PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our Class A shares. You should read this entire prospectus carefully, especially the risks of investing in our Class A shares discussed under “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included elsewhere in this prospectus before making an investment decision. The information in this prospectus gives effect to the Reorganization and the other transactions described under “Our Structure.” We are a holding company and, upon completion of this offering, we will hold substantially all of our assets and conduct substantially all of our business through the Och-Ziff Operating Group.

Overview

We are a leading international, institutional alternative asset management firm and one of the largest alternative asset managers in the world, with approximately $29.7 billion of assets under management for over 700 fund investors as of August 31, 2007. We have a strong track record spanning over 13 years, which we believe places us among the longest standing alternative asset managers globally.

We were founded in 1994 by Daniel Och, together with the Ziffs, with the goal of building an enduring, world class investment management business. Prior to founding our company, Mr. Och spent over 11 years at Goldman, Sachs & Co. Mr. Och instilled the team-based culture he experienced at Goldman Sachs into our firm, and this approach has helped us become a leader in the alternative asset management industry. Today, we have over 350 personnel, with over 130 investment professionals, including 18 partners. We have been a leader in international expansion in our industry with headquarters in New York and offices in London, Hong Kong, Tokyo, Bangalore and Beijing.

Our funds seek to deliver consistent positive, risk-adjusted returns throughout market cycles, with a focus on risk management and capital preservation. “Risk-adjusted returns” are based on the income generated from primary investment positions, net of expenses associated with hedges intended to limit the risks associated with market changes, interest rate fluctuations, currency movements, geopolitical events and other risks. Our diversified, multi-strategy approach combines global investment strategies, including merger arbitrage, convertible arbitrage, equity restructuring, credit and distressed credit investments, private equity and real estate. We base our investment decisions on detailed, research-based analysis and thorough due diligence. Our investment philosophy focuses on opportunities for long-term value. Our investment processes are designed to incorporate risk management into every investment decision: our portfolio managers meet with our analysts daily to review the risks related to their positions and the inherent risks associated with these positions, and we have a risk management committee that conducts regular oversight of portfolio risk. Risk management has been a core foundation of our business since inception and remains a critical part of our investment process today.

We believe our deeply embedded, team-based culture differentiates us from our competitors. Our partners, whom we also refer to as our executive managing directors, and our managing directors derive virtually all of their income payments from participation in the profits of our entire business. Our compensation system helps minimize the potential for asymmetric risk profiles between fund investors and our partners and employees and fosters a strong culture of internal cooperation and sharing of ideas. Additionally, all of our professional employees have the opportunity to eventually become managing directors and executive managing directors, providing a compelling incentive and retention mechanism. At the time of this offering, we intend to grant to all of our managing directors and other employees 14,761,905 Class A restricted share units in the aggregate under our 2007 equity incentive plan which will vest over a four-year period.

 

Our operations, including our growth and expansion, have been financed primarily from cash flows generated by our operations. Our primary sources of revenues are management fees and incentive income. Management fees are based on assets under management. Incentive income, which is primarily earned on an annual basis, is based on realized and unrealized gains generated by the funds that we manage. Accordingly, for any given fiscal period our revenues will be heavily influenced by the combination of assets under management and the investment performance of our funds. The investment performance of our funds is pivotal to the long-term success of our business. To increase assets under management our funds must attract new investment capital, realize gains that they can reinvest and maintain low redemption rates, all of which are dependent upon the performance of our funds.

The long-term interests of our fund investors have always been, and will always be, of paramount importance and have driven, and will continue to drive, our growth strategy. This growth has been based on building and expanding investment platforms and geographic capabilities to enable us to provide the best possible investment services to our fund investors.

Our assets under management have grown from approximately $5.8 billion as of December 31, 2002 to approximately $29.7 billion as of August 31, 2007, representing a 42% compound annual growth rate. We have continued to expand internationally, and today invest more than 50% of our AUM in foreign markets. We take a measured approach to growth, accepting new investor capital commensurate with investment opportunities and our goal of delivering positive, risk-adjusted returns.

Our Total Historical AUM ⁽¹⁾

(dollars in billions)

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(1)

Includes Deferred Balances and investments in our funds by us, our partners and certain other affiliated parties on which we have not charged management fees or received incentive income. As of August 31, 2007, our AUM relating to these amounts was approximately $1.8 billion, or 6.1%, of our AUM. We will charge management fees and receive incentive income on investments made by our partners (but not by us or the other affiliated parties) in our funds on and after the closing date of this offering, other than in respect of investments made with Deferred Income Distributions and Investment Distributions (as defined under “—Distributions and Other Payments to Our Existing Owners”).

 

Investment Performance

We believe one of the principal drivers of our growth has been the investment performance of our flagship global multi-strategy fund, OZ Master Fund, Ltd. Performance for OZ Master Fund, Ltd. is provided for illustrative purposes only. OZ Master Fund, Ltd. includes every strategy and geography in which our funds invest and constituted approximately 63% of our AUM as of August 31, 2007. Our other funds implement geographical or strategy focused investment programs. The performance metrics for our other funds vary from those of OZ Master Fund, Ltd., and such variance may be material. Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Information Overview—Assets Under Management and Fund Performance” and “Business—Investment Performance” for information regarding the performance of our other funds.

In considering the performance information contained in this prospectus, prospective Class A shareholders should bear in mind that such performance information (including that reflected in the following table) is not indicative of the possible performance of our Class A shares. An investment in our Class A shares is not an investment in any of the Och-Ziff funds, including OZ Master Fund, Ltd. Moreover, OZ Master Fund, Ltd. and most of our other funds will not be consolidated in our financial statements for periods following June 30, 2007 as a result of the deconsolidation of most of our funds as of June 30, 2007. The performance reflected in the following table is also not necessarily indicative of the future results of OZ Master Fund, Ltd. There can be no assurance that OZ Master Fund, Ltd. will continue to achieve, or that our other existing and future funds will achieve, comparable results. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Information Overview—Assets Under Management and Fund Performance” and “Business—Investment Performance” for additional information regarding the limitations of this information.

The following table sets forth, as of August 31, 2007, comparative performance measures for OZ Master Fund, Ltd. and the S&P 500 Index:

 

		1 Year			3 Years			5 Years			Strategy Inception
Net Annualized Return (1)
OZ Master Fund, Ltd.(2)		13.4	%		12.4	%		13.7	%		16.7	%
S&P 500 Index(3)		15.1			12.2			12.0			11.3
Correlation of OZ Master Fund, Ltd. to S&P 500 Index(4)		0.56			0.61			0.44			0.45
Volatility
Master Fund Standard Deviation (Annualized)(5)		3.4			3.0			3.5			5.0
S&P 500 Index Standard Deviation (Annualized)(5)		8.0			7.4			11.0			14.1
Sharpe Ratio (6)
Master Fund		2.33			2.69			3.06			2.45
S&P 500 Index		1.21			1.07			0.81			0.49

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(1)	Net Annualized Return represents a composite of the average annual return of the feeder funds that comprise OZ Master Fund, Ltd. Net Annualized Return is presented on a total return basis, net of all fees and expenses, and includes the reinvestment of all dividends and income.

(2)

Performance from inception includes actual total return for the partial year beginning in April 1994. For the period from April 1994 through December 1997, performance represents the performance of Och-Ziff Capital Management, L.P., a Delaware limited partnership that was managed by Daniel Och following an investment strategy that is substantially similar to that of OZ Master Fund, Ltd. In addition, during this period performance was calculated by deducting management fees on a quarterly basis and incentive income on a monthly basis. Starting from January 1998, performance has been calculated by deducting both management fees and incentive income on a monthly basis from the composite returns of OZ Master Fund, Ltd.

 

(3)

The returns of the S&P 500 Index are presented for the limited purpose of providing a comparison to the broader equity market. You should not assume that there is any material overlap between those securities in the portfolio of OZ Master Fund, Ltd. and those that comprise the S&P 500 Index. It is not possible to invest directly in the S&P 500 Index. Returns of the S&P 500 Index have not been reduced by fees and expenses associated with investing in securities and include the reinvestment of dividends. The S&P 500 Index is an equity index owned and maintained by Standard & Poor’s, a division of McGraw-Hill, and its value is calculated as the free float-weighted average of the share prices of 500 large-cap corporations listed on the NYSE and Nasdaq.

(4)	Correlation to the returns of the S&P 500 Index represents a statistical measure of the degree to which the return of one portfolio is correlated to the return of another. It is expressed as a factor that ranges from -1.0 (perfectly inversely correlated) to +1.0 (perfectly positively correlated).

(5)	Standard deviation is a statistical measure of the degree to which an individual value in a distribution tends to vary from the mean of the distribution.

(6)

Sharpe Ratio represents a measure of the investment returns as adjusted for risk. The Sharpe Ratio is calculated by subtracting a “risk-free” rate from the composite returns, and dividing that amount by the standard deviation of returns. A higher Sharpe Ratio indicates a portfolio that generates a return that is higher than would be expected for the level of risk in the portfolio as compared to the risk-free rate. The risk-free rate used is three-month LIBOR.

Why We Are Going Public

 

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To enable us to implement our growth strategy and continue to attract and retain the finest talent in the world.

 

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To continue to develop new investment strategies as we identify strategic opportunities around the world.

 

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To offer existing and prospective partners and employees direct participation in our success, which will align the interests of our partners and employees with those of our investors.

 

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Each of our existing partners will invest 100% of the after-tax proceeds received by him in connection with this offering in certain of our funds, including funds we may offer in the future. Not only will this more closely align the interests of our partners with our fund investors, but we believe this will also assist us in building a track record and ultimately raising additional capital for our funds.

Industry Overview

The asset management business involves managing investments on behalf of third parties in exchange for contracted fees and other income. The industry manages trillions of dollars of assets, and can be broadly divided into two categories: traditional asset management and alternative asset management.

Traditional Asset Management

Traditional asset managers, such as large mutual funds and separate account managers, typically manage portfolios of actively traded equity, fixed income and/or derivative securities. The investment objectives of such portfolios may include total return, capital appreciation, current income and/or replicating the performance of a specific index. The investment strategies of traditional asset managers typically involve long-only portfolios. Such portfolios may include investment companies registered under the Investment Company Act of 1940, or the “1940 Act,” (such as mutual funds, closed-end funds or exchange-traded funds) or separate accounts managed on behalf of individuals or institutions. Managers

 

of such portfolios are compensated, in general, on a monthly or quarterly basis, at a contracted fee based on the assets under management, generally without regard to performance of the investments held in the portfolio. Managers of such portfolios in the United States are typically registered with the U.S. Securities and Exchange Commission, or the “SEC,” under the Investment Advisers Act of 1940, or the “Advisers Act”.

Alternative Asset Management

Alternative asset management, in general, involves a variety of investment strategies where the common element is the manager’s goal of delivering, within certain risk parameters, investment performance that is typically measured on an absolute return basis, meaning that performance is measured not by how well a fund performs relative to a benchmark index, but by how well the fund performs in absolute terms. Examples of alternative asset managers are managers of hedge and private equity funds. These managers typically manage pooled investment vehicles which are not subject to the investment limitations of traditional mutual funds and separate account managers. The investment vehicles managed by alternative asset managers may employ a wide variety of investment strategies. Alternative asset managers strive to produce investment returns that have a lower correlation to the broader market than do traditional asset management strategies. Alternative asset managers typically earn management fees based on the value of the investments they manage and earn incentive income based on the performance of such investments. Alternative investment funds are typically exempt from registration with regulatory authorities. Advisers of such funds in the United States may or may not be registered with the SEC under the Advisers Act. Investment vehicles employing alternative investment strategies are commonly referred to as hedge funds, among other things.

Hedge Funds

The term “hedge funds” generally refers to privately held and unregistered collective investment vehicles. Because they are not subject to the investment limitations imposed by the 1940 Act, hedge funds differ from traditional investment vehicles, such as mutual funds, by the strategies they employ and the asset classes in which they invest. Asset classes in which hedge funds may invest are very broad and include liquid and illiquid securities, derivative instruments, asset-backed securities and a variety of other non-traditional assets, such as distressed securities and infrastructure investments, among others.

The increasing demand for hedge fund products by institutional investors is one of the main drivers of the hedge fund industry’s growth. According to McKinsey & Company, institutional investors accounted for approximately 40% to 50% of all new flows into hedge funds in 2006. Higher institutional demand is driven by several factors, including the pursuit of higher returns compared to those generated by traditional equity and fixed income strategies, the desire to diversify investment portfolios by investing in assets with low correlation to traditional asset classes, and an increased level of comfort with hedge fund investments as the industry continues to mature.

 

Historical Hedge Fund AUM and Net Asset Flows

(dollars in billions)

Source: HFR Industry Reports ^© HFR Inc. 2007

Despite the rapid expansion in institutional inflows, alternative investment strategies still account for a relatively small portion of all institutional assets, signifying potential opportunity for continued growth. The increased role of institutional investors has resulted in a greater focus on risk management and investment operations throughout the industry.

Our Competitive Strengths

Leading Institutional Alternative Asset Management Firm.     We are one of the leading alternative asset managers in the world and have become a widely respected brand name in the industry. We believe that the strength and breadth of our franchise, supported by our people, investment approach and track record of success, provide a distinct advantage for raising capital, attracting and retaining talent, generating investment opportunities and maximizing long-term value for our shareholders.

Diversified, Global Alternative Investment Platform.     During our 13-year history, we have grown by launching new funds that complement our existing strategies and capitalizing on opportunities to deploy our financial and intellectual capital internationally. We believe that there is significant potential for us to continue to develop our investment strategies in additional markets and that our ability to identify and quickly respond to opportunities to enter new growth areas is a key competitive advantage.

Our Culture .     Our team-based culture is deeply embedded and emphasizes the success of our company as a whole, enforced by our company-wide compensation structure. We believe this unique culture is a key differentiator of our company and has helped us attract and retain highly talented, results-driven people.

Experienced Global Investment Team .     We have a team of over 130 investment professionals, led by Daniel Och, David Windreich, Michael Cohen, Zoltan Varga and Harold Kelly, each of whom has been with our company for at least nine years. Building on their many years of industry experience, the team provides a deep knowledge of the global capital markets and has developed long-term relationships with financial leaders and businesses in the asset management industry which are critical to the success of our company.

 

Research-Driven Investment Process .     Over our 13-year history, we have developed and refined a rigorous, research-driven investment process based on extensive qualitative and quantitative analysis. We generally make investments where our analytical processes lead us to believe we have expertise and a competitive advantage, and then only in positions for which we believe the related risks are reasonable and manageable.

Record of Positive, Risk-Adjusted Returns .     We believe that our investment professionals have an exceptional record of generating positive, risk-adjusted returns, consistent with our funds’ investment objectives. We believe that our investment track record across a broad and expanding range of alternative asset classes and through varying economic conditions and market cycles is a key driver of our success.

Risk Management Expertise.     Risk management is a core element of our investment philosophy and process, and plays a crucial role in the strategy and operation of our business. Our risk management process is implemented at both the individual position and total portfolio levels and our Chief Executive Officer is responsible for managing overall portfolio risk.

Our Record of Growth .     We were established in 1994 with one professional located in an office in New York. Over time, we have grown our company with the goal of creating an enduring business. This growth has been systematic and methodical. We have been among the pioneers in international expansion, and we believe that our international platform is among the strongest in our industry.

Alignment of Interests.     One of our fundamental philosophies is to align our interests with those of our fund investors. Each of our existing partners will invest all of his after-tax proceeds received in connection with this offering initially into our OZ Global Special Investments funds. These investments may be transferred to other Och-Ziff funds or new opportunities, but will otherwise not be redeemable by them for a period of five years following this offering, without the approval of the general partner or board of directors of such funds, as applicable. In addition, we intend to grant              Class A restricted share units to all of our managing directors and other employees at the time of this offering, which will vest over a four-year period.

Diverse Investor Base .     Our funds have a diverse and sophisticated investor base consisting of more than 700 investors, including many of the largest pension funds, university endowments and financial institutions. No single investor in our funds accounted for more than 4% of our assets under management as of August 31, 2007.

Sources of Liquidity .     We believe the use of leverage in our funds’ investments has been conservative. For this reason, we have been able to secure access to pools of capital at fixed terms over several years. We may increase our use of leverage in the future in a manner that is consistent with our growth strategy and investment and risk management processes.

Our Growth Strategy

Continue to Deliver Positive, Risk-Adjusted Returns .     We believe that our fundamental research-driven analysis, diversified and dynamic investment process, and highly disciplined risk management processes will provide opportunities for us to continue to deliver positive, risk-adjusted returns to our growing investor base.

Continue to Broaden Our Leading Global Alternative Investment Platform.     We believe we have been a leader in establishing global investment capabilities in local markets outside of the United

 

States, as evidenced by our activities in Europe and Asia. As capital markets develop and opportunities arise around the world, we expect to continue to open new offices and develop local teams to take advantage of those opportunities.

Pursue New Investment Strategies .     To maximize our flexibility, we manage our investment capital such that we are poised to pursue investment opportunities as they arise, whether due to specific corporate events or general market or economic changes or trends. We seek to diversify our investment platform and capabilities to better identify investment opportunities in existing and new geographies, strategies and asset classes.

Develop New Products .    We seek to develop and broaden our investment strategies and capabilities in areas around the world. We launch new products only after a thorough vetting process based upon our internal capabilities and risk assessments, providing our funds with opportunities to deploy capital and enabling us to diversify our product offerings and sources of revenue.

Continue to Broaden Our Investor Base .    Many institutional investors have allocated significant amounts of capital to our multi-strategy and other product offerings, motivated, we believe, by our positive, risk-adjusted returns and our diversified, international risk-managed investment discipline and well-developed infrastructure. We intend to continue to attract new capital, while striving to continue to deliver positive, risk-adjusted returns.

Develop New Distribution Channels .    As we expand our investment platform, we believe our reputation and market position will attract new investors in developing global markets. Furthermore, new distribution channels for alternative asset management products are opening, and we believe we are well positioned to take advantage of these opportunities.

Our Structure

We conduct our business through the Och-Ziff Operating Group, which consists of separate entities owned and operated by our existing owners, and through our real estate business, which is a joint venture between entities owned and operated by our existing owners and third parties. We have historically operated our business through these separate entities with no single holding company owned by the existing owners. Our existing owners include Mr. Och, our 17 other existing partners and the Ziffs. For accounting purposes in our historical financial statements, Mr. Och is treated as the sole equity owner of our business prior to this offering, our 17 other existing partners are treated as non-equity partners and the Ziffs are treated as having a right to receive certain payments based on management fees and incentive income earned by us. Distributions to the existing owners have been treated in our historical financial statements as follows: distributions on equity for Mr. Och, compensation expense for our 17 other existing partners and profit sharing expense for the Ziffs.

Prior to the completion of this offering, we will reorganize our company through the transactions described below and in “Our Structure”, and we will acquire the interests in the real estate business held by our existing owners. The real estate business will become a subsidiary of the Och-Ziff Operating Group, and third parties who currently own the remaining interests in the real estate business will continue to directly own a 50% interest therein. As more fully described below and under “Our Structure,” each of our existing owner’s interest in our business will be reclassified, for financial accounting purposes, into an equity interest in our business. Thus, despite the different financial accounting treatment of such interests prior to the Transactions as described above, upon completion of the Reorganization, each of the existing owners will hold the same type of equity interests in the Och-Ziff Operating Group, as well as the other interests described below. In addition, upon completion

 

of the Transactions, Och-Ziff Capital Management Group LLC will be a holding company and its primary assets will be its ownership interest in the Och-Ziff Operating Group entities, which will be held indirectly through two intermediate holding companies: Och-Ziff Corp and Och-Ziff Holding. We will hold substantially all of our assets and conduct substantially all of our business through the Och-Ziff Operating Group. Having a holding company structure rather than a group of separate entities will facilitate our ability to offer interests in our business to the public.

The Reorganization

Och-Ziff Operating Group Entities.     The Och-Ziff Operating Group currently consists of OZ Management, OZ Advisors I and OZ Advisors II. Upon the completion of the Reorganization, all of our interests in OZ Management and OZ Advisors I will be held through Och-Ziff Corp, which will be taxed as a corporation. As a result, we anticipate that we will have significantly higher income tax expense after the Reorganization and that our effective income tax rate will increase substantially. All of our interests in OZ Advisors II will be held through Och-Ziff Holding, which will be a disregarded entity for U.S. federal income tax purposes. Each intermediate holding company will be the sole general partner of the applicable Och-Ziff Operating Group entity and will, therefore, generally control the business and affairs of such entity.

We intend to continue to conduct all of our material business activities through the Och-Ziff Operating Group. Historically, we have used more than one Och-Ziff Operating Group entity to segregate operations for business, financial, tax and other reasons. Going forward, we may increase or decrease the number of our Och-Ziff Operating Group entities and intermediate holding companies based on our views as to the appropriate balance between administrative convenience and continued business, financial, tax and other considerations. We expect that we will continue to conduct our fee-generating businesses, our domestic fund business and our domestic real estate fund business through OZ Management and OZ Advisors I. We expect that we will hold our interests in our offshore funds through OZ Advisors II.

Following the Reorganization, the operating entities of the Och-Ziff Operating Group will continue to be entitled to all of the management fees and incentive income earned with respect to our funds.

Och-Ziff Operating Group Units

Class A operating group units.     As described above, our existing owners currently hold interests in our business that are treated differently for financial accounting purposes. However, for all other purposes of our business, we treat all of our partners as the current owners of our business. Each of our partners holds the same proportionate interest in each Och-Ziff Operating Group entity, whether treated as equity or non-equity for financial accounting purposes. Prior to completion of this offering, each existing partner’s interest in each Och-Ziff Operating Group entity will be reclassified as Class A operating group units, which will represent common equity interests in the respective Och-Ziff Operating Group entity. Each of Mr. Och and our 17 other partners will receive an amount of Class A operating group units in each Och-Ziff Operating Group entity equal to such partner’s then-existing income allocation percentage under the applicable limited partnership agreement in effect immediately prior to such reclassification. In addition, as part of the reclassification, each partner will also receive a Class C non-equity interest (the “Class C Non-Equity Interests”), which will not represent a common equity interest in our business. The Class C Non-Equity Interests will represent non-equity interests on which discretionary income allocations may be made to our existing and future partners, as described below, although we currently do not intend to make any such distributions. The Ziffs’ existing interest in our business will also be reclassified as Class A operating group units, representing an approximately

 

10% interest in the common equity of each Och-Ziff Operating Group entity immediately prior to this offering, which will proportionately reduce each partner’s common equity interest in the respective Och-Ziff Operating Group entity. The Ziffs will not hold any Class C Non-Equity Interests. As a result, upon completion of the Reorganization and prior to this offering, Mr. Och, the 17 other partners and the Ziffs will own in the aggregate 100% of the common equity in each Och-Ziff Operating Group entity.

One Class A operating group unit in each Och-Ziff Operating Group entity collectively represents one “Och-Ziff Operating Group A Unit”. Och-Ziff Operating Group A Units will be exchangeable for our Class A shares on a one-for-one basis, subject to exchange rate adjustments for splits, unit distributions and reclassifications and subject to vesting, minimum retained ownership requirements and transfer restrictions, as described below. Upon completion of this offering, including the use of proceeds therefrom, Mr. Och, our 17 other existing partners and the Ziffs will hold Och-Ziff Operating Group A Units representing 44.2%, 37.7% and 9.1%, respectively, of the equity in our business (or 43.5%, 37.2% and 9.0%, respectively, if the underwriters exercise their option to purchase additional Class A shares in full).

Class B operating group units.     As described below under “—Offering Transactions—Public Offering of Class A Shares,” after completion of the Reorganization and in connection with the consummation of this offering, we will contribute the proceeds to us from this offering to the intermediate holding companies, which will in turn contribute such proceeds to the Och-Ziff Operating Group entities in exchange for Class B operating group units in each such entity. Each intermediate holding company will hold Class B operating group units in each Och-Ziff Operating Group entity that it controls. Och-Ziff Corp will hold 100% of the Class B operating group units in each of OZ Management and OZ Advisors I, and Och-Ziff Holding will hold 100% of the Class B operating group units in OZ Advisors II. The Class B operating group units will be economically identical to the Class A operating group units held by our existing owners, representing common equity interests in our business, but will not be exchangeable for Class A shares and will not be subject to vesting, forfeiture or minimum retained ownership requirements.

One Class B operating group unit in each Och-Ziff Operating Group entity collectively represents one “Och-Ziff Operating Group B Unit”. In this prospectus, we refer to the Och-Ziff Operating Group A Units and the Och-Ziff Operating Group B Units, which together represent all of the common equity interests in the Och-Ziff Operating Group entities, collectively as the “Operating Group Equity Units”. The Operating Group Equity Units will have no preference or priority over other securities of the Och-Ziff Operating Group and, upon liquidation, dissolution or winding up, will be entitled to any assets remaining after payment of all debts and liabilities of the Och-Ziff Operating Group.

Class C Non-Equity Interests.     As described above, our existing partners will also receive Class C Non-Equity Interests in the Reorganization. The Class C Non-Equity Interests will represent non-equity interests in our business which the Chairman of the Partner Management Committee (or, in the event there is no Chairman, the full Partner Management Committee acting by majority vote), in conjunction with our compensation committee, may from time to time use to make discretionary income allocations to our partners, including new partners, and will not represent common equity interests in the Och-Ziff Operating Group entities. We currently do not intend to make any such distributions on the Class C Non-Equity Interests. However, in the future, the Chairman of the Partner Management Committee (or the full committee as described above) and our compensation committee may determine that for competitive or other reasons, distributions on the Class C Non-Equity Interests are advisable and in keeping with our compensation philosophy of rewarding performance that increases long-term shareholder value and attracting and retaining the highest quality professionals. In such case, distributions may be made to one or more holders of the Class C Non-Equity Interests as and to

 

the extent determined appropriate by the Chairman of the Partner Management Committee (or the full committee as described above) and our compensation committee and need not be made to all such holders on a pro rata basis or otherwise. No holder of Class C Non-Equity Interests will have any right to receive distributions on such interests. Any discretionary income allocations made pursuant to the Class C Non-Equity Interests would be treated as an expense for financial reporting purposes and would therefore reduce amounts available for distribution to us (and, in turn, our Class A shareholders), our partners and the Ziffs as owners of the equity interests in the Och-Ziff Operating Group after this offering.

Deconsolidation of Och-Ziff Funds .     In accordance with GAAP, most of our funds have historically been consolidated into our combined financial statements notwithstanding the fact that we have had only a minority interest in these funds. As a result, our historical combined financial statements reflect the assets, liabilities, revenues, expenses and cash flows of these funds on a gross basis rather than reflecting only the value of our investments in such funds. As of December 31, 2006, the assets of the Och-Ziff funds consolidated on our balance sheet were $36.0 billion, while the net asset value of our investments in these consolidated funds was approximately $414.5 million. In addition, all management fees and incentive income earned by us from these funds were eliminated as a result of the consolidation of these funds and are reflected on our historical financial statements as an increase in our allocated share of the net income from these funds.

In December 2006, we granted substantive “kick-out” rights to the unaffiliated limited partners of most of our domestic funds enabling them to remove the respective general partner with a simple majority vote. These rights became effective on January 1, 2007. In June 2007, we granted similar rights to the unaffiliated shareholders of each of our offshore funds, enabling them to replace the respective investment manager by replacing one or more members of the respective boards of directors. These rights became effective on June 30, 2007. As a result, most of our domestic funds and all of our offshore funds have been deconsolidated as of the relevant effective dates of such rights. Funds with only affiliated investors will continue to be consolidated for financial reporting periods as of and after June 30, 2007. These funds comprised approximately $87.7 million or 0.3% of our assets under management as of June 30, 2007.

We granted these rights to our fund investors for no consideration in order to enable us to deconsolidate these funds. We believe the deconsolidation allows us to present financial information in a manner that more clearly reflects our business, financial condition and results of operations because, among other things:

 

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We will include the management fees and incentive income earned from our deconsolidated funds on our statements of income rather than eliminating the revenue in consolidation.

 

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We will not record on our balance sheets or statements of income the gross assets, liabilities, revenues, expenses and other income or the related non-controlling interests of our fund investors in our deconsolidated funds.

 

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We will not reflect cash flows of our deconsolidated funds on our statements of cash flows.

Despite the above changes to certain aspects of our combined financial statements, the deconsolidation of our funds will not have any effect on our net income or equity.

Furthermore, because management makes operating decisions and allocates resources based on financial information that, among other things, shows our results of operations after giving effect to the deconsolidation of our funds, our financial reporting is now presented in a manner that is consistent

 

with how our management evaluates our business and the related risks thus providing shareholders with a better method of understanding our business.

Offering Transactions

Public Offering of Class A Shares.     Och-Ziff Capital Management Group LLC will issue 36,000,000 Class A shares in this offering (or 41,400,000 Class A shares if the underwriters exercise their option to purchase additional Class A shares in full). The Class A shares will entitle the holders to one vote per share. Och-Ziff will then contribute the proceeds from this offering less underwriting discounts and commissions to its intermediate holding companies, based on the relative value of those entities. The intermediate holding companies may enter into credit arrangements with one another with respect to a portion of such proceeds, depending upon the relative need and other business considerations. Any such credit arrangements will have no effect on our overall organizational structure, including the number of Operating Group Equity Units issued to our existing owners and our intermediate holding companies. The intermediate holding companies will then contribute all of the proceeds received from us to the Och-Ziff Operating Group in exchange for newly issued Och-Ziff Operating Group B Units such that the intermediate holding companies will hold a number of Och-Ziff Operating Group B Units that will be equal in number to the number of Class A shares issued in this offering. As a result, our existing owners’ percentage ownership of the common equity interests in the Och-Ziff Operating Group will be correspondingly reduced. Och-Ziff Operating Group B Units held by the intermediate holding companies will be economically identical in all respects to Och-Ziff Operating Group A Units that our existing owners will hold, but will not be exchangeable for Class A shares and will not be subject to vesting, forfeiture or minimum retained ownership requirements. The Och-Ziff Operating Group will then immediately use all of such offering proceeds to purchase an aggregate of 36,000,000 Och-Ziff Operating Group A Units from our existing owners for an aggregate purchase price equal to $1.1 billion, and such units will be cancelled. Upon such purchase, an equal number of Class B shares held by our existing partners will correspondingly be cancelled, as described below. We will pay all of the expenses related to this offering from cash on hand, and we will not retain any of the proceeds from this offering. The number of Och-Ziff Operating Group A Units purchased from each of Mr. Och, our 17 other existing partners and the Ziffs (and, therefore, the corresponding number of Class B shares to be cancelled) will equal such existing owner’s pro rata portion of the aggregate amount of such units outstanding immediately prior to such purchase.

In the event the underwriters exercise their option to purchase additional Class A shares, the proceeds will be used as described above. First, Och-Ziff will contribute the proceeds to it to the intermediate holding companies based on the relative value of those entities, and the intermediate holding companies will then contribute all of such proceeds to the Och-Ziff Operating Group in exchange for a number of newly issued Och-Ziff Operating Group B Units equal to the number of Class A shares issued pursuant to the underwriters’ option. The Och-Ziff Operating Group will then use all of the offering proceeds from the exercise of such option, assuming such option is exercised in full, to purchase 5,400,000 Och-Ziff Operating Group A Units from our existing owners on a pro rata basis for an aggregate purchase price equal to $160.7 million, and such units, as well as 4,860,000 Class B shares held by our existing partners, will be cancelled.

Reclassification of Och-Ziff Interests to Class B Shares.     All of the currently outstanding limited liability company interests of Och-Ziff Capital Management Group LLC are held by our existing partners. These interests will be reclassified as our Class B shares prior to the completion of this offering and will be adjusted so that our partners will hold a number of Class B shares upon completion of the Reorganization equal to the number of Och-Ziff Operating Group A Units then held by each such partner. Upon the purchase by the Och-Ziff Operating Group of Och-Ziff Operating Group A Units from

 

our existing partners with the proceeds from this offering as described above, a corresponding number of Class B shares will be cancelled so that, upon completion of this offering, our existing partners will hold 327,600,000 Class B shares (or 322,740,000 Class B shares if the underwriters exercise their option to purchase additional Class A shares in full), which will equal the number of Och-Ziff Operating Group A Units then held by them. The Ziffs will not hold any of our Class B shares. The Class B shares will have no economic rights but will entitle the holders to one vote per share. The Class B shares are not expected to be registered for public sale or listed on any securities exchange and will only be transferable by a holder in connection with a transfer of such holder’s Och-Ziff Operating Group A Units. The Class B shares are intended solely to provide our existing partners with a voting interest in Och-Ziff Capital Management Group LLC equal to their economic interest in our business. As a result, the number of Class B shares held by an existing partner at any time will equal the number of Och-Ziff Operating Group A Units then held by such partner. Holders of Class A shares and Class B shares will vote together as a single class on all matters submitted to a vote of our shareholders. Upon completion of this offering, our partners will hold Class B shares representing 90.1% of the total voting power of our company (or 88.6% if the underwriters exercise their option to purchase additional Class A shares in full). Each of our partners will grant initially to Mr. Och, as the sole member of the Class B Shareholder Committee, an irrevocable proxy to vote all of his Class B shares until the later of (i) Mr. Och’s withdrawal, death or disability or (ii) such time as our partners hold less than 40% of the total combined voting power of our company.

IPO Date Awards .     At the time of this offering, we intend to grant to all of our managing directors and other employees (which do not include our partners) 14,761,905 Class A restricted share units in the aggregate under our 2007 equity incentive plan. These units, which may be settled in Class A shares or cash, at the election of a majority of our Board of Directors, will vest in equal installments over a four-year period beginning on the first anniversary of this offering and will accrue distributions (to be paid when the underlying Class A restricted share units vest). We will recognize compensation expense over the vesting period. An employee will forfeit all unvested units if an employee leaves or is terminated for any reason (other than in the event of a termination of employment resulting from death or disability, or without cause within the one-year period following a change in control of us, in which case all such restricted share units will vest). To the extent that Class A restricted share units are settled in Class A shares, we expect to issue registered Class A shares in respect of such units upon vesting. As a result, such Class A shares will be freely transferable by non-affiliates upon issuance and by affiliates under Rule 144 under the Securities Act, or “Rule 144,” without regard to holding period limitations.

Exchange and Registration Rights .     We will enter into an exchange agreement with our existing owners. Pursuant to the exchange agreement, our existing owners will be entitled to exchange their Och-Ziff Operating Group A Units with the Och-Ziff Operating Group entities for our Class A shares on a one-for-one basis, subject to exchange rate adjustments for splits, unit distributions and reclassifications and subject to vesting, minimum retained ownership requirements and transfer restrictions. Such exchanges generally may be made as and when approved by the Chairman of the exchange committee (or the full committee acting by majority vote if there is no Chairman) for the five-year period following this offering and quarterly thereafter. The exchange committee will consist of the members of the Partner Management Committee, with Mr. Och initially acting as Chairman. Our Board of Directors may cause the Och-Ziff Operating Group entities to elect to pay a cash equivalent in lieu of Class A shares upon any such exchange. Upon any such exchange, the corresponding Class B shares of Och-Ziff Capital Management Group LLC held by an exchanging owner will be cancelled, and such exchanging owner may be entitled to certain payments under the tax receivable agreement described below. Upon any such exchange for Class A shares, the number of Och-Ziff Operating Group B Units

 

that we hold will correspondingly increase. See “Certain Relationships and Related Party Transactions—Limited Partnership Agreements of Och-Ziff Operating Group Entities—Issuance of Equity Securities by Och-Ziff.” If and when an existing owner exchanges an Och-Ziff Operating Group A Unit for a Class A share and the corresponding Class B share is cancelled, then-existing Class A shareholders will be diluted with respect to their ownership of the Class A shares. However, the relative equity ownership positions of the exchanging existing owner and of the other equity owners of our business (whether held at Och-Ziff Capital Management Group LLC or at Och-Ziff Operating Group) will not be altered. In addition, other than with respect to an exchange by the Ziffs, there will be no effect on the number of voting shares outstanding, as a corresponding Class B share is cancelled for each Class A share issued upon such exchange. We intend to grant to our existing owners certain registration rights with respect to the Class A shares received by them as a result of any such exchange or otherwise. In addition to certain demand rights and piggyback registration rights, we will be required to file a shelf registration statement on or prior to the fifth anniversary of this offering covering the resale of all Class A shares held by our existing owners or issuable upon exchange of their Och-Ziff Operating Group A Units. The Och-Ziff Operating Group B Units held by our intermediate holding companies will not be exchangeable for Class A shares.

Tax Receivable Agreement .     The purchase by the Och-Ziff Operating Group of Och-Ziff Operating Group A Units from our existing owners with the proceeds from this offering, as well as future taxable exchanges by our existing owners of Och-Ziff Operating Group A Units for our Class A shares on a one-for-one basis (or, at our option, a cash equivalent), is expected to result in an increase in the tax basis of the tangible and intangible assets of the Och-Ziff Operating Group that would not otherwise have been available. As a result, we expect that the amount of tax that we would otherwise have been required to pay in the future will be reduced. Accordingly, Och-Ziff Corp and our other corporate taxpayer intermediate holding companies, if any, will enter into a tax receivable agreement with our existing owners whereby such intermediate holding companies will agree to pay to our existing owners 85% of the amount of tax savings actually realized by such entities.

In connection with the purchase by the Och-Ziff Operating Group of Och-Ziff Operating Group A Units from our existing owners with the proceeds from this offering, we have assumed, for financial accounting purposes, no material change in the relevant tax law and that we will earn sufficient taxable income to realize the full tax benefit of increased amortization of our assets attributable to tax basis increases resulting from such purchase. On that basis, the cash savings to our intermediate holding companies from the initial purchase would aggregate approximately $             million over the next 15 years (or $             million over the next 15 years if the underwriters exercise their option to purchase additional Class A shares in full). These amounts reflect the fact that payments under the tax receivable agreement may result in further tax savings, and thus may give rise to additional payment obligations thereunder. The obligation to pay 85% of the amount of such cash savings to our existing owners is an obligation of the corporate taxpayer intermediate holding companies and not of the Och-Ziff Operating Group entities. Future cash savings and related payments to our existing owners in respect of subsequent exchanges would be in addition to these amounts. We may need to incur debt to finance payments under the tax receivable agreement to the extent our cash resources are insufficient to meet our obligations under the tax receivable agreement. While the actual increase in tax basis, as well as the amount and timing of any payments under this agreement, will vary based upon a number of factors (including the timing of future exchanges, the price of our Class A shares at the time of any exchange, the extent to which such exchanges are taxable and the amount and timing of our income), depending upon the outcome of these factors, payments that we may be obligated to make to our existing owners as a result of the purchase of Och-Ziff Operating Group A Units in connection with this offering, as well as the payments in respect of subsequent exchanges, could be substantial. In light of the numerous factors affecting our obligation to make such payments, however, the timing and amounts of any such actual payments are not reasonably ascertainable at this time.

 

Vesting; Forfeiture; Transfer and Other Restrictions Applicable to Our Partners .     Upon completion of the Reorganization, Mr. Och and the 17 other partners will hold equity interests in our business that will, pursuant to the operating group limited partnership agreements, be subject to different vesting, forfeiture, transfer, and other restrictions and minimum retained ownership requirements as described below. Pursuant to the operating group limited partnership agreements, the Och-Ziff Operating Group A Units received by Mr. Och and our 17 other partners in the Reorganization that are purchased with proceeds from this offering, including proceeds from any exercise by the underwriters of their option to purchase additional Class A shares, will be deemed fully vested upon such purchase and thereafter will be cancelled. All other Och-Ziff Operating Group A Units received by Mr. Och and our 17 other partners in the Reorganization will be unvested. Accordingly, 100% of the Och-Ziff Operating Group A Units held by Mr. Och and our 17 other partners upon completion of this offering (including after giving effect to the exercise of the underwriters’ option to purchase additional Class A shares) will be unvested. Such units will vest, subject to our partners’ continued association with us, in equal installments on each anniversary date of this offering for five years, beginning on the first anniversary date of this offering. The unvested Och-Ziff Operating Group A Units of Mr. Och will be subject to forfeiture to the other partners only if Mr. Och voluntarily terminates his association with us. The unvested Och-Ziff Operating Group A Units of any partner other than Mr. Och will be subject to forfeiture to the other partners if such partner voluntarily terminates his association with us or is terminated by the partnership for cause or if the Partner Performance Committee terminates such partner for any reason. We will recognize compensation expense to the extent of the amount of Och-Ziff Operating Group A Units that vest in each year over the vesting period. In addition, the operating group limited partnership agreements will provide for restrictions on transfers by any of our partners of their interests in our business, permitting transfers of their vested Och-Ziff Operating Group A Units, including in exchange for Class A shares pursuant to the exchange agreement, generally only as permitted by the Chairman of the Partner Management Committee (or, with respect to the Chairman or in the event there is no Chairman, by the Partner Management Committee acting by majority vote); provided that after the fifth anniversary of this offering, there will be no restrictions on exchanges by any of our partners of their Och-Ziff Operating Group A Units for our Class A shares or the transfer of any such Class A shares received in any such exchange. In addition, on or prior to such fifth anniversary, we will be required to file a shelf registration statement covering the resale of all Class A shares held by our existing owners or issuable upon any such exchange. Any transfers will be further subject to a requirement that each partner (including Mr. Och), while he is associated with us and during the two-year period immediately following the date of termination of his association with us for any reason, maintains a minimum ownership of 25% of the vested Och-Ziff Operating Group A Units received by him and without reduction for dispositions. The foregoing vesting and minimum retained ownership requirements may be waived by the Chairman of the Partner Management Committee (or by majority vote of the Partner Management Committee with respect to the Chairman or in the event there is no Chairman) at any time. Any waiver of the vesting provisions would result in an accelerated recognition of compensation expense associated with such interests. Each of Mr. Och and our 17 other partners will also be subject to certain restrictions with respect to competing with us, soliciting our employees or fund investors and disclosing confidential information about our business. Our managing directors will be subject to similar restrictions. Each of Mr. Och and our 17 other partners will re-invest 100% of the after-tax proceeds received by him in connection with this offering into our funds.

Restrictions on Transfer of the Ziffs’ Interest in Our Business .     Upon completion of the Reorganization, the Ziffs will also hold equity interests in our business that will, pursuant to the operating group limited partnership agreements, be subject to vesting (without regard to service or performance conditions) and transfer restrictions as described below but will not be subject to forfeiture or minimum retained ownership requirements. The operating group limited partnership agreements will

 

provide that the Och-Ziff Operating Group A Units received by the Ziffs in the Reorganization that are purchased with proceeds from this offering, including proceeds from any exercise by the underwriters of their option to purchase additional Class A shares, will be deemed fully vested upon such purchase and will thereafter be cancelled. All other Och-Ziff Operating Group A Units received by the Ziffs in the Reorganization will be unvested. Accordingly, 100% of the Och-Ziff Operating Group A Units held by the Ziffs upon completion of this offering (including after giving effect to the exercise of the underwriters’ option to purchase additional Class A shares) will be unvested. Such units will vest in equal installments on each anniversary date of this offering for five years, beginning on the first anniversary of this offering. The Ziffs will be restricted from transferring any Och-Ziff Operating Group A Units prior to vesting. The Ziffs will not have any demand registration rights with respect to any Class A shares acquired by them upon exchange of their Och-Ziff Operating Group A Units but will have “piggyback” registration rights that are the same as those granted to our existing partners and will be entitled to include their Class A shares in the shelf registration statement that we will be required to file on or prior to the fifth anniversary of this offering. In addition, following the first anniversary of this offering, the Ziffs will generally be entitled, in any given fiscal quarter, to exchange their vested Och-Ziff Operating Group A Units for Class A shares in an amount equal to up to the lesser of (i) 3.3% of the total issued and outstanding Class A shares at the time of such exchange and (ii) 5% of the Class A shares that would have been held by them had they exchanged all of their Och-Ziff Operating Group A Units into Class A shares immediately prior to the completion of this offering. The Ziffs will generally be entitled to freely sell any such Class A shares received upon any such exchange, subject to applicable law. The Ziffs will also be permitted to contribute their vested Och-Ziff Operating Group A Units to charities, subject to the approval of the Chairman of the Partner Management Committee. The foregoing vesting requirements and transfer restrictions may be waived by the Chairman of the Partner Management Committee (or by majority vote of the Partner Management Committee in the event there is no Chairman) at any time. The Ziffs will invest approximately 50% of the after-tax proceeds received by them in connection with this offering into our funds, which investments will be subject to the lock-up period applicable to the funds in which the Ziffs choose to invest.

Certain Committees

Partner Management Committee .     The operating group limited partnership agreements will provide for the establishment of a “Partner Management Committee”. The Partner Management Committee will be a committee comprised of seven partners, which shall consist initially of Messrs. Och, Windreich, Frank, Cohen, Varga, Kelly and Brown, with Mr. Och serving as Chairman. The Partner Management Committee shall act by majority approval. Each member of the Partner Management Committee shall serve until such member’s withdrawal, death, disability or, other than with respect to Mr. Och, removal by the Partner Performance Committee. Upon Mr. Och’s withdrawal, death or disability, the remaining members of the Partner Management Committee shall act by majority vote to either (1) replace Mr. Och with a partner to serve as Chairman, until such partner’s withdrawal, death, disability or removal by the other members of the Partner Management Committee or (2) reduce the size of the Partner Management Committee to the remaining members (in which event, there shall be no Chairman, and the remaining members will act by majority vote). Upon the withdrawal, death, disability or removal of any of the members of the Partner Management Committee other than the Chairman, the remaining members of the Partner Management Committee shall act by majority vote to fill such vacancy. Upon a reconstitution as provided in clause (1) above, the Partner Management Committee shall have the same rights of reconstitution in the event of the new member’s withdrawal, death, disability or removal. The Chairman of the Partner Management Committee (or, in the event there is no Chairman, the full Partner Management Committee acting by majority vote) will have authority to make determinations with respect to distributions on the Class C Non-Equity Interests, subject to the authority of our compensation committee, although we do not currently intend to make any such distributions. In addition, the Chairman (or, with respect to the Chairman or in the event there is no Chairman, the full Partner Management Committee acting by majority vote) will have authority to

 

approve transfers of Och-Ziff Operating Group A Units in accordance with the operating group limited partnership agreements. The full Partner Management Committee acting by majority vote will also have authority to reconstitute the Class B Shareholder Committee.

Partner Performance Committee .     The operating group limited partnership agreements will provide for the establishment of a “Partner Performance Committee”. The Partner Performance Committee will be a committee comprised of six partners acting by majority vote, which shall consist initially of Messrs. Och, Windreich, Frank, Cohen, Varga and Kelly, with Mr. Och serving as Chairman. The vote of Mr. Och will break any deadlock. Each member of the Partner Performance Committee shall serve until such member’s withdrawal, death, disability or, other than with respect to Mr. Och, removal by the other members of the Partner Performance Committee. Upon Mr. Och’s withdrawal, death or disability, the remaining members of the Partner Performance Committee shall act by majority vote to replace Mr. Och with a partner (who may or may not serve as Chairman) until such partner’s withdrawal, death, disability or removal by the other members of the Partner Performance Committee. Upon the withdrawal, death, disability or removal of any of the members of the Partner Performance Committee other than the Chairman, the remaining members of the committee shall act by majority vote to fill such vacancy. Upon a reconstitution as provided above, the Partner Performance Committee shall have the same rights of reconstitution in the event of the new partner’s withdrawal, death, disability or removal. The Partner Performance Committee will have authority to terminate any partner, other than Mr. Och, for any reason. At all times in which there is a Chairman of the Partner Performance Committee, any such termination shall be made only upon the recommendation of the Chairman.

Class B Shareholder Committee .     The shareholders’ agreement will provide for the establishment of the “Class B Shareholder Committee”. The Class B Shareholder Committee initially will be a committee of one, consisting solely of Mr. Och until his withdrawal, death or disability. Upon Mr. Och’s withdrawal, death or disability, the Partner Management Committee shall act by majority vote to reconstitute the Class B Shareholder Committee either by (1) appointing a new partner to serve as the sole member of the Class B Shareholder Committee until such partner’s withdrawal, death, disability or removal by the Partner Management Committee, or (2) appointing the members of the Partner Management Committee as the members of the Class B Shareholder Committee (in which event such members would act by majority vote in their capacity as the Class B Shareholder Committee). Upon a reconstitution as provided by clause (1) above, the Partner Management Committee shall have the same rights of reconstitution in the event of the new partner’s withdrawal, death, disability or removal. Upon a reconstitution as provided by clause (2) above, the Class B Shareholder Committee shall thereafter be comprised of the members who from time to time constitute the Partner Management Committee. The Class B Shareholder Committee will have certain voting, nomination, consent and approval rights, as described below.

Voting, Nomination, Consent and Approval Rights of Class B Shareholder Committee

Our Class B Shareholder Committee will have certain voting, nomination, consent and approval rights pursuant to the shareholders’ agreement. These rights include:

 

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The right to vote all of the outstanding Class B shares, pursuant to irrevocable voting proxies granted by our existing partners, until the later of (i) Mr. Och’s withdrawal, death or disability or (ii) such time as our partners hold less than 40% of the total combined voting power of our company. Upon completion of this offering, the Class B shares will represent 90.1% of the total voting power of our company (or 88.6% if the underwriters exercise their option to purchase additional Class A shares in full);

 

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The right initially to designate five of the seven nominees for election to our Board of Directors, with such number of nominees decreasing as the voting interest held by our partners decreases;

 

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The right to consent to or approve certain actions (so long as our existing partners continue to own more than 40% of the total combined voting power of our company), including:

 

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incurrence of indebtedness, issuance of securities or making of investments, in each case subject to monetary thresholds;

 

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entry into a new line of business;

 

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adoption of a shareholder rights plan;

 

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appointment or termination of a chief executive officer; or

 

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termination of any executive officer or partner of any of our subsidiaries without cause.

In addition, our operating agreement requires that we obtain the consent of the Class B Shareholder Committee for specified actions primarily relating to our structure so long as any Class B shares remain outstanding. Our structure is intended to ensure that we maintain exchangeability of Class A shares and Och-Ziff Operating Group A Units on a one-for-one basis. Accordingly, the Class B Shareholder Committee will have the right to approve or consent to actions that could result in an economic disparity, such as the issuance of certain securities, making certain capital contributions, owning or disposing of certain assets, incurring certain indebtedness and conducting business outside of the Och-Ziff Operating Group. Please refer to “Description of Shares—Och-Ziff Capital Management Group LLC Limited Liability Company Agreement—Relationship with Och-Ziff Operating Group Entities” for additional information.

 

The diagram below depicts our organizational structure immediately following the above-described transactions: ⁽¹⁾

 

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(1)	This diagram does not give effect to 14,761,905 Class A restricted share units to be granted under our 2007 equity incentive plan to all of our managing directors and our other employees in

 

connection with this offering or the issuance of any Class A shares upon exercise of the underwriters’ option to purchase additional Class A shares. Assuming the underwriters exercise in full their option to purchase additional Class A shares, and after giving effect to the settlement of the 14,761,905 Class A restricted share units to be granted in connection with this offering (assuming such units are settled in Class A shares), (i) our existing owners will hold 86.5% of the equity in our business and 85.2% of the total combined voting power of our company and (ii) investors in this offering will hold, indirectly, 10.0% of the equity in our business and 10.9% of the total combined voting power of our company. Our real estate funds, OZ 2004 Investment Partners, L.L.C. and OZ 2004 GP, L.L.C., which are reflected as part of the Och-Ziff Operating Group in our historical financial statements, are not reflected in this diagram as these entities will become subsidiaries of the Och-Ziff Operating Group in connection with the Transactions.

(2)

Our existing owners include Mr. Och, the 17 other existing partners and the Ziffs. Upon consummation of this offering, Mr. Och, the 17 other existing partners and the Ziffs will hold Och-Ziff Operating Group A Units representing 44.2%, 37.7% and 9.1%, respectively, of the equity in our business (or 42.0%, 35.9% and 8.6%, respectively, if the underwriters exercise their option to purchase additional Class A shares in full and after giving effect to the settlement of the 14,761,905 Class A restricted share units to be granted in connection with this offering in Class A shares). Our existing partners will hold all of the Class C Non-Equity Interests, which may be used for discretionary income allocations in the future, although we currently do not intend to make any distributions on such interests. The Ziffs will not hold any Class C Non-Equity Interests.

(3)

Upon consummation of this offering, Mr. Och will hold Class B shares representing 48.6% of the voting power of our company and the 17 other partners will hold Class B shares representing 41.5% of the voting power of our company (or 45.9% and 39.3%, respectively, if the underwriters exercise their option to purchase additional Class A shares in full and after giving effect to the settlement of the 14,761,905 Class A restricted share units to be granted in connection with this offering in Class A shares). Our existing partners will grant initially to Mr. Och, as the sole member of the Class B Shareholder Committee, an irrevocable proxy to vote all of their Class B shares. The Ziffs will not hold any of our Class B shares.

(4)	Och-Ziff Operating Group A Units and Och-Ziff Operating Group B Units together represent all of the equity interests in the Och-Ziff Operating Group.

(5)	Held solely by existing partners for potential future discretionary income allocations.

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Tax Consequences and Post-Offering Distributions

Skadden, Arps, Slate, Meagher & Flom LLP has acted as our counsel in connection with this offering. Subject to the assumptions and other qualifications described in “Material U.S. Federal Tax Considerations—Taxation of Our Company—Federal Income Tax Opinion Regarding Partnership Status,” Skadden, Arps, Slate, Meagher & Flom LLP is of the opinion that at the closing of this offering we will be treated, for U.S. federal income tax purposes, as a partnership and not as an association or publicly traded partnership (within the meaning of Section 7704 of the Code) subject to tax as a corporation. As a result of our being treated as a partnership for U.S. federal income tax purposes, holders of Class A shares will be required to report their allocable share of our income for U.S. federal income tax purposes, regardless of whether any cash or other distributions are paid to them. Income will be allocable to holders of Class A shares as a result of dividends and interest from Och-Ziff Corp and Och-Ziff Holding’s income, which will be based on the operations of the Och-Ziff Operating Group.

The Och-Ziff Operating Group entities will also be treated as partnerships and not as corporations for U.S. federal income tax purposes. Accordingly, the direct holders of Operating Group Equity Units that are not taxed on a flow-through basis, including Och-Ziff Corp and our existing owners, will incur

 

U.S. federal, state and local income taxes on their proportionate share of any net taxable income of the Och-Ziff Operating Group. As a result of Och-Ziff Corp being taxed as a corporation we anticipate that we will have significantly higher tax expenses after the Reorganization and that our effective tax rate will increase substantially.

After this offering, we intend to cause the Och-Ziff Operating Group to make distributions on a pro rata basis to holders of Operating Group Equity Units (including our existing owners and our intermediate holding companies) in order to fund any distributions we may declare on the Class A shares. However any such distributions will be at the sole discretion of our Board of Directors. If the Och-Ziff Operating Group makes such distributions, the holders of Operating Group Equity Units will be entitled to receive distributions pro rata, based on their partnership interests. In the event that a distribution is made on the Operating Group Equity Units solely to fund a distribution on the Class A shares, we would expect that the distribution per Class A share would equal the distribution per Operating Group Equity Unit. As a result, our existing owners would receive a distribution per Och-Ziff Operating Group A Unit equal to the per Class A share distribution. No similar distributions will be made on the corresponding Class B shares of Och-Ziff held by our partners. In addition, in accordance with the operating group limited partnership agreements, we will cause the applicable Och-Ziff Operating Group entities to distribute cash on a pro rata basis to direct holders of Operating Group Equity Units in an amount at least equal to the presumed maximum tax liabilities arising from the ownership of such units, if any. Because the purpose of such tax distributions is to enable Och-Ziff Corp and the existing owners to satisfy their respective tax liabilities, no such distribution will necessarily be required to be distributed by our intermediate holding companies to us, and we may determine not to pay cash distributions on the Class A shares. The declaration and payment of distributions on the Class A shares will be at the sole discretion of our Board of Directors. As a result, there may be instances in which our existing owners receive a distribution on their Och-Ziff Operating Group A Units but holders of Class A shares receive no distribution. A holder of Class A shares will be required to report its share of our taxable income even if the Board of Directors does not pay distributions. Distributions on Operating Group Equity Units will be made on all such units, whether or not vested.

Members of the United States Congress have introduced legislation that would, if enacted, preclude us from qualifying for treatment as a partnership for U.S. federal income tax purposes under the publicly traded partnership rules. If this or any similar legislation were to be enacted and to apply to us, Class A shareholders would be negatively impacted because we would incur a material increase in our tax liability, which could result in a reduction in the value of our Class A shares. In addition, proposed changes to the U.S. federal tax laws and interpretations thereof could change the character or treatment of portions of our income, including, for instance, treating carried interest income as entirely ordinary income. “Carried interest” is a term often used in the marketplace as a general reference to describe a general partner’s right to receive its incentive income in the form of a profit allocation eligible for capital gains tax treatment (to the extent that the carried interest consists of capital gains).

Distributions and Other Payments to our Existing Owners

In 2006 and from January 1, 2007 to the date of this prospectus, excluding the special distributions described in the bullet points below, our named executive officers, certain of whom are also directors, received aggregate cash distributions of $        billion and $        billion, respectively, while our other existing owners received an aggregate of $        billion and $        billion, respectively.

 

The following is a summary of special distributions that have been or will be made to our existing owners in connection with this offering and the other transactions described in this prospectus. We refer to these distributions collectively as the “Special Distributions”:

 

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Special Pre-Offering Distributions

 

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Term Loan Distributions . On July 2, 2007, we entered into a new $750 million term loan, which we will amend prior to the closing of this offering. We intend to use the full amount of the proceeds from the term loan to make pro rata distributions to our existing owners prior to completion of this offering, which we refer to throughout this prospectus as the “Term Loan Distributions”. Our named executive officers, certain of whom are also directors, will receive Term Loan Distributions of $        million in the aggregate, while our other existing owners will receive Term Loan Distributions of $        million in the aggregate.

 

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Distribution of Investments in Och-Ziff Funds. We have made investments in our funds on behalf of our existing partners that we expect to distribute to them prior to the completion of this offering. These investments, which were approximately $300 million at June 30, 2007, will be distributed in the form of limited partnership interests in the respective funds. We refer to these distributions as the “Investment Distributions”.

 

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2007 Management Fee Distribution. Prior to completion of this offering, we intend to declare a distribution to our existing owners equal to management fees earned from January 1, 2007 through the date of this offering reduced by expenses and prior management fee distributions for such period. Such distributions are not expected to exceed $        million in the aggregate and will not include any amounts in respect of incentive income that has been or may be earned for 2007. We refer to this distribution as the “2007 Management Fee Distribution” and, together with the Term Loan Distributions and the Investment Distributions, the “Pre-Offering Distributions”.

 

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Offering Distributions

 

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In connection with our purchase of Och-Ziff Operating Group A Units with proceeds of this offering, our named executive officers are expected to receive approximately $779 million in the aggregate (or $896 million if the underwriters exercise their option to purchase additional Class A shares in full), while our other existing owners are expected to receive approximately $293 million in the aggregate (or $337 million, if the underwriters exercise their option to purchase additional Class A shares in full). All of the net after-tax proceeds to be received by our partners in connection with this offering (and 50% of the net after-tax proceeds received by the Ziffs) will be reinvested in our funds.

 

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Special Post-Offering Distributions and Payments

 

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Deferred Income Distributions. We intend that the Deferred Balances, which were approximately $1.5 billion as of June 30, 2007, will be paid in the form of cash or other property to OZ Management and, in turn, distributed to our existing owners over a three-year period commencing in January 2008. Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Post-Offering Liquidity” for additional information regarding our deferral arrangements and the termination thereof. We refer to these distributions as the “Deferred Income Distributions”.

 

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Tax Receivable Payments. Commencing in 2008, our existing owners will be eligible to receive payments under the tax receivable agreement in connection with our purchase of their Och-Ziff Operating Group A Units in connection with this offering and pursuant to subsequent exchanges. Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations–Post-Offering Liquidity” and “Certain Relationships and Related Party Transactions—Tax Receivable Agreement” for additional information regarding the timing and amount of such distributions. We refer to these payments as “Tax Receivable Payments”.

Additional Information

Our principal executive offices are located at 9 West 57th Street, New York, New York 10019. The telephone number of our principal executive offices is (212) 790-0041.

 

The Offering

 

Shares offered by us in this offering

Class A shares: 36,000,000

 

Shares to be outstanding immediately after this offering

Class A shares: 36,000,000

 

Class B shares: 327,600,000

 

Shares to be held by our existing owners immediately after this offering

Class A shares: None

 

Class B shares: 327,600,000 (100% held by our partners)

 

Operating Group Equity Units to be held by us and our existing owners immediately after this offering

36,000,000 by us, or 9.0%

364,000,000 by our existing owners, or 91.0%

 

Voting

One vote per Class A share.

 

One vote per Class B share.

 

Holders of our Class A shares and Class B shares will vote together as a single class on all matters submitted to a vote of our shareholders. Our Class B Shareholder Committee has the right to vote all of the Class B Shares pursuant to irrevocable voting proxies.

 

Approval and board designation rights

Our Class B Shareholder Committee will initially have approval and consent rights with respect to certain actions of our Board of Directors and will also initially have the right to designate five of the seven nominees for election to our Board of Directors.

 

Use of proceeds

We estimate that the proceeds from the sale of our Class A shares in this offering, after deducting the underwriting discounts and commissions, will be approximately $1.1 billion. All of such proceeds to us from this offering will be contributed to the Och-Ziff Operating Group, which in turn will apply those proceeds to purchase Och-Ziff Operating Group A Units from our existing owners at a purchase price per unit equal to the initial public offering price less underwriting discounts and commissions. Accordingly, we will not retain any of the proceeds from this offering. In addition, we will pay all of the expenses related to this offering, estimated to be approximately $20.4 million, from cash on hand.

 

Cash distribution policy

Our intention is to distribute to our Class A shareholders on a quarterly basis substantially all of Och-Ziff Capital Management Group LLC’s net after-tax share of Och-Ziff Operating Group annual economic income in excess of amounts determined by us to be necessary or appropriate to provide for the operation and growth of our business and to provide for future distributions to our Class A shareholders. We expect that our first quarterly distribution will be paid in the first quarter of 2008 in respect of the prior quarter. Incentive income has a significant impact on our economic income but these amounts are not determinable until completion of our fiscal year. We currently anticipate that quarterly distributions in respect of the first three fiscal quarters of any given calendar year will be based on our actual performance, but will not reflect any assumption as to incentive income that may or may not be recorded at year end. Accordingly, if our performance for a given year enables us to earn incentive income, the distributions made in respect of our first three fiscal quarters will be smaller than the distribution we make in respect of our fourth fiscal quarter.

 

The declaration and payment of any future distributions will be at the sole discretion of our Board of Directors, which may change our distribution policy at any time. Our ability to make distributions may be limited by legal and contractual restrictions. For example, as a Delaware limited liability company we are not permitted to make a distribution if and to the extent that after giving effect to such distribution, our liabilities would exceed the fair value of our assets. In addition, we will not be permitted to make distributions if we are in default under our new term loan, and the term loan will limit the aggregate amount of distributions we can pay during a 12-month period to our “free cash flow”, as such term is defined in the term loan. See “Description of New Term Loan.” In addition, our Board of Directors will take into account such other factors as it may deem relevant, including general economic and business conditions; our strategic plans and prospects; our business and investment opportunities; our financial condition and operating results; working capital requirements and anticipated cash needs; and contractual obligations, including payment obligations pursuant to the tax receivable agreement.

 

In addition, in accordance with the operating group limited partnership agreements, we will cause the applicable Och-Ziff Operating Group entities to distribute cash on a pro rata basis to direct holders of Och-Ziff Operating Group Units, including us and our existing owners, in an amount at least equal to the maximum presumed tax liabilities arising from the direct ownership of such units, if any. We will also cause the

 

applicable Och-Ziff Operating Group Entities to distribute cash to us sufficient to fund any payments due under the tax receivable agreement and the expense allocation agreement.

 

The distributions to holders of Och-Ziff Operating Group Units in respect of their tax liabilities and payments under the tax receivable agreement will reduce amounts that would otherwise be available for distribution on Class A shares.

 

Proposed New York Stock Exchange symbol

“OZM”

 

Risk factors

Please read the section entitled “Risk Factors” beginning on page 31 for a discussion of some of the factors you should carefully consider before deciding to invest in our Class A shares.

References in this section to the number of our Class A shares and Class B shares to be outstanding after this offering, and the percent of our total combined voting power held, do not reflect:

 

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364,000,000 Class A shares issuable upon exchange of 364,000,000 Och-Ziff Operating Group A Units (or 358,600,000 Class A shares if the underwriters exercise in full their option to purchase additional Class A shares) held by our existing owners;

 

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5,400,000 Class A shares issuable on exercise of the underwriters’ option to purchase additional Class A shares in full if they sell more than 36,000,000 Class A shares in this offering; or

 

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interests that may be granted under our 2007 equity incentive plan, consisting of:

 

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14,761,905 Class A restricted share units that we expect to grant to all of our managing directors and other employees (which do not include our partners) at the time of this offering, which will vest, subject to their continued employment (other than in the event of a termination of employment resulting from death or disability or without cause within the one year period following a change in control of us, in which case all such restricted share units will vest), in equal installments on each anniversary date of this offering for four years, beginning on the first anniversary date of this offering, and which may be settled, at the election of a majority of our Board of Directors, in Class A shares or cash;

 

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60,000,000 Class A shares reserved for issuance under our 2007 equity incentive plan.

 

SUMMARY HISTORICAL COMBINED AND

UNAUDITED PRO FORMA FINANCIAL INFORMATION

Summary Historical Combined Financial Information

The following tables set forth certain summary financial information on a historical basis. The Och-Ziff Operating Group is considered our predecessor for accounting purposes, and its combined financial statements will be our historical financial statements following this offering. The summary historical combined financial information set forth below as of December 31, 2006 and 2005, and for the years ended December 31, 2006, 2005 and 2004, has been derived from our audited combined financial statements included elsewhere in this prospectus. The summary historical combined financial information set forth below as of December 31, 2004, 2003 and 2002, and for the years ended December 31, 2003 and 2002, has been derived from our unaudited accounting records prepared on a consistent basis with the financial statements described above.

The summary historical combined financial information set forth below as of June 30, 2007 and 2006, and for the six months ended June 30, 2007 and 2006, has been derived from our unaudited interim combined financial statements included elsewhere in this prospectus. The unaudited interim combined financial statements include all normal and recurring adjustments that are, in the opinion of management, necessary for a fair presentation of our financial position and results of operations for the periods presented.

Effective January 1, 2004, the Och-Ziff Operating Group adopted FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities, an interpretation of ARB No. 51 , which requires us to consolidate variable interest entities in which we were determined to be the primary beneficiary. As a result, amounts presented for 2002 and 2003 are not comparable to amounts presented in subsequent periods.

In addition, as of January 1, 2007, the Och-Ziff Operating Group no longer consolidates most of its domestic funds due to changes in the substantive rights afforded to the unaffiliated limited partners of those funds. Similar changes to the rights of unaffiliated shareholders in the offshore funds were made in June 2007 and resulted in the deconsolidation of all of the offshore funds as of June 30, 2007. As a result, the financial information presented for the six months ended June 30, 2007 is not comparable to the financial information presented for the six months ended June 30, 2006.

In addition, incentive income, which has a significant impact on our results of operations, is determined on an annual basis at the end of our fiscal year and is not reflected in our interim financial results, other than incentive income actually earned during a given interim period as a result of investor redemptions during the period, which may or may not be significant. Accordingly, our interim results are not indicative of the results we expect for a full fiscal year.

Compensation and benefits for all periods presented does not include any income allocations to Daniel Och, which were accounted for as increases to partner’s equity, but includes income allocations to all other existing partners. For periods following the completion of the Reorganization, income allocations to all of our existing owners in respect of their Och-Ziff Operating Group A Units will be treated as increases to partners’ equity of the Och-Ziff Operating Group. Such interests will be reclassified in consolidation to Partners’ and others’ interests in consolidated subsidiaries in periods following the Transactions. After completion of this offering, compensation expense will reflect the amortization of significant non-cash equity-based compensation expense relating to the vesting of the Och-Ziff Operating Group A Units to be issued to all existing partners, including Daniel Och, over the

 

five-year period following this offering, as well as the vesting of Class A restricted share units granted to managing directors and other employees in connection with this offering over the four-year period following this offering. In addition, we expect to recognize a significant charge associated with the purchase of Och-Ziff Operating Group A Units from our existing owners in connection with this offering and an additional charge associated with the Term Loan Distributions in the period or periods in which such distributions are made. Accordingly, compensation and benefits expense reflected in our historical results is not indicative of future compensation and benefits expense.

A portion of historical income was deferred by us and generally remains indexed to our funds. We intend to amend these deferral arrangements (with the result that no income will be deferred in future periods) and the full amount of the deferred balance, which was approximately $1.5 billion as of June 30, 2007, will be paid to OZ Management which amount will, in turn, be distributed to our existing owners over a three-year period commencing in 2008. In addition, Investments in Och-Ziff Funds as of June 30, 2007 includes approximately $300 million invested in our funds by us on behalf of our partners, the interest in which we expect to distribute to our partners prior to the completion of this offering. As a result, these amounts, which approximated $1.8 billion in the aggregate as of June 30, 2007, will not benefit our Class A shareholders, and the expected Deferred Income Distributions and Investment Distributions will reduce, as applicable, total partner’s equity of the Och-Ziff Operating Group with respect to distributions to Mr. Och, compensation payable with respect to distributions to our 17 other partners and profit sharing payable with respect to distributions to the Ziffs.

The information below should be read in conjunction with “Our Structure,” “Selected Combined Financial and Operating Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the combined financial statements and notes thereto included elsewhere in this prospectus.

 

		Summary Historical Financial Information
		Six Months Ended June 30,								Year Ended December 31,
		2007				2006				2006				2005				2004				2003				2002
		(dollars in thousands)
Summary Operating Information
Revenues
Management fees, incentive income and other revenues		$	53,231			$	8,325			$	33,391			$	22,456			$	18,280			$	233,053			$	70,089
Och-Ziff funds income			531,587				449,534				972,442				489,352				267,646				133,911				148,362
Total Revenues			584,818				457,859				1,005,833				511,808				285,926				366,964				218,451
Expenses
Compensation and benefits			183,310				119,428				446,672				239,466				153,503				125,949				46,303
Non-compensation expenses			60,411				39,461				147,675				88,962				60,825				52,145				22,848
Och-Ziff funds expenses			340,979				249,427				495,621				418,705				199,782				138,824				115,279
Total Expenses			584,700				408,316				1,089,968				747,133				414,110				316,918				184,430
Total Other Income			2,379,915				1,276,839				3,290,175				1,640,983				1,167,756				423,822				(29,046	)
Income Before Non-Controlling Interests in Income of Consolidated Subsidiaries and Income Taxes			2,380,033				1,326,382				3,206,040				1,405,658				1,039,572				473,868				4,975
Non-controlling interests in income of consolidated subsidiaries			(2,173,310	)			(1,240,219	)			(2,594,706	)			(1,134,869	)			(836,007	)			(268,274	)			19,449
Income Before Income Taxes			206,723				86,163				611,334				270,789				203,565				205,594				24,424
Income taxes			7,283				4,804				23,327				9,898				9,785				7,655				3,175
Net Income		$	199,440			$	81,359			$	588,007			$	260,891			$	193,780			$	197,939			$	21,249