Blue Owl Capital Inc. (NYSE:OWL) Q3 2023 Earnings Call Transcript

Blue Owl Capital Inc. (NYSE:OWL) Q3 2023 Earnings Call Transcript November 2, 2023

Blue Owl Capital Inc. reports earnings inline with expectations. Reported EPS is $0.16 EPS, expectations were $0.16.

Operator: Ladies and gentlemen, thank you for standing by. My name is Bhavesh, and I will be your conference operator today. At this time, I would like to welcome everyone to the Blue Owl Q3 2023 Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there be a question-and-answer session. [Operator Instructions] Thank you. I will now hand the call over to Ann Dai, Head of Investor Relations. You may begin your conference.

Ann Dai: Thanks, Operator, and good morning, everyone. Joining me today are Doug Ostrover and Marc Lipschultz, Co-Chief Executive Officers; and Alan Kirshenbaum, our Chief Financial Officer. I’d like to remind our listeners that remarks made during the call may contain forward-looking statements, which are not a guarantee of future performance or results and involve a number of risks and uncertainties that are outside the company’s control. Actual results may differ materially from those in forward-looking statements as a result of a number of factors, including those described from time-to-time in Blue Owl Capital’s filings with the Securities and Exchange Commission. The company assumes no obligation to update any forward-looking statements.

A senior financial executive leading a board meeting, discussing new strategies for investments.

We’d also like to remind everyone that we’ll refer to non-GAAP measures on the call, which are reconciled to GAAP figures in our earnings presentation available on the Investor Resources section of our website at blueowl.com. Please note that nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase an interest in any Blue Owl Fund. This morning we issued our financial results for the third quarter of 2023, reporting fee-related earnings or FRE of $0.17 per share and distributable earnings or DE of $0.16 per share. We declared a dividend of $0.14 per share for the third quarter payable on November 30th to holders of record as of November 20th. During the call today, we’ll be referring to the earnings presentation, which we posted to our website this morning, so please have that on-hand to follow along.

With that, I’d like to turn the call over to Doug.

Doug Ostrover: Thank you, Ann, and good morning, everyone. I want to thank all of you for joining us today. It’s been a pleasure to spend the last two years on these earnings calls with our shareholders and analysts. As we move through the transition of the Co-CEO structure that we announced earlier this year, we decided to take a divide and conquer approach to allow each member of the management team to leverage their time more efficiently. And so going-forward, you’ll be hearing from Marc and Alan on our quarterly earnings calls, while, Michael and I will be taking a step back from this aspect of the business. To be clear, I’m not going anywhere. I’ll continue to be very available and accessible and I look-forward to seeing many of you at upcoming conferences and meetings.

That said, given the rapid growth that we’ve had at Blue Owl and what now feels like a pretty well-oiled earnings process. It feels like the right time for me to focus my attention more fully on the many strategic growth initiatives we have in the works right now. So with that, let me hand things over to Marc.

Marc Lipschultz: Thanks so much, Doug. Today, we again demonstrated the steady and resilient growth that we believe sets Blue Owl apart in the alternative asset management space with our 10th straight quarter as a public company, also being our 10th straight quarter of generating FRE growth. When we think about what’s happened in the world over that timeframe. This time in 2021 10-year treasuries were around 1.5% and a year ago, they just crossed 4%, with the expectation by the end of 2023, we’ll be talking about rate cuts. Obviously, those expectations have shifted meaningfully over the past year. In the first three quarters of 2022, S&P 500 corrected 25% as interest rates marched upwards, only to reverse and rally 20% over the next year, despite elevated rates and ongoing geopolitical risks.

The capital markets and M&A have been installed for the better part of the year, and in March, we witnessed a handful of bank failures that took the market completely off-guard. All of this is to say, the only thing that’s been clear over the past couple of years is the lack of clarity into the short-term path of rates for the longer term impact of those rates on economic growth and how liquid markets will react to the information we have on-hand. In contrast, we’ve been able to demonstrate our Blue Owl permanent capital at FRE centric model by design, creates a differentiated and more predictable earnings profile. And on a last 12-month basis, we have grown DE by 28% and FRE by 26% despite of these market headwinds, since we’ve been public management fee growth has been over 40% per year.

That’s not to say that this growth has come easily, but one advantage we have structural is that very few assets leave our system, because our AUM is mostly permanent capital. So the capital we’re raising is generally additive instead of replacing assets that are being returned to investors. On top of that, our business is positively levered to many of the ongoing secular tailwinds within alternatives, including the continued growth of direct lending, larger managers benefiting from ongoing consolidation across alts and private wealth’s incremental adoption of alternatives as a core component of an investor portfolio. For these reasons, we feel confident that Blue Owl will remain a differentiated story with a differentiated growth trajectory.

As it relates to the fundraising landscape, we continue to see very positive indications for demand across our strategies, which are generally income-oriented and downside protection-focused. Across our perpetually offered products and wealth, we raised $1.5 billion in the third quarter, a nearly 20% step up from the prior quarter. Over the last 12 months, we have been the top fundraiser in the industry in both credit and real estate when looking at net flows, and on a gross basis, we have been the second-best fundraiser over that period. Both of these are extraordinary statistics and I think testaments to the many years that we’ve been building our platform and relationships in this space. Now, a lot of firms are trying to catch up to where we are and given the size of the opportunity, this is not a zero-sum game.

We and others can do well at the same time and there will be a lot of growth ahead across the industry. But I wanted to take a moment to recognize what we’ve been able to accomplish so far. I think we are exceeding expectations in the face of headwinds and I’m very enthused about what lies ahead for this business. On the institutional side of our business, we announced $1 billion mandate from a leading sovereign wealth firm, reflecting continued progress in the strategic and geographic expansion of our LP base. We have improving visibility into the end-of-year flows as we launch fundraising for a handful of strategies, including GP Stakes, for which we anticipate a small close for our sixth fund before the end of this year. We are very excited about the potential for cross-sell for this fund with our credit and real estate investors and we’ve seen strong demand to bring the GP Stakes strategy to a number of new wealth platforms as well.

In real estate, we remain very well positioned, despite the substantial headwinds in this space. Having already reached our $4 billion target for this latest vintage of our flagship fund, getting to the $5 billion hard cap, which we expect to hit, will represent a doubling in the size from the prior vintage, a challenging feat even in strong markets and reflective of the distinctive and attractive attributes of our net lease strategy. And as I mentioned earlier, in the wealth channel, we are outselling competitors by a wide margin and we continue to build out that syndicate. And we remain engaged in a number of institutional investor dialogues regarding separate accounts and upcoming launches, some of which may close during the fourth quarter.

Moving on to the business performance. In credit, we saw improving trends in deployment, with Blue Owl taking lead roles in some of the largest deals and refinancing announced or closed across the market, including Finastra and PetVet. Repayments during the quarter were elevated relative to levels seen earlier in the year, providing additional opportunities to redeploy capital at even more attractive levels. Overall, we continue to see our direct lending business expand as we meet the capital needs of an evolving marketplace. And the risk-reward opportunity presented by private credit today remains one of the best we’ve seen in our tenures as investment professionals, a sentiment that we often hear echoed back by our investors. In our GP Stakes business, we continue to witness the resilience of larger cap GPs, with these managers being the beneficiaries of market share gains during more challenging fundraising environments.

In real estate, we’ve been active in deploying capital at attractive cap rates, with Fund VI about 20% committed or deployed and have continued to monetize at meaningful spreads to our entry points. Bringing all of this together, we think of our business as Alternative Asset Manager 3.0, meaning our business offers the steady stream of management fee-driven earnings that investors have been asking for in conjunction with the robust growth that they expect and we have a greater ability to keep assets in our system due to our permanent capital. Our financial profile is very simple and durable, and doesn’t depend on realizations or capital market fees to drive earnings growth. As a premier solutions provider to a large and growing market, we think we offer a very attractive proposition of strong earnings and dividend growth underpinned by a core asset base that is exceptionally stable and we look forward to continuing to prove this model out to all types of market conditions.

With that, let me turn to Alan to discuss our financial results.

Alan Kirshenbaum: Thank you, Marc. Good morning, everyone. Thanks for joining us today. To start off, we are pleased with our third quarter and LTM results. Marc mentioned this, but I want to reiterate that this is our 10th consecutive quarter. It’s actually been every quarter since becoming a public company of both management fee and FRE sequential growth. The only alternative asset manager that has demonstrated this over the past two and a half years. And as Marc also referred to earlier, as you can see on slide five, our management fees have grown at a 42% CAGR since we became a public company. We’re talking not just very good growth, but steady, consistent, resilient growth through what has obviously been a very challenging and volatile market environment.

So let’s go through some of the key highlights of our LTM results through September 30th. Management fees are up 32% for the LTM period versus a year ago, and 93% of these management fees are from permanent capital vehicles. FRE is up 26% for the LTM period versus a year ago and our FRE margin is right on top of our 60% target, which we continue to expect to be the target for the next few years. And DE is up 28% for the LTM period versus a year ago. Now I’d like to spend a moment on our fundraising efforts. As you can see on slide 12, we raised $2.9 billion in the third quarter and over the last 12 months, we raised $14.5 billion. I’ll break down the third quarter numbers across our strategies and products. In credit, we raised over $2.1 billion.

$1.2 billion was raised in our diversified and first-lien lending strategies, including over $900 million raised in our wealth distributed credit income BDC, OCIC, returning to a pace we haven’t seen since the first half of 2022. And approximately $1 billion was raised in our tech lending strategies, including approximately $300 million raised in our wealth distributed tech lending BDC, OTIC. In GP strategic capital, we raised approximately $100 million during the third quarter and in October, we closed on approximately $400 million for a GP Stakes co-investment vehicle with a longstanding and valued partner, which will invest side by side with our fifth and sixth GP stakes funds. In real estate, we raised approximately $700 million, approximately half of that in our sixth vintage of our real estate strategy and the other half in our wealth distributed non-traded REITs, ORENT.

We have now raised over $2 billion of equity in ORENT since its launch a year ago, primarily through just one wire house and during what has been an exceptionally challenging environment for real estate. So we’re pleased with those results. And since May, we have launched ORENT on a few additional platforms and have some meaningful launches ahead for the fourth quarter and into 2024. As Marc alluded to earlier, we continue to see strong institutional interest in our products and we are expecting a strong finish to the year in the institutional channel. As we have discussed throughout the year overall, as we head into the end of 2023, we continue to see fundraising tilting institutional for the year. In the wealth channel, we have continued to see solid interest in our strategies with steady increases again in our fundraising levels quarter-over-quarter and we believe that will continue to build on itself through the end of this year and into next year.

We are very excited about where we can be next year. All in all, we’ve raised over $36 billion of fee-paying AUM since January 1, 2022. When I think about fundraising overall, we’ve always talked about how permanent capital differentiates us, because assets not leaving the system means that we have higher growth for the same amount of fundraising. Said another way, we keep more of the capital we raise than our peers. Putting some numbers around that, for approximately every $5 of fee-paying AUM inflows we bring in, we see just $1 going out in the form of distributions or redemptions. For our peers, on average, every $2 raised is met with $1 leaving their system, meaning half of their fundraising covers assets that are being paid out to investors in one form or another.

That’s a huge difference. It’s a big advantage for us. In addition to the staying power of existing AUM and the benefit of ongoing fundraising, we have substantial embedded earnings that we will unlock over time. AUM not yet paying fees was $12.6 billion at September 30th. This AUM corresponds to an expected increase in annual management fees, totaling over $175 million once deployed. And as many of you will recall, we have over $200 million of management fees in aggregate that will turn on upon the listing of our private BDCs over time. We believe, in part because of these things and in part because of our permanent capital, we have a higher quality of earnings. Moving on to our credit platform, we had gross originations of $4.4 billion for the quarter and net funded deployment of $2.1 billion.

This brings our gross originations for the last 12 months to $13 billion with $7.4 billion of net funded deployment. So as it relates to the $9.3 billion of AUM not yet paying fees and credit, it would take us a little over one year to fully deploy this capital based on our average net funded deployment pace over the last 12 months. With that said, as Marc commented earlier, we have been seeing a considerable uptick in pipeline activity in our direct lending platform and believe the fourth quarter could be a much bigger quarter for deployment than previous quarters this year. Although the impact of management fees in 2023 will be nominal, it’s a great place to start 2024. Our credit portfolio returned 4.1% in the third quarter and 17.4% over the LTM, while annualized realized losses remain approximately 6 basis points on a gross basis and have been fully offset by realized gains.

Rated average LTVs remain in the low 40s across direct lending and in the low 30s specifically in our tech lending portfolio. For our GP strategic capital platform, total invested commitments for our fifth GP Stakes fund, including agreements in principle, are approximately $11 billion of capital with line of sight into about $2 billion of opportunities, which if all signs would bring us through the remaining capital available in Fund V. And performance across these funds remain strong with a net IRR of 23% for Fund III, 46% for Fund IV and 21% for Fund V, all of which compare favorably to the median returns for private equity funds of the same vintages. And in our real estate platform, deployment activity remains robust with over $1 billion deployed during the quarter.

And our pipeline of opportunities remained strong with over $4 billion of transaction volume under letter of intent or contract to close. With regards to performance, we achieved gross returns across our real estate portfolio of 2.4% for the third quarter and 13.8% for the last 12 months. Okay, let’s wrap up here with one closing thought, dividend growth. This year, we will have posted dividend growth of 22% over last year and since becoming a public company, we have achieved a 28% CAGR for our dividend, the highest in the public alternative asset manager space and we feel this is truly reflective of how we have grown our business. Dividend growth is our north star. It reflects our pace of growth, but also informs about the quality of the earnings underlying that growth and the confidence we have in the staying power of those earnings.

It’s a metric that captures all aspects of our business, including fundraising, deployment, revenue growth, embedded future earnings and so on. And for that reason, it’s one of the metrics that we think investors should be most focused on for us. Thank you again to everyone who has joined us on the call today. With that, Operator, can we please open the line for questions?

See also 12 Stocks that Could Skyrocket According to Investment Newsletters and 30 Most Interesting Cities in America.

Q&A Session

Operator: Thank you. [Operator Instructions] Thank you. Our first question comes from the line of Craig Siegenthaler from Bank of America. Please go ahead with your question.

Craig Siegenthaler: Good morning, Doug, Alan. Hope everyone’s doing well. Following Alan’s comments around a strong finish to 2023 in the institutional channel, we wanted to get your perspective on the quarterly inflow of $1 billion and how we should think about the level of institutional fundraising over the next few quarters, actually especially with a first close in GP Stakes VI by December 31, especially?

Marc Lipschultz: Hey, Craig. This is Marc. Thank you for the question. Look, this quarter is — quarter four is expected to be a strong one from a fundraising point of view across wealth and institutional. We’re seeing terrific strength in wealth continue to grow there. As you know, we’ve been the number one net fundraiser in the market and we continue to see substantial growth as we head into this month and this quarter. And then institutional as well with GP Stakes VI, we do expect to do our first close in the fourth quarter. And so I guess it leads probably to a broader point, which is to call it what it is, look, we expect fourth quarter to be very strong. This quarter, the timing between when things close for us is a little less predictable.

We just don’t run as many funds. So we don’t like to get either overexcited about a particularly strong quarter or overly concerned about a quarter that’s a little bit lighter. We look forward to long-term strong predictable dividend growth. We just don’t run as many funds, as you know and we don’t expect we will. Today, we have the highest fee rate in the industry. We run products where we are going to deliver superior risk returns and where we can build true scale, as you know, in really just about everything we do. We’re a market leader, if not the singular market leader and that’s going to continue to be our center of gravity. What we want to do is grow FRE and grow dividends, and of course, did that again this quarter, and we plan to do it again next quarter and keep on keeping on in that regard.

So between wealth institutional and having a flagship product back in the market in Q4, we do anticipate it being strong.

Craig Siegenthaler: Thanks, Marc.

Marc Lipschultz: Of course. Thank you.

Craig Siegenthaler: Just for my follow-up, we were looking for an update on Oak Trust’s fundraising trajectory. So I was wondering if you could share how many large retail platforms it’s on today. And if you have line of sight into more platform additions over the near-term. And any other comments around its net flow potential would be helpful, too? Thank you.

Alan Kirshenbaum: Sure. Thanks, Craig. We are currently live on three platforms, three large platforms. We added one currently in the fourth quarter and we anticipate coming on one or more additional large platforms in one queue. The trajectory continues to look strong, again, in the face of incredible headwinds in the world of real estate, and certainly, relatively speaking, very, very strong flows that we’ve seen to-date. If you recall, we’ve raised about $2 billion primarily from really one wire house platform in the face of a number of things that have happened over this past year, and in the face of strong headwinds, as I said, in real estate writ large. So we continue to be cautiously very optimistic about continued trends up and to the right in what we can do with our ORENT product, in particular, in 2024 and forward.

Marc Lipschultz: I’ll just add something to that and I — linking kind of the two comments, my comment and Alan’s comment, together. ORENT’s a great example of a truly distinctive product in the real estate space and one where we see really substantial long-term potential and growth. It is a far more durable product. We continue to generate extremely attractive positive returns in ORENT during markets where people are maybe a little less discerning about risks, those distinctions don’t appear significant. Then you get into a world of uncertainty and products that are really built for durability, which is the hallmark of what we do at Blue Owl, really sing. And that is in no small part why ORENT is by far the number one net fundraiser in the market and we are continuing to grow at a time when the word real estate is out of favor and that’s exactly what makes the opportunity for ORENT and for us so substantial because we’re delivering excellent returns in that market and frankly originating at really attractive cap rates with outstanding counterparties.

So that is an area where I think you’ll continue to see us. When we look forward, we think it’s one of the most exciting areas we have. We see it on the institutional side, frankly, as well. We have already closed $4 billion for Fund VI, which was our target. We’ll hit our hard cap of $5 billion and that’ll be double the size of our last fund. And I’ll mark it again where everyone else in real estate is going the other way. That’s that kind of durability, predictability and product differentiation that’s going to continue to be our hallmark and I do think ORENT in particular will be an extraordinarily attractive growth engine for us. It produces a great yield with great predictability and stability.

Craig Siegenthaler: Marc, Alan, thank you.

Alan Kirshenbaum: Thank you, Craig.

Marc Lipschultz: Thank you.

Operator: Thank you. Our next question comes from the line of Alex Blostein from Goldman Sachs. Please go ahead with your question.

Alex Blostein: Hi. Good morning. Thanks for the question. Actually, a question for Doug, maybe going back to the first point you made in the beginning of the call around some of the changes in sort of leadership priorities and how you guys are going to be spending your time. So maybe help us frame kind of what your strategic growth initiatives are that you expect to focus on over the near-term and really which one of these are you expecting to be most sort of needle moving in terms of revenue growth into 2024?

Doug Ostrover: Sure. I’m so happy I get a question. I was sitting here dying to speak. First of all, let me just say I’m not going anywhere and for better or worse, you’re going to be stuck with me for a long time. I’m incredibly proud of what we’ve built and I think we’re in the early innings of taking this business to a whole other level. And we’ve always wanted to create and I think we’re executing on becoming one of the most unique alternative asset managers. And just for everybody listening, I really plan on just spending as much time as possible with our stakeholders, our LPs and shareholders. Look, we have a number of initiatives and I’m happy to offline to go into a lot of them. But let me just give you one that I think will resonate.

About six and a half years ago, we saw a really interesting opportunity in the software space. It was a growing sector. There were no dedicated pools of capital there. We launched our first dedicated software lending product and today we have about $20 billion of capital focused on that sector. If you look what we’ve done in healthcare today, we’ve spent a lot of time working with buyout firms. We’ve done, I think, almost $14 billion of deals in the space and have a great track record. We’ve added expertise in Royalty Pharma. We’ve now — we just made a small acquisition to add life sciences expertise and we’re spending a lot of time thinking about could a dedicated healthcare product be comparable or the TAM is certainly bigger than the software space.

So that’s the kind of thing we’re working on and where I plan to spend the bulk of my time.

Alex Blostein: All right. Awesome. And we definitely look forward to still speaking with you. So my second question may be less strategic and a little bit more micro. So, Alan, I think this one’s for you. I think in your prepared remarks, you suggested that FRE margins will hover around 60% for the next several years. I guess I’m just better trying to understand, why isn’t there more operating leverage in the business that’s growing revenues at a pace that you guys have been able to put up and are likely to continue to put up over the next few years.