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

Well, let me -- if it's okay with you, I'd like to just broaden out a little bit. time. So in terms of private wealth, -- we're still big believers. -- penetration in that market is still very small, well below 5%. If you look at the traditional institution, it's approaching 20%, 25%. This is a market that is growing rapidly. We have massive amounts of wealth being created. You can see that for any of you who know anything about the RIA channel. The RIAs are trading at 20 to 25x because there's a belief of all this wealth, they're going to continue to attract capital. Same thing for us. We expect more and more of that capital to come into the market. It's going to come into the market because we think we're offering unique products that have really good risk-adjusted returns. So we're big believers in wealth. We have a couple of funds, new products we launched. We have our digital infrastructure fund in wealth. We have what's called LCX, which is our asset-backed business. Those have both exceeded expectations. We've hit $2 billion. ORAM, which is our nontraded REIT. It's the second biggest REIT in the market, still taking in meaningful inflows, it's at $16 billion. If I look back at digital infrastructure, we got to $2 billion quicker than ORAM. So I'm not saying it will grow that way to $16 billion, but I think it has a lot of upside. Same thing on the asset-based side, much less competition, returns are very high. And most importantly, in those products, the redemptions are de minimis. In LCX and what we call OTT, digital infrastructure, they're in and around 0.5% of 1% and ORAM, which is continuing to take in lots of capital we had our lowest redemptions. I think 1.5 what's right around there, which is our lowest in 8 quarters. So that's what we're seeing kind of away from credit. In terms of our credit book, and the main fund is OCIC, which I think is right around $20 billion of capital. that peaked in the first quarter. We saw a sequential decline in the second quarter. As you mentioned, we're in the middle of the tender period right now. It's too early for us to say -- but I think on our call in the second quarter, we said we expect that to come down again. And so that's the trend we're seeing. I can tell you that what I'm pleased about is that we're not seeing an increase in the number of tenders. So we had over 90% of the people in that fund say we want to stay in that under 10% they've continued to tender, but the number has gone down. And hopefully, with the negative rhetoric and the press dying down, we can start to take that down. And over the next X number of quarters, eliminate that. So I'm cautiously optimistic there. I'll give you 1 interesting stat, which I just saw. We had a meeting on those. -- today at Blue Owl, and we have a lot of advisers, as you can imagine, 70% of those advisers have clients in more than 1 Blue Owl product. If I went back to the same time last year, that number was at 50%. So what that says is, even with negative story, we've seen a really nice uptick in our advisers who have worked with us adding UL products in this environment. Many of the products I mentioned to you. The other thing I just want to mention is I think -- many of you, if you invest in long-only firms, you know when someone gets into a redemption cycle, the net assets of the firm go down and the earnings of the firm decline and they can decline meaningfully. For us, -- our credit products, as I mentioned, are about 11% of our fee-paying AUM. At our peak, we were slightly over $4 billion of redemptions, which is just 2%. I think people would be shocked if they drill down, they would see in the second quarter, we actually had net inflows from wealth, even paying out the full 5% redemption. And so -- and the business is growing. And I think Alan reiterated that we think we will beat consensus. So I think it's moderating in credit. And we're hopeful to see it continue to accelerate in the other parts of the business.

Great. I want to spend a bunch of time talking about real assets, but maybe just quickly touching on your GP stakes business. Sure. Just what are your latest thoughts on LP interest in GP stakes as an asset class? If there's any update you can give us on the fundraising for your latest flagship -- and then any other thoughts on the longer-term prospects for that sleeve of the business.

Yes. This is an interesting business. And we are -- and I don't say this with any go at all, but we are the dominant player. We are bigger than our next 3 competitors combined. And as I mentioned early on, -- this is an asset class. It's a niche product. I think we probably get on earnings calls, maybe 1 question on this, maybe oftentimes 0 -- it's a really good business. The money is locked up for a very long period of time. The returns we've put out are exceptional. Think about this for a minute. Think about you have the ability to go, and these are private alternative asset managers, where you have the ability to go and effectively partner at 1 of those firms. You get the fee and carry just like any of the partners. That's what we share it. And you probably are aware of this, the bigger firms have gotten materially better, and we've shared in that upside. So the returns are really good. It's a very nice stream of income and it's income with some meaningful cap gains. The biggest negative in the asset class that people struggle with is how do I get liquidity? I own a stake in a private company, what if they never monetize -- what we've been able to do to address that is as the portfolios have matured, we've been able at a nice premium to be able to take a strip of that fund, let's say, it's a Fund III, it might own 12, 14 managers and go sell the fully funded strip to an insurance company who can look at that and say, "Oh, I see the income and I want a really long-dated asset, which is hard to find that pays me an above-market current income. And so the mics have been high, and as I mentioned, current income has been great. So I'm really bullish on that business. It's not going to be a 20% grower, it's going to be a slower grower for us, but we're spending a lot of time right now thinking about what are some other ways we can grow that business. So we recently launched a mid-market firm -- and we've been exploring opportunities in the wealth channel as well. So more to come on that, but I'm pleased with where we are in that business.

Great. All right, let's turn to our real assets business, but really the topic. So AI specifically, there's been a lot of industry discussions focused on financing partnerships capital formation. Maybe just to start out, remind us how exactly does Blue participate in that sort of opportunity set?

So listen, I think it all starts with our triple net lease business. So we are the largest player by far in triple net lease. And again, a triple net lease, we go to an investment-grade counterparty, we buy a mission-critical asset. They lease it back for upwards of 20 years, we can usually get close to a 3% escalator per year on that. We've generated really good really great returns in this product. Now what does triple-net lease mean? We get our income, all the expenses of that building we acquired, they're borne by the tenant. Insurance, maintenance taxes. That's pretty unique. This is for all of your PA I'm telling you spend time looking at this. The reason I bring this up is if I were to look at the credit quality of our average tenant for a while, we own 10% or close to 10% of Walgreens stores. So we'll do mission-critical retail as well. But on average, it's around a BBB. Then all of a sudden, there was this new market that emerged, the data center market, where we could go and provide capital same triple net lease, but where the tenant on average was a Microsoft, Google, a meta in Amazon, AA or better rating on average. -- at same term, same 20-year lease. And in fact, we've hit this inflection point in this market where we're earning more on a doubler AAA than we are on a -- so when we saw that, we knew we were in a unique position to go and provide capital to 1 of those firms who maybe was outsourced the building of it of that facility, and we did that. only came across the opportunity to actually become 1 of the builders. And we acquired a business a few years ago, where today, I can't say we're the largest, but we are 1 of the largest builders and operators of data centers globally. Over 140 data centers we have built over the last 10 years. And again, there are others who are close. I think we are one of the biggest, if not the biggest, in terms of things we are owning and operating to. Now by buying the land, by getting the power by coming in and building it, we get to make extra spread, especially if we're doing it somewhere that's a little bit more remote. We're in this very unique time period where we're seeing demand like this, and the supply has actually dropped way off. So when I bought the business when we bought the business a number of years ago, my biggest fear was what if we hit this inflection point where demand flattens out and supply catches up to it. Can we still get a great return for our investors. I thought we could. But what's happened in this environment, again, demand has been much greater than we thought and supply has shrunk. And so cap rates have remained exceptionally high. I mean, plus for AA-type credits, sometimes even higher depending on where the land is located. So the question I get all the time is sounds like a great opportunity. What's the downside? What if there's an overbuild? What if there's -- what am I missing? So you should know when we're spending time and evaluating these deals, there are a couple of risks. One is, well, it's the tenant credit worthy. And so for example, overseas, our largest tenant is Amazon. We feel really good that they're a credit-worthy tenant. So then the question is at the end of 20 years, on all this land, I own millions of square feet of buildings, lots of infrastructure, what is that worth? That is -- that's hard. Now I would tell you how we run our models, we run our models assuming it's worth -- and if it's worth 0, can we still get an adequate rate of return somewhere between 7% and 10%, sometimes a little bit higher. In all of our deals, we won't do the deal. We have to be able to earn that in a 0 recovery scenario. I would tell you, we think it's very improbable owning thousands of acres, millions of square feet of buildings that are pristine that it's 0. The best example I can give you, I talked about this in one of our earlier meetings, we own and operate a data center that was built for AOL, you've got mail, like literally was built in the late '90s. It went from AOL, it went to LinkedIn. It went to Microsoft, it's at Oracle. -- and we have a long-dated lease there. The useful life of these is quite long. So we -- it's funny, we are part of the AI ecosystem. But I would tell you, when I sit down with our investors, Anthropic comes through ChaTGPT, whoever it might be on the latest AI LLM or something else that touches it. it's hard to figure out what the value is and where it can go. I can tell you on the infrastructure side, we believe this is a place where people can put out large sums of capital and rest easy that you're going to make an adequate rate of return, and I think there is the potential to make 20%, 30% and many multiples on your money in this asset class. So we're quite bullish on it. And we're finishing up our latest fund. It's done quite well. And our backlogs at Blue Owl for demand for the land we have. I'm not allowed to give the number, but the backlogs are the biggest we've ever experienced.

You answered most of my next question, which was going to be the risks, how you think about the potential for overbuild. Maybe I'll just add...

We're just in sync. I knew where you were going.

It's almost like you knew the questions in advance. But maybe I'll just ask, is there -- any context around the news that came out over the weekend? Any additional color that investors should be thinking through? Or it kind of sounds like what you're saying is the backlog is so immense that it's -- I wouldn't say meaningless, but it's not slowing you down, but any other color on sort of the AI slowdown potential headwinds that we've been seeing?

Yes. I think the news that's come out over the last 10 days or so, I've is cause for concern. And I'm not an expert. I've been reading what everybody else has been reading, talking to a lot of people. And there's a lot of unknowns. I think my takeaway from this is the demand for compute is growing exponentially. And there is no slowdown. I think safety guard, safety rails are key, and I hope they're enacted, but they need to be enacted globally. But for all of us in this room using AI to make our lives easier and to become more efficient and for every room like this around the world, I don't see that slowing down. And all you have to do is look at anthropics revenue how it's been growing tenfold every year. There's never been anything like it, and we're seeing it. We are seeing this insatiable demand for compute. I will tell you, long term, when I talked about that supply/demand, at some point, we will get to equilibrium. -- where we have enough data center capacity, we have enough compute. And we hope at that point, we have really attractive Microsoft, Amazon, Google, meta paper in our portfolios, so that when 1 of those companies says, I'm not financing at an 8 anymore, I'm financing at $5 million we've got a bunch of paper that all of a sudden, the market becomes 5. And I think that's how it's going to play out. But I don't see any slowdown in the demand and the efficiencies it affords all of us. So I think we're well positioned for the next few months.

And Maybe how should investors think about translating all this into Blue -- all earnings power? So as the segment keeps scale, you mentioned before, real assets is your fastest-growing segment. How do we think about triple net lease, the flagship fund, the wealth fund odd all these contributing to overall fee growth in earnings power, how would you kind of frame that up?

Yes. We haven't come out with '27 guidance I think Alan will address that later in the year or early in the first quarter. Yes, I talked about this earlier. Our growth has been slower than we'd like this year, not surprised, given everything that went on. So the question is how do we grow quicker next year? I gave you the example of advisers, the number of advisers who now have more than one product. I think the best way to think about it is what's going on in the core of the business. So in credit, we're still bringing in money in real assets. We launched our -- I think it's Fund VI. We went out at $7.5 billion. We're right around $8 billion. We've got permission to go above $8 billion. I don't know where we'll end up, but let's call it, around $8.5 billion, so well above our target. We went out with the European net lease business. We think Europe, much less competition. We believe we're one of the first movers there. We wanted to raise $1 billion. We raised $1.5 billion. Across the board, I'll just list a couple of others. We have our strategic equity fund. We wanted to raise between $1 billion and $2 billion. We raised $3 billion. That's a continuation vehicle, which I think has the potential to be quite large. We're working on credit secondaries now. [indiscernible] in the market with a middle market fund. We launched other credit verticals real estate credit, digital infrastructure credit. Each of those will be well in excess of $1 billion, and we think we have the potential to build something really significant. We didn't talk about insurance. A lot of our peers, there's a lot of noise in insurance today with one firm in particular, but we create a lot of product that is quite good for insurance companies, but we're a relatively small player in insurance. We outsource it. We sell to a lot of our peers. And we brought in the CIO insurance company called Prosperity was owned by Elliott. They started de novo, and sold it for billions of dollars. His name is Devin Mishra we are -- we've got major focus on how do we grow that line of business. So I like how we're positioned. I like our assets. At the end of the day, when there was a lot of negative press, the 1 thing that we could control at Blue Al, and I think this is really important, and I talked to the team about it, is performance. And performance, I started with this across the board has been exceptional. And if we can continue to identify markets where demand is greater than supply, and we can come and continue to create alpha for our clients. I think we're well poised to have meaningful growth in the future, and that's what we're going to continue to do.

Great. Unfortunately, we're out of time. We'll have to leave it there. But thanks for having -- thank you so much.

Really appreciate it. Thank you, everyone.