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Edited Transcript of OZM earnings conference call or presentation 6-May-20 12:30pm GMT

Q1 2020 Sculptor Capital Management Inc Earnings Call

NEW YORK May 25, 2020 (Thomson StreetEvents) -- Edited Transcript of Sculptor Capital Management Inc earnings conference call or presentation Wednesday, May 6, 2020 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Elise King

Sculptor Capital Management, Inc. - Head of Shareholders Services

* Robert Scott Shafir

Sculptor Capital Management, Inc. - CEO, Executive MD & Director

* Thomas Michael Sipp

Sculptor Capital Management, Inc. - CFO & Executive MD

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Conference Call Participants

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* Gerald Edward O'Hara

Jefferies LLC, Research Division - Equity Analyst

* Patrick Davitt

Autonomous Research LLP - Partner, United States Asset Managers

* William R. Katz

Citigroup Inc, Research Division - MD

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Presentation

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Elise King, Sculptor Capital Management, Inc. - Head of Shareholders Services [1]

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Thanks, Melissa. Good morning, everyone, and welcome to our call. Joining me are Robert Shafir, our Chief Executive Officer; and Tom Sipp, our Chief Financial Officer.

Today's call contains forward-looking statements, many of which are inherently uncertain and outside of our control. Before we get started, I need to remind you that Sculptor Capital's actual results may differ, possibly materially, from those indicated in these forward-looking statements. Please refer to our most recent SEC filings for a description of the risk factors that could affect our financial results, our business and other matters related to these statements. The company does not undertake any obligation to publicly update any forward-looking statements.

During today's call, we will be referring to economic income, distributable earnings and other financial measures that are not prepared in accordance with U.S. GAAP. Information about and reconciliations of these non-GAAP measures to the most directly comparable GAAP measure are available in our earnings release, which is posted on our website. No statements made during this call should be construed as an offer to purchase shares of the company or an interest in any of our funds or any other entities.

Our earnings press release from this morning also included an earnings presentation. We will be referring to this report during the call. If you had joined through the conference call and would like to follow along, you can find the presentation on the Investor Relations page of sculptor.com at the earnings release link. If you had joined through the webcast, you can navigate through the presentation on the webcast screen.

Earlier this morning, we reported a first quarter 2020 GAAP net loss of $28 million or $1.27 per basic and diluted cost a share. As always, you can find a full review of our GAAP results in our earnings release. On an economic income basis, we reported first quarter 2020 distributable earnings loss of $0.3 million or $0.01 per fully diluted share. First quarter adjusted distributable earnings were $3.6 million.

If you have any questions about the information provided in our press release or on our call this morning, please feel free to follow-up with me. With that, let me turn the call over to Rob.

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Robert Scott Shafir, Sculptor Capital Management, Inc. - CEO, Executive MD & Director [2]

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Thanks, Elise, and good morning, everyone. Before we begin our usual comments, I want to take a moment to address the current pandemic. We hope that you and your families are safe and healthy. Our thoughts are with our employees, our clients and the world at large during this time. We are extremely grateful to the health care workers and other frontline responders who put themselves at risk on a daily basis, and we want to thank them for their service and sacrifice. As for the rest of the world, Sculptor has adapted our operations due to COVID-19. We had thoroughly tested our remote capabilities prior to New York City's pause order and an approximately 2/3 of our workforce working from home prior to this direction. Since the state order, the vast majority of employees have been working remotely. I'm pleased to say that everyone has been operating efficiently from their remote locations, and we have seen strong collaboration and connectivity across teams. Our virtual correspondence and ability to work around the clock has allowed us to effectively service our investments, clients and shareholders.

Now moving on to performance. Sculptor Master Fund was down 6.6% net for the first quarter, comparing favorably to the negative 20% return for the MSCI World index. The Master Fund was up 5.5% net in April bringing year-to-date performance through April to down 1.4% net. We view this as a testament to our risk management capabilities, and these returns are consistent with our reputation for protecting capital in adverse markets. As I address performance within the Master Fund, I will be giving commentary mostly about March due to the extreme market dislocation, which dominated our quarterly performance. That said, the story really goes back to February when we coalesced around a view that the markets were not correctly pricing in the risks posed by coronavirus. We meaningfully cut the Master Fund's exposure in February and early March, drastically reducing our gross exposure and cutting net equity exposure from roughly 50% of NAV to near 0%. This left us well positioned to take advantage of opportunities presented as March progressed. The financial market dislocation amid the coronavirus outbreak was notable, not only for its severity, but also for its record speed. We witnessed a sudden and sharp correction across all asset classes, culminating with billions of dollars in margin calls and liquidations over the weekend of March 20 before the U.S. Federal Reserve and Treasury intervened with monumental stimulus programs to slow the markets decline and protect the financial system.

Having reduced our gross and net exposure ahead of the storm, the Master Fund was, in our view, in the unique and enviable position of being highly liquid and holding significant risk-taking dry powder. We used that advantage to nearly double the size of our global credit exposure across both corporate and structured credit within the Master Fund during this time. Losses in the Master Fund were concentrated in corporate credit or 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 have become disconnected from fundamentals, and we believe that much of the performance will be earned back in time. We added significantly in a range of high-quality credits at spread levels that we feel are compelling even if the economy does not achieve a V-shaped mean reversion.

Structured credit was at the epicenter of the sell-off with extreme weakness, particularly in non-agency RMBS as forced sellers, primarily levered mortgage REITs flooded the market with assets. This pushed prices to levels that imply economic scenarios that we view as improbably catastrophic. As a result, this is our most active area during the month as we were able to add substantial exposure at severely discounted prices. Fundamental equities was a small detractor for the month and largely flat on the year, thanks to a mix of solid stock picking and importantly, capturing the January upside in markets before eliminating nearly all directional exposure. Looking forward, we are confident in our new and existing investments, and we continue to see great opportunities across markets. In corporate credit, companies will need liquidity to get to the other side of this crisis, and those that cannot obtain liquidity, they present opportunities for us across investments in bankruptcies and restructurings, which is an area of expertise for Sculptor.

In structured credit, we continue to expect further opportunities to buy higher quality securities at discounted, at dislocated prices as a result of the violent sell-off and reshaping of the investor base. Equities will also continue to offer opportunities to invest in those companies that we believe can get through the crisis and resume growth on the other side. It is important to also note that despite the negative performance in March, investor conversations have been positive as they continue to believe in the Master Fund and see the value proposition of protecting capital during market dislocations and providing opportunity for upside capture as markets recover.

Our global opportunistic credit fund, Sculptor Credit Opportunities Fund, was down 20.0% net for the first quarter of 2020. The fund has generated a 7.5% annualized net return life to date, which has outperformed the BAML Global High Yield Index by 2.8%. While March represented a significant hit from a mark-to-market perspective, opportunistic credit is something that we and our investors examine over longer time periods, years rather than months or quarters. To match our investing to that outlook, our credit funds are structured with multiyear commitments to both ride out bad times, while being able to deploy significant capital as opportunities arise. Again, our view is that the majority of the market -- of the March credit losses were not due to permanent capital impairment, and we believe we will recover much of that performance over time.

Importantly, we were not forced to sell any positions at unattractive prices during the month. Our real estate funds continue to deploy capital and generate strong returns with a 19% annualized net return in our third opportunistic fund. Despite the recent market dislocation, we believe, our diversified approach across product types, position of the capital structure, focus on current income and modest use of leverage has allowed our portfolios to generate consistent returns over time. As for our current capital deployment, market conditions have changed dramatically over the last few months, creating an opportunity for Sculptor real estate funds. We believe the opportunity set will manifest itself over several quarters and will favor managers with an ability to transition rapidly amongst the asset classes, parts of the capital structure and between public and private markets. During the month of March, our real estate credit and equity funds were focused on deploying capital into public debt, public equity and other tradable credit markets in which we had a brief window to deploy capital into real estate at a fraction of value and replacement cost.

Turning to flows. As you can see on Page 7, as of March 31, our assets under management were $33.4 billion with net inflows in the first quarter of $555 million and performance-related depreciation of $1.6 billion. As of May 1, our assets under management were $34 billion, which was driven by $179 million of net inflows and estimated $472 million of performance-related appreciation in April.

Turning to Page 8. Multi-strategy funds had assets of $8.5 billion as of March 31, which included $210 million of net outflows and $657 million of performance-related depreciation in the first quarter. From March 31 to May 1, multi-strategy and net outflows were approximately $144 million and appreciation of $444 million. Real estate had total assets under management of $4 billion as of March 31. The increase was driven by $647 million of inflows, primarily due to additional closings and Sculptor Real Estate Fund IV. Through May 1, the fund has raised $2.0 billion, and we anticipate a final close this quarter. Opportunistic credit had $5 billion of assets as of March 31, which included $279 million of net outflows in the first quarter and $801 million of performance-related depreciation. We were pleased to see meaningful net inflows of $385 million, an appreciation of $70 million, an opportunistic credit from March 31 to May 1.

In addition, we drew most of the dry powder in our existing credit funds taking advantage of what we perceive to be a unique investment opportunity created by the March margin call. We will be actively deploying this additional capital and are happy to see our clients continued belief in our opportunistic credit capabilities.

Institutional credit strategies had assets of $16.0 billion as of March 31 with net inflows of $397 million in the first quarter, primarily driven by closing an aircraft securitization, of which we retain all the equity for our funds. We expect the new issue, aircraft ABS markets remain closed for the foreseeable future as the market looks for more clarity on the direction of air travel and its associated impact on airline credit, lease rates and residual values. In the first quarter, we refinanced one CLO. Due to the coronavirus and the resulting freeze of capital market activities, the CLO issuance market has, for the most part, halted. It is not known when the market will open back up given the uncertainty around the coronavirus timeline. We would like to specifically address CLO management fees as there have been significant rating agency downgrades, impacting the leveraged loan market and in turn, the over-collateralization test in many CLOs across the industry. This resulted in a $3.4 million cash deferral of management fees recognized in the first quarter in some of our CLOs.

With that, let me turn the call over to Tom to go through the financials.

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Thomas Michael Sipp, Sculptor Capital Management, Inc. - CFO & Executive MD [3]

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Thanks, Rob, and good morning, everyone. As Elise mentioned at the beginning of the call, and as you can see on Page 9, we reported a first quarter 2020 distributable earnings loss of $300,000 and adjusted distributable earnings gain of $3.6 million. We did not declare a dividend this quarter. Revenues were $72 million in the first quarter, down 38% from the first quarter of 2019. Management fees were $60 million in the first quarter, flat year-over-year as increases from Real Estate Fund IV and institutional credit strategies were offset by lower fees from opportunistic credit and multi-strategy funds. Incentive income was $9 million for the first quarter, down $44 million compared to the first quarter of 2019. The lower incentive income was due to idiosyncratic timing of crystallizations from long-term clients and lower investment performance in the quarter. As seen on Page 10, as of March 31, 2020, our accrued, but unrecognized incentive was $140 million, down $114 million from the prior quarter. The decrease was driven by $104 million in negative performance, with the majority coming from the customized credit platform. Based on our April month-to-date estimated performance, the (inaudible) is estimated to have increased by approximately $15 million to $20 million. We continue to expect a large portion of the opportunistic credit (inaudible) to crystallize in the fourth quarter of 2020.

Turning back to Page 9. Other revenues were $3 million in the first quarter, down 16% from the previous quarter and down 22% versus the first quarter of 2019 due to lower interest income generated in the quarter. Before I begin with reviewing details of our expense base, I would like to address our 2020 guidance. We are actively evaluating options to reduce costs across our business, balancing short-term challenges with long-term platform opportunities. We plan to revise our expense guidance later in the year.

For the first quarter 2020, total expenses were $70 million, down 12% from the first quarter of 2019. In the first quarter 2020, compensation and benefits expense was $40 million, down 8% from the first quarter 2019. Bonus expense was $20 million for the first quarter, down 11% from 2019. The year-over-year decrease was primarily driven by a decrease in our bonus accrual. Salaries and benefits were $20 million for the first quarter, down 4% from the first quarter of 2019. The decrease year-over-year was due to lower headcount.

In the first quarter, general and administrative expenses were $26 million, down 19% from the first quarter of 2019. The lower G&A was due to a reduction in strategic action expenses. Interest expense for the first quarter of 2020 was flat year-over-year. This was driven by the reduction in the term loan balance, offset by the debt securities starting to accrue interest. We expect full year 2020 interest expense to be between $15 million and $17 million. Please note that our preferred units started accruing dividends in February and will not impact economic income, however, it will be treated as reduction to distributable earnings. We plan to revise our guidance for the full year 2020 tax receivable agreement and other payables as a corporation later this year. As a reminder, these estimates are subject to many variables that won't be finalized into the fourth quarter of the year and therefore, could vary materially.

Now an update on the balance sheet. As of March 31, 2020, total cash, cash equivalents and long-term treasuries were $330 million. Subject to quarter end, we paid down the term loan by $9.5 million, resulting in an outstanding balance of $8.5 million. We plan to continue to strengthen our balance sheet by using a majority of our earnings after public shareholder dividends to pay down our existing term loan, followed by our preferred units and debt security instruments.

With that, let me turn it back over to Rob.

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Robert Scott Shafir, Sculptor Capital Management, Inc. - CEO, Executive MD & Director [4]

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Thanks, Tom. There is no denying that coronavirus had an impact on our financial results for the quarter. Despite this, our goals remain intact, and we are committed to growing our 3 core product areas. Our multi-strategy funds have protected investor capital in a very turbulent market sell-off. Opportunistic credit saw an unprecedented repricing, but we believe that our investments will recover over time. Our clients remain confident in our investment capability, particularly in times of market disruption, as evidenced by the fact that we saw positive net hedge fund flows on April 1. We continue to grow our real estate business and are excited about the opportunity set, given the recent dislocation across the real estate space. We believe our businesses that have been impacted, such as CLOs and structured credit, will return to normal as history has shown.

In addition to our product focus, we are committed to strengthening our balance sheet and are adjusting our expense base given the current environment. I believe in the long-term strategy of the firm and know we will make it to the other side of this crisis, having served our clients, shareholders and employees well.

With that, I'll turn it back over to the operator.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Bill Katz with Citigroup.

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William R. Katz, Citigroup Inc, Research Division - MD [2]

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Okay. I hope everyone is staying safe during these times. Just a couple of questions this morning. Maybe we could start on the CLOs. That's certainly a hot button topic for the industry. Could you maybe break down a little more detail here in terms of base versus subordinated fees? And how we might think about any kind of stress test around those management fees, if there would be subsequent downgrades?

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Thomas Michael Sipp, Sculptor Capital Management, Inc. - CFO & Executive MD [3]

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Yes, Bill, this is Tom. I'll start with that one. There had been widespread downgrades and defaults on collateral held by CLOs. This has impacted the over-collateralization tests. Our specific CLOs -- certain of our CLOs, the cash flow that would normally be -- the cash flow for the subordinated management fees has been diverted to pay down principal and interest on certain of our CLOs. For the first quarter, it was $3.4 million. The -- this will -- if these over-collateralization tests are not resolved, this will increase quarter-over-quarter. We think it's a manageable amount based on our current modeling. It will impact our liquidity and cash position over the next coming quarters, but we think it will be based on our current modeling and forecast around our specific ratings and default rates, we think, this is a manageable exposure.

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William R. Katz, Citigroup Inc, Research Division - MD [4]

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Is there any way to quantify what kind of increase we're talking about sequentially?

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Thomas Michael Sipp, Sculptor Capital Management, Inc. - CFO & Executive MD [5]

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We're not providing a forecast based on our modeling. The number, as we stated, was $3.4 million for the first quarter. So again, if ratings don't change, that number will increase. But we think it will be a -- it will peak at a manageable level based on our current modeling.

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William R. Katz, Citigroup Inc, Research Division - MD [6]

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Okay. Second question, maybe, Tom, sticking with you. You had mentioned -- both of you mentioned possibility of rationalizing the expense base. Just sort of wondering how much variability there is to the expense lines and where that might be?

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Thomas Michael Sipp, Sculptor Capital Management, Inc. - CFO & Executive MD [7]

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Yes. So we're not providing new guidance. We are very diligently reviewing our expense base, looking at our G&A compensation cost, bonus expense, and we're balancing kind of finding reduction opportunities with continuing to invest in the platform. So again, we're not providing guidance, but we will be pretty diligent in reviewing that expense base and taking things down where we can.

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William R. Katz, Citigroup Inc, Research Division - MD [8]

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Okay. Just one more for me, and I'll get back in the queue. You had mentioned where you were, I think, quarter-to-date in terms of net new assets, which sounds great. From here, just given your commentary around some of the structured markets, if you will, how do you -- where do you sort of see the incremental growth? And then one performance question underneath that, why not a better snapback in the -- on the credit side, given what's been happening with some of the indices quarter-to-date versus how you did in the first quarter?

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Robert Scott Shafir, Sculptor Capital Management, Inc. - CEO, Executive MD & Director [9]

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Yes, Bill, let me take that. I think -- I guess the first question was regarding the fundraising possibilities or is that what you were asking specifically about?

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William R. Katz, Citigroup Inc, Research Division - MD [10]

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Right. Yes.

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Robert Scott Shafir, Sculptor Capital Management, Inc. - CEO, Executive MD & Director [11]

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I'd say the -- I'd say there is a very active dialogue going on with clients right now. And I think primarily, as you might expect, given the volatility in the marketplace, a lot of that focus has been around some of the really opportunistic areas. So credit being one. As you can see, we raised assets. We raised close to $400 million of new money in our opportunistic credit fund in the quarter. And I'd say that we are having a very active dialogue with several clients. I mean, obviously, hard to quantify until we actually close business, but I would say that the dialogue is probably the most active. It's been on the opportunistic credit side since I have been at the firm. And I think that dialogue has certainly been pulled forward just given the market conditions and the possibilities of earning some pretty interesting returns, given what's going on there. Obviously, real estate has been another area that we have had a lot of interest in, and you can see it from our -- the success of Fund IV, which is now $2 billion. And as I said in the speech, we expect to close -- have our final close this quarter. But again, given the dislocations in that market, we would expect to see a lot of interest going forward there. And I think, given our track record, I think, we're very well positioned.

On the multi-strategy side, this is what I would say there. Certainly, from an outflow perspective, things have been very quiet. We're starting to see some pickup on the private banking side, early days. But I think as things settle down from the sort of days of (inaudible) and sort of portfolio liquidations and people get back into whatever new normal is going to be, I've been saying this for 2 years, but I believe this to my core that I think products that in more volatile environments protect downside and give upside capture are going to do well. And certainly, I think we've been able to do that by given the fact that we're down just a fraction on the year given what's happened to the marketplace here. So I like our long-term possibilities there. I think that's more of a longer queue, probably the shorter-term stuff will be more in the opportunistic spaces, would be my guess.

In terms of the snapback in credit, I guess, I'd say the following. First of all, there is -- we -- the -- a lot of the stuff that you see in the portfolio have been stuff that is special situation oriented. And as we said earlier, a lot of that is idiosyncratic, and we don't really look at that so much on a sort of month-to-month basis, but more over the period of time. So I would expect to see more recovery there. As we said, we like our positions. We've tried to, and I think, successfully deployed money within companies that we think have the staying power across the cycle to get to the other side of this.

I also think that some of the stuff in the structured credit markets have not bounced as much as some other areas there. And I, again, would expect to see some recovery over the period of time. And as I have also mentioned, we were very active over the course of the month deploying capital into both the structured credit market, given the liquidations there and on the corporate credit side. So we like our position there. Some of it is obviously idiosyncratic, so it's tough to see exactly when you're going to see those recoveries. But we think over the course of time, given the positions we have, we're pretty confident we'll get some good recovery there.

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Operator [12]

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Our next question comes from the line of Gerry O'Hara with Jefferies.

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Gerald Edward O'Hara, Jefferies LLC, Research Division - Equity Analyst [13]

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Perhaps one just on the real estate funds. You mentioned kind of a brief window to deploy capital. Maybe if you could just talk or, I guess, expand upon that a little bit as it relates to, I guess, for starters, why the brevity, but also perhaps, any themes that you may be kind of looking to put capital out in the real estate markets? That would be helpful.

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Robert Scott Shafir, Sculptor Capital Management, Inc. - CEO, Executive MD & Director [14]

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Well, I think on the real estate side, as we said, I think we're in a very fortunate position to have a lot of fresh capital that we can deploy in what looks to be a pretty target-rich market. And probably, the more severe moves have happened in the public markets. And where we saw things that we thought were interesting opportunities in the equity or the credit side of the public markets that we thought were the right real estate exposures, we did some investing there. I think over the medium term, certainly, things like distressed debt, where we see things like motivated divestitures or where we can do something where we can be a solutions provider and the private markets are going to be places that I think are going to be very interesting for us and places where we'll look to deploy capital. And again, as the cycle evolves here, we'll obviously look across a lot of the, not only traditional spaces, but a lot of the nontraditional spaces, where, I think, we've made our mark by being so diversified and playing in a lot of areas where a lot of our competitors don't.

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Gerald Edward O'Hara, Jefferies LLC, Research Division - Equity Analyst [15]

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Helpful. And then perhaps, sticking with, I guess, maybe some nontraditional asset classes. Can you give us a little sense of how we should think about the aircraft securitization portfolio under sort of the current environment? And how that's either impacted or kind of -- or protected even just from ancillary, supply and demand and valuation, I suppose?

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Robert Scott Shafir, Sculptor Capital Management, Inc. - CEO, Executive MD & Director [16]

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Yes, sure. Yes, look, given what's going on in the airline industry, I -- we would expect that market to remain shut for a while, certainly, several months, if not longer. I mean the aviation cycle is one that plays out over time. And obviously, with most of the planes on the ground, it's where -- I think those markets are just going to remain shut. I would expect that those markets won't open until we start to get back to a pretty material amount of capacity actually being utilized before those -- before the actual markets open up for things like our GECAS opportunities and so forth. But again, the flip side of that is that while that sort of may slow down some stuff on the structured credit side, there'll be interesting investment opportunities for some of our other funds that are more opportunistic in the space.

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Gerald Edward O'Hara, Jefferies LLC, Research Division - Equity Analyst [17]

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Okay. And last one for me. Not sure to the extent that you can comment on it, but any update or additional color that you can provide on the Africa situation?

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Thomas Michael Sipp, Sculptor Capital Management, Inc. - CFO & Executive MD [18]

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Yes. I'll -- this is Tom. I'll take that. The claimants and the DOJ have made their responses before the court at the end of April or throughout April. These are both public documents. The claimants, the government and OZ Africa have each advanced, different methods to value the mining rights in question. We continue to defend the matter and believe that our approach advanced by OZ Africa, which is the basis for the provision, the $19 million provision that we have is the right one under the law. We do believe the case is advancing in the court system, but it's -- the timeline is really up to the court and uncertain. But it is in the later stages of the process, we believe. Really beyond that, we're limited on what we can say as it's an ongoing matter before the judge.

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Operator [19]

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(Operator Instructions) Our next question comes from the line of Patrick Davitt with Autonomous Research.

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Patrick Davitt, Autonomous Research LLP - Partner, United States Asset Managers [20]

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Back to Bill's question. I appreciate you not wanting to give guidance on the CLO management fee issue, but it sounds like from some of the other firms that have reported the subordinated fees are what we really need to be to be worried about with this issue. So to Bill's question, could you at least frame the total exposure to the subordinated fees side as we try to think about what the worst-case scenarios are there, if downgrades continue?

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Thomas Michael Sipp, Sculptor Capital Management, Inc. - CFO & Executive MD [21]

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Yes. Our subordinated fees are about 25%, 30% of our CLO management fees.

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Patrick Davitt, Autonomous Research LLP - Partner, United States Asset Managers [22]

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And then the -- on the real estate side, could you try to frame any, even if it's broadly, maybe what percentage of the portfolio you feel is exposed to industries that might be more exposed to the economy we're in now, hospitality and leisure, in particular?

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Robert Scott Shafir, Sculptor Capital Management, Inc. - CEO, Executive MD & Director [23]

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Again, as I think, it's a very, very diversified portfolio. So I don't think we have material concentration risk to any one specific sector. Obviously, the marketplace is -- the overall markets have been impacted here. But if you look at even our returns in our invested capital, including Fund III, I think, we're in pretty good shape.

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Operator [24]

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Our next question is a follow-up from the line of Bill Katz with Citigroup.

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William R. Katz, Citigroup Inc, Research Division - MD [25]

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Just one on the balance sheet. Just sort of wondering, if we could appreciate things are still sort of moving around a little bit. Can you talk about how much sort of true working capital you need to run the business versus excess liquidity? And how you sort of see the waterfall for debt reduction? And anything you've learned from the first quarter about potentially hedging any of the receivable, just given some the debt payments coming due as we look out into next year or so?

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Thomas Michael Sipp, Sculptor Capital Management, Inc. - CFO & Executive MD [26]

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Yes, Bill. One, we would not look to hedge our receivables because as -- in our view, that just wouldn't be aligned with our LPs and our funds and how we earn incentives on those funds. That's something that we would not entertain. The waterfall is, we sweep cash, free cash above $200 million to pay down. If you -- first and foremost, we have a payout ratio -- a dividend payout ratio of 20% to 30% of our DE. All that goes to the public shareholders. Any free cash above $200 million, we pay down the term loan. From there, we then pay off -- it would be swept to pay off the preferred units and then the sub-debt from there would start to amortize.

And just to kind of answer your free cash, right now, as of the end of the quarter, we have $190 million of free cash. We are comfortable. There is excess free cash above our working capital needs in the $190 million, but we do not publish what that level is.

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Operator [27]

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Thank you. Ladies and gentlemen, that concludes our time allowed for questions. I'll turn the floor back over Ms. King for any final comments.

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Elise King, Sculptor Capital Management, Inc. - Head of Shareholders Services [28]

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Thanks, Melissa. Thank you, everyone, for joining us today and for your interest in Sculptor Capital. If you have any questions, please don't hesitate to contact me at (212) 719-7381. Media inquiries should be directed to Jonathan Gashalter at (212) 257-4170. Thank you. Have a great day.