US hedge fund operator Och-Ziff, which plans to raise about $1.1 billion in an initial public offering next week, could face a tough reception when it floats shares on Tuesday.
Last month the alternative asset manager, founded in 1994 by former Goldman Sachs trader Daniel Och and the Ziff family, cut the amount it planned to raise by half amid concerns that market turbulence might dampen demand. But analysts still question the level of shareholder interest in Och-Ziff, which has $30 billion under management.
"I think they're going to have to cut the price," said Scott Sweet, managing director of research firm IPOboutique.com. "I would not be a player in that deal."
The last major asset manager to go public has hardly inspired investors. The Blackstone Group, which had its highly anticipated debut in June, was one of this summer's worst performing offerings and closed on Friday over 20 percent below its initial offering price. "There's still a serious lingering hangover from Blackstone," said Sweet. "We're in a much, much worse environment."
Since June shaky credit markets have squeezed demand for securities related to subprime mortgages and leveraged loans, slowing deal activity and burdening equity values.
"The environment is getting tougher by the day," said Tabb Group consultant Adam Sussman. "When Och-Ziff cut their offering, I don't think they were pricing in that the credit problem would widen this much. But for hedge funds like Och-Ziff, falling markets could bring opportunities, Sussman added.
"For investors with a riskier appetite, this is an opportunistic time," said Sussman. "Valuations are coming down for everything - which makes it cheaper for Och-Ziff to make their investments."
Also potentially holding investors back is the dismal performance of Fortress Investment Group, a hedge fund and private equity firm that manages some $43 billion in private equity, real estate and hedge fund assets. Fortress, which went public early this year, now trades at about half of its initial offering price.
"They invest in assets that are illiquid and enormously difficult to value," said Morningstar Inc analyst Andrew Richards, adding that speculating on the underlying asset value has made Fortress' stock price volatile.
Similar issues could weigh on relatively opaque hedge funds like Och-Ziff, especially if weak credit markets continue to cause investors concern over the value of assets
Och-Ziff's proposed valuation at the midpoint of its price range values the company $9.8 billion, which is relatively high compared to valuation metrics applied to Fortress and Blackstone, according to Francis Gaskins, president of research firm IPOdesktop.com.
Och-Ziff has a negative price-to-book value ratio, Gaskins said, while both Fortress and Blackstone have positive book value. For the 12 months ending on both June 30 and September 30, the company also underperformed both the Dow Jones Industrial Average and the Standard & Poor's 500 Index, Gaskins added.