Blue Owl Capital Inc. Q3 FY2022 Earnings Call

Good morning. My name is Sophiana, and I will be your conference operator for today. At this time, I would like to welcome you to the Blue Owl third quarter 2022 earnings call. Today’s call is being recorded. All lines have been placed on mute to prevent any background noise, and after the speaker’s remarks, there will be a question-and-answer session. Thank you. And I would now like to turn the conference over to Ann Dai. Please go ahead.

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-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. 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 a Blue Owl fund. This morning, we issued our financial results for the third quarter of 2022, and reported Fee-Related Earnings, or FRE, of $0.15 per share, and distributable earnings, or DE, of $0.14 per share. We also declared a dividend of $0.12 per share payable on November 30 to shareholders of record as of November 21. 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.

Thank you, Ann, and good morning, everyone. Today, we reported another strong quarter of growth for Blue Owl. And as I reflect on the growing earnings power of our firm and contrast that with how our stock has traded over the last few months, I am really struck by the disparity between these two trends. So, I thought it would be an interesting moment in time to pull the lens back in the midst of this market dislocation and volatility, and really focus on what we have accomplished as a business. We entered the public markets in May of 2021 at $10 per share. At that time, we mapped out and shared with our investors an ambitious growth plan. And over the past six quarters, we have made substantial progress in outperforming that plan. As you can see on Slide 6, since our entrance to the public markets, we have grown AUM by 112%, fee-paying AUM by 96%, and permanent capital by 86%. We have also grown management fees by 93%, distributable earnings by 77%, and our dividend by 50%. We acquired a $15 billion net lease real estate business and a $6.5 billion CLO business, and we have continued to expand our already robust retail distribution. Our earnings are driven 100% with FRE, with 93% of our management fees coming from permanent capital. And over the past few weeks, we have traded below our $10 per share initial trading price, despite an earnings stream that looks like a quickly growing and highly durable annuity. We can't control the market. All we can do at the end of the day is continue to put up strong results like we did this quarter. We have made good progress towards the key milestones we highlighted in our Investor Day, raising $50 billion of fee-paying AUM across 2022 and 2023, achieving after-tax DE of $1 billion in 2023, and paying $1 per share dividend in 2025. Across the firm, we have a unique perspective on market dynamics, considering the over 300 portfolio companies we work with in our direct lending business, our over 50 partner managers in GP Solutions, and the over 100 companies we work with in real estate. The operating trends we see remain positive and durable across this cohort, despite the elevated volatility in public markets. Portfolio company revenue continues to trend positively, with an ability to pass along impacts of inflation for the most part, which supports the bottom line and therefore, each company's ability to service its debt. Our partner managers, who tend to be larger, more diversified, and more specialized alternative asset managers, continue to fundraise successfully, meeting their stated capital-raising targets. And in real estate, we continue to see 100% rent payment across our tenants. Ultimately, we believe that as we continue to prove out Blue Owl's resilient business model, it will resonate with public investors through what we expect to be a continued challenging and volatile market backdrop. Moving on to our third quarter results, we demonstrated another quarter of steady and robust growth, with management fees growing 19% quarter-over-quarter and 70% year-over-year. We had a record fundraising quarter, well diversified across institutional and private wealth channels, with $8.8 billion of new capital raised across the platform. Over the last 12 months, we have raised over $37 billion across new capital and debt, which is nearly three times greater than the prior 12-month period, and we continue to broaden our distribution footprint as we integrate and cross-sell institutionally and expand our private wealth distribution efforts globally. We had a very robust quarter of institutional fundraising, with significant capital raised across diversified and tech lending and GP minority equity stakes. Institutional accounts constituted roughly 60% of capital raised in the third quarter, including commitments from new and existing LPs across the US, Europe, and Asia, and we have raised $12.7 billion from institutional accounts over the last 12 months. In aggregate, over the past year and a half, we have raised nearly $8 billion from institutional LPs that were non-investors prior to our introduction to the public markets, illustrating the ongoing demand for our strategies and continued progress in expanding our LP base. Private wealth had another strong quarter, with $3.6 billion of inflows for the third quarter, bringing the last 12-month inflows to over $11 billion. Tender requests have remained minimal, with approximately $75 million across our entire platform. What we hear often from our fund investors is that the defensive nature of our strategies, and their focus on income generation, principal preservation, and inflation protection, are highly desirable during good markets, but they stand out even more during challenging environments. Our fundraising during the third quarter reflects the ongoing demand for these qualities and for the track record we have generated in our strategies. Looking ahead, the key messages we've highlighted over the past year, and most recently at Investor Day, should continue to resonate in today's market. The market backdrop may have changed, but we have not wavered in our long-term strategic focus. In fact, we think this market environment favors Blue Owl's business. We see meaningful runway to raise capital across institutional and wealth channels, and in our view, we have the right strategies, the right people, and deep investment expertise in place to invest that capital well. Permanent capital remains the cornerstone of our business, creating competitive advantages and supporting growth. With each successive dollar of new assets raised, we will continue to add new layers to Blue Owl’s earnings power. 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.

Great. Thanks so much, Doug. The favorable investing environment in direct lending we highlighted last quarter remained in place through the third quarter, as Blue Owl played an integral role as a liquidity provider to sponsors in a market where capital has been scarce, with lenders unwilling or unable to commit to financings. We continue to see very attractive opportunities at wider spreads and lower loan-to-values in even larger and higher quality companies than we've seen for some time and remain very selective in our underwriting standards. The healthy fundraising trends we have seen position our firm well to lead some of the biggest and most compelling deals happening in the market today, such as Anaplan, Zendesk, and Avalara. To further illustrate our current attractiveness of the opportunities we're evaluating, let me contrast what we're seeing right now to a typical deal from even a year ago. On the base rate, we're about 250 basis points higher as a result of Fed actions, and on an average deal, we might be seeing spreads about 100 to 150 basis points wider than a year ago. Combined with a stronger position to negotiate even better terms, we're looking at investments that could provide 11% to 12% unlevered yields relative to approximately 7% to 8% unlevered for a similar financing a year ago. Additionally, we're seeing sponsors putting in more equity for deals today, creating an even greater cushion for us as the creditor. We've continued to finance very large market-leading companies and year-to-date have looked at approximately 60 deals with facility sizes in excess of $1 billion, exceeding the over 40 investments of that size we evaluated in all of 2021 for the full year. Moreover, we continue to see a good pipeline despite the decline in broader industry M&A volumes. On Slide 13 of the earnings presentation, we had gross originations of $6 billion and net funded deployment of $3.9 billion for the third quarter, driving the ongoing growth of our high-quality portfolio, and by extension, management fees. For the last 12 months, gross originations in direct lending have been $26.1 billion, which is 33% greater than what we originated in the prior 12-month period. Credit quality across our direct lending portfolio remains very strong, with our annualized realized losses remaining at approximately five basis points since inception; however, that even overstates losses as we also had realized gains. In fact, we've had annualized realized net gains of positive five basis points. This means that if we take our realized losses with our realized gains together, that is a net positive for investors. Our weighted average loan-to-value remains in the low 40s across our direct lending portfolio, and in the low 30s across our tech portfolio. We're continuing to see great resiliency in the ability of the portfolio companies we finance to pass along cost increases to their end customers, limiting the impact on their margins. Turning to performance, the direct lending portfolio achieved gross appreciation of 5.4% for the third quarter, and 8.1% over the last 12 months. Now, regarding real estate, we continue to see very high levels of interest in our net lease strategy and myriad opportunities to put capital to work. As corporate borrowing costs continue to increase and markets become harder to access, the attractiveness of a net lease solution grows, and we continue to see a robust pipeline of opportunities, with roughly $6.9 billion of transaction volume under letter of intent or contract to close, and a near-term pipeline of more than $21 billion of potential volume. Inclusive of announced acquisition activity, we've invested or committed over 80% of the equity in our fifth closed-end fund, keeping us on track to hold an initial close of our real estate Fund VI this quarter. We launched our latest open-end product, the Net Lease Trust, in September through one of the large wirehouses, and we are in the process of expanding the syndicate over the coming quarters. In this environment of persistently high inflation, a net lease strategy offers desirable inflation-hedging characteristics, as the CapEx, maintenance taxes, and other expenses of owning real estate are borne solely by the tenant, and investors' responses to the structure as a result have been very positive. We're very excited about our net lease strategy generally and believe we've got a very differentiated approach. Investors in this strategy can access the advantages of the net lease structure, which targets an attractive 7% plus yield for primarily investment-grade counterparties, with beneficial tax attributes, and we think this compares quite favorably to other strategies currently available. You've heard us say this multiple times, but I believe it bears repeating: income generation, inflation mitigation, and downside protection are what fund investors are looking for in markets such as these, and our net lease strategy provides exactly that. We achieved gross appreciation across our real estate portfolio of 2.8% for the third quarter, and 22.9% for the last 12 months. These are strong risk-adjusted returns for the underlying credit profile of these portfolios, and they seem to resonate well with the investors we speak to. With that, let me turn it over to Michael to discuss our GP Capital Solutions business.

Thank you, Marc. We continue to see constructive trends in our GP Capital Solutions business. Given our scale, we are focused on the largest, most diversified managers within the alternatives universe. These managers remain the beneficiaries of a persistent trend of GP consolidation, with the big getting bigger, and the strong getting stronger. We held what we had expected to be our final close for Dyal V towards the end of the quarter, and at that time, agreed with our fund investors to allow a final $500 million of capacity to come in before the year-end. With the existing and closed $12.5 billion, and the anticipated incremental $500 million, we expect the final fund size for Dyal V to reach approximately $13 billion, relative to our initial $9 billion goal. This was a very successful fundraise, characterized by a growing and diversified LP base, with over 250 investors, many of whom were new to Blue Owl products. From the Fund V fundraise, $6.9 billion was from institutional LPs, of which over half are new firm relationships. $5.3 billion was from the wealth and intermediary channels, approximately two-thirds of which are from platforms and intermediary partners that are new firm relationships. The attractiveness of such a large number of new clients highlights the opportunity Blue Owl has to continue to cross-sell and collaboratively cover additional clients across each of our three leading investment strategies. Clearly, we've been seeing strong and growing demand for our differentiated GP minority equity stakes strategy, highlighting what we believe to be a market-leading position. Fund V is a record fundraise in the GP stakes industry, at over twice the size of the next largest competitor. We've raised approximately two-thirds of all the capital allocated to GP stakes funds over the last decade. This positions us to continue deploying capital into large firms with leading track records, who we believe will continue to outperform other market players over the long run. Total invested commitments for Dyal V, net of co-investments to our investors, and including agreements in principle to close on two additional investments, will bring Fund V to $8.4 billion of committed capital, and we continue to see a relatively smooth deployment pace, with roughly $4 billion of equity committed annually for the last few years, despite large changes in economic and market conditions. The investments we make through our GP minority equity stake strategy are the culmination of many years of relationship-building and strategic conversations, making the timing of capital deployment less dependent on short-term dynamics. We remain confident in this relatively smooth deployment pace as we look ahead. Performance across Dyal Funds remains strong, with a net IRR of 23.4% for Fund III and 57.6% for our Fund IV. We're very optimistic about what the next 12 months hold for the GP Capital Solutions business. Not only is Dyal well positioned within a very small subset of firms that have the scale and capability to provide growth capital to these fund managers, but we continue to partner with managers who are the greatest beneficiaries of flows to alternatives and GP consolidation. Overall, we see ample opportunities to take advantage of the dislocation in the current market environment. With that, I will turn things over to Alan to discuss our financial results.

Thank you, Michael. Good morning, everyone. I'm going to start by walking through the numbers for this quarter, 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. This earnings call is going to sound a lot like my remarks from last quarter and the quarter before, and I suspect next quarter will sound a lot like my remarks from this quarter. We built our business with a foundation of permanent capital and steady predictable management fee cash flows. We don't have lumpy carriers of interest revenues flowing through our P&L, so we look different than our peers. We expect earnings releases this quarter, last quarter, and next quarter to continue to differentiate us in the diversified alternative industry. Let's cover our quarterly results. Our third quarter was another quarter of strong growth for our business. Management fees are up $54.9 million or 19% from last quarter, and up 70% from the third quarter a year ago. Broken down by strategy, direct lending management fees are up $24 million or 16% from last quarter, and up 50% from the third quarter a year ago. GP Capital Solutions management fees are up $29.1 million or 23% from last quarter, and up 72% from the third quarter a year ago, and real estate management fees are up $1.8 million or 10% from last quarter. So, as you can see, we had double-digit management fee growth quarter-over-quarter in all three of our strategies. FRE is up $12.8 million or 6% from last quarter, and up 48% from the third quarter a year ago. Distribution costs are driving the lower increase in FRE quarter-over-quarter, which also brought FRE margins down a little from last quarter, all in line with the guidance we provided on our last earnings call in August. We're continuing to be right on track with our 60% FRE margin guidance for 2022, but I'll cover that in a few moments. Our ratio of compensation as a percentage of revenue is roughly flat to last quarter at 27%. We announced a dividend of $0.12 per share for the third quarter, up from $0.11 per share last quarter, and $0.09 per share in the third quarter a year ago, resulting in a 33% increase in our dividend year-over-year. All of this is in line with our expectations and what we noted on our earnings call last quarter. Now, I'd like to spend a moment on our fundraising efforts as we posted very large numbers again in the third quarter. As a reminder, in the second quarter, we raised $7.2 billion, and now in the third quarter, we have raised $8.8 billion. I'll break down these numbers across our strategies and products. In direct lending, we raised $5.5 billion, over $2 billion from one of the three biggest state pensions in the US, a new relationship for us, $1.7 billion for our tech strategy, $0.8 billion for our retail distributed core income BDC, ORCIC, which has now over $5.25 billion of equity, and approximately $1 billion for other direct lending products. In GP Capital Solutions, we raised $2.9 billion. $2.7 billion was raised for Dyal Fund V, and then an additional $200 million of co-invest. That brings our total funds raised for Dyal Fund V to $12.5 billion through September 30. When you think about a run rate revenue number for the GP Capital Solutions strategy overall, I would consider that to be around $525 million to $540 million annualized, which includes all commitments raised through September 30. Not included in these fundraising or run rate revenue numbers is our ability to raise an additional $500 million through the end of this year in Dyal Fund V. In real estate, we raised $400 million, a good early outcome for the recently launched Net Lease Trust product, our first non-traded REIT, which is leveraging our best-in-class retail distribution network. That momentum continues to build nicely into the fourth quarter, and we are also planning for an initial close of our real estate Fund VI product in the fourth quarter, which we are all very excited about. As you just heard, we have had extraordinarily strong second and third quarter fundraising levels, and good momentum heading into the fourth quarter. We are not expecting record levels in the fourth quarter as we saw in the second and third quarters, but we are expecting another strong fundraising quarter. As it relates to our AUM metrics, on Slide 11, we reported AUM of $132.1 billion, fee-paying AUM of $84.1 billion, and total permanent capital of $106 billion. AUM grew $13 billion to $132.1 billion, an 11% increase from last quarter, and an 87% increase from the third quarter a year ago. Fee-paying AUM grew $6.6 billion to $84.1 billion, a 9% increase from last quarter, and a 79% increase from the third quarter a year ago, driven primarily by capital raised and deployed in direct lending, capital raised in Dyal Fund V, and when examining the growth from a year ago, the addition of our real estate and CLO businesses. Permanent capital grew $10.5 billion to $106 billion, an 11% increase from last quarter, and a 64% increase from the third quarter a year ago, primarily driven by capital raised and deployed in direct lending, capital raised in Dyal Fund V, as well as the addition of our real estate business when compared to a year ago. AUM not yet paying fees was $10.7 billion, including $9 billion in direct lending, $0.8 billion in GP Capital Solutions, and $0.9 billion in real estate. This AUM corresponds to an expected increase in annual management fees totaling approximately $140 million once deployed. As Marc highlighted earlier, we continue to have strong deployment in direct lending, with gross originations of $6 billion for the quarter and net funded deployment of $3.9 billion. This brings our gross originations for the last 12 months to $26.1 billion, with $16.9 billion of net funded deployment. Consequently, related to the $9 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. Turning to our balance sheet, we continue to be in a strong capital position. We currently have over $1 billion of liquidity with an average 13-year maturity and a low 2.9% cost of borrowing. Before getting to Q&A, there are a few last items I want to cover. For G&A and distribution costs, I’ve mentioned on previous earnings calls that we will incur larger distribution costs in the back half of this year. In the third quarter, we incurred approximately $37 million of distribution costs. Most of this was anticipated, and I had provided guidance on this last quarter during our Q&A session, but some of it, approximately $8 million was due to the much larger final closing of Dyal Fund V. The $37 million of distribution costs this quarter compare to approximately $12 million of distribution costs that were incurred in the second quarter. As I mentioned on previous calls, these are incredibly valuable dollars we're raising here, permanent capital that generates significant management fees and Part I fees every quarter, every year for our shareholders. Looking ahead to the fourth quarter of this year, we could incur approximately $25 million of distribution costs, but it’s sometimes hard to predict the size and timing of these costs. As for the third quarter, our regular wage G&A, excluding distribution costs, is slightly down from the second quarter, although I expect this line item to continue to grow in future quarters, simply as a result of the overall continued growth of our business. Regarding the financial milestones we've set guidance on, we are on track with all of them, but here's a specific update. We are right on track to achieve $1.3 billion of revenues this year, a 60% FRE margin this year, and raise $50 billion of fee-paying AUM during 2022 and 2023. Of the $50 billion, we have raised approximately $20 billion through September 30, representing year-to-date equity raised plus year-to-date debt raised for products where we earn fees on debt, less year-to-date fee-free capital. We’re on track to double our 2021 revenues of $900 million to $1.8 billion in 2023, achieve $1 billion of distributable earnings in 2023, and pay out $1 per share dividend in 2025. Regarding our dividends for 2022, we have posted a $0.10 dividend for the first quarter, an $0.11 dividend for the second quarter, a $0.12 dividend for this quarter, and we feel comfortable posting a $0.13 dividend for the fourth quarter. Since we set a target at the beginning of this year of distributing approximately 85% of DE, this has allowed us to hold some cash back for buying back our stock, funding GP commitments to our new products, and investing in the growth of our business. We continue to plan to fix our dividend for 2023, which I will talk more about in February on our fourth quarter earnings call. Reflecting on all the items I just covered, I see them as a strong message about our business model. In these times of market dislocation, volatility, and strong headwinds, we continue to demonstrate strong growth quarter-over-quarter and remain on track with all milestones we set for ourselves. Regarding share buybacks, we have been active in buying back our stock this year, particularly over the past few months. Since the beginning of the third quarter, we have bought back 4.3 million shares at an average price of $9.26 per share, for a total of approximately $40 million, representing incredible value for our shareholders. This brings our year-to-date buyback totals to 6.3 million shares at an average price of $10.17 per share, or approximately $65 million. I have commented on previous earnings calls about the rising rate environment we're in and the potential impact that could have on our business. In the third quarter, included in our management fee line, our Part I fees from our BDCs increased $16.1 million, or 35% from the second quarter. A significant portion of this was driven by higher interest rates, along with AUM growth in our newer BDCs like ORCIC and ORTF II. We're expecting additional increases in our management fee line in the fourth quarter due to continued rising rates and possible increases into next year. In summary, we're pleased with our results again this quarter, delivering strong growth across all key metrics: AUM, fee-paying AUM, permanent capital, management fees, FRE, and DE. Heading into year-end, we are excited about wrapping up our first full year as a public company, and we can't wait to report those results to you in February. Thank you again to everyone who has joined us on the call today. With that, operator, will you please open the line for questions?

Our first question will come from Alex Blostein with Goldman Sachs. Please go ahead.

Hey guys, good morning. I think that was me. Sorry, I thought - it wasn't particularly clear. So, thanks for the update. I think the question that I have for you guys is around the $50 billion fundraising target that you've reiterated through 2023. Clearly, the retail environment has gotten a bit softer for the whole industry, given all the volatility and we’ve seen sort of moderation in flows across the space. So, if we continue to be in a fairly uncertain macro backdrop, can you help us sort of fill the gaps of where the incremental fundraising is going to come from if retail falls short of your original expectations to get you to the $50 billion?

Sure. Good morning and thanks for the question, Alex. Yes, we are reiterating the $50 billion. We came out with that on our Investor Day in May. I think Alan mentioned we've raised $20 billion to date, and we'll go into this further on. We're expecting a good fourth quarter. You know we had a great third quarter. We raised almost $9 billion, and that breaks out 60% institutional, 40% retail. We don't spend a lot of time on institutional, but when we put all these businesses together, we spend time talking about having no overlap in our LP base, and that opportunity to cross-sell is just beginning. I think what you're seeing is, we are just starting to capitalize on that opportunity. I don't want to overstate it; it takes time, but it's something we're very positive on. In terms of wealth, we raised $3.6 billion for the quarter. That is in line with what we did in the second quarter, and I think it's important to point out we had virtually no redemptions or minimal redemptions in the second and third quarter. I also want to comment, with regard to wealth, that while we desire flows to be very consistent each quarter, that's just not how markets work. If you peel the onion back and consider the products we have, we believe they are far superior to what a high-net-worth investor could find in a mutual fund or anywhere in the public markets. High current income that is downside-protected. I can’t tell you exactly what the wealth flows will be quarter-over-quarter, but strongly believe over the next five years, there will be significant wealth capital flowing into the alternative markets. We're confident, and I think we’ve proved over the last few years, that we are in a position to capture a meaningful amount of those flows.

Okay, thank you.

Our next question will come from Glenn Schorr with Evercore ISI. Please go ahead.

Hi. Thanks very much. I have a question on GP stakes. In this environment, I would think the pipeline opportunity is significant because there's no other way to access, except for someone like you. So, A, if you could talk about the pipeline, and, B, if you could talk about - the inception to date on Dyal - on Fund IV is great, but it is down low to mid-double digits quarter-on-quarter. Expected in this market, but I'm curious about how you go about it. Meaning, is it a company-specific market? There’s a higher discount rate. They’re using public comps. I'm just curious how the marks work there. Thank you.

Hey Glenn, it's Michael. Thanks for the questions. We saw your Beastie Boys reference in the other note. I was hoping we would get a Guns and Roses reference this time, but maybe next time. The pipeline in GP Solutions is one built over many years. Most of the deals we're doing are the result of five to seven to ten years of conversations, and they really aren't specific to a market environment quarter-over-quarter. Our pipeline is extremely consistent. We target and have achieved about $4 billion of deployments per year, which is a consistent number when you look back several years. We plan to do several deals in the last two quarters of this year with exceptional GPs, and it's not market timing on their part or ours. I would expect a very consistent deployment pace out of GP Solutions for 2022, 2023, and 2024. Regarding Fund IV, it's performing well. If you're looking for specifics driving the price and fund performance this quarter, several stocks, public companies held in Fund IV include Blue Owl due to the original Owl Rock investment, as well as Bridgepoint. When examining the quarter-on-quarter change, it was driven predominantly by those two names that experienced mark-to-market losses over the quarter from a share price perspective. We tend to hesitate early in a fund's lifecycle to disclose IRRs because a lack of a J-curve in the early cash flows means we will have high IRRs at the outset, which probably will moderate as we deploy the fund. I wouldn't interpret a super high IRR then a decrease as a reflection on that fund's performance. We expect it to be a great cash flow generator for our fund investors over time. We don't even report Fund V’s IRR yet because it's very eye-popping and will most likely only modulate down as capital goes in the ground. However, once we reach years five, six, or seven of a fund like we have with Fund III, you'll see a more consistent IRR in the mid-20s for that fund, which will be hard to change given how much time has passed and how much cash flow is coming out of the Dyal GP stakes funds.

Okay, thanks very much. Hope you avoid the November rain.

Our next question will come from Craig Siegenthaler with Bank of America. Please go ahead.

Hey, good morning, everyone. Hope you're doing well and good to hear that you're on track with your targets. So, my question is on the credit quality migration within direct lending. From the last disclosures, it looks like ORCIC still had zero non-accruals, but across all your direct lending portfolios, what are you seeing on the credit quality front? Has there been any pickup in non-accruals? Have you needed to restructure a higher number of loans? Any early-stage delinquencies, compensation of paying kind, anything on that front would be helpful given that it looks like we’re in a recession.

Of course. Thank you. A few thoughts. Let me headline with which I know we talk about each quarter: the credit performance is the bedrock for us. It's really, really important and thankfully, we do a good job with it. For Owl shareholders, managing the capital is what matters. Performance is crucial over the long-term for raising capital. With that said, the straightforward answer is credit quality is strong. We continue to see excellent performance in our portfolio. That is to say, we're witnessing growth in revenue and EBITDA quarter-over-quarter in the portfolio, with great strength in the sectors we've selected. We operate in ten sectors that many characterize as very defensive. Look, we are definitely entering tumultuous times, and there must be a mathematical certainty that in a recession, challenges arise, although we continue to see consistent performance and very strong interest coverage. You asked a good question about early measures like accelerating requests for amendments or incremental capital. We aren't seeing that; in fact, the pace on those types of requests has been very steady. We're not ignoring the clouds on the horizon but we always plan for them. By virtue of planning and constructing our portfolio for durability through cycles, we're experiencing the benefits. Since inception, we have issued $60 billion in loans and our realized loss rate has been five basis points, taking into account realized gains, losses net of gains show a positive number in our portfolio across the platform since inception. We're monitoring closely and recognizing the tumultuous environment but notice continued strong performance.

That's great to hear. Thanks.

Our next question will come from Bill Katz with Credit Suisse. Please go ahead.

Okay, thank you very much for taking the questions. Good morning. Maybe going to try and sneak a two-part question, so I apologize for violating the code. The first part of the question is, can you give us a sense of, as you think about - I know you just did Fund V, but can you help us walk through the timing on Fund VI, just given what you talk about in terms of deployment? So, we’re staying on a $4 billion glide path. Was there anything in the third quarter in terms of catch-up fees? The second question is, as you look into 2023, how should we consider operating leverage?

Thanks, Bill. Michael here. On Fund VI, considering the $8.4 billion of Fund V committed and earmarked for deals, with our pipeline and consistent deployment of roughly $4 billion annually, we’re well-positioned to begin discussions with clients at the end of next year. We expect 2024 to be the year we start generating fees from Fund VI. There’s been no real change to that overall plan. We successfully raised a larger fund this time around than initially anticipated. Catch-up fees were $21 million. We prefer our clients to opt for a higher forward-looking management fee rather than catch-up fees. So, we see increases in overall management fee rates and relatively small catch-up fees at $21 million this quarter, given the amount of capital raised.

And Alan, could you have something else?

Bill, could you repeat your second part of the question? I believe it was on operating leverage.

Thank you, and thank you for taking the second question. So, just, as you think through moving past some of the noise in terms of the catch-up fee and the sort of upfront placement fees, which I appreciate the transitory nature of that. As we sort of think about the core operating leverage of the franchise, obviously running at a pretty high 60% to begin with, does that all incrementally drop to the bottom line, or would you consider reinvesting some of that to spur even faster growth looking beyond 2024?

Thanks, Bill. Generally speaking, I think we should continue targeting 60% as our FRE margin for our business. It's already industry-high. When blending it across all our different strategies and businesses, I think that’s a comfortable place to land.

Our next question comes from Ken Worthington with JPMorgan. Please go ahead.

Hi. Good morning. If I caught this correctly, I think you called out that you were going to continue to fix the dividend in 2023. What considerations are you thinking about when setting this level? The fact you highlighted this just sort of caught my attention. Has something changed in how you're considering the future dividend?

Thanks, Ken. Appreciate the question. Going back to our Investor Day in May, I talked about our expectation to fix the dividend in 2023 and on a go-forward basis. We believe this can open our shareholder base to investors not otherwise looking at a company with a variable dividend philosophy. There're considerations we take into account when setting that fixed dividend, like estimating DE for next year, and determining how much we want to hold back this year. As I've mentioned on previous calls, we initially targeted 85% as a variable payout on DE. We’re currently in line with that for the year, and need to consider how much we want to retain for stock buybacks, GP commitments, and other related items to set that fixed dividend. There will be more to come in February when we announce the level where we're going to fix it.

But to clarify, the idea of paying out the bulk of our earnings remains unchanged. As Alan noted, we target an 85% payout. We're looking to fix that into a more structured dividend.

Okay, perfect. I wanted to ensure I wasn't misreading your comments, thank you very much.

Our next question comes from Adam Beatty with UBS. Please go ahead.

Oh, thank you, and good morning. I want to ask about a trend or potential trend in the wealth management channel. One of the things we're hearing is that among some of the larger distributors and some of their FAs, there's an increasing appetite for exclusive products, meaning products or strategies only available at certain firms. Is that something Blue Owl is considering? And more broadly, what do you consider the pros and cons of that approach?

Thanks for the question. We are not currently seeing a trend of exclusive products. There is a preference to launch a product first on their platforms and have a period of exclusivity. However, most big firms, large wirehouses do not want 100% of capital coming from them. It's important to them to have other capital raised away from them. That said, that's not a trend we're noticing, but I agree with your point. We're focused on working with firms that can provide differentiated products. With that said, we have our diversified lending, which looks similar to other funds. However, we have a tech lending product where we're the only firm in the market with such an offering. We also have our triple net lease real estate product, which is a different take on real estate. We anticipate introducing additional products where we have virtually no competition within the wealth channel over the next couple of quarters.

Great. Appreciate the nuance. Thank you, Doug.

Our final question will come from Brian Bedell with Deutsche Bank. Please go ahead.

Great. Thanks. Good morning, folks. To stay on that retail theme, can you remind us of the wirehouses - I know you were onboarding one or two in the third and fourth quarters. Just remind us of the penetration you have in wirehouses now, or at least how it looks. When you think about the penetration within those wirehouses in terms of the financial advisors using your product, what’s the opportunity to build that? And if you don’t mind commenting on the RIA market and private banks as well. Basically, I'm trying to glean an understanding of the runway of distribution penetration that could offset or more than offset any risk-off type of pullback by retail investors.

Thanks for the question. I’ll break it down by product. We’re working with all major wirehouses but don’t have all of our products available at those wirehouses. In our diversified lending strategy, our core income, we are quite established, but there's still potential for growth. In our technology fund, we’re in a few wirehouses today, but see substantial growth ahead. We’re excited about our non-traded REIT, the Oak Street REIT. We’re currently only in one wirehouse, and expect to build out a significant syndicate in the first quarter. Regarding RIAs, we have twelve people covering that market and are actively pushing all three strategies, experiencing some success. It's important to note that developing these products doesn’t generate immediate sales; it requires time, education, and comfortability with the product. Currently, we’re in the early innings of what we can achieve. Our penetration is nowhere near what firms like Blackstone have and I believe we can reach that, although it will take time.

To add, our penetration within the wirehouses is a very minimal slice of the individual investor universe. There are power users who recognize the advantages of our products, but the majority of individual investors on these platforms remain unfamiliar. This is a considerable opportunity. While risk-off environments may slow adoption and individual orders may be lower, the diversity in wealth means it’s not a singular outcome. We're confident this area of growth is substantial. We aren’t facing redemptions but can realize significant adoption for our distinct products, thus uncovering new platforms we haven’t tapped into. We view this as significant opportunity.

And that will conclude today's question-and-answer session. I would now like to turn the call over to CEO, Doug Ostrover, for closing remarks.

Well, thanks, Operator, and thank you, everyone, for the questions. We are really pleased with our third quarter results, and we hope you can see we've built a unique firm with a steady stream of income from permanent capital. Coupled with strong growth, we believe we have a stock that’s poised to perform well. We are grateful for everyone's support and remain confident about the firm’s future. We look forward to hopefully exceeding our investors’ expectations in the future. Thank you again.

This will conclude today’s conference. Thank you for your participation, and you may now disconnect.