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

Good morning, everyone, and welcome to Bank of America's 33rd Annual Financial Services Conference. This is Craig Siegenthaler, North America Head of Diversified Financials at BofA, and it's my pleasure to introduce Doug Ostrover. Doug is the Co-Founder and Co-CEO of Blue Owl and prior to founding Owl Rock in 2016, Doug also cofounded GSO in 2005, which was eventually sold to Blackstone. Before GSO, Doug ran Credit Suisse's leverage finance group and held senior roles in Credit at DLJ before CS acquired it. The reason I'm saying this is, in my view, Doug is one of the strongest, longest backgrounds in private credit in the world. So Doug, thank you for joining us today.

It's great to be here. First of all, let me apologize about my voice. I wasn't an Eagles fan like you, but somehow it's disappeared. So we actually were exchanging cough drops. I'm thinking this up, who had the better cough drops.

I think it was me.

Yes. So far, it's working. I appreciate it.

Yes, I did lose my voice on Sunday, but I think I'm coming back a little bit.

Sounds good.

So Blue Owl is an alternative asset manager with $270 billion of AUM now. A big focus on private credit, also general partner solutions and real estate. It also has the largest individual investor and private client efforts relative to its size. The firm was founded between a merger of Owl Rock and Dyal in 2021, when it first listed. And this is one of our top high-rated names today. So with that, let's start with the macro setup. We entered a 3-year bull market, IPOs are expected to rebound. The yield curve has steepened. There's also a record money market AUM on the sidelines. So Doug, my question is, what are your expectations for both fundraising and investing in '25?

Fundraising and investing. And investing across the board or private credit?

We'll focus on private credit.

Okay. So first of all, I think, many of you know, private credit has a great moment in the sun. It's a lot of press. My favorite press is when Jamie Dimon keeps complaining about shadow banking. We can talk more about that, which is not. But look, I think you're going to see private debt continue to accelerate. Now there's a view out there that maybe its golden era has peaked and it's coming down. But what people don't realize is even with spreads coming down, SOFR has remained relatively high. And if you take SOFR rate, plus around 500 is our average spread plus 2 points of fee we get. On an unlevered basis, we're still earning a 10% and for most institutions, we use a little bit of leverage. And so maybe we can generate that net after fees, 11%, 12%, that's really attractive, and we're in the camp that rates are going to stay higher for longer. We have -- just for those who don't know us well, we have about $100 billion, maybe a little bit more of private credit. We're one of the top firms in the space. And we review every name in that portfolio every quarter and performance is good. We're not in cyclicals. So we're looking for more annuity-like businesses. What I can tell you in our book, and I would say for other good underwriters, the next 18 to 24 months are going to remain robust, and I think flows are going to be really good, not just institutionally, but in wealth. And if anything, I see wealth continuing to accelerate. So what was the first part of the question.

So fundraising and investment, we've kind of broken that.

Yes. And so listen, I think investing is going to be better than it has been. However, we're real -- especially in private credit, we're really tied to the M&A market. So we're expecting an uptick this year, a meaningful uptick. If you look at the performance of the M&A stocks, they're all up, everybody is expecting it to get better. We're seeing with the new president, new regulatory environment, we had a number of multibillion-dollar deals last year that went away because we couldn't get regulatory approval. So discussions are up, but the thing I want to warn everybody is when we talk about an improvement in M&A, it doesn't happen overnight. So you're not going to see it in the first quarter. You may not really even see it in the second quarter. It's really more of a second half phenomenon. Now that's our private credit business. I'll go very quickly because I know we have limited time. Our triple-net lease business, I think, will remain our fastest-growing business. We're expecting to do a lot there. We also have an alternative credit business, which does mostly asset-based lending. That is definitely accelerating. And I think we have a real ability there to disintermediate the banks. And I think the -- after our triple net lease, our data center business is going to remain really robust. So I think you should expect for Blue Owl this year deployment to be quite strong. So between raising money and deployment, we're cautiously optimistic, in fact, pretty bullish.

So Doug, inside of your fundraising commentary, especially where you think retail private wealth gets stronger this year. In credit, we've seen spreads tighten. We've seen base rates come down, so the yields are a little bit lower, and we have seen stronger returns in part of the equity count. So do you expect to see any rotation or migration from the credit side to the equity side? Or is it just not a zero-sum game sort of everything [indiscernible] ?

It's not a zero-sum game. And if you go -- especially, let's start on the institutional side. There's a certain amount allocated to equity-like risk and a certain amount to fixed income. We fall -- private credit falls in the fixed income bucket. If anything, I'm seeing people increase their allocations in fixed income to private debt. So even with that spread tightening and base rates coming down, I expect that to grow. And on the wealth side, we're -- as you mentioned, we're one of the biggest players for those who don't know this. We have 150 people around the world. That will be 200 over the next couple of quarters. I get a run every night of what his -- the fund is sold daily. And I see credit continuing to do quite well.

So you hosted an Investor Day not too long ago, last Friday. So my question is, I was wondering if you could sort of walk us through those sort of 2 main growth targets. And also, you've announced a bunch of strategic acquisitions in the last year in sort of high-growth secular growth segments, how big are they a part of you getting to those sort of 5-year targets?

Yes. So what Craig is referring to, we had Investor Day on Friday. It's part of the reason I'm losing my voice. And I -- and just to give you a sense, we've been growing over -- we went public 3 years ago. We've been growing FRE in excess of 30% a year for the last 3 years. We came out on Friday saying that we will do in excess of 20% growth for the next 5 years, both revenues and FRE. And unlike a lot of our peers, I think that Michael Chae just presented?

Yes.

And you mentioned I was with Blackstone, so I know them well. We have a much simpler business model. So let me just describe it and then I'll morph that into your question. The best way to think about what we've built is we have fewer lines of business, but where we -- our capital is distinct. Most of it is very long dated. So think about much of it -- some of it is truly permanent, but some goes as long as 17, 20 years. So what that means is I can look at our revenue and know that revenue stream is going to go on for a very long period of time. So we joked at Investor Day, at January 2, 2025, we turned the lights on, I can look at revenue, the $2 billion we earned in '24 and now that's going to go on in perpetuity. So then the question is, what's our growth beyond that? And so if you listen to our quarterly calls, they're pretty boring because maybe we've raised a little bit more, maybe margins within -- higher by 50 basis points, lower by 50 basis points. There's not a lot of disparity in what we do. So to hit those numbers, we came out and we said there's just a few things we need to do. One, we need to keep our flywheel in wealth going. We're raising on continuously offered products in excess right around $10 billion a year. I think we'll do better than that this year. And we see a path to about $15 billion. And that won't happen day 1, but that will include some growth in what we call digital infrastructure, which is what we acquired in our asset-based business, what we acquired. We have technology BDCs. We have 2 of them. We've decided to merge them and take them public. And let me just put a number on this. So $10 billion or so a year is roughly $250 million of revenue a year, every year, $15 billion, 2.5 points is over $300 million. So that's a big driver. Our BDC merger will generate because we get a step-up in fees once it goes public, another $140 million. So those are 2 major things. The third is we have roughly $25 billion of capital we haven't spent, we'll spend it. That will generate another $300 million of revenue. Then we have flagship funds. We have our -- what we call our GP stakes business, where we take stakes, minority stakes in large alternative asset managers. We've closed on about $7 billion. We have in our model. Our last fund was $13 billion to $13 billion again, we feel really good about that and doing a successor fund. A real estate fund, the last fund was $5 billion. We're out in the market. We're about to launch a $7.5 billion fund. And that -- Alan, did I miss anything? I think that's everything, right? So take a step back, it's executing on our flagship funds, keeping wealth going and then really these new businesses, they will contribute. I think the one thing I left out is digital infrastructure. We are closing on $7 billion, and we're assuming we do a $10 billion next fund. Point I want to make it this. These are things that are very much in our control. And if we execute, which I think we will, the stock has gone from $10 to $25. I don't see why we can't take the stock from $25 to $50.

So I think the number -- really highlight there was, you said $140 million from IPO to tech BDCs on top of shadowing and deployment of about $300 million. So I think it's -- you got $440 million of revenue without raising another $1 of capital.

Yes, that's in excess, that's right, and that's in excess of 20% growth in '25. That -- those 2 things are happening. And of course, we're going to continue to raise money. We've already raised a lot of money this year. So look, we feel really good about exceeding those numbers in the near term. And look, anything can happen in 5 years, but I feel pretty optimistic that we'll continue to exceed expectations.

Now when I saw the 5-year targets for FRE, 20% plus. One thing that I thought immediately was that's FRE, not FRE per share. Now I know you addressed this in Q&A at the Investor Day, but what is that 20% FRE growth in excess translate into FRE per share?

I think you should assume that we will generate -- we expect to generate more than 20%, and I think you should assume that we will grow FRE per share at 20% or greater as well.

Okay.

Because there was definitely some confusion about that, but we feel pretty good about putting that number out there as well.

So let's talk about product innovation, where I think you guys have definitely a core competency. There are plans, I believe, to launch an ABF alternative credit semi-liquid vehicle this year. I think there might be plans later in the year to launch more of a digital infra semi-liquid, that's near-term horizon. What are some other product gaps out there that you can launch with existing capabilities? And then what are some other product gaps you may need to acquire or do a team lift out with it.

We don't sit around and think about that we have product gaps. What we're always looking for or we're looking for businesses where the demand for capital is greater than the supply of capital. And if we can find a marketplace like that, that's big. That we could scale and we can come in and create alpha for our investors. Then we start asking ourselves, should we build it organically or should we buy it? So a great example is the asset-backed market, we identified this big, growing marketplace. Done a bunch in equipment, done something in rail. We had done some things in aerospace. And we thought, oh, well, let's just take our existing team. But it was a heavy lift, and it was going to cost us a lot of money and a lot of time. It'd be a first-time fund. And then we didn't go out and solicit this firm Atalaya. They actually called us and said, we think the world is becoming more competitive. We see firms like Apollo making a big push. We've been doing this 19 years. We're trying to figure out how do we get into wealth, how do we grow our institutional presence globally? How do we strengthen HR, compliance, legal, cybersecurity? And by the way, how do we do all that and allow ourselves to continue to be the best. So that was once -- and we can talk about culture, but once we decided there was a cultural fit, this was the top 19-year track record decile performance. That was easy and we could buy it and make it accretive day 1, and they were willing to take all stock. And so it wasn't there, we had identified an opportunity and we were trying to figure out how do we go about it. Digital infrastructure, we've been looking at infrastructure broadly. You know we have a very big tech lending business. So we kind of had our finger on the pulse of what was happening there, but that to build organically would have been impossible. So as I look at our business today, I really don't see any gaps. And we are really focused now on integrating the acquisitions. And in those 2 businesses you mentioned, asset-backed and digital infrastructure, really trying to figure out how do we scale them. You know this. We talked about it at Investor Day. We bought a business called the Oak Street 3 years ago, a triple net lease business. It's really the template for what -- how we want to operate. We bought this business, we integrated it. And in 3 years, we have tripled the size of the business, tripled their revenues, almost tripled assets. And we said at Investor Day, we're going to triple it again. So how do we take that playbook and apply it now into the asset-backed market, how do we apply that to the data center market and really go and grow those, both institutionally and especially in wealth. I think both of these products have very limited competition in the wealth channel. And from what we're hearing, again, we haven't officially launched. We're expecting to get a really good reception. And in each of them, it takes time to ramp, but they'll make a contribution. If you were asking me where might there be a product gap, I'll just tell you other areas that we've looked at. We've looked at, as I mentioned, more broadly infrastructure. We've looked at secondaries, and we've looked at European credit. And I would say of those 3, European credit is probably the least interesting for us at this point.

I think with the triple net lease point, the most important thing to highlight is you tripled that business in essentially a real estate bear market over 3 years.

Yes. Yes. And I'll just say 1 other thing. I don't know if many of you know, have ever invested in triple net lease. This -- the firm we acquired focuses on investment-grade companies going there, buying mission-critical, usually stores, manufacturing assets, distribution facilities, we buy it and they lease it back for 15-plus years. It was a niche market. Just to give you an idea, the amount of PP&E on IG balance sheets today is around $12 trillion. Total volume in triple net lease for IG companies is under $40 billion. So it's a tiny market, but we are, by far, the market leader. And we've been able to generate really good current income and in our institutional funds, believe it or not, total returns over a 15-year period in excess of 20%. So in our latest fund, while it's a relatively new fund is tracking that way as well. But the point I wanted to make is when we bought this business, everybody thought, such a niche business, how are you going to grow it? And to your point, especially in a really bad real estate market. And I think we've proved the naysayers wrong. But I do think we have a playbook that we are now applying to these more recent acquisitions. And I think you're going to have -- our investors are going to have a similar experience there.

So you had an active period of M&A, 4 deals in kind of a short period of time. We were debating is Blue Owl done? Are they going to go through sort of a digestion phase. But then actually, you hired a star banker from Goldman, Chris Eby. But I guess you're not done. I guess you're still looking at things, but maybe flesh that out. What is the forward strategy for M&A?

Well, Chris is going to be really excited that you called him a star banker. So I'm going to let him know that. In fact, I'm going to text on as soon as I walk out. I think, listen, we -- for better or worse, we're a big firm, right? We have a $35 billion market cap, $265 billion of capital, but we're a young firm. We're -- there's a feeling that we're a more entrepreneurial firm. And I mentioned earlier about somebody in their 40s, they've built a nice business, they're thinking about where they take the business. And so we are getting a lot of inbounds. Now we did 4 deals, but we probably looked at 100 businesses. I mean really, it's like we're probably investing in less than 2% of what we get a chance to see. But it was a little too haphazard. And if you think about anybody who's a good investor, process, having a process, a repeatable process to make decisions. So we brought Chris in to add structure and process to the M&A side of things. And he's been with us 3 or 4 months now and doing a great job. And honestly, it's not that we're -- we have nothing we're serious about right now, but we get so many inbounds. And we also want to keep our finger on the pulse, not just the inbounds, but what's going on in the M&A market in general. Where are things traded, why are they trading there? And maybe there's something that we're not approached on that BofA or Goldman or Morgan Stanley is seeing that we didn't see. So Chris is spearheading all of that. And very focused on that outreach.

Private wealth is now arguably the most attractive channel in sort of a 10-year basis, just given how low adoption rates are. Blue Owl has the highest contribution of profits and growth from this channel. Where are we in the progression? And I know a lot of focus initially was on the wires but now it's branched out into IBDs, RAAs, Europe, Asia, where you sell some products. Where are we in that progression?

Well, let me take you back to when I left Blackstone in 2015. And Blackstone, KKR, Ares, Apollo, every big firm, the way they were approaching wealth was they were doing something called an adviser subadviser model. And what that meant was they were going out and they were outsourcing the fundraising to somebody else. That was the adviser. And I was at Blackstone, we were the sub-adviser. So we invested it. They went out, somebody else went out and sold it. It was a bad model, and I was leaving and one of the things when I was leaving, I always thought about were where is the world going, how should I position my firm. And what is it I could do as a small firm better than the big firms? I saw how broken this adviser, sub-adviser model was, but I also knew wealth was going to take off. This was 10 years ago. So while I was on my garden leave, Blackstone decided they agreed with me. They decided we have to get out of this adviser, sub-adviser model and they sold their interest, their 50% stake in the business to KKR and they went and built everything internally. So I launched the business, and I hired almost 50 people and I bet you, we were spending $30 million a year with 0 revenue. And you can imagine everybody else in my firm was saying, our profits are so depressed, what are you doing? And we stuck with it because I had been through it, and it just took time. I knew it would accelerate, and it did. So today, we're raising from what we call continuously offered products, meaning products that are in the market every day, every night, they're sold daily, we're raising about $10 billion a year. I think as we look at the world, we think we're in the really early stages. The big difference from where we were 10 years ago to today is there's more competition. A lot of people talk about it, but here's an interesting stat. Over 60% of sales go to 6 firms. We're somewhere -- we're probably 2 or 3. So we have -- we've created a nice moat but we see competition coming, and we are really committed to trying to figure out not just how we maintain market share, but how do we grow that market share. And so one of the ways we're going to grow it, we need more resources. We need more resources around the world. We also need unique products. Digital infrastructure, we're going to get, I think, a really good reception, a pure play on data centers. I think in asset-backed space, we have a chance to build something and use a little bit of a different structure that's been used in the past to really scale that. I think you hit on something that's key. The rest of the world is a big opportunity. And so let's take a place like Japan, where there's a tremendous amount of savings, finding a partner there who can help you distribute. But you should know, we are throughout Europe. We're throughout Asia. We're in the Middle East. We have people in all those regions, speaking the language, calling on wealth platforms and materials in local languages. We are just scratching the surface there. And at Investor Day, I know these numbers, just to give you an idea, Craig touched on this. Penetration of alts and firms is less than 3%. It's expected that by the end of '28, the wealth channel will hold $300 trillion of assets. If you believe that can grow by 20 points from 3% to 23% penetration, which a lot of people do, that's $60 trillion. So let's just say that's just way too aggressive, cut in the half $30 trillion. The numbers are staggering. And I gave these examples on Friday when we were talking. I was talking to the CIO of a bank, who I'm very close with, not BofA, but another large bank. They have $1 trillion of wealth assets. And over the last 5 years, they've sold just $27 billion of alternatives. Now $27 billion is a lot, but not as a percentage of $1 trillion. It's 2.7%. They believe they're going to grow over the next 5 to 7 years, tenfold. It's not my numbers, this is their numbers, $27 billion to $270 billion. We're one of the few firms that has been on their platform, sold a lot of product, and we will get more than our fair share than incremental $250 billion. But they -- this is kind of interesting. They have 500,000 wealth clients, and they have 4,000 wealth clients that have actually invested in alternatives. So under 1% is actually invested. There's another firm out there -- fund -- Bank B that is a smaller bank, but much bigger in wealth, 15,000 advisers, $4 trillion, they have never sold an alt on their product. We are working with them on a pilot program for their first one. So when you think about both domestically imagine someone with $4 trillion has never offered an alt. There's a lot of opportunities domestically, and I believe there's a significant opportunity overseas. So I think we're going to continue to accelerate sales. We mentioned in Investor Day, we're raising about $10 billion. We'd like to get to $15 billion a year in that space. And by the way, that's just on continuously offered stuff. We might have our real estate fund, our GP stakes fund, our credit product, whatever digital infrastructure, we also go into the wealth platform not on a continuously offered basis, but with the institutional product for their super users where we might get a 4-week window to go sell. And we can raise, I mean I think -- and you would know -- I can't remember the number, but I think we raised last year in our GP stakes in the wealth platform, $2 billion or $3 billion, just by being on platforms for 2, 3, 4 weeks at a time. So the opportunity set is quite large. Blackstone, who you just heard from, is the biggest but we're #2, sometimes #3, but I'll tell you something interesting in real estate, we outsold them last year.

What's also more important is you're #1 as a percentage of profits.

Yes.

I have 1 more here on digital infra data centers, but we're running out of time, so I want to see if there's any questions from the audience. So please just raise your hand. We'll get you a mic. We have one up here in the front.

It's got to be a good question since you're the only question.

So in terms of [indiscernible] balance sheet. So [indiscernible]?

So look, we take -- we're very focused on competition, but the improving regulatory picture for the banks, I don't think it's going to have much of an impact on our business. It's what I was saying a little bit earlier, the banks have a model, which is a velocity of capital model, and it's incredibly profitable. And it's not going to change. And by the way, this has been going on for, I was at Credit Suisse in 2000, and I was at DLJ before that. And this is how we ran the business. I'll just give you a quick example. So I come -- I was at DLJ, I go to Credit Suisse. Now I have a big balance sheet. I went from having virtually no capital to having $5 billion line. And so what I would do is go and let's say, it was a KKR deal. I'd commit to $5 billion of the cap stack, and I would turn around and sell it as quickly as possible. My goal was often to sell it before it even funded to lay that commitment off like immediately. And oftentimes, I could make as much as 3 points for doing that. So that's $150 million of profit on basically a trade. So naturally, a bank like BofA, JPMorgan, Morgan Stanley, Goldman Sachs, their goal isn't to turn that $5 billion once. They want to turn at 10 or 20 times. And by the way -- and they're also starting with a bigger balance sheet than $5 billion. So that's the model, and that's not going to change. And it is by far the most lucrative business away from M&A at most banks. I think you hit on something key, though, and that is where the banks become our biggest competitor or when the syndicated markets are strong. And when the syndicated markets are weak, they leave the marketplace because this is how a deal usually happens. Let's use that same KKR deal. If they're going to put it on their balance sheet, they're going to syndicate it. And they'll say, okay, KKR, we'll do it at LIBOR plus 500, 3 points, and we need some cushion, maybe it's 50, 75 basis points. So they have some wiggle room before they lose money. But going back to 2022 when rates were going up very quickly. It was really hard to price that risk. And so we went from a market where the banks have been super active to where they left the marketplace, completely left it. And so that was an incredible time for direct lenders, spreads gapped out, covenants became much better. And we made a fortune in that market. But today, we're back to a more, I would say, market that's in equilibrium. And we were talking about it earlier in one-on-one, we launched in 2016 where markets were in equilibrium until COVID and rates were near 0, and we did really well. The thing to keep in mind in direct lending, whether there's a good market, bad market, bad market spreads gap out. But over a long period of time, if I went back all the way back to my GSO days, which was the Blackstone Credit business, we've been able to earn on average and access indirect lending 200 basis points above the syndicated market. And when markets are robust like they are today, that's kind of the spread that we're earning versus what you might find in the syndicated loan market.

Any other questions in the audience? One -- just wait for the mic, right in the second row.

There's a thought out there that private credit is taking the business that banks don't want. Do you agree with that? And if not, why not? Why is that not the case?

Well, I made the comment earlier about Jamie Dimon is -- was yelling from the rooftops about shadow banking. Now I would tell you, when I launched my first business, it was called GSO Capital and it was the novel idea that, hey, we had been -- when I was at DLJ and Credit Suisse, we had been the #1 underwriter for 13 straight years. So the idea was let's go raise a pool of capital and instead of syndicating it, let's just go focus on the best credits and we'll keep them. The reality was the best credits were going to the banks, and we were doing the more marginal stuff. But that was 20 years ago. The business has matured a lot. And I would tell you what we're seeing today are the best credits. And the reason for that is, I think, a lot of PE firms are viewing us as like an insurance policy. Have you ever gone -- when I bought my first house, which you know well, as my neighbor. It was built in the 1930s. I was paying up. It was a hot market, had someone do the inspection. And then you get in there, you open the walls and you're like, "Oh my God, there's wires, there's more asbestos. It's going to cost me more." Today, buying a business is really competitive. There's not enough companies for sale. You've probably all heard about the term EBITDA add-backs. If you're looking at -- when I get a SIM -- of a deal of PE firms working on, you have trailing EBITDA and then pro forma adjusted, which can be anywhere from 20% on the low end percent to 60% higher. My point is, you can do all this work, you don't really know what you own until you get in there. So what's happening is there's been a lot more adoption by PE firms. We cover 700 PE firms. They want to talk to us. We've transacted with close to 200. And so what they're doing now when you're paying up and you're paying this huge price, you're saying, you know what, I'll go, I'll do the deal with Blue Owl. I'll pay a few hundred basis points more. I know if there's a problem early on, they're not going to push me into bankruptcy. And once I get my arms around the business, I'll negotiate for a year, 18 months of call protection. I will either lower the rate with them or I'll go to the syndicated market. And so what that -- if you were to think about it, so we're -- our penetration is much greater than it's been. The negative is we have short call provisions. Best case, we're getting 18 months. And so if you're going to pay up, you're a private equity firm, meaning paying up on your debt, you know in 18 months at a one-on-one call price, you can take us out. It's just not that expensive. So I think to answer your question, it started in the old days that we were seeing the weaker stuff. But I mean, we are working on deals. The number of $1 billion, $2 billion, $4 billion type transactions, meaning the debt needs. So that means there's another $1 billion, $2 billion, $4 billion of equity underneath us. We're working on big world-class companies that if I took you back just 10 years ago, I think there had been one $1 billion transaction. Now there -- we're working on deals literally every week. So our penetration in the market is much higher and it's growing. But it doesn't mean that -- I'll just end on this, it doesn't mean that the syndicated market is going away. What people fail to realize is the syndicated market is driven by demand. As long as that demand is there, they're going to go price deals to the lowest common denominator. And there will always be companies that are going to say that's attractive. And so today, CLO formation is good, mutual funds are taking in capital. It's a robust syndicated market. We're still seeing a lot. It just means our spreads are back to around that 200 and they had been closer to 400 just a couple of years ago.

Doug, with that, we are out of time. But on behalf of all of us at BofA, we want to thank you.

Thank you. Thank you, everybody. Appreciate it.