Blue Owl Capital Inc. (OWL) Earnings Call Transcript & Summary

Good morning, and thank you, everyone, for joining. Welcome to the UBS Virtual Financials Conference. Right now, we're very pleased to have Michael Rees, Co-President of Blue Owl and Founder of Dyal Capital Partners, the legacy firm, speaking with us in a fireside chat format. A couple of things to note before we begin. First is that you should have a link to be able to send questions to me via text. I'll see those appear on my screen, and I can pass those on to Michael. Also, I want to draw your attention to important disclosures about UBS Research, which can be found at www.ubs.com/disclosures. And with that, we'll kick it off with Michael. Michael, thank you so much for joining us. It's a busy morning. Congratulations on your first quarterly earnings report this morning.

Thank you, Adam. Pleasure to be here. I appreciate the time.

Looking forward to chatting with you.

Look, Blue Owl is recently listed, recently combined. So maybe if we could start off by taking a step back and just outlining where Blue Owl sits in the private assets ecosystem? And maybe a little bit about the rationale for the business combination? And what you expect to benefit from that?

Yes. Thank you, Adam. The -- several friends and colleagues have commented that this was one of the most complex transactions they've seen in a long time. So it probably does merit some unwinding and unpacking a little bit. So the Dyal business, which predominantly takes minority equity stakes in GPs. So we buy a 15%-ish to 25% stake in leading GPs. We have 50 of such transactions across 5 funds. And that was grown and developed as part of Neuberger Berman. We were a unit of Neuberger. And at one point, over the last several years, we took a minority partnership, a minority interest in Owl Rock. Owl Rock had been, at that point, about a 4.5-year-old business focused on direct lending and private credit. And we talked a lot, the leaders of our Dyal business and the leaders of the Owl Rock business, about where we thought the industry was going and how we thought we could create something that was really unique, a service model of being a leading service provider to all of the GPs in the industry. As we got to know our business and theirs, it became very apparent that we were talking to the very same people. We were, on the Dyal side, talking about providing capital at the GP level to help these firms grow. Firms like Silver Lake and Starwood, Platinum and Cerberus, et cetera. And the very same conversations were happening at the portfolio company level from our friends and partners at Owl Rock. And we had a very similar way of approaching long-term partnership looking at a lot of those catchy phrases, the win-win scenario or making sure we weren't looking at things from a zero-sum game perspective. And I know those sound like platitudes, but really for us, it was a way of culture. And so we thought that we could create something truly unique, have different pools of capital, but be speaking to the leaders of some of the best firms in the industry about their problems and their needs and how we could combine to create a leading service provider in that vein. So we -- all in one day, we had a carve-out of the Dyal business from Neuberger Berman. We had a merger of that Dyal business with Owl Rock, and we had a listing on the New York Stock Exchange via a SPAC that was managed by HPS. And so it was a little bit of a Triple Lindy, but ultimately, it was just a vehicle at a moment in time to create what is Blue Owl today, which is that service provider, provider of picks and shovels to the overall alternative segment.

Right. It was a high degree of difficulty, but I think you stuck the landing. So congratulations on that. You mentioned in the evolution of it kind of talking with some of the same people. And yet, I believe there's synergies in terms of LPs of Dyal and LPs of Owl Rock being somewhat different kind of on the LP side. So tell us a little bit about that and how you expect that to come together and benefit the firm?

Yes. That's a really ironic outcome of this combination on the deal side or the GP stake side and the lending. We're talking to the same GPs, all of those names that I mentioned. But as it relates to clients, we were hardly talking to any of the same clients. It was a natural evolution of growing up at Neuberger Berman on the Dyal side and having salespeople spread throughout the globe. And the Owl Rock business started with a really institutional capital raise, predominantly in the U.S. And what happened when we got closer and closer to this merger, we recognized that we only had 2% client overlap. And so a big part of where the synergy lies in this deal is ensuring that all of the legacy Dyal clients know about the great lending and credit products offered by legacy Owl Rock and vice versa. And that has really started to play dividends. We're only really 2 months into this new business model. But certainly, clients are recognizing a similar approach, philosophy and culture that we bring together at Blue Owl.

Excellent. Excellent. No, that will help with the outcome of the business combination, I think. A question back on sort of the business side. You're lending to sponsors on one side, and then you're taking stakes in alternative managers and the GPs on the other side of the business. How do you manage those dynamics? Or how do you intend to within the combined firm?

Well, we're really keeping most of the activities separate. There's a team that comes in every day and thinks about a GP stake. There's a team that comes in every day and thinks about loans to portfolio companies. But where we think we can get pretty interesting synergy is having a small number of people that are seeing the whole landscape and being able to understand what is happening and what needs are being met at a lot of these leading GPs. And so we have a very tight information policy that makes sure that nothing sensitive goes either direction. We manage that very closely. It's very important for all of our stakeholders. But oftentimes, those GPs come to us and say, let's try to make the most of this broad relationship. What else can we do together? And that really is why we put these businesses under one roof. We're also -- maybe a question you haven't yet asked, Adam, but we're also seeing there are pockets where we don't yet have capital that could be beneficial into this GP dialogue. We don't yet have a big pool of capital to do co-investments and secondaries, but we fully expect to. And there are specialized lending products, whether that's focused on technology or health care that we think can be tailor-made so that we can really have the full beach front covered in those conversations with the GPs, have a pool of capital really to meet any needs that they have and part of what we're doing in addition to making sure we're talking to all clients about the full breadth of opportunities is making sure we're putting together capital pools that can meet all of those different needs.

Exactly. You talked a little bit on the earnings call, and I want to revisit it just because it's so compelling. The -- how would you compare the expected growth of Blue Owl versus kind of the industry? We're all kind of familiar with the industry growth story in private assets and the different asset classes. Do you expect Blue Owl to track along with that or surpass that? How do you think about that?

We certainly think that Blue Owl has growth potential that's above the market average. We're operating in 2 very underpenetrated spaces. And I know there's a lot of noise out there, so to speak, about how crowded it is in either direct lending or even GP solutions. When you really back off that and look at the numbers, the lending market is so big with so much dry powder out there and direct lenders taking market share away from traditional sources of lending banks, et cetera, that there's -- it's a high likelihood that direct lending overall will take market share from banks and more public sources of loans and credit. And the legacy Owl Rock, the Blue Owl business, will take even more share just given a business model and a structure that we think is attractive. On the stake side, there are only 3 major players. The other 2 are quite small, and we feel like we have the ability to grow quite rapidly given that the need for capital in the stake space continues to grow, and we feel like we're very underpenetrated. So we think we should be able to grow overall at levels that are higher than even the lofty growth projectors for alternatives as an industry.

Yes. And I just want to dig into the need for capital a little bit because I think it's important to understand -- it was important in my familiarity with the firm to understand that while we may think about it as kind of taking -- GP stakes business, taking a stake in a fledgling-type company, there's an ongoing capital need as companies see new funds and develop new businesses that provides potential for Blue Owl to kind of re-up that stakes business. Isn't that right?

Yes, Adam, that was one of the hardest miss that we had to overcome when we launched Dyal 5, 6 years ago, focused on private equity and private markets. Everyone thought that it was -- you had to provide rescue financing for firms that weren't doing well. But really, when you look at it, what's happening is the better a firm is doing, the more capital it is consuming. And so it's sort of a winner's curse. You have a firm that might have been doing a new fund every 4 years. And the size of that fund would be growing by 10% or 20%. Now those funds are coming every 2.5 years, and they're growing by 40%, or maybe they're expanding into other strategies that are adjacent. So it's the winners that are using the most capital, and why -- it is a high-quality portfolio that you have. And I tell this story often. If we would have sat back with a whiteboard and said, in 2014, pick the 25 firms you'd love to do a deal with. In any investing game, you're probably not going to get a hit rate that's exceedingly high. Our list of targets and what we actually were able to accomplish is highly overlapping. It was because the -- exactly for that reason, the better a firm was doing, the more likely they wanted capital from us. So we came right out of the gate with what we thought was the leading private equity firm focused on software, which is Vista, and then energy, which was EnCap, and Starwood and Silver Lake. You go right down the line. And so it is one where it's more of a need for capital because of success than any type of rescue financing. And quite frankly, we haven't even looked at any business that was troubled at the time of these conversations.

Interesting. And you talked about kind of the target list of firms that you would have wanted or had as targets in the past. In terms of going forward and the overall universe of investments either within a given Dyal fund or across the Dyal universe, do you have parameters around concentration of exposure or certain diversification or breadth of exposure or other selection criteria that you use with your investments?

We really don't have to. We look at a portfolio of a dozen to maybe 15 partnerships. We size our funds accordingly for that, and it just naturally happens that we get broad exposure. When you invest in a GP, particularly the larger, more established ones, it typically comes with international diversification. Most firms are global now if they're big enough. It comes with vintage diversification because you own a piece of their business, their carried interest back to their 2012 fund and their 2032 fund. So why GP stakes is interesting for LP investors is you're not making a bet on a 2021 fund. You're getting exposure to really every vintage. So our portfolios are pretty well diversified across all kinds of different metrics. And of course, we look at concentration issues, but it's never been one we've had to manage all that aggressively.

There's a question -- and you mentioned the attractiveness to LPs. Here's a question from the LP side. It's a hallmark of Blue Owl and Dyal, in particular, to have an emphasis on permanent capital, meaning that you're not returning principal to shareholders. So how is that structure from an LP perspective? If they're not getting their principal back, how do they get returns? And what's the attractiveness for LPs?

Adam, I'm glad you asked that question because it reminded me, I didn't finish where I was headed with that growth question that you asked. When -- you cover a lot of the large peers in our space. And every time they report earnings and AUM, they say our net assets grew by x. And that is because they had gross inflows of $40 billion and $20 billion of outflows on older funds rolling off. So their net assets grew by $20 billion, which we've seen great growth, and believe me, a lot of the peers are doing exceedingly well at the moment. But we don't have that issue at Blue Owl. The way we've structured our GP stakes funds and our lending business is that it is all based off of permanent capital. Our revenue today that we reported this morning was 90% derived from permanent capital funds. So when we go out and we raise x billion, it is just additive. We call it a layered cake, and it's just additive to what we already have. We're not running up the down escalator or on that hamster wheel, whatever analogy you want to use, and it really helps drive our growth, and why we think our business model -- in addition to the segments where we operate and we think we can take market share, but our business model will, we believe, drive better earnings growth than our peers over time.

Do you get -- it's interesting. Do you get a lot of LPs going into kind of successor funds to kind of maximize that exposure? Or is it based more on their investment objectives and liquidity needs maybe?

Yes. On the stake side, I think our investors, our LPs have recognized that you want to hold these cash flows forever. If you buy a stake in a great firm and then -- and that firm was selected because it will last the test of time, why would you ever want to sell it? And that's the pitch we made to investors all along the way. And at this point, they understand it. They recognize that if you own a passive minority stake in a business, it's kind of hard to sell. It can happen, and we've done it, and we will continue to do it on occasion. But really, the cash flow nature of what we can create for investors is interesting. And it's ironic, one of the biggest structural themes that we see in the industry, these continuation funds is really the market trying to emulate what we already have at Blue Owl, which is a recognition that there are a lot of good businesses, then why would you sell them 4, 5 years after you bottom. You want to keep owning them for not just 3, 4, 5 years, but 7, 10, 15 years. And our funds are set up to allow for our investors to continue to own these businesses without having to go through the disruption of a continuation fund.

It's interesting across the coverage, that's one of the things that -- and in a couple of different ways, Blue Owl has kind of jumped ahead to the end game, if you will, like you see the firms talking about building perpetual capital. And you guys kind of started in that place at least to the extent that you've listed publicly. Another way that, I think, Blue Owl may have done that is on the retail business. And this is probably more about the diversified lending side. But tell us a little bit about how the firm has kind of come out of the gate with a very strong retail channel where other alternative managers are still kind of in their infancy on that spot.

Yes. If you -- we're all students of the industry. And if you look back, you could find any industry report from 20 years ago saying that institutions will increase their penetration of alternatives from something like 2% or 3% to something in the low teens. And actually, it played out. It's amazing when some of those reports were prognosticating that accurately. So good on folks that recognized that. We believe we're at the same point on the retail spectrum. We've talked a lot over time that the retail investor, the high net worth investor has a hard time accessing high-quality alternative products. And that's been the case for a long time. And you've seen over the last 3 to 5 years, a recognition by the industry, but -- by a few players, in particular, that if you can create a high-quality product that is tailor-made for the retail channel, but doesn't sacrifice quality that there -- you can help this adoption curve. And Doug and Marc and Craig as they founded Owl Rock, they had this recognition from the beginning that the direct lending area was really well suited to developing products that retail and high net worth investors will find attractive. Certain features had to be tweaked. It doesn't come with a K-1. It comes typically with a more tax advantage, easier to administer a wrapper. And where Owl Rock really took it to the next level was by making sure that the retail investor and the institutional investor got access to the same high-quality loans. Often, other shops and peers of ours, not that they're not doing very well in the space, they offer 2 underlying pools of assets. We don't believe that, that's the attractive way to go. We don't think that's fair to the end investor. We -- so we've really focused hard at Blue Owl of delivering an institutional quality product into the retail channel. And you hear about the tremendous results at places like Blackstone and Starwood. It's still the infancy of developing and penetrating retail. And Owl Rock has a very large team, purpose built for that, and has had tremendous success along the way. We're a very well-known product category in the independent broker-dealer and RIA channels and now launching a couple of very exciting products into the wirehouses literally this week and next. So we think retail will be a large driver of growth at Blue Owl for time to come. And we think we may not be first, but we're not far off of one of the first movers into the space. And we've invested a lot of money to make sure we can service it in an institutional quality way.

How does that look like the other way? You mentioned suitability of the products. You mentioned the team that you have in place and penetration with some of the independents moving into the wirehouses. If you could give us a little bit of detail about how that -- how you built up to the wirehouse entry and kind of what you expect from here more concretely? Will it be bigger than the independent channel for Blue Owl?

Putting yourself in the position of a large private bank or a large wirehouse, and you have a myriad of financial advisers that have different knowledge bases of what alternatives is and different levels of sophistication of what the end client wants. And so it's not like the wirehouses and private banks, in general, want to just slap a product on the platform and see how it goes. That has been certainly what has not worked in the past. So what we want to have at Blue Owl is a set of products that is tailor-made, that has the right features around liquidity and tax reporting, et cetera, but also comes with an institutional-quality sales force to support the financial adviser and the end client in evaluating the product itself, the suitability of that product and how it fits within the portfolio. So it's different to have that large sales force that can help the wirehouse channel meet its clients' needs versus just throwing things at the wall to see what sticks.

No, absolutely. I mean I speak with the alternatives managers here at UBS, and I know that -- I'm always interested in talking with them about the latest and greatest or the new exciting product, and they're much more sort of cautious and very much gatekeepers in terms of, hey, if this is going to go in front of the FAs, it's better be good.