Valuing the Och-Ziff IPO

Bloomberg News reports that Och-Ziff Capital Management Group LLC, the hedge-fund company run by former Goldman Sachs Group Inc. (NYSE: GS) equities trader Daniel Och, filed to raise $2 billion in an initial public offering. Och-Ziff managed $26.8 billion for 700 fund investors as of April 30. The $2 billion will be used to buy equity held by Och-Ziff owners, and its 18 partners will be required to reinvest the proceeds in funds managed by the firm for five years.

Och-Ziff appears to be a good performer, with industry standard fees. According to DealBook, it charges a management fee of 1.5% to 2.5% on its assets under management, and it takes 20% of the profits earned by its funds. Since its inception in 1994, Och-Ziff's flagship fund has generated annual returns of 17% after fees, better than the 11.6% return posted by the S&P 500 index during the same period.

This deal is more comparable to the Fortress Investment Group (NYSE: FIG) IPO in February than the Blackstone Group LLP (NYSE: BX) one last month. With $36 billion under management and a market capitalization of $9.5 billion, the market is valuing each of Fortress's dollars managed at 27 cents. This is much lower than the 41 cents per dollar of assets under management at Blackstone -- based on $78.7 billion managed and a market capitalization of $31.9 billion.

Applying the Fortress valuation, I'd say that Och-Ziff should have a market capitalization of $7.2 billion. We'll soon see.

Peter Cohan is president of Peter S. Cohan & Associates, a management consulting and venture capital firm. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned in this post.