Blue Owl Capital Inc. Q2 FY2023 Earnings Call

Good morning and welcome to the Blue Owl Capital's Second Quarter 2023 Earnings Call. During the presentation, your lines will remain on listen-only. After the speakers' remarks, there will be a question-and-answer session. I would like to advise all parties that this conference call is being recorded. I will now turn the call over to Ann Dai, Head of Investor Relations for Blue Owl.

Thanks, operator, and good morning, everyone. Joining me today are Doug Ostrover and Marc Lipschultz, Co-Chief Executive Officers; Michael Rees, Co-President; and Alan Kirshenbaum, 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. Please note that nothing on this call constitutes an offer to sell or solicitation of an offer to purchase, and interest in any Blue Owl fund. This morning, we issued our financial results for the second 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’ve declared a dividend of $0.14 per share for the second quarter, payable on August 31, to holders of record as of August 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 results for Blue Owl, again demonstrating the steady and resilient growth that we believe sets us apart in the alternative asset management space. When we became a public company, the thesis that we laid out for our investors was a simple one. We would generate substantial growth through a variety of market environments, anchored by our base of permanent capital, and we would provide an earnings stream that looked much less volatile than peers, with earnings supported almost entirely by management fee streams. Over the past two years, markets have shifted rapidly from a zero interest rate environment and robust capital markets to over 500 basis points Fed funds rate and meaningful declines in M&A and public issuance. The world changed overnight multiple times, and many companies face sizable challenges as a result, including supply chain difficulties, inflationary pressure, and capital funding issues. Over this period, Blue Owl was able to step up and increasingly demonstrate the value of our capital solutions to a broad slab of partners. We provided necessary capital to businesses across nearly every industry in our credit business and have seen minimal credit losses as a result of our disciplined underwriting. Our GP strategic capital platform supported the continued growth of the private markets ecosystem. And in real estate, we offered crucial and scaled alternative solutions to large companies seeking liquidity and capital flexibility. It has always been our perspective that robust private markets support the health of both public markets and the broader economy. We feel these past few years have been a validation of that view. Also, over this period, Blue Owl strategies provided much needed recurring income, downside protection, and inflation hedging to investors. Our credit and real estate returns have been in the double-digits on a last 12-month basis contrasted against very volatile public markets. We believe the trust that we've built with investors is reflected in the $32 billion of fee paying AUM we've raised so far in 2022 and 2023, which compares to our fee paying AUM of $61 billion at the end of 2021, an over 50% growth. This is substantial growth in any market environment, much less the one we've faced over the past year and a half and we continue to see strong demand for our strategies. In addition, the diversification of our business between institutional and wealth channels continues to serve us well, with roughly half of our fundraising over this period coming from each of these areas. On the institutional side, last year, we completed or made significant progress towards raises for some of our larger funds such as our GP Stakes V and our second vintage of tech lending BDC. As for 2023, we'll be more diversified between separate account mandates, new product launches, and next vintages of smaller funds. In wealth, we have returned to seeing steady increases in monthly flows for our wirehouse distributed products, and we've continued to see very modest redemption requests from the small percentage of our products, which offer a quarterly redemption feature with just over $160 million requested in the second quarter or 0.5% of AUM in those products. This compares to over $1.3 billion raised in those same products, another very solid quarter of net inflows. If you take a step back to look at our flows across Blue Owl, from the first quarter of ‘22 to the first quarter of ‘23, we saw nearly six and a half times more inflows than we did outflows. For every dollar that left our system as a result of distributions or redemptions, we raised almost $6.50. By comparison, our peers on average raised just $2 for every dollar that left their platforms. During robust fundraising periods, this dynamic may not be as noticeable, but in a more challenging environment, such as the one we've been experiencing, you can clearly see that the assets we raise, which are higher fee, are also relatively stickier, and that is the advantage of permanent capital. In summary, we continue to feel very well-positioned for many different market and economic environments, as investors seek trusted scaled managers to provide safe yield and differentiated returns. We continue to see LPs growing their alternatives allocations and consolidating their asset manager relationships, and we are confident Blue Owl will be one of the beneficiaries of this long-term secular trend. All of this is captured in the steady yet extraordinary growth that we have achieved over the past two years, increasing AUM by 140% and distributable earnings by 110%. Recently, we completed a full rebrand towards a unified Blue Owl name. Going forward, the legacy brands of Owl Rock, Dyal Capital, and Oak Street will be known as Blue Owl Credit, GP Strategic Capital, and Real Estate platforms. This evolution marks another milestone in Blue Owl's journey, driving towards our long-standing vision of synthesizing multiple complementary businesses into a market-leading provider of Capital Solutions. We plan to continue adding to our capabilities, further broadening the ways in which Blue Owl can be valuable to our partners and the products that we offer to our investors. With that, I'd like to turn the call over to Marc, to give you an update on our credit and real estate businesses.

Great. Thank you, Doug. The second quarter was characterized by many of the same themes we saw earlier in the year with uncertainty around the trajectory of interest rates and pace of economic growth constraining overall market activity. In our credit business, we continue to deploy capital into high conviction, attractive opportunities providing essential capital for our portfolio companies. Over the last 12 months, we originated nearly $15 billion of loans providing crucial financing to the M&A market. During the second quarter, gross originations were $3.4 billion with $1.4 billion of repayments, allowing us to redeploy capital into attractive high yielding opportunities. Gross deployment has slowed a bit in keeping with lower market activity with U.S. M&A down nearly 40% on a year-on-year basis. However, as we've highlighted in prior quarters, direct lending has continued to occupy a larger share of the market. We believe much of the market share that direct lending has taken over the years reflects a permanent shift in borrower behavior, driven by the value of our lending proposition, namely the benefits of privacy, predictability, and partnership. Credit quality remains very strong. Despite a more challenging macro backdrop, we continue to see good revenue and EBITDA growth on average at the portfolio companies. We have not seen any meaningful change in our internal watch list, nor have we seen any material step up in amendment requests or non-accruals. Weighted average loan-to-values remain in the low-40s across our entire direct lending portfolio and the low-30s across our tech dedicated portfolio. Across the $78 billion of loans we've originated since inception, annualized realized losses have been approximately six basis points, and those have been fully offset by realized gains over that same period. With regards to performance, the direct lending portfolio achieved gross returns of 4.3% for the second quarter and 18.9% for the last 12 months. Moving on to real estate, we continue to see high levels of interest in our net lease strategy with corporate borrowing costs elevated and financing markets more challenging. Our pipeline of opportunities remains robust, with roughly $3.8 billion of transaction volume under a letter of intent or contract close and a near-term pipeline of about $30 billion of potential volume. Inclusive of announced acquisition activity, we have invested or committed all of the equity in our fifth closed-end fund and have started deploying capital out of our sixth vintage, which we've already raised $3.7 billion of capital. We expect we'll reach our hard cap of $5 billion in the second half of this year, which would make this fund twice the size of the prior one. During the second quarter, we added a large wirehouse distribution partner for our perpetually offered real estate product and anticipate adding to this syndicate meaningfully through the rest of this year and into 2024. With regards to performance, we achieved gross returns across our real estate portfolio of 2.3% for the second quarter and 14.2% for the last 12 months. Despite the substantial increase in interest rates, we continue to buy assets with a significant margin of safety to where they trade on a marketed basis and monetize meaningful spreads to our entry points, notable during a period when many in the industry are facing challenges in this regard. To contextualize this, during the second quarter, we've sold or signed letters of intent on over $150 million of assets at an average cap rate of 5.6%, achieving net IRRs of 30% and net MoICs of 1.7 times. Taking a step back, what we've been able to achieve so far with our real estate business is indicative of our playbook for future strategic M&A and how we look to create value for our shareholders. When we acquired this business, it had about $8 billion of fee paid AUM, and a year and a half later, we've achieved 60% growth. As I mentioned earlier, we expect to raise a next vintage fund, double the size of the prior one. In addition, we've launched a wealth-distributed product in scale raising $1.7 billion in under a year despite asset class headwinds and outflow dynamics for our pure products. Over time, we expect this will be a tremendous growth vertical for Blue Owl, and we think this has a lot to do with our decision to approach real estate a bit differently from our peers. This is the same mindset with which we approach future M&A for Blue Owl, to find parts of the market that are less crowded, where we can create unique value for our investors and accelerate growth and scale by bringing businesses into our ecosystem. With that, let me turn it to Michael, to discuss GP Strategic Capital.

Thank you, Marc. Our GP Strategic Capital business continues to serve as an important resource for the private market ecosystem, providing growth capital to some of the largest and most diversified alternative asset managers. Most recently, we announced the minority investment in Stonepeak, a leading alternative investment firm specializing in infrastructure and real assets with over $55 billion in AUM. With a robust and expanding pipeline, total invested commitments for our fifth GP Stakes fund including agreements in principle, have reached approximately $11 billion of capital or roughly 85% of the funds, and we currently have a line of sight into approximately $2 billion of new opportunities, which if all signed, would bring us through the remaining capital available in Fund V. Our focus on larger firms within the alternatives universe has positioned our platform well within the current fundraising environment. Of note, one of our managers, CBC, recently closed its latest flagship fund with 26 billion euros of commitments, surpassing its fundraising target and its private equity's largest ever buyout fund. Performance across our GP Stakes funds remained strong with a net IRR of 24% for Fund III, 49% for Fund IV, and 28% for Fund V, all of which compare favorably to the median return for private equity funds of the same vintages. Looking ahead, we are looking forward to launching conversations on our sixth vintage fund in our GP Stake strategy and continue to anticipate a first close in early 2024. Finally, I would like to address the rumors and speculation that have been in the press. I am 100% committed to Blue Owl’s long-term success and will continue leading the GP Strategic Capital business. As a show of alignment for the long-term, I have elected to receive 100% of my compensation for 2023, 2024, and 2025 in Blue Owl equity. I look forward to continuing to drive value for our shareholders. With that, I will turn things over to Alan, to discuss our financial results.

Thank you. Good morning, everyone. I'm going to start off by walking through the numbers for this quarter and the last 12 months, 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 second quarter and LTM results, another quarter of strong industry-leading growth. Some key highlights of our results through June 30 include total revenues up 37%, FRE up 34%, DE up 32%, and our dividend is up 33%, all on an LTM versus a year ago basis. All of this was because we built our business differently than our peers. We built our business with the foundation of permanent capital and steady predictable management fee cash flows. So to step through our results through June 30 in more detail, management fees are up $459 million or 46% for the LTM period versus a year ago. Broken down by strategy, credit management fees are up $272 million or 53%. GP Strategic Capital management fees are up $123 million or 28%, and real estate management fees are up $64 million or 175%. Keeping in mind, we acquired our real estate business at the end of 2021, so we don't have a full year in our prior year LTM results. This is obviously very considerable growth that we've been able to accomplish. Compensation expense came in just under 28% comp-to-revenue for the LTM period. Overall, we are trending in-line with our guidance of our comp expense ratio sitting in the 25% to 30% comp-to-revenue range, likely towards the higher end of that range due to further growth and investment in our business. G&A expense came in at $192 million for the LTM period and $39 million for the quarter. Overall, we are trending in-line with our guidance of G&A expense trending up a little in 2023 from last year, with placement costs down and regular way G&A higher, driven by the overall growth of our business. FRE is up $227 million or 34% for the LTM period versus a year ago. So, with our comp percentage up a little, and our overall G&A percentage down a little, we continue to be right on track with our 60% FRE margin target for 2023. We announced the dividend of $0.14 per share for the second quarter. For the LTM period, we have paid $0.53 in dividends versus $0.40 for a year ago. That results in a 33% increase in our dividends. Now I'd like to spend a moment on our fundraising efforts in which the environment continues to prove challenging, but we're seeing some positive indicators, I'll talk about in a moment. As you can see on slide 12, we raised $2.9 billion in the second quarter and over the last 12 months, we raised $20.4 billion, 19% above the prior year period. I'll break down the second quarter numbers across our strategies and products. In credit, we raised over $1.5 billion. $1.3 billion raised in our diversified and first lien lending strategies, including almost $800 million raised in our wealth distributed core income BDC, OCIC. And over $200 million raised in our tech lending strategies, almost all raised in our wealth distributed tech lending BDC OTIC. In GP Strategic Capital, we raised approximately $200 million. And in real estate, we raised approximately $1.1 billion, approximately $700 million in our real estate Fund VI and approximately $300 million in our net lease trust product ORENT, our non-traded REIT. Although we had a lower level of institutional closes in the second quarter, we continue to see strong institutional interest in our products. And in the wealth channel, we have continued to see good interest in our strategies with steady increases in our fundraising goals quarter-over-quarter, and we believe that will continue to build on itself through the end of the year. Not only are the gross fundraising levels improving, but we continue to be very encouraged by the net fundraising levels we are seeing from our products that have quarterly redemption features. As Doug pointed out, we are still seeing strong net positive inflows with these products, with gross inflows for the second quarter running at about eight times the level of outflows for the small set of products we offer a quarterly redemption feature. All in all, we've raised approximately $32 billion of fee-paying AUM since January 1, 2022, and our overall fee rate is significantly higher than our peers at over 150 basis points versus our peer average of below 100 basis points. As we discussed on last quarter's call, overall, as we progress through 2023, we continue to expect fundraising to tilt institutional, although as I've said previously, timing is always challenging to predict. As it relates to our AUM metrics, AUM grew $30.5 billion to $149.6 billion, a 26% increase from the second quarter a year ago. Fee-paying AUM grew $16.1 billion to $93.6 billion, a 21% increase from the second quarter a year ago. Both metrics are driven primarily by capital raised and deployed in credit. Capital raised in GP Stakes Fund V and capital raised in real estate Fund VI. Permanent capital grew $23.1 billion to $118.6 billion, a 24% increase from the second quarter a year ago. As a reminder, 93% of our management fees are from these permanent capital vehicles. AUM not yet paying fees was $12 billion, including $8.1 billion in credit, $1.1 billion in GP Strategic Capital, and $2.8 billion in real estate. This AUM corresponds to an expected increase in annual management fees, totaling over $170 million once deployed which equates to a fee rate of 1.4%. In credit, we had gross originations of $3.4 billion for the quarter, and net funded deployment of $1.6 billion. This brings our gross originations for the last 12 months to $14.6 billion with $9.2 billion of net funded deployment. So, as it relates to the $8.1 billion of AUM not yet paying fees in credit, it would take us approximately one year to fully deploy this capital based on our average net funded deployment pace over the last 12 months. Deployment has obviously been running at a much slower pace, so there could be some upside to this. Turning to our balance sheet, we continue to be in a strong capital position. We currently have a significant amount of liquidity with an average 13-year maturity and low 3% cost of borrowing. Summing it all up, another strong quarter of growth for our business. As it relates to our 2023 goals that we spoke about at our Investor Day in May of 2022, we continue to track well against our goals of $1 billion of distributable earnings and $50 billion of fee paying AUM. We are currently about one quarter behind our original target timeline in achieving these 2023 goals, which we are very pleased with considering the market and fundraising environment we've all been in. Standing here today, we continue to see our path in achieving a $1 per share dividend for 2025, driven by continued strong FRE growth anticipated for the next two and a half years. We are very pleased with our results. We delivered exceptional growth in all of our key metrics: AUM, fee-paying AUM, management fees, FRE, and DE, and expect to see continued strong growth for the foreseeable future. Thank you again to everyone who's joined us on the call today. With that, operator, can we please open the line for questions?

Your first question comes from Glenn Schorr with Evercore ISI. Your line is now open.

Hi. Thank you. So I appreciate all the commentary. I wonder if you can help us aggregate in terms of your comments on first close for GP, the next net lease fund being twice the size. And maybe any guesstimates on private credit, maybe just lump that into next 12 months, what kind of numbers does that add up to? And then when thinking about the cyclicality of your current mix of business, how do you think about broadening the platform in an effort to reduce that cyclicality? Thanks so much.

Thank you, Glenn. I appreciate the question. Good morning. Regarding our flagship real estate product, Fund VI, we are still in the fundraising phase. We aim to reach our goal of $4 billion, but we believe we can increase that to a $5 billion closing, which would double the size of Fund V. We are very excited about this, especially given the current market conditions and real estate sentiment. For GP Stakes Fund VI, we have already exceeded 75% of our investment target. We plan to engage with investors in the latter half of this year and anticipate closing early next year. We are thrilled about the prospect of raising a significant Fund VI, backed by strong fund performance that we are eager to present to the market. On the credit side, there is considerable interest in our credit products, as discussed previously. I will now hand it over to Doug for further details.

Yes. Thanks for the question. So look, when you mentioned the word cyclical, we don't really view it as cyclical. It's really just more fundraising, it’s episodic. And when we talk about being a quarter behind, it's really, I got to get the exact number, but it’s just a few billion dollars of fundraising have a big impact on that delta. But maybe I can just address it, in a little more detail. Look, the pipeline looks really strong, and as I said, it’s hard to predict timing, but we are seeing a lot of enthusiasm for the strategies. So, let me just start maybe with private wealth and then I'll roll into institutional as well. Remember, the funds, they generate a lot of income. They're downside protected. It's definitely resonated. If you look on the wealth side for continuously offered credit products, I think we were up 32% quarter-over-quarter. Now one quarter certainly doesn't make a trend, but we're seeing a lot of positive momentum in our wealth credit strategies and we're expanding the syndicates. Real estate across the industry, I think because there have been redemptions in funds, lots of chatter about office, real estate quotes have definitely been slower, but we're starting to see some real excitement about our triple net lease strategy, and we're going to have some meaningful growth to our syndicate this quarter. So, I'm really excited, as you know, about what we can do with this product. We're seeing it on the institutional side, and I think now on the wealth side, we're going to be able to grow. Most importantly, we've had minimal redemptions across all of our products. So, in wealth, we're very, very excited about this channel. Again, it's just one quarter, but I'm cautiously optimistic. On the institutional side, we're still seeing a tremendous amount of interest in our credit strategies. But you have to remember, this is a bit of a strange quarter for us. We're not in the market with any flagship funds. And as you know, we just finished raising $8 billion of fee-paying assets at very high fees for our Tech II product. And so, the way I would think about is we will be in the market with new credit products over the next few quarters. We've already gone out, talked to investors. We're seeing a lot of interest. If I think about this quarter and last quarter, the best way to think about what we've been doing is we're really dealing with more bespoke mandates, really more SMAs. And it's really hard to predict the timing on those. And by the way, these SMAs are large, but it’s not like we have fund and we can say the timing is we're closing August 31, you have to be in. These are much more negotiated. And I think between now and the end of the year, you'll start to see some of those hit. And as Alan mentioned, we'll finish up fundraising in real estate VI. We're in the market with our continuation fund and we expect to be in the market with GP Stakes, Fund VI as well. Since I have the mic, I can't help myself. Just one last thing. I know everyone is very fixated on asset growth, but we'd like to start changing the conversation a little bit to the type of assets we're raising and why we're different. Our average fee today is about 1.6%, our average management fee. When I look across our peers, many are at 1%, but many are well below 1%. So, not every dollar raised is the same. And in addition, our capital doesn’t leave, as Alan touched on. So, we're really excited. We think the trajectory and the destination are still really strong. And I have more to say on fundraising in the upcoming quarters as we launch some of these new credit funds.

And I want to amplify one last thing, which Doug commented on earlier, but just touched on again, which is the nature of the capital. Again, just as we set out to build this business, we really did set out to build a very different kind of ALT's management firm. And I mean, in this context, as a shareholder in terms of the business model, so quality of assets, the fee rate on the assets, the value add, if you will, on the assets, really important. As is that duration, and remember we talked a little bit earlier for every dollar that leaves our system, we are raising $6.5. That's literally multiples of our peer set, and it relates to the fact that we have permanent capital, so you don't have the dollars flowing out, but we do have dollars flowing in. So, when you think about what those two things combined mean for the power and trajectory of this model, and the predictability of that trajectory, set aside any given quarter or quarter-to-quarter, but predict that the steepness of that slope and the predictability of its destination when you have the 1.6% fee rate and $6.5 being raised for every dollar that exits the system, it really is a different business model.

All right. Thank you for all that.

Our next question comes from Alex Blostein with Goldman Sachs. Your line is open.

Hi. Good morning, everybody. Hi Doug, I was hoping we could build a little bit more on the discussion around how you're thinking about building out institutional credit business for you guys. So, you mentioned SMAs, new fund launches, and obviously there's some next vintages albeit from smaller funds. So, can you help maybe contextualize what that looks like in terms of the pipeline size, LP types, kind of how that's evolved? Just a little bit more meat around the bones, could be helpful there because it's sort of opaque in the context of the whole firm. And it sounds like it could be bigger business for you guys, but some incremental color would be helpful there.

Yes. Listen, as I think about the credit business, in particular, remember in the past, we've done, which has been a good strategy, a lot of BDCs, and now we're transitioning into some more longer duration GP LP strategies. And so, the most obvious, we will be in the market with a diversified strategy really geared towards the international markets. Not going into too much detail, coming up with a structure that really works well. And then, I'm happy, we're not ready to disclose it, but just like in Tech, I think today, we are about $16 billion, $17 billion dedicated software capital. I think you're going to see us launch other industry verticals that we think could be quite large. So, a combination of moving, we're going to do other BDCs, but also introduce more GP LP funds where we can be in the market on a more regular basis. If you think about our peers, they do Fund I, the money leaves, they come back with Fund II. Our BDC is the capital doesn't leave, but there's not always the opportunity to come back with the subsequent funds. So, we'll start to build more of that GP LP sequence and more industry focused funds.

Got you. All right. Thanks for that. My second question maybe is around the real estate business, kind of a two part of there, so I apologize. But I guess, one, an update of where you guys are with adding to the syndicate. It sounded like you plan to add more this quarter and just generally in the back half. But overall flows in the retail channel for the real estate products have been a little softer, maybe comment in your expectations there. And then when we look at the Fund VI, where are you guys in terms of deployed capital in that fund and how frequently do you ultimately think, the LP GP style funds there could be coming back to the market, seeing how you guys I think are one of the largest players in that market and you could deploy that capital pretty quickly.

So, let me start with the syndicate. I think we are planning to launch on two very large wires. As you know, we've been primarily in one wire, where we've had really meaningful market share there, and we are about to launch on two new wires. I think we've raised about $2 billion, just under $2 billion to-date. Look, I think this is a really exciting product. It's tax advantage. It generates high current income. I think you heard in our comments, even in this rising rate environment, we've been able to sell assets and generate meaningful capital gains. So, I'm really optimistic about where we can take this product on the wealth channel. And, over the next couple of weeks, hopefully, we'll announce who the two big wires are, but we're basically done there. On the institutional side, I'll let Marc comment on where we are in terms of deployment and when we can be back in market.

It's a favorable environment for triple net lease real estate. From a fundraising perspective, this area remains attractive due to its predictability and stability. As corporate costs rise and uncertainty over capital availability increases, many companies see triple net lease as an excellent option. Regarding Fund VI, we have $3.8 billion in the pipeline. If we reach our $5 billion target, that would give us $10 billion in purchasing capacity, and the $3.8 billion in signed agreements is significant. We are also looking at a broader pipeline of $30 billion. While we are focused on raising Fund VI and not discussing Fund VII, we have a strong market position in triple net lease for high-quality, investment-grade clients, and interest in both the product and capital utilization is increasing. This aligns with the understanding that not all real estate or investment strategies are equal. Our approach at Blue Owl is to minimize risk, reduce volatility, and provide consistent or improved returns with less risk. The performance of our triple net lease business over the past year highlights this, delivering a 14% return in a challenging market.

I would just add, Alex that all three of our platforms have very strong growth that we've experienced since our IPO and for the foreseeable future. We expect that to continue the real estate platform. We continue to expect to have the strongest growth of the three platforms.

All right. Thanks so much.

Your next question comes from Craig Siegenthaler with Bank of America. Your line is now open.

Thank you. Good morning, Doug, Alan. Hope you guys are doing well. My question is on the international markets. Asian Sovereign Wealth Funds, European Pension Plans, Asian Private Banks, it seems like you have a lot of upside potential with these very large pools of capital. So, including and excluding the potential for GP LP drawdown funds, which you just commented on, can you provide your perspective on current penetrations and the total growth potential for Blue Owl with non-U.S. investors?

Good morning, and thank you for the question. I believe you are correct; this represents a significant opportunity for us. I spoke to the firm last night regarding this matter. We are genuinely beginning to observe substantial penetration in Asia and the Middle East. While I don’t want to get ahead of ourselves, as we approach the completion of Fund VI in real estate, I anticipate that a large portion will come from international investors, which is certainly a key area of focus for us. We have invested considerable resources in expanding our team across Asia, particularly in Korea, Japan, Hong Kong, and Singapore. To address your question, I am confident that we will capture more than our fair share from those markets.

Thanks, Doug. My follow-up's a quick one. How many large wealth management platforms should we expect Oak Trust and ORCIC to be on by year end?

I think the answer to that, Craig, is we are starting from one on the real estate side. We definitely expect to see significant increases over the next six to 12 months. It's a bit harder to predict for year-end. We have a couple of new ones that we are onboarding in the upcoming weeks, so we anticipate substantial growth on the real estate side. OCIC, which is a more mature product available on many more platforms, has a considerable head start compared to our real estate REIT. However, we continue to add platforms where we can in an opportunistic manner, so I expect to see a few more added in the next six to 12 months.

Yes. I think the best way to approach this is that while I can't provide a specific number at the moment, I believe we will have our products available on nearly every major platform in the market, which is quite significant. There have been a few companies that have been difficult to engage, but now they have agreed to feature one of our products. We consider ourselves to be the clear number two player in this market. As I mentioned earlier, we are excited about our progress, our market penetration continues to increase, and we remain very optimistic about our potential.

Thank you, Doug.

Thanks, Craig.

Your next question comes from Patrick Davitt with Autonomous Research. Your line is open.

Hi, good morning, everyone. First one, I imagine the pace of credit deployment is at least a part of the reason you're running a quarter behind on the DE target. So, through that lens, it does seem like we're starting to see a pickup in some bigger announcements. So, could you frame how the direct lending pipeline trended through 2Q and how you feel about second half deployment relative to one half deployment, now that it feels like things are unlocking a little bit. Thank you.

Yes, deployment is certainly a factor. While we can't ignore the impact of the M&A cycle, our share in direct lending remains strong. We believe this positions us well as the M&A cycle shifts, and we are seeing an increase in opportunities. It's difficult to predict specific months or quarters, but the trend is positive. This morning's announcement about the New Relic buyout, with Blue Owl leading the financing, highlights our ongoing leadership in the software space. These developments represent significant opportunities for us, indicating a recovery in activity, although it may not have been as abundant previously. As we approach the second half of the year, we expect this positive momentum to continue, as there is substantial pent-up demand for private equity deployment, and we are well positioned to capture a large share of it.

Thank you. And my follow-up is a little higher level. It looks like Europe could finally be picking up some share in direct lending. So, could you update us on your appetite to get much bigger there? Do you think you could do that organically, or do you think you need to buy something? Thank you.

So, let me start with, look, we love the markets we're in. The U.S. market has served very well. It's by far the most robust and largest, of course. And very important, I never ever want to miss start any conversation about credit without credit quality. And the credit quality for both the opportunities and the way we have particularly built into this market, over $78 billion of originated credit, our running loss rate is six basis points. And in software, we have never had a loss. So, I put that first and foremost in any decision we make. And that said, do agree that Europe is much like other capital markets sort of starting to follow suit with the U.S. and that presents an opportunity. I think we will look to attack it both ways. We already do a tremendous amount of business with the firm. I mean, these are all global firms and in many cases, even European-based firms. So, in our GP Stakes business, for example, we own stakes in firms all over the world, including, for example, CBC, who just raised the world's largest buyout fund. So, our network, our ecosystem certainly spans well into Europe. So, organically we already do episodic opportunities there, we readily can build organically by putting more origination resources. It's the same credit work, of course, we have well over 100 people doing credit work. So, organically, I think we can and will continue to participate or look to accelerate our participation. But we're open to an acquisition in the world of lending in Europe. It would be of course a jump start and with the right team and the right platform, we can do as we just talked about with the former Oak Street. Now, real estate business, I think we can do some pretty special things when we integrate into the Blue Owl platform. So, certainly open minded about it, but otherwise or in addition, we'll pursue it organically over time.

Helpful. Thanks.

Thanks Patrick.

Your next question comes from Brian McKenna with JMP Securities. Your line is open.

Thanks. Good morning all. It would be great just to get some more color on your new PE secondaries business. You made a senior hire earlier in the year to run this business. So, could you talk about this hire? Why now is the right time to start building out this business? And then what the opportunity is longer term in both the retail and institutional channels?

We've made several new hires recently, starting with strong leadership from Chris Crampton, who has extensive experience in the private equity industry. Since then, we've added three more team members and more are on the way. We've allocated additional internal resources and now have a comprehensive capability to seize what we believe is a significant opportunity. Specifically, in the secondary market, we're supporting our partner firms—those 600 firms we currently finance and the 60 in which we have stakes—by providing them with another private capital solution within the Blue Owl ecosystem. Many of these firms hold valuable assets. From my own experience in private equity dating back to the 90s, it's clear that once you acquire a great business, the challenge becomes selling it. Many firms prefer to retain ownership, and the GP-led secondaries, or continuation funds, offer a solution. This approach allows general partners to retain control of assets they manage well, providing liquidity as an option instead of an obligation for limited partners. It effectively meets the diverse needs of various stakeholders in private equity, which encompasses trillions of dollars in assets. Consider this: if you were a firm, which single asset would you choose to continue managing and owning to maximize your potential profits? Our strategy is to facilitate the retention of those coveted assets. This strategy is distinct because we engage with the private equity community daily, financing general partners and their portfolio companies. We're adding another viable solution within our established partnerships, encouraging firms to bring us their valuable assets so they can maintain ownership while we offer liquidity for those who prefer not to proceed. We see this as a considerable opportunity that addresses the current market needs.

Yes. And if you think about how our business our entire model is really set up to be a solutions provider. We have 650 PE firms we cover. On the credit side, we have stakes and over 60 private markets firms. And we're not in the PE business. We're not a competitor. And so, we've gone out and they've said to us, our most pressing need, as Marc was saying, is how do we hold on to our best assets longer? And we think we can come in and provide that capital. And I have to tell you, when we look at the market, when we look at the demand from these PE firms to hold on to these assets, the demand for capital is enormous. The supply of capital is de-minimis. And whenever you're in an environment, where the demand is so much greater than the supply of capital, we think we can generate outsized returns for our investors. In terms of fundraising, we are dual tracking it. We're in the institutional market. We're also in the wealth channel. Let's just focus on wealth for a minute. Think about the average investor trying to access the PE market. Maybe they can find one firm, two firms. Usually, it'll be one of the big brands. But we're going to give them a way to come in. We'll go out we're going to say these are the top 150 firms, and we're going to focus on the deal flow from those 150 firms. They'd never be able to get that kind of access. And so, we think we're going to create a better way, especially for the wealthy investor to invest in PE. And, it's early days and it's not going to have a huge impact on ‘23 numbers, but as Marc alluded to, the TAM here is very, very large. And I think if we come in and we execute and we think we can generate top quartile result, totally better. I think we can create something potentially that's going to be quite large.

Great. Thank you guys.

Thank you.

Your next question comes from Adam Beatty with UBS. Your line is open.

Thank you, and good morning. Just want to follow-up on credit deployment. On the one hand, you've got strong kind of secular tailwinds, and then as Marc mentioned, some choppy deal activity recently, I want to ask about two other aspects. One is, the slower slash episodic fundraising and, IE capacity constraint and how much that might play into the recent deployment trends and whether some of the near-term fundraising that you talked about might loosen that up. And then also just in terms of pricing and the cost of funds, whether you're seeing any hesitancy on the part of borrowers, just as that's so elevated these days. Thanks very much.

So, Adam, thank you. In terms of activity, I think the fundamental constraint activity has really been just absolute market levels of activity. Our share is high. Our role is distinctive. Blue Owl really plays a pretty special role in that capital solutions center. But at the end of the day, there’s only so much activity. The activity has been uptick in as we just talked about. We have capacity, but I will say we and the industry, it's not excess capacity, that is to say, we've talked about this before, the dry powder in private equity very much outmatches the dry powder in private credit. And so, well, I will certainly not suggest that the slower deployment in Q2 was a lack of capacity to deploy capital, I would equally say it's not as if we have excess capacity. Fundraising will continue to be very important to having adequate firepower to support the private markets ecosystem. And, as we continue to go through these disruptions in the banking system, and disruptions in syndicated markets, I think what probably all can take away is to have a healthy economy and to have a healthy capital market system, we need a healthy private lending system. Thankfully, it's very healthy today, but it can use more capital. And that's what we've been talking about and are pursuing, and by putting together GP LP format funds by accessing the foreign markets. As Doug talked about, places we just have underpenetrated over time, we think that can help us get the capital that not just that we need to pursue our business, but frankly, the market needs to have a healthy flow of capital and a healthy available leverage pool.

Yes, Marc talked about the demand from PE versus supply of capital. And I think one thing that is not discussed a lot is, the big players like ourselves who were sitting with these large capital bases, when rates were lower and M&A was robust, we could have 20%, 25% of our loans get refinanced in a quarter. So, we had so much money to deploy because you take what's refinance plus what's coming in. Today, there's very little being refinanced. There's very little M&A. And so, what we have to put to work is really just new capital coming in. So, it's a very good time. And look, the positive for us, our returns are basically on an unlevered basis, have gone from 6%, 7% to about 12%. So clearly, PE firms have to use less leverage, because the interest burden is that much greater. But look, as Marc said, its deployment is really driven by M&A volumes right now. And it feels like it's picking up, but it's too early to tell.

And to your latter question about, it is the absolute cost of capital or the higher cost of capital impacting PE appetite or activity. And I don't want to pretend I know all decision-makers decisions. But I would say at a meta level, no, at the end of the day, that's math, right. That gets into the clearing price of an asset. If you know what your cost of capital is and remember, one of the great strengths of direct lending is predictability. We tell you the terms, you know what it will cost. That's positive. Then you can price that into your investment decision. So, I think it speaks more to how you have to price equity transactions and that probably have led to the slowdown when you get these gaps between what buyers want to pay and sellers want to take. But over time, markets function, and it'll just price in this cost of capital. It will probably mean less leverage to Doug's point, and that'll probably mean lower purchase prices for certain assets, but that all can be solved by change in the numbers on the, so to speak on the page. So no, I don't think cost of capital, cost of debt is likely to provide any meaningful drag. You've got $1.5 trillion of private equity dry powder. Private equity has shown its ability to thrive in high-rate environments, low-rate environments, strong economies, weak economies, it's a good asset class, and it'll be a good asset class going forward.

Very much appreciate it. Thank you, both.

Thank you.

Your next question comes from Ken Worthington with J.P. Morgan. Your line is now open.

Hi. Good morning. Thanks for taking the questions. Maybe to follow-up on Patrick's earlier question, and in terms of activity, to what extent was April an outlier and thus a drag on originations for the quarter? And then to what extent is competition from the banks reemerging in the sponsor direct lending market? And would you expect as competition sort of reemerges that this will impact sort of pricing, and what you can kind of get on your transactions?

The value proposition for us in direct lending revolves around predictability, privacy, and partnership. While the syndicated market is important and some borrowers may secure better terms there, the definition of better varies. For private equity firms making long-term decisions, the additional cost of capital for private debt, along with increased diligence and stricter agreements, is justified when seeking partnership and capital predictability. I do hope the syndicated markets will return; however, they currently do not play a significant role in our business. The idea that alternative asset managers and banks are in opposition is puzzling. Both entities can provide multiple solutions in the marketplace. We need depth in capital to support M&A activities, and the return of the syndicated market could foster a stronger M&A environment. Additionally, there are many areas that syndicated markets can finance that we do not, such as deep cyclicals or businesses with high customer concentration. Our track record of maintaining a low annualized loss rate is due to our specific credit selection approach. We are not attempting to address every capital structure but are focused on partnering with quality firms that acquire outstanding businesses. While the banks may be slightly more open for business now, we hope they will return in full force soon. We are prepared to compete in that space, providing valuable solutions for those who utilize our capital.

Fair enough. And then just on April, was April bad enough that it impacted the overall quarter or was it really not that big an outlier?

I understand where you're coming from. I can't answer that with any precision. Our business unlike trade in markets, the rhythm is not measurable in weeks, maybe not even months, depending on the particular timeline of a transaction. So, I think it would be right for me to say, oh, okay, well, March directly impacted April. However, there is little doubt that the hangover, the malaise, the disruption of the mini banking crisis, certainly impacted markets are included in the sense that it just kind of froze up, right, the system froze up, people froze up and anything that people were deciding on by and large probably got deferred. So I know I measure could be a scientific or prescriptive is that I appreciate the nature of the question. Safe to say Q2 suffered from a lot of economic uncertainty, a lot of interest rate uncertainty, and then of course, this shock to the system from banking. So, yes, it was a tough quarter for market participants, not in particular to Blue Owl, of course, but to market participants.

Okay. Great. Thank you very much.

Thanks, Ken.

Your next question comes from Brian Bedell with Deutsche Bank. Your line is now open.

Great. Thanks. Good morning. Thanks for taking my questions. Maybe one on the wealth channel and the unified branding, I guess to what extent do you think the implementation of that unified branding is, may help over the next, year or so, and interaction with advisors that you're working with currently on those platforms. And then also, does it make it easier for you to extend in new platforms? So I mean, I guess the overall question is, to what extent do you think the unified brand can enhance fundraising over the next one to two years?

Yes. Thanks for the question. Look, you raise a good and important point, and that's why we went to a unified brand. Especially in the wealth channel when we were out with different brands. I'm not sure if people even knew that it sat under one roof, but where we really saw it, was in the international markets. And look, our goal is to create a brand that's the equivalent of Blackstone, Ares, KKR, Carlyle, TPG around the world, and having three or four different brands, we just thought cumbersome. I think that ability as you think about wealth or the institutional market, the ability to cross-sell, and to understand and say that's a trusted partner. We've done well with them when we walk in with that new strategy, and we have instant credibility. So, to answer your question specifically, when we had hired a consultant about, I don't know, 18 months ago to study this for us, and we did go out to the wealth channel and all of them, all of the major wirehouses came back and said it would make their lives so much easier to have it all under one brand. So we've implemented it. We've gotten great feedback. As I said, I think it'll help us over time to really cross-sell all of our products.

That's great color. Thank you. And, maybe just one last one on the direct lending. A lot of my questions have been asked and answered there, but any view on the Basel III endgame rules that were proposed for the banking system? Is it pretty much in-line with what you expected? And so the strong secular trend there, of course, longer term for direct lending to become a larger source of bank lending, or do you see things in the proposed rules that make you even more excited longer term about your role in the bank lending?

The banking sector is experiencing stabilization and increased regulatory focus. Recently, we witnessed the consequences of making long-term commitments with short-term capital. It's important to emphasize that this isn't a competition between private lenders and banks; both play essential roles in addressing various challenges. While some may not perceive it this way, it's the reality. Ultimately, we have long-term capital from investors who seek long-term solutions, which is logical. We operate without depositors and do not pose systemic risks, nor do we have explicit or implicit government guarantees. This allows us to offer a different type of risk and capital duration. Regarding Basel III and discussions around the heightened capitalization of banks, we don't hold a specific stance. It's a landscape that complements ours, with fantastic banks functioning effectively in this country. We support a balanced banking market alongside a robust private credit market. We don’t want to delve into the specifics of the regulations, but we observe the emergence of complementary systems featuring varied types of capital, risk, and providers, all of which operate effectively. Private capital has steadily progressed in delivering sustainable solutions, positively impacting our overall economy. I'm optimistic about our future, and I'll leave it to the banks to determine the best path for their sector. I believe we can coexist beneficially, contributing positively to the overall debt markets.

Okay. Great perspective. Thank you.

There are no further questions at this time. I will now turn the call back over to Doug Ostrover.

Well, thanks, everyone. We appreciate everybody spending so much time and for the excellent questions. Hopefully, we gave you a good overview and hopefully, it comes through just how excited we are about the business and where we can take it. So, we look forward to talking to some of you after the call and staying in touch. Thanks.

This concludes today's conference call. You may now disconnect.