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Fight over Sculptor hedge fund sale entwined in Daniel Och’s tax affairs

The value of the former Och-Ziff Capital Management has plunged 96% since its 2007 IPO

Sculptor Capital Management explicitly warned investors ahead of its 2007 initial public offering that “conflicts of interest” stemming from a complicated ownership structure could one day pit the hedge fund’s billionaire founder Daniel Och against public shareholders.

That theoretical tension has turned very real in recent weeks as Sculptor — worth $12bn when it listed — aims to sell itself to real estate specialist Rithm Capital for a fraction of the sum.

Och this month attacked the $639mn transaction as bad for shareholders, accusing the board of breaching its fiduciary duty by selling Sculptor on the cheap.

The board has fired back, insisting it struck the best deal possible and alleging that Och has undermined the company out of his own self interest.

The ugly dispute underscores how Wall Street firms dominated by big personalities can have an awkward existence as public companies. It involves complex partnership units and tax agreements that are common among the private asset managers that have listed over the past 25 years.

The latest twist in the saga came late on Wednesday, when Sculptor said it rejected a rival bid to Rithm led by billionaire hedge fund managers including Boaz Weinstein of Saba Capital and Pershing Square’s Bill Ackman. The group had boosted its offer to $12.76 a share, compared with the $11.15 a share agreed with Rithm.

Och, a former star trader at Goldman Sachs, co-founded what was then known as Och-Ziff Capital Management in 1994 as a hedge fund investing across debt, equity and global macro. Its assets eventually peaked at $50bn.

But disappointing results followed the global financial crisis and investor enthusiasm for hedge funds waned. In 2016 the firm paid $412mn to settle charges of bribery in several African countries, which it now says led to Och’s removal as chief executive and Och-Ziff’s rebranding as Sculptor.

In a scorching letter released this week, Sculptor accused Och of orchestrating a campaign of “retribution” and a “well-publicised, years-long smear campaign against the company’s management” since his exit. The firm said Och had taken home $3.3bn in profits and dividends even as Sculptor’s share price collapsed by 96 per cent.

In an earlier securities filing, Sculptor detailed a year-long process to find a buyer for the hedge fund amid what its board said was Och’s distracting meddling.

Sculptor said Och has demanded outsized personal payouts and that his and other founders’ “economic interests diverge in certain respects from those of a public company shareholder”.

The alleged divergence largely stems from layers of partnership units held by Och and other founders that remained in place after the Och-Ziff IPO. Och and other founders owe tax liabilities on their units, costs not borne by public holders of Sculptor’s common stock.

The IPO structure used at Och-Ziff was replicated by several private capital managers and boutique investment banks, crystallising wealth for their founders but also complicating a potential sale down the road.

Several bidders initially made offers for the firm as a whole, but they could not provide a per-share bid because they were unable to count the number of Sculptor’s underlying shares, according to the securities filing.

“The alphabet soup of units was a real issue,” said one deal adviser to Sculptor. “Bidders all had the wrong share counts and no understanding of how those things work. When they saw how the payout waterfall works, they’d be like, ‘I have a ton of different units I didn’t know about and that I have to pay up for.’”

Victor Fleischer, a tax law professor at the University of California at Irvine, told the Financial Times that US investors were more accustomed to traditional corporations which offer more recourse for minority shareholders.

“Publicly traded partnerships have much more complicated structures and may not provide the same level of protection that corporate shareholders receive”, he said.

The board launched its auction at a time when Och was also criticising the company over Sculptor chief executive Jimmy Levin’s pay, which totalled $146mn in 2021. The securities filing described “alternative transaction approaches” and “inducements” aimed at winning Och’s support for a deal.

In one concession, Rithm offered Och and the other founders the chance to keep or “roll over” their stakes in Sculptor’s “class A” partnership units, which would spare Och from a large tax on capital gains. However, Rithm says it is no longer contractually bound to the rollover now that the Och group has publicly criticised its deal.

Rithm will also separately assume $173mn that Sculptor will be obliged to pay Och and other fund founders over several years under what is known as a tax receivable agreement.

Under the terms of the transaction, Sculptor realises corporate tax deductions when Och swaps his partnership units into common stock. Under the TRA, Sculptor pays Och as compensation for the tax benefits from the exchange of units into shares.

Sculptor’s proxy filing said that Och had considered supporting a Rithm buyout, but demanded that it “pre-pay a significant portion” of the $173mn and “reimburse the [Och] group for historical legal fees”. This week Sculptor disclosed that the Och group had already reaped $150mn in TRA payments since the firm’s IPO.

Rithm has assumed the obligation to pay the $173mn even if it does not ultimately generate enough income to need the tax deductions. Still, Och would prefer to have at least a portion of the sum made immediately upon the deal closing, according to securities filings and people familiar with the matter.

“He’s got a $170mn reason to ensure he blocks the deal [and] for Rithm to pay him to go away,” said an adviser to Sculptor. “If you’re sitting there and Rithm is saying ‘I’d like you to support the deal’, these are all parts of the play,” the adviser added.

A representative for Och denied that his personal financial priorities were influencing his public campaign against the Rithm deal, which he has described as the product of a “breach of fiduciary duty” by the Sculptor independent directors.

“It is outrageous that the special committee continues to restrict the [Och group] and other parties from engaging in discussions that could surface a higher offer that would benefit all shareholders,” the representative said.

This week Och demanded that Sculptor release previous bidders from confidentiality agreements in order to spark rival offers and pushed for detailed records on how Sculptor conducted the sale process.

Both Sculptor and Och each say they have made big concessions in order to ease a sale for common stockholders.

Sculptor’s current management said in the securities filing that it had given up $112mn of special class of partnership units they had previously been granted, while Levin had reduced his upcoming pay as well.

A representative for Och said that the founders, including Och himself, gave up $600mn of equity in a 2019 restructuring intended to put the fund on a firm footing following the Africa bribery scandal and allow it to add and retain new talent.

Everton suitor 777 hails new era of football ‘hyper commercialisation’

Miami investment group says cross-selling opportunities justify its bets on struggling clubs

Football clubs are entering a new era of “hyper commercialisation”, according to the co-founder of 777 Partners, the private Miami investment group that has emerged as one of the most acquisitive operators in the global game.

The firm, which was unknown in the sports world five years ago, has snapped up hundreds of millions of dollars worth of stakes in clubs stretching from Italy to Brazil and is now eyeing an investment in Everton, its first Premier League target, according to several people familiar with the matter.

Most of the clubs have been financial underperformers, raising questions about the returns on its investment, but Josh Wander, who set up 777 in 2015 with co-founder Steven Pasko, said in an interview that critics misunderstood the logic behind its bets.

“We have a strong view that there’s a new wave of commercialisation coming to football,” he said, adding that it had paid attractive prices to invest in clubs that had “done a horrible job of commercialising the product”.

Wander declined to comment on 777’s interest in Everton, but noted the Premier League had done “a very good job relative to the other leagues of commercialising their product”.

He said 777’s goal was “to be profitable by next season” across its portfolio of clubs, which include Genoa in Italy, Vasco da Gama in Brazil, Hertha Berlin in Germany and Standard Liège in Belgium.

Everton, controlled by Anglo-Iranian businessman Farhad Moshiri through an Isle of Man entity, is another club in a weak financial position after several years of losses, a brush with relegation last season and the rising costs of a new stadium project. The indebted club recently ended months of exclusive negotiations with MSP Sports Capital, people familiar with the matter said.

Wander and 777 are part of a trend towards multi-club ownership that is reshaping football and raising concerns at Uefa, its European governing body. But they have been dogged by questions since taking their first 15 per cent stake in Sevilla in 2018. 

“It’s so absurd to me that people say we’re not serious when we bought [stakes in] seven clubs in the last 18 months,” Wander said. “Is there anyone in the world that’s been more serious about buying football clubs in history than Josh Wander?”

777 had $9bn to $10bn of assets under management including a “close to $4bn insurance balance sheet”, he said. All of its funds had been generated by its own operations apart from $250mn it raised in preferred equity, he added. 

It is now looking to raise “a few hundred million” of equity and debt for its football holding company, in a process led by Tifosy Capital. Wander said it had held discussions with Saudi Arabia’s $650bn Public Investment Fund, but “nothing came of it”.

Wander and Pasko built 777 from early investments in “esoteric” financial assets such as lottery winnings and structured settlements, in which defendants in lawsuits agree to pay damages over several years rather than as a lump sum.

The firm’s holdings now span seven industries, including aviation, litigation finance and private credit, which Wander said shared a common theme of predictable long-term cash flows. In sports, he said, 777’s strategy includes moving players between its clubs, buying adjacent businesses such as ticketing and merchandise, and cross-selling products from its other companies.

“The vision for this football group is that one day we’re not selling hot dogs and beers to our customers; [it’s] that we’re selling insurance or financial services or whatever,” he said. The intensity of fans’ engagement with their clubs meant “they want to be monetised”, he added.

Wander said 777’s arrival on the high-profile stage of football dealmaking had brought with it “salacious” media coverage, including of a 2003 cocaine trafficking arrest which led to him being put on probation.

“It was a stupid college thing. So all of the success that I’ve had has been in spite of the fact that every time I’ve tried to do something, somebody brings that up and throws it in my face,” he said. “And when I got involved in investing in sports, it became a perfect opportunity for those people that are haters to try to destroy you with things that are somewhat meaningless.”

US watchdog has proposed 47 rules affecting market participants under chair’s leadership

US Securities and Exchange Commission chair Gary Gensler has hit the financial sector with more new major rules and regulatory proposals than any predecessor since the response to the 2008 global financial crisis, a new tally shows.

Gensler’s SEC has put forward 47 proposals that substantially affect market participants and adopted 22 of them in the first 850 days of his leadership, ending August 15, the Committee on Capital Markets Regulation calculated.

That is the most of both since Mary Schapiro, who oversaw the agency’s initial response to the financial crisis after she became chair in January 2009 and put forward 59 proposals and 18 final rules.

The current SEC regime also stands out for the share of its proposals that were not mandated by congressional legislation. While 59 per cent of chair Mary Jo White’s 22 proposals from 2013 to 2015 were mandated by the 2010 Dodd-Frank financial reform act and other laws, just 17 per cent of Gensler’s proposals were, and several of those were left over from Dodd-Frank.

The capital markets group, made up of financial sector companies, academics and former regulators, has a history of being highly critical of regulation that it considers intrusive or damaging to US companies’ ability to win investment. Gensler’s proposals have come in for particular scorn but raised concerns about prior chairs’ work as well.

“Most of what Gensler has done is unnecessary . . . markets need to be regulated but they need to be regulated in the correct way,” said Hal Scott, the group’s president and an emeritus Harvard Law School professor.

The SEC said: “Chair Gensler is focused on ensuring that the markets work best for investors and issuers and not the other way around. All of the rules on the agency’s agenda advance the SEC’s mission.”

Among other measures, Gensler’s SEC has enacted changes to mutual fund pricing and cyber security disclosures and proposed new rules for asset custody and environmental, social and governance investing.

The committee research excluded final rules that were initially proposed by the previous chair, those focused specifically on the agency’s internal processes and joint rulemaking where the SEC was the junior partner with other US watchdogs. When those are included, Gensler’s predecessors finalised more rules than he did, but they still proposed fewer.

The August 15 end date for the committee’s analysis means the final rule count excludes a sweeping revamp of the private funds industry passed last week.

Financial reform groups argued that Gensler’s proposals are needed to respond to the rise of electronic trading, the rapid expansion of private markets and other market developments. A 1,500-page proposal to rewrite the rules on stock trading, for example, would be the biggest change to equity markets since 2005.

“It is totally reasonable for the SEC to modernise its regulatory framework in response to changes in business practices, markets and technology,” said Micah Hauptman, director of investor protection at the Consumer Federation of America.

But industry groups have said that many of the proposals will drive up costs, weaken returns and reduce competition among money managers. They also said the SEC had failed to consider the impact of doing so many changes at once.

“Too many of the regulations [Gensler] has proposed lack purpose, justification and realism,” said Eric Pan, chief executive of the Investment Company Institute, which represents fund managers. “They will likely hurt markets more than improve them. They illustrate that quantity cannot substitute for quality.”

Creating the KnitWell Group brings three women's specialty retailers with similar products and customer demographics closer together under a single umbrella.

Private equity firm Sycamore Partners has formed a holding company called the KnitWell Group comprised of its Ann Taylor, Loft and Talbots women’s specialty businesses.

Together, the three brands generate more than $3 billion in annual sales and have a workforce of about 30,000.

Lizanne Kindler, chief executive officer of Talbots, shifts into the role of leading the KnitWell Group as executive chair and CEO. An office of the executive chair was formed that includes Kindler and other top executives, which will be supported by senior leaders at each of the brands, the New York-based Sycamore indicated in its announcement Wednesday.

The creation of the holding company raises several possibilities for cost savings and sharing talent as well as best practices in product development and other areas more than might have been done in the past. The holding company can get its subsidiaries to sell products to one another at below-market prices.

There’s also speculation that by bringing the retail businesses together, it’s a prelude to a potential sale of the group to another private equity firm, retail company or through an IPO.

“The Ann Taylor and Talbot brands have tremendous customer overlap. This combination is long overdue as a meaningful opportunity to streamline overhead and generate cost savings,” said William S. Susman, managing director of Threadstone Capital. “Eventually, you are creating a large-scale entity with higher profitability that could be attractive in the public markets.”

“The first thought that comes to my mind is that they are trying to sell these companies by packaging them into a salable group,” commented veteran retail analyst, consultant and blogger Walter Loeb. “The products that these three companies sell are comparable.”

“KnitWell is a collection of powerful brands that, in aggregate, have been providing customers with the fashions they want for nearly 300 years,” Kindler said in a statement. “Brands are propelled by a deep and meaningful connection with the customers they serve, and that is where we start and end each day. With that as our North Star, we know that this new structure will support our efforts to unite brands and people by providing greater resources and capabilities, economies of scale and enhanced value.”

Stefan Kaluzny, managing director of Sycamore Partners, said in a statement, “Lizanne and the team have done an incredible job over the last decade reviving and growing these iconic American brands, first Talbots and, most recently, Ann Taylor and Loft. The consistent and focused approach, which leverages the replicable playbook this team has developed, is laying the foundation of success not only for the brands currently part of the KnitWell portfolio, but also for potential future brands. We look forward to our continued partnership with Lizanne and the entire team.”

The new company will also continue to provide oversight and shared services to Lane Bryant, which sells plus-size women’s apparel brand and is less comparable to the other three brands.

Another financial source, who requested not to be named, said, “If you go way back in time, when Ann Taylor and Talbots were publicly traded companies and competed against each other, when one comped up three points, the other would be down three points. It was like Coke and Pepsi, two competing brands.” For many years, Ann Taylor and Loft, founded as a lower-priced, casual version of Ann Taylor, would also not perform equally; when one showed gains, the other showed declines.

“Fundamentally, they do have comparable merchandising, and only slightly different demographics, but there could be an opportunity to take out a ton of back office expenses and up the value of a combination. This feels long overdue.”

In 2020, the Ascena Retail Group went bankrupt and later agreed to sell Ann Taylor, Loft, Lane Bryant and Lou & Grey to Sycamore Partners, which previously had acquired Talbots. Sycamore also owns or has large stakes in Staples, Torrid and Hot Topic, among other retail and consumer brands.

Talbots, Ann Taylor and Loft still attract customers and have had loyal followings. But they’ve lost a good deal of their luster over the last millennium, and have lost business to overseas retailers expanding into the U.S. such as Zara, H&M, Aritzia and Uniqlo, as well as off-pricers such as T.J. Maxx, and Amazon.

It’s the last blue supermoon for more than a decade, NASA says

A rare blue supermoon will rise in the sky Wednesday night.

A blue supermoon, or super blue moon, is the confluence of two events: A supermoon—when a full moon occurs within a day of the moon’s closest point of orbit to Earth—and a blue moon, when it’s the second full moon in a single month.

According to the National Aeronautics and Space Administration, as many as two decades can elapse between blue supermoons, but about 10 years is the average. The next blue supermoons are expected in 2037, in January and again in March of that year, NASA said.

The full moon raised concerns about exacerbating the storm surge from Hurricane Idalia, which made landfall Wednesday morning on Florida’s Gulf Coast. The moon influences ocean tides, and a supermoon’s greater gravitational force heightens high and low tides.

Storm surges, a leading cause of death in a hurricane, are created when high winds force ocean waters onshore. Forecasters predicted storm surges of up to 8 feet as of Wednesday afternoon.

Search-and-rescue operations were under way on the island of Cedar Key, Fla., on Wednesday afternoon, before an expected extra-high tide typically caused by a supermoon, called a king tide, according to local law enforcement.

August will have had two supermoons. The first was on Aug. 1. They happen three to four times a year, and make the moon look bigger and brighter.

Tonight’s supermoon is the biggest and brightest of 2023, according to the Old Farmer’s Almanac.

The supermoon will be at its highest point in the sky at 1:23 a.m. ET Thursday, according to NASA.

A blue moon happens once every two to three years. The name doesn’t mean that the moon looks blue during these calendar events. However, certain types of clouds or particles from volcanic ash can occasionally make it appear blue.

There is another type of blue moon, according to NASA—a seasonal one. While each season, such as summer, typically has three full moons, sometimes there are four. The third of those four full moons is the blue moon.

Och oh

The spat between Sculptor Capital Management and its founder and erstwhile head Daniel Och is simply delightful, and, as Marc Rubinstein has noted, offers a fascinating look under the hood of the hedge fund industry.

The latest twist is a great example. After Och started trying to sabotage the hedge fund’s deal to sell itself, Sculptor has released several savage letters criticising its former supremo.

One included this absolute pearl of a chart

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https://www.ft.com/content/e2b8ce84-ec9d-4b3f-8499-2ccfaee94d54

For context, one of Och’s most potent attack lines against Sculptor (née Och-Ziff Capital Management) is that it has grossly overpaid Jimmy Levin, his former protégé and current CEO and CIO, even as performance has been woefully poor.

That’s . . . not entirely wrong. Sculptor’s investment performance has been dismal for a while, and its share price has bombed. It IPO’d at $32 back in 2007, and now wants to sell itself for $11.15 per share. Over 2021-22 it has paid employees led by Levin $732.8mn in salaries, bonuses and benefits, even as it reported losses of $27mn.

But as Sculptor archly noted in its letter to Och, no one has done better than Och himself, despite presiding over much of the hedge fund’s period as a public company and the debilitating effects of an African bribery scandal (detailed in the second letter).

There’s much to say here — and there will almost certainly be more twists in this saga — but it really does hammer home the adage that hedge funds are a compensation scheme masquerading as an asset class.