Barron's slams hedge fund Och-Ziff

Posted Nov 17th 2007 4:40PM by Tom Taulli
Filed under: Private Equity, Blackstone Group L.P (BX)

Last Wednesday, the mega hedge fund Och-Ziff went public. But investors were jittery and the stock has already dropped 12.5% since its debut.

Well, it may drop even more -- that is, according to a piece in Barron's [a paid service]. In fact, the author, Andrew Bary, calls the company's investment performance an example of "mediocrity."

The current market value of Och-Ziff is about $10.8 billion, which means it is trading at about 18 times earnings. So, on its face, this seems reasonable, right?

Well, you need to make some adjustments. First of all, there is the favorable tax treatment (which may undergo some changes in Congress).

Next, Och-Ziff relies primarily on hefty fees for its investment performance. But, what if the firm has a down year? It could be a big hit to the bottom line.

Something else: tangible book value is negative (-$1.00 per share). Why? Because Och and other insiders cashed out big time from the IPO.

Finally, the OZ Master Fund has underperformed the S&P 500 for the past year, three years, and five years. True, the firm claims it has had less volatility. But, is that enough to keep investors excited?

Interestingly enough, Barry thinks Och-Ziff can fall just like other asset managers, such as Blackstone Group (NYSE: BX) and Fortress Investment Group (NYSE: FIG). He even believes that a $10 drop in the stock price would still not make the stock cheap.

Ouch.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar Online Guide to Decoding Financial Statements. He also operates DealProfiles.com.

Tags: Blackstone, BX, FIG, Fortress, Hedge Funds, Och-Ziff, OZ Master Fund