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

All right. Thanks, everybody. We'll get started. Up next, it is my pleasure to introduce Doug Ostrover, Co-Founder and Co-CEO of Blue Owl. With $150 billion of assets under management across private credit, GP Solutions and real estate, Owl is one of the fastest-growing companies under our coverage, delivering nearly 30% growth in earnings year-to-date in 2023. Owl remains one of the largest managers in direct lending with a robust fundraising footprint in wealth management markets and growing presence in institutional space as well. In addition to direct lending, Owl is in the market with a nice vintage of GP Solutions fund and continues to make nice traction with a differentiated offering in real estate as well. Thank you. Thank you so much for being here. It's always great to see you.

Likewise.

And I'm looking forward to this.

Well, thanks for having us.

Look, before we sort of get into the business, I did want to touch on the management changes that you guys announced earlier this year. Obviously, you taking the role of a co-CEO as opposed to a CEO, along with Marc Lipschultz and you made a couple of other changes as well. So talk just a little bit about what are the practical implications of the announcements that you've made? And how are you spending your time now?

Well, again, thank you, everybody. I know there's been a lot of fireside chats. So I appreciate everybody being here. Listen, in terms of the management changes, it was kind of an easy decision. When you put these mergers together, you think about management, you think you have it right. But as the business evolved, I started thinking, I just -- I need more firepower in the C-suite. And so if you think about Michael Rees, who does an unbelievable job in the GP Solutions business, he's still President of that. But I elevated, as you mentioned, Craig Packer, who oversees our credit business, Today, that's $80-odd billion of assets. It's been our fastest-growing business because of the trend in private credit. And then we also elevated Marc Zahr, who runs our triple-net lease business, which I'm sure we'll touch on, and that has been growing very rapidly. In terms of Marc Lipschultz, when we launched the business back in '15, '16, Marc has basically been my co-CEO all along. I didn't -- he didn't have that title. But Marc will focus on the things that -- not that I don't want to focus on, but I think a better use of his time, budgeting, back office, working closely with Alan and his team, legal, compliance, cyber, still really involved in the investment side. The whole idea of what we're trying to do, and you know this well, is to get everybody to their highest and best use. We have a pretty simple story. I think, hopefully, many of you know our story. We have, as Alan pointed out, $160 billion of assets. But what's different about our story and I was looking at the list of presenters and you know this better than anyone, it's easy to get your arms around. 3 verticals, but most importantly, up at the OWL, that level, our public company, 100% of our revenue comes from management fee. And that management fee comes from long-dated pools of capital. The way I like to think about it is it's basically an annuity because the capital goes on much -- many of it for 20-plus years. So when I come in, in January of 2024 and turn the lights on, I know what we made in '23. We're going to make that. And then we have all these other avenues for growth. As you mentioned, we've been growing at 30% a year. And I think we should be able to maintain something close to that. One last point, if it's okay, and then I promise I'll turn it back to you. If you ask me one of the things that I think we're not getting enough credit for and as you think about these management changes and trying to accelerate growth, it's that we have a lot of the embedded profitability of the firm is to get to -- we're talking about getting to $1 a share in '25. We've got a lot of the pieces already there. So if you think about capital we've raised and haven't yet deployed, that is approximately just a little under $200 million of incremental revenue. Our BDCs, which I'm sure you'll want to touch on, we have 3 BDCs. We will list them within the next 2 years. When we do, that's $215 million of incremental capital -- incremental revenue. You talked about the GP Solutions business. Our last fund was $13 billion. We're in the market with a new fund, Fund V has exceptional results. I'm hopeful we get to at least $13 billion, no guarantees, but if we do, that's $260 million. You talked about the wealth channel. I think last month or the month before, we've put up roughly $500 million a month just from our credit products. That's $6 billion a year. That's basically permanent capital. Over 2 years, it's $12 billion. That's $300 million of revenue. And that doesn't include the other 15, 20 things we're working on. And just what I laid out for you, just what's in the ground today. We just have to come in and execute. That's $1 billion of incremental revenue. right? And I think should allow us to -- if we execute to continue to grow at 30-plus percent per annum.

You pretty much answered half of my questions with that response. But before that, we will talk about private credit though. believe it or not, there's still some juice in the tank. So starting with maybe retail, it's an important channel for you guys. From the time you and I started talking, that was always going to be part of the growth strategy. And as you pointed out, gross sales momentum has really improved as you progress through the year. $500 million, I think, in subscriptions is November 1 between the core income vehicle and the tech BDC. What are you seeing that's sort of different and accelerating in the retail dynamic? Is this advisers that you already work with buying more? Is it expanding the adviser network? Is it getting on more distribution platforms? Like what's been the incremental needle mover even in the last couple of months?

I think it's a little of all the above. I don't mean to be so vague, but let's just start with our credit products. It definitely feels like a safer environment for many in the wealth channel to come in and invest in credit. And so we definitely -- our same-store sales are improving on existing platforms. At the same time, we are adding new platforms. For those who don't know what we're doing in wealth, we got super active in wealth from the day we launched. Blackstone has been by far the biggest player. We are the #2 player. In the last couple of quarters, if you look at net results, we've been #1. So when I look at credit, what we've been able to do over the last few quarters, is we're adding platforms that are not going to raise $1 billion a year for us. But maybe they can raise $150 million, $200 million, and we raised 5 of the -- we bring on 5 of those, that's $1 billion of incremental capital every year. And so we're getting more and more firms excited about it. In terms of where I see growth there, in one, our Real Estate product is just on one platform. It was on Morgan Stanley. And sometime by the end of the first quarter, we will have it on quite a few platforms. And I think you just never know, but I think there's meaningful upside there. And then the other thing I would just stress is incumbency. You get on the platform, you're successful. You've raised a lot of money for the institution. When you come with the next one, there's a belief that you can do it again. And what we're doing today, and you've probably heard from a lot of people, our biggest business in wealth right now is traditional direct lending. Sponsored diversified lending we call it, which is our core income fund. And that is not quite there, but it's on its -- very close to $10 billion of capital and growing rapidly. But as you've heard, probably from a lot of people you interviewed, there are a lot of people trying to do that. So for us, what we're trying to do is think about, where are their voids, where are there holes in product offerings? And instead of us just going to the wire houses and saying, let's put this on, we're going and saying, "Hey, how can we work together? Where is there an imbalance between the demand from your advisers and the supply of capital and can we be the right party to build that?" And we've got a few of those initiatives going on and I am cautiously optimistic about what that can be. The last thing I just want to point out, so we have our perpetually offered stuff. But I'd say the other area that doesn't -- there's not a lot of people talking about, is the RIA channel. These are really big advisers spinning out of the wirehouses, setting up their own business. And they can range from $1 billion to $2 billion to $30 billion, and they can write big tickets. The other thing they do is they really believe in alternatives. So say you're a big RIA, you're managing capital for a family that is worth $200 million, the family has $50 million with you. If you can get something unique in alternatives, what the RIAs do is they run around. They don't use their existing pool. They might use a little, but they run around and they try to grow their asset base with these unique offerings. And we're seeing firms writing checks of $50 million to $500 million, $500 million. And so it's a big channel. And I will just leave you with this, if you were to ask me for 2024, where we're going to spend the most money, away from a potential acquisition, it will be adding resources to our wealth platform. We have 120-odd people. It's going to -- I could see us adding 50 people at least over the next year.

That's predominantly on the distribution side?

On the distribution side.

Great. How -- so a couple of things to unpack there. But I do want to hit on how you think about redemption risks in the more established products? So the core income -- the BDC? The reason why I ask is, so far, obviously, the redemption experience has been pretty minimal and the experience for clients has been pretty good. And in an event where credit losses become more topical and if you do start to see more people kind of running for the door, how do you think the product will handle it? What is the sort of a BREIT experience that maybe we as an industry can draw on to think about how it could be similar or different in BDC world?

Well, look, it's obviously something we're spending a lot of time on, and we're trying to be prepared for that. As credit people, you're always thinking about the downside. I don't think many people are familiar with this, but if you look at how we built our business, our second BDC, which we started maybe a year or 2 after we launched, we call it BDC 2, which is very creative, but that was a private BDC raised in the wealth channel. And so we've had a product on our platform for about 7 or 8 years that has been redeemable. So if I look at that experience, in addition to what we've raised in the wires, we've never been above 2.5%. And I think there's a number of reasons for that. And by the way, that BDC 2, don't forget, we went through COVID, and we never were above 2.5%. So one, if you think about Blackstone and I'll touch on BREIT, I think they've done a really good job there, but they have an incredible brand. When you go on platforms, you are Blackstone, everybody knows you immediately. But you can imagine, we go on these platforms, we were Blue Owl and nobody had heard of us. So we really had to educate people. And so I think early on, when you get that big flood of money into B Credit and BREIT, it were people that were buying the brand and maybe didn't know exactly what they were getting. Whereas with us not having a good brand, it's actually helped us from a redemption standpoint, where we're not seeing a lot because people really dug into it and agonized over what they were buying. But I think most importantly, you really have to differentiate between a Credit product and something that is generating meaningful gains. So if you think about Credit, BCRED, our core income fund and some of the other funds, let's say we're paying out at 10% to 12%, you get that every quarter. The NAV barely moves. You're getting really nice distributions. Now you're right. If credit losses were to spike, could a few people say, "Oh, I don't want to be in this" and maybe want to get out and we're prepared for that. I think we have approximately 8 quarters of liquidity hidden away. It's probably too much, but we want to be conservative. If you think about BREIT, though and what happened there, they were paying out over the last 4 years, they claimed their returns were 14% per year. They were paying out just 4%. So your dollar in the portfolio, NAV went from $1 to $1.10, $1.20, $1.30 $1.40, rates start going up, REITs start getting beaten up. Now you don't just have a dollar in, the bulk of your return is in that $1.40. And when I went out and I obviously do a lot of marketing in that channel, there was a real belief that Blackstone was going to be forced to mark it down. I think a combination of having hot money and having so much gain embedded led people to redeem. To Blackstone's credit and this is the positive, these products offer 5% liquidity per quarter. They've met that liquidity. So now it's battle-tested. It has more credibility. I think going forward, when we work on products that are going to have meaningful -- a meaningful component of the return in cap gains, we're going to have to make the redemption features more onerous, right? We can't make it where you hit a button, you're out, you can come back a quarter or 2 later, no penalties. And so that's something we're working on. We don't have any new structures yet, but it's something I'm confident that the banks want to fix as well.

Yes. Yes. No, that makes sense. Let's talk about the institutional part of the credit business. It has been an important strategic priority for you guys to continue building that out. So maybe a quick update on where you are in that progress? I know you had a couple of sizable wins in separate accounts. Those are lumpy. So any update on kind of the pipeline of additional potential sort of wins in the SMA channel when it comes to credit?

Yes, listen, we'll see what happens this quarter in the first quarter. To answer your question, we have a bunch of great mandates we're working on. In terms of our effort, I would say wealth will be #1 in terms of CapEx. And # 2 will be institutional distribution. I think the low-hanging fruit for us is we have $160 billion of assets. We have 3 divisions. If you were to look at -- let's just take the credit sleeve. We have people who might have $1 billion in credit with us, and it doesn't touch GP Solutions or real estate. We have people with gigantic orders, tickets in GP Solutions, but not in our other products. So what we really need to do now is figure out, if I have XYZ institution in Credit, how do I get them into the other parts of our business? It's a big focus. We're not giving up on institutional. We've raised -- 60% of our capital is from that channel. The other thing I'll just comment on very quickly is the negative -- it's not a negative, but BDC capital, you don't return capital. So if someone has exposure to you, they're not thinking like, "Oh, it's going to wind down. I'm going to get my capital back, and I'm going to re-up." And so what you'll see us launch this year are a number of strategies, which might be more traditional in the market, raise it, 4 years to deploy it and then get us more on a cycle of raising capital like that.

Great. Let's talk a little bit about deployment, again and sticking with Direct Lending and private credit for a couple of minutes. It's clearly been a pretty challenging year for sponsor activity resulting in, I've seen, a more muted deployment backdrop. The good news is that the refis are lower as well. So the installed base remains, but the new activity is clearly a bit slower. So let's just talk a little bit about the pipeline. It feels a little bit more promising as we look out into '24, but what's your best guess on the opportunity for deployment over the next 12 months?

So I don't know the exact numbers, so these are rough estimates. In '21, I think, we did roughly $25 billion of originations. '22, it was just under that, $24 billion, $24 billion and change. This year through the third quarter, it was $9.5 billion. So it was way down. I think we're going to have a very good fourth quarter, but you never know how things are going to close. It could roll into the first quarter. But even if we got to $13 billion, $14 billion, $15 billion plus, it's still way down. I think you summed it up well. We are seeing signs of a lot more M&A occurring. I don't know if it will play out, but I can tell you internally, how we're budgeting next year, we think we should be back in line with what we did in '21, '22, in and around that $25 billion.

Within that, how do you think about new activity versus loans that are going to start coming due in '25, '26? And there's a substantial amount of maturities, as we've seen in the syndicated marketplace that could be really an inventory for future deployment for private credit, if the opportunity is right. Is that playing a role in your sort of optimism on '24 as well, or is it partly the yield activity that does?

And it's actually -- you're hitting on something I think that we didn't see coming. Everybody was talking about the wall of maturities. So just think about -- if you think about a trouble -- a company who's having issues, obviously, you have the traditional default scenario, a where company's cash flows have cratered, there's no real equity value. We're not seeing that, but I'm sure there's a little of that in the market. What everybody was worried about was this latest wall of maturities that was coming and will continue to come. So let's just take a company that was doing $100 million of EBITDA, spot for 10 times, $1 billion, they issued $600 million of high yield, let's say, or loans, and they were paying us 6%. So they were paying $36 million. $100 million of cash flow, $36 million of interest expense, 3x coverage, it works. But now if instead of paying 6%, you have to pay 12%, that's $72 million. So what's happening on those deals is they're not defaulting, the sponsor is coming to us and saying, "I can't refinance in the public market. How much equity do I have to put in to delever and how much are you willing to underwrite?" So a great example, Vista recently did a deal, Fenestra. They came to us. We said you got to put in $1 billion and use that to pay down debt, and we will refinance the rest. KKR came to us on a deal. PetVet, same thing. We have 3 or 4 things in-house right now where we're working with firms, smaller size than those deals, but that has been a great source of deal flow. It has been sponsors saying, still have a pretty good business. Don't want to take a 0. I'll put in more capital. I know my total return will be lower, but in terms of the fund, it's much better than taking a 0 on a single asset. So that has been a pretty good source of deal flow, and I think it's going to continue to accelerate. I also think we're seeing signs that the M&A markets getting better. So we're cautiously optimistic. Look, the nice thing for us, when we talk about our numbers is we launched 9 years ago. If you told me I'd be working on deals with capital needs of a $10 billion company that needs $4 billion of capital, I would have told you 8, 9 years ago, that would be impossible. We'd never get those deals from the banks. But we're seeing deals of those size and scale, and most importantly, that quality. And so it is a great time, I think, in our space to be a lender because not only is loan-to-value low and pricing good, but the caliber of companies that we're able to finance, again, I've been doing this for a really long time. I never thought we'd finance companies like that.

All right. One more on credit, I promise, and then we'll move on. But I do want to talk about some of the new initiatives. And you hit a little bit on that, but I think it was more related to the structure kind of like GP LP Funds, but I really want to talk about the asset classes, where today, Owl's predominantly Direct Lending business sponsor-backed and there's plenty of runway. We know the stats there. But given what happened with the banks earlier this year, given the opportunity in things like asset-backed finance, things like CRE lending, what's your appetite to just broaden where you play in the private credit markets?

Yes. So maybe I can just hit on just -- I'll start with Credit, but just hit on a few things because they flow into credit as well. Look, in credit, I'd say the 2 biggest initiatives right now. I mentioned on the earnings call, we had tremendous success 6 years ago, launching our software business, lending to software companies. It's $20 billion of fee-paying AUM today. We're spending a lot of time in the health care space, including life sciences, biotech, royalty pharma, we will do something there. I think you hit on what we're probably seeing as the biggest potential initiative, we'll call it alternate capital, where we're not working with sponsors. We're working with private companies. We have a group that does asset-based lending. We have a team that works on equipment finance, rail, aero, funding to the life settlement business. These were all things the banks remain very active in. And as you've said, what we've noticed is the banks are becoming less active. So the TAM is growing quite a bit. We have the expertise in-house. And so that is something on the credit side, we'll run after. In Real Estate and triple net lease, we -- don't forget, we work primarily with investment-grade companies. We're just financing their U.S. assets. We are working now with those companies on raising capital to do triple-net lease in Europe. In addition to that, we see just a massive opportunity to provide capital -- debt capital to the real estate industry. And I think you'll find this interesting. We've looked at quite a few potential acquisition candidates in that space. And the problem is, there's just many -- too much office, too many problem loans. And so we just think we're better off starting at de novo and that is a new initiative that will kick off in the first quarter. And then in GP stakes, we're in the market with our new fund. And I think this quarter, hopefully, will announce something in a mid-market fund as well. So lots going on in terms of inorganic activity.

Great. Great. So let's talk about GP Solutions for a minute. You mentioned you're in the market with a flagship product that's been -- it sounds like it's going well, but it's clearly been a pretty tough fundraising environment for most private equity firms. And I'm not sure how LPs view GP Solutions, the legacy [ Owl ] business, but does it sit in the private equity bucket and the kind of the box that it's in, and therefore, it falls under the same constraints, whether it's lack of cash flows or denominator effect, et cetera, or it kind of lives elsewhere? But it sounds like it's going reasonably well. So maybe update us a little bit on kind of what your expectations are for that fund.

Yes. So we just launched. We'll definitely have a close this quarter. Look, the results are incredible. And not only are they incredible in terms of total return. But if you look at Funds III and IV and Fund V is our latest fund, III and IV are throwing off 20-plus percent cash-on-cash returns. We don't -- who was up here, was it Bruce Flatt before me?

That was Bruce, correct.

Yes. He's public. But think of like we have Starwood. We have Silver Lake. Imagine you can invest in the funds, which is great, or you could be like Barry Sternlicht's partner. And have fee and carry and at the end of the year share in what any of these really big alternative managers are doing. It is a tough fundraising environment, but what I've seen is the big firms are getting the lion's share of what's being allocated. So it's been a great area for us. I think in terms of fundraising, it's not going to be easy to go raise $13 billion. But I hope that we can show the marketplace that this will be a case study of bringing all the resources of Blue Owl to bear. The institutional activity, but if you look, we've raised good money in the wealth channel, but we've really been in 1 wire. We think we're going to be able to get on a lot of the wires, not permanently offered, but have a window to go raise $300 million, $500 million, $700 million and so I am cautiously optimistic and I think we should have a nice close this quarter and continue to grow into that $13 billion.

Great. What about the secondaries business? That's, again, one of the newer initiatives at the time of the deal, it just made all the sense of the world that you guys should have a secondary business, you see a ton of deal flow. So just building our business around it makes sense. Where are you in that journey? Any milestones you want to share there?

So now you're getting to the things I love to talk about.

You didn't love talking about private credit?

No, I did. But these are areas that I think everybody is moving in one direction. Look, if you think about what we do as a firm, we view ourselves as the solutions provider to the private market ecosystem. We're constantly going out trying to figure out where can we fill that void when that demand of cap -- for capital is greater than the supply. Today, if you go to the sponsor community and you ask them, what's the #1 issue you're facing? It's how to hold on to their best assets longer. And so they are -- almost everyone we talk to has assets that they've owned for 5 or 8 years. They've made multiples on their money, and they want to roll it into what's called a GP-led secondary, a fund of 1. So you go to your existing investors and say, we're going to sell this to this new fund. We're effectively buying it. You have a choice, you can stay in, roll your interest or you can get cash. Because no one's getting cash back, 95% are saying they want cash. So there's massive demand for capital. So I'll leave all of you with this question, especially in wealth. The days, I believe, of putting money in the new broadly diversified buyout fund, a blind pool, taking 5 years to invest, 5, 10 years to harvest, high fees, still going to be a good product. but this is what we're offering. We're going to identify the top 150 firms in the world. We're going to go to those firms. We're going to say, what are your 2 best assets that you're willing to roll into a continuation vehicle. And by the way, you can't take a dime out of the sale, you have to roll all that money in with us. If we go to those 150 firms and we get their top 1 or 2, let's say, we have 200 to 250 companies that they've owned for a long time, can we cherry-pick the top 20 to 30 names and create a great pool and do it at lower cost, no J-curve and eliminate what I call that left tail risk. That left tail risk is when you buy a new asset, sometimes you're surprised. You don't really know what you're getting. But if you've owned it for 8 years, there's no left tail -- there shouldn't be a left tail risk. So to answer your question, we are committing to a couple of deals. We've raised some money. It's going to take time. But if you think about the TAM of private equity and that this potentially is a way better way to invest in private equity, especially for the wealth channel and for smaller institutions. I don't want to say over the next 2 years, but over the next 5 years, this could be really a big opportunity for us.

Great. All right. Last question for you on inorganic side of things. You talked about M&A pretty frequently. And you guys have been quite active actually in M&A since you went public or since you became a public company, some smaller things recently. But as you think about the M&A priorities for Owl, all over the next 12 to 18 months, what does that look like?

Listen, we -- it's a tough fundraising environment, as you've mentioned. And so there are a lot of firms out there that their growth has slowed, and they think that by merging into a platform like ours, it could be better for their business, and they think the stock is attractive. So we're seeing a lot. What are we looking for? We're looking for businesses, one where we can be a market leader. We love things that have high current income and where we can protect the downside. It was in the press that we were looking at a company called [ Hafen ]. We haven't done any work on [ Hafen ]. But it's a great example. European corporate credit would be something we would be really interested in. I think the best way to think about what we're looking to do is take a hard look at the real estate business. We bought this business. It was a great company, great entrepreneur running it, wanted to merge in. But the reason we got so excited about it, and I was taking a page out of Blackstone's book, is pay up, get a world-class franchise, bring it on to our distribution. We've grown that in 2 years, over 60% of their assets. And I think by the end of '24, so 3 years, we'll have grown their assets well in excess of 100%. That's the type of thing we're trying to find. And so the bar is high, has to fit culturally. But I'm confident there's something out there that over the next year, that could fit.

Great. Well, on that note, thank you. It's always great to see you.

Yes. Good to be here. Thank you again for having me.

Yes. Appreciate it.