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

Well, wonderful. Thank you, everybody, for joining our next session. It is my pleasure to introduce Doug Ostrover, Co-Founder and CEO of Blue Owl. This is Doug's first appearance at our conference since becoming public. With over $130 billion in assets under management across private credit, GP solutions and most recently, real estate, Owl is one of the fastest-growing companies in our coverage. Since entering public markets in the middle of last year, feels longer, but I guess that's how long it's been, Owl's AUM has doubled and distributable earnings per share increased by nearly 80%. And looking ahead, management still has quite ambitious growth goals. So I'm sure we get to talk to Doug about that. And obviously, get broader perspective on the market and there's plenty going on. So looking forward to this.

Great. Thanks for having me. And for those who don't know this, this is Alex's 20th fireside chat.

I'm not supposed to say that. Great. Well, look, thanks for being here again.

So look, maybe we could start with a little bit of a state of the union, right? I mean Owl went public in a bit of a unconventional way. You guys pulled through a stack combining Owl Rock and Dyal together. How has the firm's strategy evolved? How does it come together? How are the synergies between the 2 different businesses as they come together? So start there and maybe talk a little bit about your top priorities for the combined organization for 2023.

Yes. So maybe I'll start with -- if it's okay, with top priorities.

Sure.

I think you know this better than anyone. When -- what we tried to create was something really different than our [indiscernible] business that was 100% FRE and primarily with permanent capital. 90-odd [indiscernible] our revenue comes from permanent capital. I like to think of the business as an annuity stream, right. But unlike a typical annuity, it's an annuity with meaningful growth, which you highlighted. And so as I think about our business and our priorities for next year and the year after, it's really continuing to build upon what we started. And so let's just start with organic growth in continuing to create these long-dated pools of capital. So first and foremost, we have to continue to have good performance. And I'm pleased to say Alan Kirshenbaum, our CFO, is here. He'll review this in our fourth quarter earnings. But we had really good results across the [indiscernible]. And that's key for organic growth. So that's number 1, maintain good results at the fund level. Secondly, we're out, you mentioned with -- I don't think they're that lofty, but I'm sure we'll talk about it. But we've been very transparent with what we think we can do next year, and I want to make sure we do everything possible to meet or exceed those numbers. I guess the third thing, as I think about what we need to achieve next year is to continue to grow our distribution. I think a lot of people know, and I'm sure we'll talk about the retail market today. We've built probably the second largest fundraising apparatus, machinery in the marketplace after Blackstone. And we still have things we need to do [indiscernible] we don't talk a lot about, and we need to ramp up the conversation on our institutional fundraising. And I'm sure we'll spend some time on that. But I think where our CapEx will be next year is a lot more feet on the ground. We've already hired quite a few, but really take advantage of these businesses we've put together and try to sell multiple products into this blue-chip roster of LPs. And then the final thing I would just comment on is, and I'm sure we'll talk about this as well. We made an acquisition of a triple net lease business. It's a fantastic business. I think it's really indicative of what we can do when we make acquisitions. Buy something that is accretive day 1, get it into our institutional channel into our retail channel and really scale it and make it wildly accretive at that point. And so I guess, number 4 for me in terms of priorities would be over the next year to try to find one a leg of the stool where we can replicate what we did. In terms of synergies, I'll just -- and then I'll let you move on to the next question. We've been together, we put all of this together over the last 18 months and the synergies are going well. First and foremost is this ability to cross sell. And as I mentioned, we've got a lot of great LPs. Unfortunately, many of them are in just 1 product. And I think true success for us over the next year or 2, 3 years, we'll be getting those LPs into 2, 3, 4 of our products. So that's something we're focused on and the synergies are joined. And then from a business standpoint, look, we view ourselves as a solutions provider to the private market ecosystem. And we're -- I think we're just scratching the surface, but we have gotten our GP solutions team in front of not all, but most of the firms we cover on the direct lending side, to see if there's potential to take a stake. We've gotten deal flow from firms where we own a stake in those firms. We've rolled out our real estate product to -- we covered 700 PE firms. We haven't gotten to everyone, but making them aware that there's other ways to raise capital, away from just raising equity -- we can now do some interesting things for them in the real estate space. So I am cautiously optimistic about how that's developing. We still have work to do, but we're off to a good start.

Great. All right. Let's unpack a couple of these things. And a little bit of a macro question first. But given your presence in private credit markets and really your history with private credit markets, I would love to get your perspective on U.S. credit market outlook over the next 12 to 18 months. And really, when it comes to Owl's credit portfolio, how is it positioned and how is it positioned to deal with potentially slower growth, inflation and lower margins and higher interest rates?

Well, I could spend our 27 minutes answering that question. Real quickly, and I probably heard this from others, I missed Steve [indiscernible] today. I don't know if you talk on credit. But this -- I've done private credit as long as anyone in the market. This is the single best environment I've ever seen to be a creator of private credit, and we're one of the leaders. Just to give you an idea of the magnitude of how things have changed. We were making senior secured loans 9 months ago, a year ago, 40% loan to value, LIBOR plus 5.25%. We're running 6%, 6.5%, maybe 7%. That identical loan today, actually, not identical, better loan today, lower loan-to-value, tighter covenants. We're earning between 11.5% and 12%. Think about that, being at the top of the cap stack earning a 12%. The other thing that's happened, so the question is why have spreads widened out the way they have? We know that the short end of the curve is widened up. Why have they widened up? I've never seen a market that is still out of equilibrium. And the reason it's out of equilibrium is the bulk of capital that has been raised in a given year would come from the big banks, Goldman, JPMorgan, Morgan Stanley, Credit Suisse and those banks have all pulled back. Now you've probably read that are they going to come back? I will tell you with 100% certainty, they will come back. Many years ago, I ran the leverage finance business at Credit Suisse. If I was there or at another bank, I would be saying right now, we are not using our balance sheet to finance buyouts. There's too much uncertainty. Remember, the banks are in the moving business. They are in the business of velocity of capital. Let's make a loan, let's turn around and let's sell it as quickly as possible. You're trying to make 2, 3 points. So $5 billion of capital, you go and sell it, you make $100 million. You want to do that 5x, 10x, 15x. Today, you can't do it. Twitter is a great example. It was the commitment that I'm sure many banks didn't want to fund. It's $12.5 billion. I don't know where you could sell it today, $0.50. Some of it's unsecured, maybe even lower. That's $6 billion of block wiped out, everybody's [ rating ] for the years. Banks are out today. They will be back, but that is creating a void of capital. And then people would say, well, what about direct lending, there's been so much money raised in direct lending? Well, I've gone out, I've talked to CIOs around the world. Yes, there's been a lot of money, but it's really what is the dry powder. And here's what most people don't understand about the direct lending market. Prior to this year, we are in an environment where rates were going down, going down meaningfully. And so you'd go make a loan, it could be very attractive. But if the company did reasonably well and the PE firm felt comfortable with that asset, they would quickly refinance us. We would call it being on the hamster wheel. But today, there are no re-financings. There's very little regular way M&A and rates aren't going lower. So we have a $70 billion loan book. And in a given year, I could get back $20-plus billion of capital. This year, I don't know what the number is going to be because it's -- rates have continued to move up. But it's effectively 0. So the capital that's out there to meet the needs of buyouts is just new capital that's coming into direct lenders. And it's -- while we're getting some meaningful mandates, it's not anywhere near enough capital to support the demand from the PE community. Remember, PE is sitting on $2 trillion of dry powder. So it's an interesting time. I know I've gone over my 2 minutes, but real quick, in terms of performance, interest rates, I have to tell you, we review every single credit in our portfolio every quarter. Many of the companies we get monthly financials. We are not seeing material weakness in our portfolio. We're seeing a slowdown in growth, but that's not an issue as a creditor. That's an issue for the equity. So we look at it. We really haven't added any names to our watch list. And the portfolio is doing pretty well. The difference is, we're earning a lot more today. The other question on -- I think you asked me this, but I get it all the time is, what if a PE firm can't afford the coupon? What if we have another rate rise up? What does that mean? Are you going to have a lot more defaults? I have to tell you, rates going higher isn't what keeps me up at night. It's the underlying performance of the companies. If the companies are performing okay, may not be growing the way the PE firms want, but if they're just stable, even not growing, a PE firm just because the capital they were paying 6 on is now 12 or 15, I promise you, they're not going to walk away from 50%, 60%, 70% equity contribution they put in. They will figure out ways to put in more capital, fund those coupons. So right now, it is as I -- where I started, it is an exceptional time to be a lender.

Yes. Just maybe a follow-up on that. We spent a good amount of time talking about the market share dynamics in lending broadly, right, high-yield, syndicated loans, private credit. And every time there's a big dislocation in the market like maybe we've seen this year, private credit takes a bit of a step-up in market share and it kind of hangs in there, like it doesn't really step back materially. So if you think about the environment we're in today, is this another one of these moments where private credit [indiscernible] structurally higher share and then kind of grinds from there? Or [indiscernible] different?

I don't think it's different, but when you talk about these steps up, we're starting at such a low base. I think if you look at leverage finance at Goldman, for example, and you -- I don't think David Solomon's here, but if he were and you were to ask him, what's the most profitable part of your fixed income business? It's leveraged finance. See what happened is, besides [indiscernible] growth, there's more and more issuance. The fund size just get bigger and bigger. I think I read coming in the year, Thoma Bravo just closed on 30-odd billion in new capital. As I mentioned, $2 trillion of dry powder. So while you're picking market share, I think it's such a low base that it's not really going to impact the bank. I will tell you one thing that's going on today that's different than in the past. And you and I have talked a little bit about, we never thought we'd be positioned to do billion dollar financings. But now because the banks have pulled out, we're not only working on $1 billion dollar. We're working on $3 billion, $5 billion, $7 billion of capital. And I think the big change that will occur when the banks are back in the market is those biggest, highest quality deals, and they will just put on their balance sheet again. So I think that will revert back to the banks and the deal sizes of $1 billion or less, I think a lot of that will stay in.

Yes. But the volume presumably will be higher than what is right now.

Yes. And by the way, volumes are low today, but the quality of deals we're seeing, the size and scale of these businesses being over equitized, it's not only is the pricing good, but the quality of the deal flow is pretty spectacular.

Yes. So we spent a lot of time talking about the sponsor-led lending business, which is kind of the primary driver of your credit franchise. How do you think [indiscernible] business? And does that make sense to spend more time there as a way to reduce the cyclicality of capital deployment?

I get that asked a lot. We like the sponsor business. We don't view it as that cyclical. They're sitting with a lot of capital. They want to go spend it. I've said this a couple of times, but think about they're sitting with $2 trillion of capital. They're going to spend it. That will be $2 trillion of capital needs and we don't need to get too much of that to meet the needs of our business. The other thing we like about working with a PE firm in particular, is there's real alignment. We like the fact that they go in and their controls and processes and systems are best-in-class. Because remember, as a creditor, this isn't really about how much you make when things work. In the lending business, it's about how much do you lose when there's a problem, right? And so being affiliated with people who are good at businesses is a good thing. Now we are hiring people to focus on the non-sponsored market. And I was just reviewing some data. If you look at our top 5 largest loans, 2 of those 5 are 2 private companies. But they're very large private companies. And the question is why do they go to a direct lender. They go to a direct lender because they're unbelievably private. They don't want a syndicated deal. They don't want a lot of creditors knowing what's going on in their business. They want to find one party who can meet their capital needs and work with that party. So we want to continue to grow that portion of our book.

Got it. Let's spend a couple of minutes on the client base evolution. It's one of the priorities you outlined for 2023. Just to put a little bit more color around this. On the last call, you guys announced a few very sizable institutional wins. And of course, it's important to grow outside of the retail channel, as we talked about. So how are you planning to sort of tackle this part of the market over the next 12 to 18 months?

Yes. So I referenced this earlier. Look, I think our institutional fundraising is a significant opportunity for us. If I were to put up on the screen between our GP solutions, our credit business and real estate business, the list of LPs we have around the world, it's a blue chip roster [indiscernible]. But all of -- not all, I think it's approximately only 8% or 7% have any crossover at all. So let's call that 93% of those names I put up on the screen, who are very large institutions are in only one of our products. So we have been ramping up feet on the ground around the world, hiring heads of tails. And in Asia, in Europe, we're about to do something in the Middle East. I think we're in pretty good shape in the United States. And then it's going to require the leadership of the firm to be on the road a lot, myself, Marc Lipschultz, Michael Rees, Marc Zahr, Craig, the whole team, we will be out seeing these firms, talking about the myriad of products we have and how I think what we do, we're more narrowly focused than our peer. But I think what we do, we do best-in-class. We think there's a lot of upside. And we've won some very large mandates. And when you get mandate of $1 billion, $2 billion plus, your conversation just isn't with the department head, you're working closely with the CIO. And so the more CIOs we interact with, most CIOs, they want to have fewer partners, not more. And I think we can step up and be one of those preferred partners.

Great. Let's talk a little bit about the retail channel. Obviously, this has been a much more interesting topic, I guess, over the last couple of weeks. It's been a big source of growth for you guys. It's been -- it continues to be a strategy for the firm as a whole. So maybe talk through what you're seeing on the ground, especially over the few months when it comes to retail with respect to gross sales and redemptions. And really, any of this sort of spillover risk or contagion effect, however you want to call it, from things that are going on with some of the bigger products in the space right now.

Sure. Well, it's -- obviously, the spillover happened in the last week, 10 days. Look, we mentioned on our last quarterly call, we had to de minimis redemption. And sales, while they've come off, they're still relatively good. And in fact, the numbers I saw last night, I get a report every day. They were pretty reasonable. Yes, not anywhere near our peaks, but we get the voice in the market. Anyways let's make a couple of comments because there's just been so much written about this. Blackstone is doing a very good job with their products. First of all, this product was designed to give 5% liquidity in the quarter. We can meet that 5% and they'll meet it for the next few quarters and eventually things will be normal -- for any product to be truly successful, has to get tested. This is a test for the product. They're the market leader. As I mentioned, we're #2. And just for the record, we have tremendous liquidity in all of our vehicles. If we were to have redemptions of that scale, we're not forecasting that, we're not -- they sold a lot more in the Asian markets, which was much faster money market, and there were some specific to real estate. But most importantly, the product is working. It's doing exactly what it was designed to do. We're in a bit of a different boat. We have one product that competes directly. That's what we call our core income fund that competes with BCRED. We're smaller. I will tell you that we're on a platform head-to-head with them. We do it exceptionally well. Now they're on a lot more platforms. In real estate, and I'm sure we'll touch on real estate, I think we have a truly differentiated offering. And I don't expect -- while this might cause a blip for us and slow down getting on some platforms, I think our story will really resonate. So look, if you just take a step back, and I have this sheet that sits next to my desk about the high net worth mass affluent market. It's forecasted to be $220 trillion of capital by 2025, $220 trillion. It's under 5% in [ ops ]. There are people who talk about going to 50%, folks who talked about going to 25%, let's just say that there's -- we go from 5% to 20%. That is an increase of capital coming into our marketplace of $40 trillion. Probably too high. So let's cut it in half, that's $20 trillion. In fact, cut that in half, again, $10 trillion. I think you've seen that we have been able to get more than our fair share of any money flowing into the market. And if it's only $5 trillion or $10 trillion, we're going to do exceptionally well. But if it's anywhere near that higher numbers, it's going to be a -- it will be great for our firm and great for our equity. So I am still exceptionally bullish on the retail market. What are we focused on? We are focused on one education. We need to get more financial advisers using our products, not just ours, but everybody in the market. Today, it is a very small amount of advisers doing 80% of the volume. We need to reverse that. And I think that will come over time. Specific to us, we need to get on more platforms. And actually, having some noise in the market and our product is doing well, I think, will serve us well. And then the third thing is that I mentioned we have a product that competes with BCRED, our core income fund. But we are working closely with the wire house on bringing -- continuing to bring products that are really differentiated. They're not copycat products. So we're the only firm that has a lending product. We're the only firm that our REIT is really income driven, and it's a triple net lease fund. So we are being now, I think, developing the reputation as bringing the differentiated products, maybe not the exact scale of the Blackstone product, but I can tell you the wire houses like it, and we're working in conjunction. So I hope next year, I'll announced a couple of new products. And remember, they stay on in perpetuity. So the more we can get, the better.

Yes. I was hoping to touch on real estate since you just mentioned it. One of the points you made on the last call was around, just amount of the deal flow that you see for the real estate business. Right now, I think something like $7 billion of recent deal flow in the pipeline of more than 21 potential volume in the numbers you said it, which I think well exceeds the dry powder that you have in your real estate strategies. I know you're in the process of fund raising your new fund, but how do you think about the distribution channels through that fundraising cycle and the ability to fund at your real estate strategy to meet that demand?

Yes. So maybe I'll -- there was a lot happening here so, what we are in the business, we're in the triple net lease business. We work with investment-grade companies to buy what we believe are mission-critical assets, and they agreed to sign somewhere between a 12 and 20 year lease. We have escalators in rent, but most importantly, they are responsible for all of the upkeep of the facility, insurance, taxes, maintenance, the roof has a leak, they have to fix it. So we believe that gives us a really nice inflation hedge. But most importantly, over a 15-year period, we've never had a tenant not pay a lease. We've never had anything go into arrears because it's investment-grade counterparties. Today, you can imagine the debt markets not just for below investment-grade companies. But for investment companies as well, there's a lot of turmoil and the ability to go to a more asset-light model is very much in both those numbers you referenced, I can tell you they're much higher even than at the end of the last call. So the opportunity set for us is very significant. Unlike, I think, the traditional REITs, the 2 biggest REITs in the market today in the retail marketplace for Blackstone and Starwood, they're each paying between 4% and 4.5%. So lower current, more upside. I think the world has changed. We're going to pay about an 8% yield with these investment-grade counterparties, and we don't sell it, but our funds have generated mid-20s return. So we have the same kind of upside, but we've got that protection of having this IG counterparty paying us this large coupon. So to answer your question specifically, how are we going to meet the demand. Our last fund in the real estate business was $2.5 billion. We're in the market with a new $5 billion fund. I'm pretty confident we'll close on $2 billion by year-end. And our hard cap is $5 billion and confident we'll hit that hard cap by the end of the first quarter. We're rolling it out in retail. We're on one wire house. We've raised just under $1 billion with that wire house. And this noise in the market might delay us launching in a couple of wirehouses. But when I say delay, maybe a month or 2, if we were planning to go to January, February, it might get pushed to March. But we think the demand is there. We think we are meeting the need of high-quality cash flows. By the way, that are tax deferred just like a typical REIT, and I open this environment with a lot of uncertainty, it's going to rest [indiscernible] cautiously optimistic. But one point I want to make, I think we have the ability to more than double, potentially triple what we bought when we first bought Oak Street. And I think what I hope investors will take away is that we think we have a model where we can do it with other businesses as well.

Great. Well, let's talk about your third business or maybe second business, depending how you ordered, which is GP Solutions. You recently upsized the latest fund, Dyal V, with $13 billion in total raise and importantly, 2/3 of that fund is already committed or deployed. How is the current backdrop impacting GP's capital needs? And what are your expectations, I guess, for deploying the remaining piece as well as getting on to Fund VI?

Yes. So first of all, I'm really thrilled that we were able to exceed our target by 30-plus percent. I think what doesn't come out in that is we had over 250 investors, I don't want to give the wrong number, but a meaningful amount of those investors were new investors to the product. That was Fund V. Funds III and IV are throwing off very high current income. I think Fund IV is 20-plus percent. So Fund V, as you mentioned, is shaping up to be an exceptional fund. We're 2/3 invested. You can imagine in this environment with the IPO mug shot and M&A significantly that we've got a big backlog of deal flow. Now these deals take a long time to get done, many of these companies, these alternative managers, we've been talking to for 2 to 5 years, and they are around the globe. I feel pretty good going into next year. I can't tell you exactly when things close, but we can go from maybe 2/3 to 3/4, maybe a little bit higher of that capital deployed. We deploy on average, about $4 billion a year. That's been our run-rate for a long time. What that means is by the end of next year, we should be in a -- back in the market. But one thing I want to stress about the GP solutions business is that we are, by far, the largest player in the market. In fact, I think our total base is greater than all of our competition combined. And I'll give you a really interesting stat, and this is one of the things got me very excited about when we did the merger. If you look at deals that are $600 million or greater, there've been 22. We've done 20 of the 22. And so a little bit, I remember when I was at Blackstone sitting with John Gray talking about the real estate business. And really, if you needed $1 billion equity check, there was Blackstone and Brookfield. Well, in this business, if you need $1 billion equity check, there's really just Blue Owl. So I like how we're positioned and markets in a bit of disarray and values down, I think we're well positioned. I can't really comment on Fund VI, the scale, but what I can say, I feel highly confident we can meet or exceed the size of Fund V.

Look, before we wrap it up, a couple of more questions, but maybe I'll just go to one of the number of questions, which is your 2023 targets. On the last call, Alan reiterated pretty much everything, right, fundraising, revenue, margins, so all sort of on track. The environment feels like changed a little bit with respect to retail. I'm curious if that impacts your view on 2023 target at all?

No. No. We're sticking with what -- exactly what Alan said on the call. I don't view what's happening today as a major setback. Maybe it slows things down a little bit. But look, if we get together in the first quarter and Blackstone looks like they're going to have 5 successive quarters of hitting their caps, of course, we'll sit down with you and our investors and talk about revising our budget. But based on what we're seeing today, and I said this early on, it's really important to me and the leadership team at Dyal to meet -- what we tell the Street. We've been able to do that now for 5, 6 quarters, and I hope to be able to continue to do that. We try to come up with these numbers with some cushion, of course. Now I can't predict where the market will go. I didn't predict that we were going to see massive redemptions for Blackstone. But as I said, today, as I sit here and look at it, I view it as much to do about nothing. It's in the press a lot, it's a great story, but the product is doing exactly what it was designed to do. And I think long term, that's going to accrue to the benefit of the leaders in the space. And I think it will help us grow and raise more money over time.

Great. We're pretty much on time. But if there are questions in the room, we might be able to squeeze in one if you have a question. Perfect. All right. I think we are then out of time. Doug, well, thank you everybody. Appreciate it.

Thank you so much. Look forward to doing this again.