Blue Owl Capital Inc. (NYSE:OWL) Q4 2022 Earnings Call Transcript

Blue Owl Capital Inc. (NYSE:OWL) Q4 2022 Earnings Call Transcript February 13, 2023

Operator: Good morning. My name is Chris, and I will be your conference operator today. At this time, I would like to welcome you to the Blue Owl Q4 2022 Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will a question-and-answer session. Thank you. Ann Dai, Head of Investor Relations. You may begin.

Ann Dai: Thanks, operator, and good morning to everyone. Joining me today are Doug Ostrover, our Chief Executive Officer; Marc Lipschultz and Michael Rees, our Co-Presidents; 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-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.

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 any interest in any Blue Owl fund. This morning, we issued our financial results for the fourth quarter and full-year of 2022, for the fourth quarter we reported Fee-Related Earnings, or FRE, of $0.16 per share, and distributable earnings, or DE, of $0.15 per share, bringing total FRE to $0.57 per share and full-year DE of $0.53 per share. We declared a dividend of $0.13 per share for the first quarter payable on March 6 to shareholders of record as of February 24 and also announced a fixed dividend of $0.56 for 2023 or $0.14 per quarter starting with our first quarter 2023 earnings.

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. Today, we reported another strong quarter of growth for Blue Owl. Capping off our first full-year as a public company. Since Blue Owl’s entrance to the public markets, we have grown our AUM by 122% and fee-paying AUM by 107%, anchored largely by permanent capital. And over the past year, we have achieved over 40% growth on the key metrics we use to evaluate our business, including management fees, FRE and DE, and have maintained an industry leading margin of 60%. This extraordinary growth has been driven by robust fundraising in capital deployment, despite a very challenging period in the markets. Let me provide some color on our achievements that drove this growth. We raised $25 billion of fee-paying AUM in 2022 bringing us halfway to our $50 billion fundraising goal for 2022 and 2023.

Notably in the third quarter of 2022 alone, we raised more equity in that quarter than we had the entire year of 2021, reflecting robust demand and the expanding power of our increasingly global and integrated fundraising platforms across institutional and private wealth channels. Our strategies appeal to investors looking for positive leverage to rising interest rates, income generation with downside protection, inflation hedging and access to the positive secular trends across the alternative asset manager space. And we continue to see strong demand for these investment characteristics. Not only have we had strong fundraising trends, but our redemptions from products that offer quarterly tenders have remained de minimis with just $186 million of tenders received on the $13.4 billion of fee-paying AUM managed by those funds or less than 1.5%.

By contrast, inflows into those same products were close to $1.6 billion during the quarter. Private wealth remains a successful market for Blue Owl with healthy flows, despite a more challenging market environment. A testament to the attractiveness of our products and the relationships we’ve built in the space. In direct lending, we had gross originations of $22 billion for the year, just slightly off our pace from the prior year, despite a 20% decline in U.S. leverage loan volumes and a 42% decline in announced U.S. M&A transactions. This speaks to the increasing breadth and scale of Blue Owl’s platform, as well as the importance of direct lenders in today’s marketplace. Volatility and uncertainty have created an environment where other market participants are unable or unwilling to lend capital, despite the very attractive opportunities present today and we are benefiting greatly from that dynamic.

In GP Capital Solutions, we deployed about $4 billion of capital completing transactions with world class managers such as Dragonair, KPS, Veritas and PAI and bringing us to 70% committed for Fund V. During the fourth quarter, we held a final close for Fund V at nearly $13 billion over 40% higher than our $9 billion target during a period that many across the industry have described as a difficult fundraising environment. And in real estate, we are now fundraising for our net lease strategy across multiple product offerings and we are off to a great start. We closed approximately $2 billion for our drawdown product during the fourth quarter and are confident in reaching our fundraising target during the first half of 2023. In this current market environment, what we’re seeing is that the safety, inflation hedging, and tax advantaged yield characteristics of this strategy have resonated with investors.

And the cost of capital relative to the public markets has resonated with companies. We’re very proud of the substantial asset growth Blue Owl has achieved over the short period of time, but our goal is not to be asset gatherers, not all AUM is created equal and our focus is on raising very long dated assets with attractive fee and margin characteristics, where we can provide a differentiated experience for our investors. That is how we look to drive meaningful earnings and dividend growth for our shareholders and we believe that should translate into substantial value over time. And we look to do so in a way that is predictable and resilient to a wide range of market conditions, which is why our permanent capital base and FRE-centric model are so important.

Since our Investor Day in May, sell-side analyst’s expectations for 2022 earnings growth across our peer group steadily declined as the street adjusted its view of carried interest and other difficult to predict earnings trends. In contrast, expectations for Blue Owl were unchanged. Speaking to our differentiated financial profile, and we delivered on what we said we would do. Achieving our goal of reaching $1.3 billion of revenue in 2022. For the year, Blue Owl generated FRE growth of 46% and DE growth of 42%, while maintaining an industry leading 60% FRE margin. This is especially notable given the market headwinds present throughout the year, which impacted the larger financial sector. We have nearly doubled our dividend over the last six quarters.

And as Alan will highlight in greater detail later, we are now moving to a fixed dividend that we expect to grow meaningfully over time. Our asset base is very resilient. It’s based on permanent capital, compared to our peers who must monetize assets with turn capital and raise a new fund and hopefully larger fund, we generally hold on to the assets we have. So each dollar of incremental assets raised is additive to our capital base. This is what we call the Layer Cake model. On top of that, we have over $10 billion of AUM that will start paying fees once the capital is deployed providing incremental visibility into our earnings growth ahead. This is what we call the embedded earnings power of our business. All of this should sound familiar to those of you who already know the Blue Owl story.

Although the public equity and credit markets have been volatile, although interest rates have moved significantly this year and although inflation rose swiftly and has remained persistently high, weighing on GDP and many corporate earnings, the core goals that we outlined for you at Investor Day back in May have not changed. And for those that are just getting to know us, we think the past seven quarters as a public company have proven out the predictability, the stability, the resiliency and the growth potential of our business. Looking to 2023, we’re excited about the runway we see ahead in spite of the challenging market environment. We continue to progress towards the financial goals we laid out for our shareholders at Investor Day. We are committed to providing strong performance, attractive income solutions and downside protected returns for our fund investors.

We continue to deepen the relationships we have with our current institutional and wealth partners and build many new ones. And we continue to innovate to stay ahead of the competition and drive growth for our shareholders. The market backdrop has changed significantly since we’ve been public and continues to ship. But we think Blue Owl’s business was purpose built for this type of market. And our value proposition increases during environments such as these. That’s not to say that these are easy environments to navigate. To fund raise through or to deploy capital into, it is truly a testament to the incredible efforts of our employees the invaluable expertise we have across the firm and the benefits we’re seeing from bringing these businesses together.

Ultimately, the way I think about our business is this. We operate a capital light model focused on substantial capital return to shareholders, supported by a very stable and growing asset and fee base. Essentially an annuity with growth and in thinking about our earnings profile over the next few years, the question for us is not as it is for many companies, whether we’re going to grow, it’s how fast we’ll grow. That is the value of permanent capital and management fee driven earnings. With that, I’d like to turn the call over to Marc to give you an update on our direct lending and real estate businesses. Marc?

Marc Lipschultz: Great. Thanks so much, Doug. Throughout the fourth quarter, Blue Owl continued to play an integral role as a liquidity provider to sponsors in a market where capital has been scarce. We continue to see attractive opportunities at wider spreads and lower loan to values than a year ago, financing large and high-quality companies. In 2022, gross originations and direct lending were $22 billion, just 7% below our 2021 originations despite a meaningful drop off in industry volume. We looked at nearly 70 deals with facility sizes in excess of $1 billion well exceeding the over 40 investments of that size we evaluated in 2021. In the fourth quarter, gross originations were $3.5 billion and net funded deployment was $2.5 billion, a moderate slowdown from our year-to-date pace that reflected timing considerations and slower repayments.

We remain constructive about the deployment environment and continue to see a robust pipeline for investment. Though we don’t anticipate origination volume to look like the second half of 2021 and the early months of 2022, until there’s a broader recovery in M&A volumes. Credit quality always remains a key focus for us and we have been very stringent in our underwriting standards from day one, closing on approximately 5% of the deals we’ve evaluated since inception. We have been focused on the larger end of the direct lending market, financing companies that are key strategic players in their respective markets. In addition, we’ve largely stayed away from cyclical businesses in sectors that we view as carrying greater risk. We believe this selectivity has benefited the investors in our funds and our loan portfolio remains in very good shape.

Since inception, we have originated over $73 billion of loans with annualized realized losses of less than 5 basis points. And inclusive of realized gains, we’ve actually had annualized net realized gains of 3 basis points. Our weighted average loan value remains in the low-40s across our direct lending portfolio and in the low-30s across our tech portfolio. We’ve continued to see resiliency in the portfolio with ongoing positive revenue and EBITDA growth at the underlying companies, despite the headwinds of inflation. Now turning to performance, the direct lending portfolio achieved gross appreciation of 3.6% for the fourth quarter and 9.4% for 2022, outperforming the Leverage Loan Index by approximately 9 points and the high yield index by over 20 points for the year.

Now moving to real estate. We continue to see high levels of interest in our net lease strategy from investors and companies alike. With corporate borrowing costs elevated and financing markets choppier, the attractiveness of a net lease solution has resonated and our pipeline of opportunities remains robust with roughly $5.1 billion of transaction volume under a lot of intent or contract close and a near-term pipeline of about 24.5 billion of potential volume. Inclusive of announced acquisition activity, we’ve invested or committed nearly all of the equity in our fifth closed end fund. Persistently high inflation remains a focus for many investors driving demand for a net lease strategy with desirable inflation hedging characteristics as the CapEx, maintenance, taxes and other expenses of owning real estate are borne solely by the tenant.

Our latest open-end product, Net Lease Trust, has reached $1 billion of capital raised primarily through just one large warehouse platform and we look forward to continuing to expand the syndicate over the coming quarters. And we on the first close on our sixth drawdown fund for our net lease strategy at approximately $2 billion and expect to wrap up fundraising sometime in the first half of 2023. We achieved gross appreciation across our real estate portfolio of 4% for the fourth quarter and 20.6% for 2022. We think these are noteworthy risk adjusted returns for the very strong underlying credit profile of these portfolios. Particularly given the downside protection presented by the contractual income streams and the long duration leases. In summary, we continue to see very strong demand from investors for our income generating downside protected strategies across our direct lending and real estate businesses and we continue to find attractive opportunities to put capital work.

With that, let me turn to Michael to discuss GP Capital Solutions.

Michael Rees: Thank you, Mars. 2022 was a very successful year for our GP Capital Solutions business as we closed our fifth fund at a record $12.9 billion over 40% above our initial target. Making it the largest fund ever raised in the space. During the year, we deployed about $4 billion of capital into attractive opportunities, closing nine transactions and Dyal V across new and existing partner managers. This is consistent with our long-term deployment objectives and makes 2022 one of our most active years ever. We now have 17 partner managers in Fund V, constituting a diversified group of world class managers that we believe will grow substantially and benefit most from the growth and market share trends that shape private markets today.

Given our scale, we remain focused on the largest firms within the alternatives universe. And those are the managers that continue to raise the lion’s share of institutional and retail capital and we see this dynamic accelerate during years where the fundraising environment is more challenging. Through the third quarter of 2022, funds greater than $1 billion received roughly three quarters of the total capital raise across the industry, up from two-thirds in prior years. Total invested commitments were Dyal V, including agreements and principles, will bring Fund V to $8.9 billion of capital committed or roughly 70% of the fund. The forward pipeline remains strong and we continue to evaluate numerous opportunities that are quite attractive. Our business services platform, which provides strategic value-added services to our partner managers across key areas such as corporate strategy, talent management, ESG advisory and data science remained very active during the year.

The team at BSP supported our partner managers with growth initiatives across their businesses, assisting with recruitment efforts, advising on new product launches and M&A and working with them on digital transformation projects among others. Performance across Dyal funds remained strong with a net IRR of 24% for Fund III, 51% for Fund IV and 37% for Fund V, all of which compare favorably to the median returns for private equity funds at the same vintages. Moving to our professional sports minority investment strategy, we have sold our minority stake in the Phoenix Suns at an attractive multiple. In addition, to-date, we have closed on over $500 million of commitment to the strategy. We’re very optimistic about what the next 12-months hold for the GP Capital Solutions business.

LP demand for GP stake remains high as demonstrated by our recent Dyal V fundraise and we look forward to expanding the breadth of our investor base even further with the next funds. From a deployment perspective, we continue to see robust interest from well-known and scaled alternative asset managers. We look forward to launching conversations with investors on Fund VI later this year and are actively working to expand our LP base further. Exploring additional strategic relationships and partnerships in wealth and educating our combined institutional investor base on the benefits of GP solutions as a strategy. With that, I will turn things over to Alan to discuss our financial results.

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Alan Kirshenbaum: Thank you, Michael. Good morning, everyone. I’m going to start off by walking through the numbers for the fourth quarter and the full-year 2022, and then I’ll touch on a few other items I want to cover today. I’ll be making references to pages in our earnings presentation, so please feel free to have that available to follow along. To start off, we are very pleased with our fourth quarter and full-year 2022 results. As you can see on slide five, we are right where we said we would be. And have achieved the goals we set out for ourselves in 2022. We achieved our goal of $1.3 billion of revenue, we achieved our goal of a 60% FRE margin and we track nicely in very tough and volatile markets against our goal of raising $50 billion of fee-paying AUM by the end of 2023, by completing the year 2022 with $25 billion raised pathway towards our goal.

Some other key highlights include total revenues were up 47% year-over-year, FRE is up 46% year-over-year and GE is up 42% year-over-year. All of this was because we built our business differently than our peers. We built our business with a foundation of permanent capital and steady predictable management fee cash flows. Okay, let’s cover our quarterly and full-year results. Our fourth quarter was another quarter of strong growth for our business. Management fees are up $24.1 million or 7% from last quarter and up 61% year-over-year. When you adjust for one-time catch-up fees in GP Capital Solutions. Broken down by strategy, direct lending management fees are up $21.2 million or 12% from last quarter and up 48% year-over-year. GP Capital Solutions management fees are up $1.3 million or 1% from last quarter and up 53% year-over-year, excluding catch up fees.

And real estate management fees are up $1.6 million or 8% from last quarter. Compensation expense came in line with our expectations at 27% comp to revenue. G&A expense came in also in line with our expectations at $46 million for the quarter. For the full-year 2022, total G&A costs came in at about $170 million, placement costs being approximately $70 million of that and regular wage G&A expense excluding placement costs being approximately $100 million. As we think about 2023, we’re expecting a roughly similar level of overall G&A expense maybe slightly higher with placement costs slightly down and regular wage G&A higher driven by the overall growth of our business. FRE is up $12.1 million or 6% from last quarter and up 46% year-over-year.

Our FRE margin came in right on top of the 60% level that we’ve all spoken about on previous calls. And we announced a dividend of $0.13 per share for the fourth quarter up from $0.12 per share last quarter and $0.10 per share in the fourth quarter a year ago, resulting in a 30% increase in our dividend year-over-year. All of this is in line with our expectations and what we noted at Investor Day in May of 2022 and on our earnings call last quarter. Now I’d like to spend a moment on our fundraising efforts. We were pleased with our results for the quarter, in particular considering the strong headwinds and challenging markets the last six months. As a reminder, as you can see on slide 13, in the fourth quarter of 2021, we raised $3.9 billion and now in the fourth quarter of 2022, we raised $4.9 billion.

I’ll break this down across our strategies and products. In direct lending, we raised $1.7 billion almost $1 billion raised in our tech lending strategy and over $700 million raised in our diversified lending strategy, including almost $600 million raised in our retail distributed core income BDC, OR CIC. In GP Capital Solutions, we raised approximately $600 million as we completed the fundraise for Fund V. In terms of guidance for a run rate revenue number for 2023 for the GP Capital Solution strategy overall, I would think of that as around $550 million. In real estate, we raised $2.7 billion, $1.9 billion in our new real estate Fund VI. We generally expect to wrap up fundraising for this product in the first half of this year and we remain on track with our Investor Day goals for fundraising here.

And $800 million for our net lease trust product, our new non-traded REIT. As it relates to our AUM metrics, on slide 12, we reported AUM of $138.2 billion, fee paying AUM of $88.8 billion and total permanent capital of $110.7 billion. AUM not yet paying fees was $10.8 billion as of December 31. AUM grew $6.1 billion to $138.2 billion, a 5% increase from last quarter and a 46% increase from the fourth quarter a year ago. Fee paying AUM grew $4.7 billion to $88.8 billion, a 6% increase from last quarter and a 45% increase from the fourth quarter a year ago. Both metrics driven primarily by capital raise in deployment and direct lending, capital raise in GP stakes Fund V, capital raise in real estate Fund V1 in the REITs and when looking at the growth from a year ago, the addition of our CLO business.

Permanent capital grew $4.7 billion to $110.7 billion, a 4% increase from last quarter and a 40% increase from the fourth quarter a year ago. As a reminder, 94% of our management fees are from these permanent capital vehicles. AUM not yet paying fees was $10.8 billion, including $7.4 billion in direct lending, $1 billion in GP Capital Solutions and $2.4 billion in real estate. This AUM corresponds to an expected increase in annual management fees totaling over $140 million once deployed. As Marc highlighted earlier, in our direct lending strategy, we had gross originations of $3.5 billion for the quarter and net funded deployment of $2.5 billion. This brings our gross originations for the last 12 months to $22 billion with $14.4 billion of net funded deployment.

So as it relates to the $7.4 billion of AUM not yet paying fees in direct lending, it would take us about two quarters to fully deploy this based on our average net funded deployment pace over the last 12 months although our current deployment pace is a little slower than that. Turning to our balance sheet, we continue to be in a strong capital position. As you can see on slide 21, we currently have about $1 billion of liquidity with an average 14-year maturity and low 2.9% cost of borrowing. Now let’s spend a few minutes talking about 2023, both our P&L and our move to a fixed dividend. When we think about our P&L, we have previously stated our goal for 2023 was to generate $1.8 billion of revenue, double our 2021 revenues and would represent a 35% growth from 2022.

We have previously stated our goal was to raise $50 billion of fee-paying AUM over the course of 2022 and 2023. As I mentioned earlier, we are halfway there through the end of 2022. The market backdrop is incredibly challenging though. And what we’re seeing is a little of a mix shift in our fundraising. With some pressure on retail channels, but we’re seeing continued institutional interest. We’ll continue to update you, it’s clearly a bit fluid, but we are tracking towards the $50 billion goal. And most importantly, we have previously stated in our goal for 2023 was to generate $1 billion of distributable earnings, which would be an increase of approximately 35% from 2022. And these remain our expectations despite the very challenging market environment we are living through right now.

Now turning our focus to our fixed dividend for 2023, here’s how we thought through it. As I just noted, we expect to post $1 billion of DE in 2023. We currently have approximately $1.4 billion of outstanding shares. That math kicks out roughly $0.70 per share in distributable earnings for 2023. We feel it’s prudent from a capital allocation policy perspective to fix our dividend at $0.56 for 2023 or $0.14 per quarter to allow flexibility for capital allocation uses such as our share buyback program, funding GP commits and potential strategic acquisitions. And that comes out to an 80% distribution rate, in line with our policy of maximizing our distributable earnings payout ratio and a dividend yield over 4% based on our current share price.

Based on our $0.46 in dividends in 2022, this year’s $0.56 represents a healthy increase in our dividend of 22% year-over-year. Looking forward, we expect to significantly increase our dividend on an annual basis progressing towards our 2025 goal of $1 per share. So to wrap up here, before getting to Q&A, there are a few other items I want to cover. A final update on buying back shares for 2022. Over the course of the year, we bought back approximately 7.8 million shares for a total of approximately $81 million. On a separate note, I have commented throughout the year about the rising rate environment we’re in and the potential impact it could have on our business. As expected, and in line with our previous guidance, we saw another increase in our Part 1 fees from the previous quarter.

In the fourth quarter, included in our management fee line, our Part 1 fees from our BDCs increased $15.4 million or 25% from the third quarter. A large portion of this was driven by higher interest rates and some of it was from AUM growth in our newer BDCs like OR CIC and ORTF2. We are expecting to see some additional increases in our Part 1 fees in 2023, albeit at a much more modest level as interest rates begin to stabilize in 2023 from the large increases in 2022. Now to shift gears to taxes. So what the taxes look like in 2023? To give you some guidance here, it’s best to remind everyone about our structure, largely because the formation of Blue Owl with a taxable transaction to certain shareholders, Blue Owl now has certain tax benefits that we will be able to use for a number of years.

It’s hard to predict what those benefits are year-to-year as for 2023, you should assume an overall tax rate in the mid-single-digits. As for €˜24 and €˜25 for now, we would suggest using a low teens tax rate. Again, taxes are hard to predict, but as we go through the year, we’ll continue to update you on what future tax rates may look like. And finally, driving shareholder value. Earlier in 2022, we made a change to our voting structure which enabled us to be added to the Russell Indices and today we announced a fixed dividend for 2023. We believe that these initiatives will help drive shareholder value over time and this will remain an area of focus for us. So summing it all up, we are very pleased with how the year wrapped up. We delivered strong growth year-over-year in all of our key metrics: AUM, fee paying AUM, permanent capital, management fees, FRE and DE with each of these metrics up over 40%.

As I think about all of the items I just ran through in my prepared remarks, I see them as a very strong message about our business model. In these times of market dislocation, volatility, and overall strong headwinds, we continue to demonstrate strong, predictable, high margin growth. Thank you again to everyone, who has joined us on the call today. With that, operator, can you please open the line for questions?

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Q&A Session

Operator: Thank you. First question is from Alex Blostein with Goldman Sachs. Your line is open.

Alex Blostein: Hi, good morning, everybody. Thanks for the question. So maybe we can start off a little bit higher level given the first question just around the confidence on 2023 targets for you guys. So, obviously the retail backdrop is a bit softer and capital markets trends are not that’s helpful. There might be questions just around ability to both, kind of, get to the retail numbers, but also to recoup some of the fee waivers and see some of the fee step ups that I think were originally incorporated in your, kind of, walk back from the investor day? So maybe put some meat around the bones on kind of what gives you confidence that you can hit the targets that you guys have outlined and sort of help bridge the gap from where we are now to what the goals are?

Alan Kirshenbaum: Sure. Thanks, Alex. It’s Alan. Thanks for the question. So we continue to look at our forecast, we go through it every quarter. We refresh it every quarter. I did mention that to your question or comment about softness on the retail side, we are seeing a little bit of a mix shift where retail we think. In 2022, we saw retail raise a little more than institutional and what we’re thinking out of that $25 billion that was raised. And what we’re seeing here today is the inverse of that, which is we raised the other $25 billion in 2023 and institutional raise a little more than retail of that final $25 billion. So we are seeing a mix shift in that, I commented on that. We don’t know what the markets hold in terms of IPO markets or any of our products stepping up to full fees.

But as you know, when we turn the lights on every year, because of the permanent capital base that we have 94% of our management fees are from permanent capital. We have a very steady predictable cash flowing business. And so we are expecting based on all the inputs that go into our forecast for us to hit the $1.8 billion of revenue, the $1 billion of DE and the $50 billion of fee-paying AUM raise.

Doug Ostrover: Hey, Alex, just one comment. I just want to — I think you know this, but just remind everybody look, we raised $25 billion last year and what I would describe as a really challenging and choppy market. We’re not saying it’s going to be easy, but as we go through and take a look at what we have in the market and do a demand assessment, both retail and institutionally, we feel pretty good about hitting that number. But I think you know this assets are clearly really important to us, but our ultimate focus is on earnings. And Alan mentioned this, we feel very good about hitting that $1 billion of DE in €˜23.

Alex Blostein: Great. Thank you, both.

Doug Ostrover: Thank you.

Alan Kirshenbaum: Thanks, Alex.

Operator: And the next question is from Glenn Schorr with Evercore ISI. Your line is open.

Glenn Schorr: Hello there?

Alan Kirshenbaum: Hey, Glenn.

Glenn Schorr: So — hello. So look, I wish you had even more dry powder. Because it sounds like the investing landscape particularly on the direct lending side is pretty good. So I wonder if you could talk to — I think that in digestion in PE land for LPs is well known. Could you talk about the state of the lending backdrop, I would think given the availability of like much better yields on unlevered base is out there. There’d be a lot of demand on the institutional side and direct lending. But can we talk — put that in a package for us? And how it feeds into obviously your confidence in 2023? Thanks.

Marc Lipschultz: Absolutely, Glenn. So it’s a great question. First of all, I share your wishes. We wish we had more dry powder also in direct lending. It really is an exceptional time. 2022, the intersection of credit quality, most importantly, in a global world, as well as spreads, terms, sort of all the intersecting components is as good as we’ve ever seen. And reflects itself ultimately in the roll direct lending played in 2022 and continues to play. You take a look at the largest take private transactions all of the year, about half of them were done by direct lenders. And quite frankly of those half, we were a lead in almost every one of them. And we really think the opportunity is tremendous. We think about just looking over a year, year and a half between base rates and then some incremental spread one gets today on an incremental loan.

You go from a world of making an 8% unlevered to making a 12% unlevered to take senior secured risk where and in fact many of these were software, which we particularly specialize and lead in, you know, you are talking about loan to values in the low 30s. So all the way of reinforcing what I think your observation about the market, it’s a very attractive time for us to deploy capital. And I would say institutions get that. We are seeing a lot of interest from institutions. But because they see the risk return, being able to generate double-digit net returns to take extremely high in the cap stack risk in an uncertain world is pretty appealing. So we are seeing a lot of interest on the institutional side. And we continue to see a lot of interest on the retail side.

As Alan said, bit of a mix shift, but in many regards, yes, there’s some turbulence in the retail market, but more than anything that mix shift probably reflects the strength of institutional drive toward this asset class and you see people talking about it exactly as that as an asset class now. For many people, it wasn’t even an asset class before. So we’re very, very positive on the outlook for institutional involvement in this, again, asset class this year and beyond for that matter.

Glenn Schorr: Okay. Thanks. Sorry to hear you’re not a KB fan.

Doug Ostrover: Thanks, Glenn.