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

Good morning, everyone. This is Craig Siegenthaler from Bank of America, and I'm pleased to introduce Marc Lipschultz. Marc is the co-founder and Co-CEO of Blue Owl. Prior to founding Owl Rock in 2016, Marc spent more than two decades at KKR serving on the firm's Management Committee, as Global Head of Energy and Infrastructure. Under his leadership, Blue Owl's management fees, FRE and distributable earnings all more than doubled since 2021. We also have CFO, Alan Kirshenbaum; where's Alan? Right here. We also have Head of IR, Ann Dai also and joining us in the room. Marc and team, thank you so much for joining us.

Terrific to be here, sunny Miami.

So let's start with private credit, your biggest business. So your largest funds focused on large corporate lending, diversified in technology. How is the competitive landscape in this space evolved over the last two years?

Well, again, thanks for doing this, Craig. It's great to be here. Thanks, everyone, for the time and chance to talk. The most significant development in direct lending, private credit over the last few years has really been the adoption by the user of the capital. That is to say, it's been about the borrowers, the sponsors and the large corporates coming to appreciate the value of using private capital. . And so I guess, put in the way we might more simply put it, market share, but market share is obviously a combination of both what the user wants and sort of what's available. We all know over the last couple of years, there haven't been a lot of public market alternatives. But the most significant development, which I think we'll see in the durability of, as years go forward, has been the appreciation by borrowers of why they actually want a private solution. Of course, we've seen a lot more investors adopt it as well. So there's a whole ecosystem that has continued to emerge over the last few years. But I think the most important part has been that user side perspective.

So bank retention has been a theme for like a decade, but it really accelerated in March with the regional banking crisis. How has this impacted your investment opportunity set?

I always say this with proper caveat. We don't like instability in the system. We don't wish ill upon the banks and their performance. And in fact, I think people like to set up more of the rivalry between the banks and the private credit firms, and I think that's actually more story fodder than daily substance. With that said, look, it's certainly a positive for what we do. Is it a material positive? It's sort of -- it depends. Within the land of sponsor finance, and let me also kind of point out that, within the line of direct lending, we at Blue Owl focus on the very largest credits, the very largest sponsors. And as a result, most of the people that we have done business with historically wouldn't have been candidates to be clients of the regional banks directly in any case. But clearly, it is a source of capital that has been removed from the system, reduced in the system. And those borrowers at large are looking for alternatives. So when we think about continued legs for growth beyond the things we're already doing, nonsponsor finance, for example, is an area that we have been working on, looking at, and in fact, have some pretty meaningful businesses there inside our system, so to speak, today. We've built specialty finance partnerships. So we have a big corporate ABL business. That would be a direct beneficiary and is a direct beneficiary of the regional bank evolution -- change. We have an aircraft and rail car finance business. So we have some specialty capabilities. We haven't talked about them as much yet, but that certainly is part of a network of capabilities that I think we will use to develop further products down the road and benefit from the regional banking change. And the other thing I'd say is, it's a reminder, I don't know to all of us. I hope that people are noting in this regard, in terms of capital market system is it provides a window into the stability that private capital solutions provide, right? I know there's, again, always this chatter about what are the banks doing? We're not the shadow banks, an ill place, but obviously well designed termed by certain antagonists. What is the -- what are they doing? What's happening there? We're not the source of the problem. We have long-dated capital to meet long-dated needs. And what's only two weeks ago, that were back to the conversation was New York Community Bank, oh my goodness, deposits go out the door, you have a loss, can you even make it through. That's just not a salient conversation to private credit. And therefore, it's a powerful stabilizing influence. So I think two things. There's a practical business opportunity? Absolutely. It presents lending opportunities for us when traditional sources retreat. But I think it's also another demonstration of why a healthy ecosystem has a vibrant private market and a vibrant public market.

So let's move the conversation over to the private wealth vertical. You have a nontraded BDC, OCIC, it's one of your flagships. We monitored net flows improved by about 30% quarter-on-quarter. Can this momentum continue?

Yes, it is the headline. And I say yes, back to the following question for any product in investment, the way I started, I may be very simple in many regards, which is -- does it serve a purpose? Does it meet a need? And now I'm talking about the investment product to continuously offered products in credit, as you know, we have one in real estate as well and they present a really terrific risk/reward for individual investors. They're done in a structure that is designed and friendly for individual investors. As a firm, we've built our platform from day one to serve institutions and individuals as peers. And that may sound simple, but hard to do, but we've been at that for 8 years. And as a result, we have the infrastructure built to make sure that investors have the on-ramps. And that's the way we think of, for example, that continuously offer product, the core income product, OCIC. We also have a software version of that, OTIC, technology income. And there are just ways to end up participating in the exact same investments that our institutions participate in. And so in fact, we really don't think about them as, oh, that's an individual product, that's an institutional product. There are gateways to the same loans, the same portfolios. So when we signed a $1 billion partnership with Mubadala in software lending like we did in the fall, the loans that will be part of that are the same loans that are in the core income and technology income products that are continuously offered to wealth. So why do I say all that? I say all that because at the end of the day, that's about delivering a great result for the investor, in a form that is friendly to the investor. And that meets a need and when you start doing the math, which you find out, of course, is the penetration of your average individual investor portfolio, your affluent or private wealth or whatever term you prefer, is very low. It's single digits. It's probably 5% on average. That's where alts, and they weren't even called alts at the time, where in 1995 when I joined KKR. And of course, we know institutionally, we went from that world of 5% average penetration, which really meant there were some early adopters, people that had none to a world where now it's 20%, 25% of the average institutional portfolio. Over the last 30 years, that's been the arc. We're at the 5% place with the individual investors today.

So your second flagship ORENT, it's a real estate triple net lease product. I think it's the, right now, the largest inflowing real estate product out there. Now investor sentiment isn't great in the real estate vertical. So how do you expect flows to trend when sentiment in the real estate vertical improves?

So we look at the real estate part of our business as having the -- well, it does have the highest growth rate, and it's got, we think, the highest growth potential when we look in the foreseeable future for the exact reason you described. We're swimming up the stream today, right, that stream is say that were real estate and everyone flows downstream, and we're swimming up that stream with ORENT, but very successfully for the same reason, and this isn't really repetitive, but it's just the way we think about business at Blue Owl. We have to deliver a product that is excellent for the investor and is distinct and where we can be a leader. So our real estate product, Craig, as you know, is very different from every other real estate product out there. We do triple-net lease solutions. That is a long-dated leases with corporate users. We take their corporate asset, lease it back to them. And we do that for 15, 20 years at a time with rent escalators and full pass-through of costs. So we're really lending capital to, in our case, the focus is investment grade or near investment grade counterparties. So it's an incredibly durable product because not only are we lending money in that kind of product, for example, to Amazon because we'll take one of their distribution centers and lease it back to them. We also own the asset. And as a result, we have a second way to back up, in the case of Amazon, really a relevant conversation. But other borrowers, even when they're good borrowers, if somehow they get in trouble, if you own the right asset, you have your second way out. The result of that is our ORENT product today is delivering a 7% current yield, and it has the benefit of full tax depreciation on real estate, so tax efficient. And we've been doing this now through what was the Oak Street business. Now while real estate for over a dozen years, and it has been rock solid. Distributions have been bang on because it's about durability. And so that product today is the net, as you said, the largest net inflow. In fact, I know we have one platform show us the numbers and the inflows to our product were exceeded the sum total of inflows to all other real estate products on their platform.

So Marc, let's take a step back and think about the long-term growth trajectory. You don't have a private equity business today, that's a more mature business. That's a business that may have conflicts with other businesses. So maybe that's a good thing. Additionally, you're a lot smaller than some of the larger capital alts that I cover. How do you think about your FRE growth trajectory, especially relative to the peer group?

So our business model is certainly different, as you observed. And I'll start with, look, we are about delivering FRE, fee-based growth. Turning that into a dividend, delivering it to the shareholders. And we have been able to do that in a really successful fashion and to do that at a very compelling growth rate. And so what that means for us strategically is we aren't and have no ambition to be all things to all people. Whether we could or couldn't do that if we wanted to, we don't want to. Our mission, if other large alt firms are kind of going all directions on the compass, our model is northbound. There's a lot of lanes on that northbound highway and we occupy several of them, but by all measure, all of them. And our business has been about understanding the way our highway goes, being very, very large in a few concentrated areas where we see significant growth and we can deliver significant advantages. So our business is stringed together, there's a common DNA among the products. And in the products we're in, we are the market leader or a market leader, and that's important. So while we are obviously not the size of some of our other public peers in AUM. If you look, for example, at real estate, triple net lease, we are by far the largest participant. Our latest fund that we just closed over $5 billion, that's double the size of our prior fund in that area, which was the largest fund prior to this fund in that arena. And that product area, for example, is one where we just lead the pack by such a distance that we are the corporate partner of choice. And so today, now that means opportunities with fab companies that are looking to build fab plants, we are the corporate partner of choice, say, okay, we could hold their real estate. They certainly don't have to own that when they're deploying, say on the talks about $5 trillion, $7 trillion. We're supposed to plug in and be that corporate solution. And so there, we're the clear market leader. And GP stakes, $13 billion fund. It's literally multiples the size of the next largest, which also means, again, we are the large cap market. So for large cap, GPs, they want to do something financially, where they go to, and we've built a network, a system, an ecosystem that's valuable for them. In London, we're not the singular leader. We're one of a few key leaders and the bigger have gotten bigger, we're one of them. But that's important to us. We want to be really good at delivering investment results. And very importantly, we want to deliver high margin, high cash flow and high growth. And we just raised our dividend, 29%. So that is the model, which is grow the business, grow it predictably, to our layer cake because of our permanent capital and deliver that to shareholders in the form of dividends and shareholder appreciation.

So let's move on to product innovation. So what are some of the newer product launches at Blue Owl? And what should we expect on the real estate debt front and even the infrastructure debt front?

So we continue to look on that northbound set of roads, where can we likewise build a distinctive product that works for the investor as well and is strategically logical fits our ecosystem while, we want to be good at it and ultimately scale at that. So where does that take us? So a great point, for example, real estate credit. Look, we're a market leader and today, an accelerating market leader in real estate. We're a market leader in credit. It's not a big leap say, well, gosh, real estate credit is a highly dislocated sector. We don't have any baggage. We don't have the legacy issues. And so to come into that market today is very appealing to us. So real estate credit is an area we're very focused on building. And we can bring our skills, do something differentiated and do it where in a way that isn't burdened by, so to speak, the legacy of approaches people have taken before. Triple net lease, we're the market leader. Our corporate clients today are saying, oh hey, look, what about Europe? We have a -- I have a warehouse there, I have a fab facility there. And so a product that we are building now is triple net lease Europe. And that's a product that is just unnatural because, of course, we're already the leader. We already have the corporate partnerships, and it's just adding -- sorry, the geography we episodically are in today. We're going to build a dedicated product in that area. So those are some of the near-term product areas. I mentioned nonsponsor finance. Our business today, and we very much like the sponsor business. And we have built an ecosystem where we're the one-stop shop for anything a private equity firm might need, right? We have portfolio financings, we have stakes in probably 50 different private equity firms today, many of the world leaders. We have a set of solutions that makes us that one-stop shop, and we don't compete with them. You made the comment earlier about not being in private equity. That's right, we are not. And that is by design. We don't. We are the picks and shovels. We're the Swiss solution as a financing provider to the very largest private equity sponsors because we're not also bidding against them on the same assets. So there is a method to all this, I think, that we've been trying to stitch together to make sure that every time we do it, we do it with a distinctive twist and a way to deliver a superior result for the investor.

What about infrastructure equity? I don't believe there's a product there yet. Is this something maybe you could use M&A to fill in or maybe organic means build this out?

So infrastructure is a great product area. I was fortunate to have started the infrastructure business at KKR back in 2009. And of course, today, it's a massive business there. Love the asset class, and when you think about our DNA, and I referenced the term but didn't define it, but our DNA is mostly producing products that are principled, preservation, oriented, stability with strong current income and, of course, very strong risk-adjusted results. We look for products where we can extract risk and still deliver the same or better results. That's kind of our frame of reference. Infrastructure certainly has those attributes. So whether it'd be something to logically try to build or buy, it's certainly on our list of things to consider, and it certainly fits that DNA profile of kind of we know what we know what we know, and so many things we don't know, and I like to think we know what we don't know. That's a product that would fit us certainly well over time.

So let's move on to capital management. Maybe remind us how Blue Owl thinks about capital allocation between the dividend, investing, M&A and buybacks. I know for a lot of us that dollar dividend target for 2025 is a big deal.

Well, not a lot. It's a big deal for me, it's a big deal for all of us. Look, we set out and now a couple of years ago, a trajectory. And we are spot on the trajectory we talked about a couple of years ago and think about what's happened in the world since. I'm not saying that -- it's not bragging, it's not oh look at us. It's rather to say we are demonstrating quarter after quarter after quarter that our model is different. We have a permanent capital model, 92% of our revenues come from permanent capital. We have an all fee-based model. There's not carry in our revenues. So we go through the volatility in the last couple of years, it doesn't change anything about our business. And so we have 100% fee-based revenues off that permanent capital base. So we're just adding layers to our layer cake. And a lot of the revenue between here and that dollar is already, so to speak, in line of sight. So Alan laid out on our last call, the $1 billion of revenue comes from just a handful of sources. It comes from continuing to lift our existing private BDCs, that's $200 million, $80 million of which we've already now done. We've already listed our second BDC and it's successfully traded. And in fact, our first BDC had its earnings call this morning, and I think we just traded the OBDC at 1 point traded to a 4-year high this morning. And so we have a very successful set of public vehicles, that is part of it. We have our new Fund VI for our GP Strategic Capital. Great opportunity to participate. At the end of the day, for everyone who likes private equity and many of us do, myself for sure, included, you can and should invest in private equity funds, and it's pretty good to be a partner in a private equity firm. Well, that's what you get when you invest in our GP stakes firm business. So that when we a -- couple percent times that next fund get another couple of $250 million of revenues. We're raising a lot in wealth. Even assuming we don't grow that, and I think we will grow that quite a lot, as you point out with real estate, we're in the early innings, both in penetration on channels and sentiment toward real estate. But even without that, we just continue our wealth product inflows and that built-- so these are just -- they're blocks. They're very much in our control. So in many regards, what we're thinking about and I don't mean eye off the ball on execution. But when you think about growth, we're really thinking about how do we go beyond in '26, '27, the products we're all talking about, those aren't even really relevant to the calculation of now to the dollar. So it is our target. It's -- we're on track to be in or around $1, as we've said. And the important thing I'd say for investors because of the nature of our model, look, it is our ambition to get to the dollar. But we don't have this variability given the blocks I just described. They're all very tangible and the permanent capital and the absence of carry. If it wasn't a dollar, it'd be really close to $1. Like we're not talking about variables that are moving around. We have a very programmed business, and that's where we're headed. And then we're thinking about, okay, where do we go beyond that? We want to continue this trajectory.

So even fairly inquisitive over the years. The Dyal merger was a big one, Oak Street, big one. You did a little CLO deal. How should we think about M&A in the future? And we talked about infrastructure earlier in the conversation. Is that maybe the likeliest target?

So we are always looking at the combination of strategic growth initiatives, internal initiatives and certainly where we have all the both the right advantages and the right resources and [ CLO ] to build a distinctive product. Of course, that's what we want to do. So triple net lease Europe, of course, a logical organic extension. We're today doing our Blue Owl strategic equity, which is our GP-led secondaries business. There is no scale participant in the market today. The clients are literally our clients today, right? as the private equity firms have a trophy asset, and we can provide a capital solution for them to keep that trophy asset. We now have already done a first close on that product. That I get very excited about over the long term because that's a way of, again, providing capital to help meet the needs of a private equity firm's ecosystem and do it in a lower risk way because nobody sells themselves a dog, right, but you're going to keep a good asset. That's the bottom line. And so that's a risk reduction product so that we're going to build and are building organically. When we think about something like infrastructure, to your point, it more logically would likely be an acquisition. In the case of real estate, it was a great acquisition in Oak Street. All that said, we do run one Blue Owl. We really believe in the power of integrating all the intellectual capital, the synergies, "around every acquisition we've done have all been about, I call them origination synergies or fundraising synergies". How about costs? In fact, we had more costs to the businesses we buy because we believe and invest in for the future pretty heavily and having best-of-breed operations capabilities. That's why we're lucky to have the team led by Alan and Andrew Polland and Neena Reddy. We have an incredible team to lead that operations group as well. All that takes capital. We invest it. And so what we want to do is, have it to be one firm. So we're not looking to be a buildup. We're not looking to just acquire and have a whole constellation of satellites. We want to have a really integrated set of products and capabilities with people that understand their job is to deliver great results for our investors and make that translate into great results for our shareholders.

Great. So let's pivot on to the operating efficiency of the business. How do you balance investing with operating leverage? And your margins are already really high. How much higher can they realistically go?

So our margins today, as you know, run at 60%, which we feel very good about. And sure, we could make the margins higher, right? And we often get this question, operating leverage, of course, it's operating leverage and many of these products being incremental products on top of existing market-leading businesses. I mean, one could meaningfully add, if you will, flow through. But we don't want to. And what I mean by that is we want to invest in continuing to have best-of-breed capabilities for that next set of products to continue to invest in the R&D of the business, those new product areas. If we want to do real estate credit, we want to invest people and capabilities in that. To do triple net lease Europe, we want the best people on the ground doing it. So what we've said is, look, we're very happy with the 60% margin. Sure, we could make it higher, but that's not the choice we want to make. We want to take what would be that increment and invest it in the initiatives and the people that are going to give us the pathway beyond the dollar. Again, this is all about what's happening beyond that dollar horizon. And we want to make sure we're making those investments today. So we have the things that we can harvest a few years from now to continue our growth rate.

Great. The fundraising backdrop became a little more challenging a couple of years ago. Kind of as you gave us, there's nice growth targets back in May 2022, which didn't make it easy, but you're still there. Denominator effect, credit backdrop. So how did that impact your fundraising trajectory? And did you need to pivot from certain channels that were weaker from a liquidity standpoint and to some that were stronger, thinking Middle Eastern [sovereign wealth funds]?

It's a terrific question, and we certainly can all readily observe that the fundraising environment over the last couple of years has been measurably more challenging. And there's probably a good reason to think it will remain challenging mostly because of the denominator effect and particularly around private equity where you just -- people are fully allocated, and so they just have liquidity or allocation constraints. So what we have benefited from that has allowed us, in point of fact, over those two years, we then raised I think it was $50.1 billion, and so we did indeed two years before, I talked about wanting to ultimately add $50 billion. Now, we had to make some pivots to different channels, we did some acquisitions. There's a lot that goes into making it happen. But the bottom line is with regard to fundraising because we have built an institutional capability right alongside from day one, there's wealth capability, we have this -- these are not monolithic markets, and certainly, they're not the same. What the wealth channel is interested in and it's secular growth. It's very different from what institutions might be interested in at a given moment and a different kind of reallocation of capital. And so it is secular growth for private credit. So we have that. But amongst the pension funds, they're not a growing pool, their allocations to all sort of probably built out at large. Over here on wealth, we talked about 5%, and it's a much bigger business. When we think about penetration in wealth, I mean you're talking about a many, many trillion dollar opportunity, way exceeding the size of institutional over time. And so we have both of those, and they're both really firing well. If you look at our fundraising in the fourth quarter, it was actually -- in fact, it was 58% wealth, but let's call it -- make it simple, balanced between institutional and wealth. We like that because they're going to [ undulate ] in different times. Sovereign wealth funds are, my co-CEO, Doug Ostrover, is just in the Middle East now. Indeed, that is an emerging market where Mubadala has signed up as a billion partnership with us. We just announced a partnership with Lunate to do our advantage fund for GP Strategic Capital. I mean that's another terrific new product of ours that we haven't even talked about until just a couple of weeks ago, we're now going to do in the middle market, the growth part of GP Strategic Capital, what we already have done in the large cap market and really be the market leader in that space. And that's a partnership with a sovereign wealth fund out of the Middle East. So absolutely, and that's part of that investment. We're putting a lot of money into building people, feet on the street around the world for capital raising because we do have to have a lot of sources. And the last, of course, where we are not present today and continue to evaluate the right approach for us is insurance. And we do not want to become an insurance company. That is not our plan. We are a capital-light business. But if I think about all the big channels of capital, we have almost every one of the big pension funds in the U.S. overstates it probably, I'm sure, we have a great penetration of super high quality, so a lot of more midsize funds that we have into pension, large corporates and others we haven't gotten to yet and we have to earn that opportunity, earn their respect and their involvement. We have a great wealth business. We are one of the two leaders, gross or net, however you want to measure it in these continuously offered products. And it's by orders of magnitude, as you know, the differences in those markets. But we don't have insurance yet so that is one that we look at and say that's a real opportunity to add a third leg of capital flow, long-dated capital.

Great. Well, Marc, at this moment, I want to check with the audience and see if anyone has a question. So yes, please raise your hand. We have a question here in the front row, and there is a mic coming to you.

Thanks, Marc. So your success has not gone unnoticed. And so my first question is, can you talk about increasing competition in the private credit space specifically and for some of these loans? There have been some stories over the last few weeks, the usual suspects. Separately, with this kind of growth, how are you doing, finding the right people, the right seats, retaining them, just getting the people to keep up with it?

Yes. Thank you. And I'm going to start, if that's okay, with the second question because actually I think it speaks very well to the first question about how do we compete and how does competition evolve. You are spot on that talent in our business is monumentally important, right? At the end of the day, many people would say, "Oh, we're in the people business", but I mean we are in the people business, how we execute, everything we do. There's no machinery reinvolved and having people that are really dedicated and skilled especially again, our DNA is very particular. We -- our culture is really important to us, about teamwork and excellence and I won't [indiscernible] as much as I'd like to on kind of the tenets of our culture. But at the heart of it, it does then lead to a view that at the end of the day, our team is of paramount importance. And we have done great in attracting talent. And nothing I say today at all, I hope whatever the view is, any kind of complacency, I actually think every day we got to get up and we have to sing for our supper, for sure. And in fact, our success to your point. What we realize that hasn't gone unnoticed. That just makes us even more fearful of who's running around behind us, and we got to keep going. We got to keep going hard and keep delivering every day. I mean I'm on the road all the time, Doug, Craig Packer, Marc Zahr, everyone is out, leadership of the team, both managing the business, but out interacting with our key investors and our key users of capital because we have to continue to have that hunger and focus. So the team, we have been really lucky. We have been getting ever more talent. And part of it is -- we tried to build a culture where people want to work. I mean I really mean this, appreciate it's a job, and I'm not trying to confuse myself that people are there for a job and to get paid. But we make it a really -- we want it to be a really good place to work. And the result of that is our turnover is like nonexistent. We have not lost an executive to a competitor. I don't -- I'm not sure I can think of one, certainly not, someone we wanted to keep. And so I feel very good about what we're attracting and what we're retaining, I don't take lightly that we have to keep doing that. Back to my point, we always try to invest ahead in people that also allows us time to develop people. I mean we really do believe in investing in the people and developing them, and that's part of spending that increment over the 60%, say, let's have more people, and they'll have a few more years, maybe before we "need them" but by that time, they're part of our culture and they're well developed skill-wise. I'd tell you all that, first, go back to the competitive point. Look, it's a competitive world. I'll never say otherwise. It is a pyramid-shaped market in the land of credit. And there's a handful of firms at the top. We're not the only one, but we're one of them. And it's the same handful that have been there for a long time. The big have gotten bigger, ourselves included. Remember, go back almost a decade now, 8 years ago when we started the firm. So its roughly the lifespan of this new version of direct lending, which is lender of first choice as opposed to last resort. And over that time, what we used to think was, collectively, we, it was a big loan, it was $100 million, and now it's multiple billions. Right now, Finastra took a $5 billion solution. But it's the same few people that provide those big cap solutions as before. So a lot of the entrants we all read about are in the base of the pyramid, and it's gotten more competitive there. But it's a big, big capital world out there between addressing refinancings. And globally, there's what, $2.5 trillion of dry powder in the hands of private equity firms. If you did one turn of leverage on that, that $2.5 trillion of loans. None of us have even a fragment of that. Remember, even when we think about our big AUM numbers today, we have almost $90 billion or so in direct lending, 80% of it's already lent out. It's not like we have $90 billion to lend to anybody. And the same applies to our peers. Most of the capital is already lent. So we sit here today and look at dry powder in direct lending and dry powder and private equity. And it's not very different from where it was two years ago in terms of just the math of those supply-demand balances.

I have two questions. I mean congratulations for what you built in a very short period of time. And somehow you are a bit the antithesis of the sectors, which is a bigger getting bigger and stronger and the barriers to entry are so high that it's very hard to succeed. So would love to hear your thought as to what you've done differently to be where you are close to like $200 billion of AUMs and other barriers to entry as high as we wanted to believe. So second question is back to your introductory remark, for like a -- I mean, as far as like I am concerned, I want to give you money to make 10%, 12% on private credit. That's great. But we'll have to understand what's the incentive for corporate to pay more because I want the illiquidity premium. Why do they pay for this illiquidity premium when they can tap some of them, not all of them, the high-yield market or the leveraged loan market at a cheaper rate? Like how do you explain this? What are we missing?

Yes. Well, thank you for both questions. And look, first, I appreciate the kind words about our growth. And let me say, we've been very fortunate. I'm not confused about that. It takes a combination of, I hope, certainly some skill and some of the right ideas, and then you need to be in the right place. And when I look across our three core lines of business, that applies in each case, they were pioneering models and they were pioneering models in the right way at the right time with the right kind of commitment to make them scale model. So again, real estate, Marc Zahr having started that real estate business when the idea of a triple net lease to an investment-grade counterparty, I mean he was literally cobbling it together, a dozen years ago. And now it's become both an institutional and increasingly a wealth asset class by far the leader in that space. And the barriers to entry are enormously high because if you're a corporate user, A, you need a scale counterparty. So we just did a triple net lease on an R&D facility for Intel. I mean they're going to go work with a corporate scale, a lender, corporate scale provider of a triple net lease, who's well known, well known to them. If you're Walgreens and you're doing -- like they have with us, billions of dollars you're going to go back to that partner that you know and trust and work within real estate. And we have the scale pool of capital. So even if it weren't, all those other considerations, we'd have the only deep pool to offer. GP Strategic Capital, clearly the same thing. So that business was built from the ground up by Michael Rees and Sean Ward and Andrew Laurino and they built it from the ground up. And it's so far and away the market leader, the barrier to entry there is enormous because remember here, you have to be the partner of choice [4P] firms, I have to live with this person for the next -- could be forever, but let's just say, 10, 20 years. And so who you are matters. And again, for the big firms, they're valuable. You have to have a big pool of capital of all the large cap deals done in strategic capital, I think literally, we've done 90% of them. And that's really because either they happen with us, or they just don't happen at all. It's not because they do something else. And so again, that's a great, huge barrier to entry. Why would you want to give someone else capital to come try to do that? Now we're going to come do it in the middle market and bring our 55-person operations group to deliver value-add to if someone who has a $6 billion business and wants to turn it into the next Silver Lake, wants to turn it into the next Vista. Last, in credit, which I think was probably the origin of that question. Look, we came to the market, and I would -- I guess I would say I think we had one really important observation, which was we wanted to do in private credit, what had already been done in private equity. And what that meant for us was to become a lender of first choice as opposed to a lender of last resort, which I was just referring to. And that singular twist had a very clear motive, which was because those are the best credits. And we want to deliver a great credit experience and we have. We've -- our running loss rates have been 6 basis points. In software, it's been zero. And that's because we're lending to great companies with great sponsors. And I'm not saying it will stop. Obviously, it can't go lower than zero, it can't go lower than 6 basis points. Of course, we'll have defaults over time. Of course, we'll make mistakes. But it shows you how low risk you can make the product done right with credit. So and now we have a barrier, right? Now there's a few big folks, and here's the question for any LP, and I would offer this very strongly. Obviously, it's self-serving. And what would you want from someone else.

Can I just ask you a question on this?

Of course.

Those guys that are great companies, why do they pay the illiquidity premium? Why don't they go to the high-yield market if the default rate is so low? Because historically, private credit for average borrowers what has changed.

Yes. So the barrier to entry is huge now because there's a few large cap people, we can provide large cap solutions. The sponsors are comfortable, the companies are comfortable. What are you going to get from someone else showing up and saying, well, I'll do large cap credit. Are they going to come say, I'm going to deliver better than a 6 basis point credit experience? It's like it's kind of silly to give someone else capital to do a large cap solution. What do they pay for? The 3 Ps: Predictability, privacy, partnership. It is they pay us more, the documents are more restrictive, and our diligence is more invasive. If I led with that, that's not a great pitch. But it is true, and it's no secret. But we give you the exact money on the exact terms, and the exact amount, on the exact day you want. It's a bilateral agreement. It doesn't matter what happened on the -- within the last week, we've had this toggling between oh inflation is done or inflation is not done, like that will matter for public execution, doesn't matter for private execution. Private solution, no rating agencies, no quarterly reporting. You do high yield bond, you're a public issuer again, you're out reporting information, and you can no longer do, hey, this is what I want to do for two years from now. And that's all private equity model, right? Just to be able to do something longer term. And last is partnership and really, really important. The fact that during the last couple of years, anyone that was borrowing from us, they wanted to do something strategic, called us up and said, hey, I have a great strategic opportunity. And as you know, my business is performing, we said, great. You put up some more capital, we'll lend you more capital. If you were in the liquid markets, you were shut out the last couple of years. So that 3Ps is the value proposition, and I started this with Craig, saying, what's the most interesting development? It's the adoption, the understanding of that is well worth it for someone that has a long-term equity plan.

Great. With that, we need to end it. But Marc, on behalf of all of us at Bank of America Merrill Lynch, thank you very much for joining us.

Thank you Craig. Appreciate it.