicable. In addition, we have reached out to our critical vendors to ensure that they are well positioned to operate during the pandemic. We rely significantly on the effectiveness of our information technology infrastructure to continue our operations and to continue to maintain appropriate controls over operations, treasury function, accounting and financial reporting. Due to the uncertainty over the timing and extent of any possible global economic recovery, we cannot readily estimate or determine the effects that the COVID-19 pandemic will ultimately have on our future business and financial results. Please see the COVID-19 commentary included throughout this MD&A, including "-Liquidity and Capital Resources" as well as "Item 1A. Risk Factors" in this quarterly report for additional information on these impacts and the potential impacts on our results of operations and financial position. Overview of Our Financial Results We reported a GAAP net loss of$28.3 million in the first quarter of 2020, compared to net income of$37.1 million in the first quarter of 2019. The increase in net loss attributable to Class A Shareholders for the first quarter of 2020 was primarily due to lower incentive income and unrealized losses on our investments, partially offset by lower income taxes, lower compensation and benefits expenses, lower general, administrative and other expenses and lower losses on early retirement of debt. Also impacting our results to Class A Shareholders was an adjustment to the redemption value of Preferred Units recognized in connection with the Recapitalization in the first quarter of 2019 that increased net income attributable to Class A Shareholders in the first quarter of 2019 by$44.4 million . In the first quarter of 2020, an adjustment of$1.3 million to the redemption value of the Preferred Units related to the accrual of distributions on the units decreased amounts attributable to Class A Shareholders in the first quarter of 2020. Please see "-Results of Operations" for detailed discussion of the drivers of our results. 38 -------------------------------------------------------------------------------- Economic Income was$2.3 million in first quarter of 2020, compared to$37.8 million in first quarter of 2019. This decrease was primarily due to lower incentive income, partially offset by lower compensation and benefits expenses and lower general, administrative and other expenses. Please see "-Economic Income Analysis" for detailed discussion of the drivers of our results. Economic Income 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$33.4 billion as ofMarch 31, 2020 . Longer-dated assets under management, which are those subject to initial commitment periods of three years or longer, were$23.9 billion , comprising 71% of our total assets under management as ofMarch 31, 2020 . Assets under management in our dedicated credit, real estate and other strategy-specific funds were$24.9 billion , comprising 75% of assets under management as ofMarch 31, 2020 . Assets under management in our multi-strategy funds totaled$8.5 billion as ofMarch 31, 2020 , decreasing$1.8 billion , or 18%, year-over-year. This change was driven by net capital outflows of$1.7 billion , primarily in theSculptor Master Fund , our largest multi-strategy fund, performance-related depreciation of$67.9 million , and$49.5 million of distributions to investors in certain smaller funds that we have decided to close.Sculptor Master Fund generated a gross return of -6.5% and a net return of -6.6% year-to-date throughMarch 31, 2020 . Losses inSculptor Master Fund were concentrated in corporate credit where even the highest quality securities widened to levels not seen since the global financial crisis of 2008. We view the majority of these losses to be mark-to-market in nature, resulting from technical pressure that had become disconnected from fundamentals, and we believe that much of the performance will be earned back in time. Please see "-Assets Under Management and Fund Performance-Multi-Strategy Funds" for additional information regarding the returns of theSculptor Master Fund . Assets under management in our dedicated credit products totaled$20.9 billion as ofMarch 31, 2020 , increasing$1.8 billion , or 9%, year-over-year. Assets under management in our opportunistic credit funds totaled$4.9 billion as ofMarch 31, 2020 , decreasing$842.3 million , or 15%, year-over-year. This change was driven by$789.6 million of performance-related depreciation,$32.4 million of net outflows, and$20.3 million of distributions in our closed-end opportunistic credit funds.Sculptor Credit Opportunities Master Fund , our global opportunistic credit fund, generated a gross return of -19.8% and a net return of -20.0% year-to-date throughMarch 31, 2020 . Similar to theSculptor Master Fund , performance was impacted by the widened levels of credit spreads not seen since 2008. Again, our view is that the majority of the March credit losses were not due to permanent capital impairment and we believe we will recover much of that performance over time. Assets under management for the fund were$1.1 billion as ofMarch 31, 2020 . Assets under management in Institutional Credit Strategies totaled$16.0 billion as ofMarch 31, 2020 , increasing$2.6 billion , or 20%, year-over-year. The increase was driven primarily by the closing of additional CLOs and launches of aircraft securitizations and a CBO, partially offset by changes in underlying collateral value and distributions. Assets under management in our real estate funds totaled$4.0 billion as ofMarch 31, 2020 , increasing$1.3 billion , or 50%, year-over-year primarily due to launch of Sculptor Real Estate Fund IV and a related co-investment vehicle, partially offset by$1.2 billion of distributions and other reductions primarily related to the expiration of the investment period ofSculptor Real Estate Fund III and related co-investment vehicles. Since inception throughMarch 31, 2020 , the gross internal rate of return ("IRR") was 28.7% and 18.7% net for Sculptor Real Estate Fund III (for which the investment period ended inSeptember 2019 ). 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. 39 -------------------------------------------------------------------------------- We typically accept capital from new and existing investors in our multi-strategy and certain open-end opportunistic credit funds on a monthly basis on the first day of each month. Investors in these funds (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. 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 reduce assets under management 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 reduce management fees in the following 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. Investors in our closed-end credit funds, securitization vehicles, real estate and certain other funds are not able to redeem their investments. In those funds, investors generally make a commitment that is funded over an investment period (or at launch for our securitization vehicles). Upon the expiration of the investment period, the investments are then sold or realized over time, and distributions are made to the investors in the fund. In a declining market, during periods when the hedge fund industry generally experiences outflows, or in response to specific company events, we could experience increased redemptions and a consequent reduction in our assets under management. Over the past few years, our assets under management have declined and this trend may continue to some extent for some period of time in light of the 2016 settlements and the global economic downturn as a result of the COVID-19 pandemic. Throughout the latter part of 2017 and 2018, net outflows from our multi-strategy funds began to normalize and were partially offset by growth in our Institutional Credit Strategies business, as well as positive fund performance. However, in the first part of 2020 our funds experienced significant performance-related depreciation due to the unprecedented market events that unfolded as a result of the COVID-19 pandemic. The COVID-19 pandemic has affected almost every segment of the global economy and may have a negative impact on our assets under management, management fees and incentive income. 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. As ofMarch 31, 2020 , approximately 3% 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 43% 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 a fund is an investor in another 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-Management Fees," 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. Appreciation (depreciation) in the tables below reflects the aggregate net capital appreciation (depreciation) for the entire period and is presented on a total return basis, net of all fees and expenses (except incentive income on Special Investments), and includes the reinvestment of all dividends and other income. Management fees and incentive income vary by product. Appreciation (depreciation) within Institutional Credit Strategies includes the effects of changes in the par value of the underlying collateral of the CLOs and CBO, foreign currency translation changes in the measurement of assets under management of our European CLOs and changes in the portfolio appraisal values for aircraft securitizations. 40 --------------------------------------------------------------------------------
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
Inflows / Distributions / Other Appreciation /
December 31, 2019 (Outflows) Reductions (Depreciation) March 31, 2020
(dollars in thousands)
Multi-strategy funds $ 9,332,118 $ (209,674) $ (5,446) $ (656,788) $ 8,460,210
Credit
Opportunistic credit funds 6,025,306 (279,275) - (801,199) 4,944,832
Institutional Credit
Strategies 15,710,319 396,992 (6) (112,906) 15,994,399
Real estate funds 3,393,876 646,876 (41,390) (9,541) 3,989,821
Other 8,311 16 (7,113) - 1,214
Total $ 34,469,930 $ 554,935 $ (53,955) $ (1,580,434) $ 33,390,476 Three Months Ended
Inflows / Distributions / Appreciation /
December 31, 2018 (Outflows) Other Reductions (Depreciation) March 31, 2019
(dollars in thousands)
Multi-strategy funds $ 10,420,858 $ (886,353) $ (21,278) $ 779,324 $ 10,292,551
Credit
Opportunistic credit funds 5,751,411 (63,530) (26,972) 126,209 5,787,118
Institutional Credit
Strategies 13,491,734 13,506 (107,147) (32,450) 13,365,643
Real estate funds 2,577,040 75,470 - (22) 2,652,488
Other 286,635 (62,868) - 379 224,146
Total $ 32,527,678 $ (923,775) $ (155,397) $ 873,440 $ 32,321,946
In the three months ended March 31, 2020 , our funds experienced
performance-related depreciation of $1.6 billion and net inflows of $554.9
million . The net inflows were comprised of (i) $1.1 billion of gross inflows,
driven by $646.9 million in real estate funds, primarily due to additional
closes of Sculptor Real Estate Fund IV, and $427.1 million in Institutional
Credit Strategies, primarily driven by a launch of an aircraft securitization;
and (ii) $571.8 million of gross outflows due to redemptions, primarily in our
open-ended credit and multi-strategy funds. In 2020, excluding securitization
vehicles within Institutional Credit Strategies, our largest sources of gross
inflows were from private banks and pensions, while pensions were the largest
source of gross outflows.
As of May 1, 2020 , estimated assets under management increased to $34.0 billion ,
driven by $472.3 million of performance-related appreciation and capital net
inflows of $178.5 million .
In the three months ended March 31, 2019 , our funds experienced
performance-related appreciation of $873.4 million and net outflows of $923.8
million . The net inflows were comprised of $240.4 million of gross inflows and
$1.2 billion of gross outflows due to redemptions, primarily in our
multi-strategy funds. In 2019, excluding securitization vehicles within
Institutional Credit Strategies, our largest sources of gross inflows were from
fund-of-funds, related parties and family offices and individuals, while related
parties were the largest sources of gross outflows. The net outflows include
approximately $558.1 million of redemptions to former executive managing
directors, the majority of which were driven by the anticipated Liquidity
Redemption discussed in Note 3 of our Annual Report.
41
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Weighted-Average Assets Under Management and Average Management Fee Rates
The table below presents our weighted-average assets under management and
average management fee rates. Weighted-average assets under management exclude
the impact of first quarter investment performance for the periods presented, as
these amounts generally do not impact management fees calculated for those
periods. The average management fee rates presented below take into account the
effect of non-fee paying assets under management. Please see the respective
sections below for average management fee rates by fund type.
Three Months Ended March 31,
2020 2019
(dollars in thousands)
Weighted-average assets under management
0.70 % 0.77 %
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. Our average management fee will vary from period to period based on the mix of products that comprise our assets under management. Fund Performance Information The tables below present performance information for the funds we manage. 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. Return information that includes Special Investments excludes incentive income on unrealized gains attributable to such investments, which could reduce returns at the time of realization. Special Investments and initial public offering investments are not allocated to all investors in the funds, and 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 0.94% to 2.25% annually of assets under management. For the first quarter of 2020, our multi-strategy funds had an average management fee rate of 1.28%. 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 theSculptor Master Fund and our other multi-strategy funds is subject to initial commitment periods of three years, and for certain of these assets, we only earn incentive income once profits attributable to an investor exceed a preferential return, or "hurdle rate," which is generally equal to the 3-month T-bill or LIBOR rate for our multi-strategy funds. Once the investment performance has exceeded the hurdle rate for these assets, we may receive a "catch-up" allocation, resulting in a potential recognition by us of a full 20% of the net profits attributable to investors in these assets. 42 --------------------------------------------------------------------------------
Returns for the Three Months Ended March 31 ,
Assets Under Management as of March AnnualizedReturns Since Inception Through
31, 2020 2019 March 31, 2020
2020 2019 Gross Net Gross Net Gross Net
Fund (dollars in thousands)
Sculptor Master Fund (1) $ 7,776,131 $ 9,191,339 -6.5 % -6.6 % 10.1 % 8.4 % 16.0 % (2) 11.0 % (2)
Sculptor Enhanced Master Fund 622,453 886,834 -7.5 % -7.2 % 15.0 % 12.7 % 12.4 % 8.2 %
Other funds 61,626 214,378 n/m n/m n/m n/m n/m n/m
$ 8,460,210 $ 10,292,551
_______________
n/m not meaningful
(1)The returns for the Sculptor Master Fund exclude Special Investments. Special
Investments in the Sculptor Master Fund are held by investors representing a
small percentage of assets under management in the fund. As of March 31, 2020 ,
inclusive of these Special Investments, the returns of the Sculptor Master Fund
for three months ended March 31, 2020 were -6.8% gross and -6.8% net, for three
months ended March 31, 2019 were 9.5% gross and 7.9% net, and annualized since
inception through March 31, 2020 were 15.7% gross and 10.9% net.
(2)The annualized returns since inception are those of the Sculptor
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, and the returns include the reinvestment of
all dividends and other income. The performance calculation for the Sculptor
Master Fund excludes realized and unrealized gains and losses attributable to
currency hedging specific to certain investors investing in Sculptor 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 Sculptor 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 March 31, 2020 , the annualized returns since the Sculptor Master Fund's
inception on January 1, 1998 were 12.5% gross and 8.3% net excluding Special
Investments and 12.2% gross and 8.2% net inclusive of Special Investments.
The $1.8 billion , or 18%, year-over-year decrease in assets under management in
our multi-strategy funds was primarily due to capital net outflows of $1.7
billion , primarily from the Sculptor Master Fund , our largest multi-strategy
fund, performance-related depreciation of $67.9 million , and distributions of
$49.5 million in certain other multi-strategy funds that we have decided to
close. In 2020, the largest sources of gross outflows from our multi-strategy
funds were attributable to private banks, pensions, and foundations and
endowments.
In the first quarter of 2020, the Sculptor Master Fund generated a gross return
of -6.5% and a net return of -6.6%. Losses in Sculptor Master Fund were
concentrated in corporate credit where even the highest quality securities
widened to levels not seen since the global financial crisis of 2008. We view
the majority of these losses to be mark-to-market in nature, resulting from
technical pressure that had become disconnected from fundamentals, and we
believe that much of the performance will be earned back in time.
In the first quarter of 2019, the Sculptor Master Fund generated a gross return
of 10.1% and a net return of 8.4%. Sculptor Master Fund delivered positive
returns across all major strategies in the quarter with performance driven
primarily by global equities, corporate credit and merger arbitrage.
43
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Credit
Assets Under Management as of March 31,
2020 2019
(dollars in thousands)
Opportunistic credit funds $ 4,944,832 $ 5,787,118
Institutional Credit Strategies 15,994,399 13,365,643
$ 20,939,231 $ 19,152,761
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 0.75% to 2.00%
annually of the net asset value of these funds. For the first quarter of 2020,
our opportunistic credit funds had an average management fee rate of 0.67%.
The table below presents assets under management and investment performance
information for certain of our opportunistic credit funds. Incentive income
related to these funds (excluding the closed-end opportunistic fund, which is
explained further below) 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, which are generally 6% to 8% for our
open-end opportunistic credit funds. Once the cumulative investment performance
has exceeded the hurdle rate, we may receive a "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.
Returns for the Three Months Ended March 31,
Assets Under Management as of March Annualized Returns Since Inception Through
31, 2020 2019 March 31, 2020
2020 2019 Gross Net Gross Net Gross Net
Fund (dollars in thousands)
Sculptor Credit Opportunities Master
Fund(1) $ 1,064,409 $ 1,726,050 -19.8 % -20.0 % 3.4 % 2.4 % 11.5 % 7.5 %
Customized Credit Focused Platform 2,878,029 3,207,350 -17.7 % -14.4 % 4.8 % 3.6 % 14.0 % 10.5 %
Closed-end opportunistic credit funds 518,104 447,976 See below for return information on our closed-end opportunistic credit funds.
Other funds 484,290 405,742 n/m n/m n/m n/m n/m n/m
$ 4,944,832 $ 5,787,118
_______________
n/m not meaningful
(1)The returns for the Sculptor Credit Opportunities Master Fund exclude Special
Investments. Special Investments in the Sculptor Credit Opportunities Master
Fund are held by investors representing a small percentage of assets under
management in the fund. As of March 31, 2020 , inclusive of these Special
Investments, the returns of the Sculptor Credit Opportunities Master Fund for
three months ended March 31, 2020 were -19.9% gross and -20.2% net, for three
months ended March 31, 2019 were 3.2% gross and 2.3% net, and annualized since
inception through March 31, 2020 were 11.1% gross and 7.3% net.
44
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Assets under management in our opportunistic credit funds decreased by $842.3
million , or 15%, year-over-year. This change was driven by $789.6 million of
performance-related depreciation, $32.4 million of net outflows, and $20.3
million of distributions in our closed-end opportunistic credit funds.
In the first quarter of 2020, the Sculptor Credit Opportunities Master Fund , our
global opportunistic credit fund, generated a gross return of -19.8% and a net
return of -20.0%. Similar to the Sculptor Master Fund , performance was impacted
by the widened levels of credit spreads not seen since 2008. Again, our view is
that the majority of the March credit losses were not due to permanent capital
impairment and we believe we will recover much of that performance over time.
In the first quarter of 2019, the Sculptor Credit Opportunities Master Fund , our
global opportunistic credit fund, generated a gross return of 3.4% and a net
return of 2.4%. Performance was broad-based with gains across both the corporate
and structured credit strategies, and geographies.
The table below presents assets under management, investment performance and
other information for our closed-end opportunistic credit funds. Our closed-end
opportunistic credit funds follow a European-style waterfall, whereby incentive
income may be paid to us only after a fund investor receives distributions in
excess of their total contributed capital and a preferential return, which is
generally 6% to 8%. Incentive income related to these funds is generally equal
to 20% of the cumulative realized profits in excess of the preferential return
attributable to each investor over the life of the fund. Once the investment
performance has exceeded the preferential return, we may receive a "catch-up"
allocation, resulting in a potential recognition by us of a full 20% of the net
profits attributable to investors in these funds. 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.
Assets Under Management as of
March 31, Inception to Date as of March 31,2020
Total Invested Gross Gross
2020 2019 Total Commitments Capital(1) IRR(2) Net IRR(3) MOIC(4)
Fund (Investment Period) (dollars in thousands)
Sculptor European Credit Opportunities Fund (2012-2015) $ -$ 1,455 n/a n/a n/a n/a n/a Sculptor Structured Products Domestic Fund II (2011-2014) 46,610 61,966 326,850 326,850 19.3 % 15.2 % 2.1x Sculptor Structured Products Offshore Fund II (2011-2014) 50,480 64,360 304,531 304,531 16.7 % 13.0 % 1.9x Sculptor Structured Products Offshore Fund I (2010-2013) 3,744 6,095 155,098 155,098 23.8 % 19.1 % 2.1x Sculptor Structured Products Domestic Fund I (2010-2013) 3,270 5,350 99,986 99,986 22.6 % 18.0 % 2.0x Other funds 414,000 308,750 414,750 80,959 n/m n/m n/m$ 518,104 $ 447,976 $ 1,301,215 $ 967,424 _______________ 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 ofMarch 31, 2020 , 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. 45 -------------------------------------------------------------------------------- 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, aircraft securitizations, CBOs, and other customized solutions for clients. Assets under management for Institutional Credit Strategies are generally based on the par value of the collateral and cash held for CLOs and CBO, and adjusted portfolio values for our aircraft securitizations. However, assets under management are reduced for any investments in these securitization vehicles held by our other funds to avoid double counting these assets. Management fees for Institutional Credit Strategies, generally range from 0.30% to 0.50% annually of assets under management. For the first quarter of 2020, Institutional Credit Strategies had an average management fee rate of 0.46% gross of rebates on cross-investments from other funds we manage (0.37% net of such rebates). Incentive income from our CLOs and CBO is generally equal to 20% of the excess cash flows due to the holders of the subordinated notes issued by the CLOs and CBO and is generally subject to a 12% hurdle rate. Because of the hurdle rate and structure of our CLOs and CBO, 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. We do not earn incentive income from our aircraft securitizations. A portion of the management fees we earn from our CLOs are subordinated to other obligations of the CLOs, including principal and interest on the notes issued by the CLOs. When certain overcollateralization and interest coverage tests are triggered, cash flows received on the underlying collateral in the CLOs that would have otherwise been distributed to us are redirected to pay principal and interest on the more senior obligations of the CLOs. Starting inApril 2020 , because of ratings downgrades and defaults on certain of the collateral held by our CLOs, driven by the market and economic impacts of the COVID-19 pandemic, certain of our CLOs failed to satisfy one or more overcollateralization tests, which has deferred the collection of a portion of our subordinated management fees. We expect to collect these fees at a later date. As ofMarch 31, 2020 , we had recognized as revenue approximately$3.4 million of subordinated management fees that were due to be collected in April but that have been deferred to future periods. We will continue to evaluate our ability to collect these and any future fees; however, to the extent the overcollateralization tests in our CLOs have not resolved, the amount of fees deferred would continue to increase, which may negatively impact our liquidity and the amounts we recognize as revenue in future periods. Most Recent Closing or Assets Under Management as of March 31, Refinancing Year Deal Size 2020 2019 (dollars in thousands) Collateralized loan obligations 2016$ 653,250 $ 604,441 $ 608,231 2017 4,209,590 3,467,743 3,494,341 2018 7,487,273 7,027,289 7,098,813 2019 2,331,964 2,236,570 948,336 2020 409,250 398,461 395,554 15,091,327 13,734,504 12,545,275 Aircraft securitizations 2018 696,000 497,611 573,084 2019 1,128,000 1,035,459 - 2020 472,732 398,653 - 2,296,732 1,931,723 573,084 Collateralized bond obligation 2019 349,550 274,183 - Other funds n/a n/a 53,989 247,284$ 17,737,609 $ 15,994,399 $ 13,365,643 46
-------------------------------------------------------------------------------- Assets under management in Institutional Credit Strategies totaled$16.0 billion as ofMarch 31, 2020 , increasing$2.6 billion , or 20%, year-over-year. The year-over-year increase in assets under management in Institutional Credit Strategies was driven primarily by the closing of additional CLOs and launches of aircraft securitizations and a CBO, partially offset by changes in underlying collateral value and distributions. In addition, in 2020 we refinanced one of our 2016 CLOs. 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 0.50% to 1.50% annually of assets under management; however, management fees forSculptor Real Estate Credit Fund I are based on invested capital both during and after the investment period. For the first quarter of 2020, our real estate funds had an average management fee rate of 0.72%. The tables below present assets under management, investment performance and other information for our real estate funds. Our real estate funds generally follow an American-style waterfall, whereby incentive income may be paid to us after a fund investment is realized if a fund investor receives distributions in excess of the capital contributed for such investment, as well as a preferential return on such investment, which is generally 6% to 10%. Upon each subsequent realization, incentive income, which is generally 20% of realized profits, is recalculated based on the cumulative realized profits in excess of the preferential return attributable to each investor over the life of the fund. Once the investment performance has exceeded the hurdle rate, we may receive a "catch-up" allocation, resulting in a potential recognition by us of a full 20% of the realized net profits attributable to investors in these funds. Due to the recalculation of cumulative realized profits upon each realization, the fund may clawback incentive income previously paid to us. As a result, we record incentive income paid to us by the real estate funds as unearned revenue in our consolidated balance sheets until the criteria for revenue recognition has been met. Assets Under Management as of March 31, 2020 2019 Fund (dollars in thousands) Sculptor Real Estate Fund I $ -$ 13,578 Sculptor Real Estate Fund II 61,602 100,904 Sculptor Real Estate Fund III 540,979 1,483,435 Sculptor Real Estate Fund IV 2,023,070 - Sculptor Real Estate Credit Fund I 730,738 725,200 Other funds 633,432 329,371$ 3,989,821 $ 2,652,488 47
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Inception to Date as of March 31, 2020
Total Investments Realized/Partially Realized Investments(1)
Invested Total Gross Total Gross
Total Commitments Capital(2) Value(3) IRR(4) Net IRR(5) Gross MOIC(6) Invested Capital Value IRR(4) Gross MOIC(6)
Fund (Investment Period) (dollars in thousands)
Sculptor Real Estate Fund
I(7) (2005-2010) $ 408,081 $ 386,298 $ 845,975 25.5 % 16.1 % 2.2x $ 386,298 $ 845,975 25.5 % 2.2x
Sculptor Real Estate Fund
II(7) (2011-2014) 839,508 762,588 1,547,666 32.9 % 21.6 % 2.0x 762,588 1,547,666 32.9 % 2.0x
Sculptor Real Estate Fund
III(7) (2014-2019) 1,500,000 1,053,427 1,685,570 28.7 % 18.7 % 1.6x 603,680 1,090,035 35.5 % 1.8x
Sculptor Real Estate Fund
IV(8) (2019-2023) 2,023,070 - - n/m n/m n/m - - n/m n/m
Sculptor Real Estate
Credit Fund I(8)
(2015-2020) 736,225 318,286 363,757 n/m n/m n/m 87,921 114,964 n/m n/m
Other funds 938,815 434,323 567,195 n/m n/m n/m 63,338 112,938 n/m n/m
$ 6,445,699 $ 2,954,922 $ 5,010,163 $ 1,903,825 $ 3,711,578 Unrealized Investments as of
Total Gross
Invested Capital Value MOIC(6)
Fund (Investment Period) (dollars in thousands)
Sculptor Real Estate Fund I (2005-2010)(7) $ - $ - -
Sculptor Real Estate Fund II (2011-2014)(7) - - -
Sculptor Real Estate Fund III (2014-2019)(7) 449,747 595,535 1.3x
Sculptor Real Estate Fund IV (2019-2023)(8) - - n/m
Sculptor Real Estate Credit Fund I (2015-2020)(8) 230,365 248,793 n/m
Other funds 370,985 454,257 n/m
$ 1,051,097 $ 1,298,585
_______________
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 March 31, 2020 . 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 March 31, 2020 .
(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 March 31, 2020 , 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
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 has invested less than half of its committed capital; therefore,
IRR and MOIC information is not presented, as it is not meaningful.
Assets under management in our real estate funds increased $1.3 billion , or
50%, year-over-year due to net inflows of $2.6 billion , primarily due to launch
of Sculptor Real Estate Fund IV and a related co-investment vehicle, partially
offset by $1.2 billion of distributions and other reductions primarily related
to the expiration of the investment period of Sculptor Real Estate Fund III and
related co-investment vehicles. Our real estate funds continue to deploy capital
and generate strong returns
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with an 18.7% annualized net return in Sculptor Real Estate Fund III. Despite
the recent market dislocation, we believe our diversified approach across
product types, position in the capital structure, focus on current income and
modest use of leverage has allowed our portfolios to generate consistent returns
over time. While we continue to actively navigate the current economic and
market conditions resulting from the COVID-19 pandemic, to the extent our
ability to realize investments may be delayed or operating cash flows from
existing investments may be reduced or deferred, we may experience a delay in
our ability to recognize incentive income from these funds.
Longer-Term Assets Under Management
As of March 31, 2020 , approximately 71% of our assets under management were
subject to initial commitment periods of three years or longer. Incentive income
on these assets, if any, is 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 amount of incentive income accrued
at the fund level but that has not yet been recognized in our revenues. 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-Revenues-Incentive Income" for additional information.
March 31, 2020 December 31, 2019
Accrued
Longer-Term Assets Accrued Unrecognized Longer-Term Assets Unrecognized
Under Management Incentive Income Under Management Incentive Income
(dollars in thousands)
Multi-strategy funds $ 327,649 $ 3,112 $ 344,623 $ 11,280
Credit
Opportunistic credit funds 3,572,500 45,199 4,012,023 143,134
Institutional Credit Strategies 15,981,557 - 15,667,058 -
Real estate funds 3,989,813 91,699 3,393,877 99,163
Other 1,216 - 8,311 -
$ 23,872,735 $ 140,010 $ 23,425,892 $ 253,577
Accrued unrecognized incentive income associated with longer-term assets
decreased by $113.6 million during the quarter, primarily driven by negative
performance in the Customized Credit Focused Platform within opportunistic
credit funds. Based on April 2020 estimated performance, accrued unrecognized
incentive income is estimated to have increased by approximately $15 to 20
million. We expect a large portion of the amounts related to our opportunistic
credit funds to be recognized in the fourth quarter of 2020. For the remainder
of accrued unrecognized incentive income, we generally recognize incentive
income in multi-strategy funds and open-end opportunistic credit funds at or
near the end of their respective commitment periods, which are generally three
to five years, when such amounts are probable of not significantly reversing. We
may begin recognizing incentive income related to assets under management in our
closed-end opportunistic credit funds and real estate funds after the conclusion
of their respective investment period, when such amounts are probable of not
significantly reversing. However, these investment periods may generally be
extended for an additional one to two years.
Understanding Our Results
Revenues
Our operations historically 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 $1.0 billion increase or
decrease in assets under management subject to a 1% management fee would
generally increase or decrease annual management fees by $10.0 million . If
profits, net of management fees, attributable to a fee-paying fund investor
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were $10.0 million in a given year, we generally would earn incentive income
equal to $2.0 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 example,
incentive income for the majority of our multi-strategy assets under management
is recognized in the fourth quarter each year, based on full year investment
performance.
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 Rates " for
information on our average management fee rate and Note 13 to our consolidated
financial statements in our Annual Report for additional information regarding
management fees.
Incentive Income. We earn incentive income based on the cumulative performance
of our funds over a commitment period. We recognize incentive income when such
amounts are probable of not significantly reversing. See Note 13 to our
consolidated financial statements in our Annual Report for additional
information regarding incentive income.
Other Revenues. Other revenues consist primarily of interest income on
investments in CLOs, cash equivalents and longer-term U.S. government
obligations, as well as subrental income. Interest income is recognized on an
effective yield basis. Subrental income is recognized on a straight-line basis
over the lease term.
Income of Consolidated Funds. Revenues recorded as income of consolidated 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.
We generally recognize compensation and benefits expenses over the related
service period.
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. We accrue minimum annual
discretionary cash bonuses on a straight-line basis during the year. The total
amount of discretionary cash bonuses ultimately recognized for the full year,
which is determined in the fourth quarter of each year, could differ materially
from the minimum amount accrued, as the total discretionary cash bonus is
dependent upon a variety of factors, including fund performance for the year.
Compensation and benefits also include 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 PSUs and Partner Equity
Units granted to executive managing directors.
We also have profit-sharing arrangements whereby certain employees or executive
managing directors are entitled to a share of incentive income that we earn from
certain funds. This incentive income is typically paid to us and then we pay a
portion to the profit-sharing participant as investments held by these funds are
realized. 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.
Deferred cash interests ("DCIs") are also granted to certain employees and
executive managing directors as a form of compensation. DCIs reflect notional
fund investments made by us on behalf of an employee or executive managing
director. DCIs generally vest over a three-year period, subject to an employee's
or executive managing director's continued service. Upon vesting, we pay the
employee or executive managing director an amount in cash equal to the notional
investment represented by the DCIs, as adjusted for notional fund performance.
Except as otherwise provided in the relevant DCI plan or in an award
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agreement, in the event of a termination of the employee's or executive managing
director's service, any portion of the DCIs that is unvested as of the date of
termination will be forfeited.
Interest Expense. Amounts included within interest expense relate primarily to
indebtedness outstanding. See "-Liquidity and Capital Resources-Debt
Obligations" and "-Liquidity and Capital Resources-Securities Sold Under
Agreements to Repurchase" for additional information.
General, Administrative and Other. General, administrative and other expenses
are comprised of professional services, occupancy and equipment, information
processing and communications, recurring placement and related service fees,
business development, insurance, foreign exchange gains and losses, and other
miscellaneous expenses. Legal settlements and provisions are also included
within general, administrative and other.
Expenses of Consolidated Funds. Expenses recorded as expenses of consolidated
funds consist of interest expense and other miscellaneous expenses.
Other (Loss) Income
Changes in Tax Receivable Agreement Liability. Changes in tax receivable
agreement liability consists of changes in our estimate of the future payments
related to the tax receivable agreement that result from changes in future
income tax savings due to changes in tax rates. See Note 18 to our consolidated
financial statements included in this report for additional information.
Net Losses on Early Retirement of Debt. Net losses on early retirement of debt
consist of net losses realized upon the early retirement of any indebtedness
outstanding, and include the write-off of unamortized debt discounts and
issuance costs, as well as other fees incurred in connection with the early
retirement of debt.
Net (Losses) Gains on Investments. Net (losses) gains on investments primarily
consist of net gains and losses on investments in our funds, including
investments in U.S. government obligations, CLOs and other funds we manage.
Net Gains of Consolidated Funds. Net gains of consolidated funds consist of net
realized and unrealized gains and losses on investments held by the consolidated
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
bases. 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 bases and
the likelihood of being able to fully utilize deferred income tax assets
existing as of the end of the period.
The Sculptor Operating Partnerships are partnerships for U.S. federal income tax
purposes. The Registrant was a partnership for U.S. federal income tax purposes
until the Corporate Classification Change on April 1, 2019 . Prior to the
Corporate Classification Change, only a portion of the income we earned was
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. Following the Corporate
Classification Change, generally all of the income allocated to the Registrant
from the Sculptor Operating Group will be subject to corporate-level income
taxes in the United States .
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Net Loss Attributable to Noncontrolling Interests
Noncontrolling interests represent ownership interests in our subsidiaries held
by parties other than us and are primarily made up of Group A Units. Increases
or decreases in net (loss) income attributable to the Group A Units are driven
by the earnings of the Sculptor Operating Group . See Note 4 for additional
information regarding our ownership interest in the Sculptor Operating Group .
Prior to the fourth quarter of 2019, we also consolidated certain of our
opportunistic 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 were reflected within net income attributable to redeemable
noncontrolling interests in the consolidated statements of comprehensive income
(loss). Increases or decreases in the net income (loss) attributable to fund
investors' interests in consolidated funds were driven by the earnings of those
funds as allocated under the contractual terms of the relevant fund agreements.
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