Blue Owl Capital Inc. Q1 FY2024 Earnings Call

Good morning, and welcome to the Blue Owl Capital's First Quarter 2024 Earnings Call. During the presentation, your lines will remain on listen-only mode. Later on we will have 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 Anne Dai, Head of Investor Relations for Blue Owl. Please go ahead.

Thanks, operator, and good morning to everyone. Joining me today are Marc Lipschultz, Co-Chief Executive Officer; 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's capital filings with the Securities and Exchange Commission. The company assumes no obligation to update any forward-looking statement. We'd also like to remind everyone that we'll refer to non-GAAP measures on the call, which are reconciled to GAAP figures in our earnings presentation, available on the Investor Resources section of our website at blueowl.com. Please note that nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase an interest in any Blue Owl fund. This morning, we issued our financial results for the first quarter of 2024, reporting fee-related earnings, or FRE of $0.20 per share; and distributable earnings, or DE, of $0.17 per share. We also declared a dividend of $0.18 per share for the first quarter payable on May 30 to holders of record as of May 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 Marc.

Great. Thank you very much, Ann. We reported another strong quarter of results for Blue Owl this morning with 12 straight quarters of consecutive management fee and FRE growth since we've been a public company. We're very pleased with the predictable, consistent, and robust growth we've been able to generate for our shareholders across a range of market backdrops, reflecting the benefits of our FRE-centric and permanent capital-heavy business model. Said plainly, our earnings consist almost entirely of management fees, so we're not subject to the volatility and uncertainty of revenues tied to realized gains and capital markets activity. And having long-duration capital means that very little use of our system, providing us with a resilient asset base that grows faster than our peer group for the same number of dollars raised. We think the market is starting to understand and appreciate the value of these stabilized attributes and how they contribute to our premium growth profile. On a 12-month year-over-year basis, we grew FRE revenue and FRE by 24% and DE by 20%. We're humbled to be among the leaders in these metrics across our whole peer group that includes very accomplished firms in our industry, and it's something we don't take lightly as we continue to plant the seeds for future growth at Blue Owl. Globally, demand for differentiated income-driven returns remains very strong, and we continue to see good interest in our credit, GP's strategic capital, and real estate strategies across institutional and wealth investors. During the quarter, we held the final close on our latest triple net lease fund, bringing in nearly $500 million. We raised $5.2 billion total after receiving approval to exceed our hard cap of $5 billion. This fund was the largest U.S.-focused real estate fund in 2023 and more than doubled the size of its predecessor fund, demonstrating significant investor demand despite a very challenging backdrop for real estate fund raising in general. In the wealth channel, gross flows into our perpetually distributed products reached $2.1 billion in the first quarter, 16% higher than the fourth quarter and almost double what we raised in the first quarter of 2023. And in April alone, we've raised close to $1 billion in those perpetual products. We also closed on $1.4 billion of institutional capital in our direct lending business, across separate accounts and closed for our first lien lending and strategic equity strategies, complementing the continued growth in wealth. And our new mid-cap GP strategic capital strategy is off to a very good start with over $0.5 billion raised during the first quarter. Subsequent to the quarter end, we announced two acquisitions that further expand our suite of investment offerings and broaden the markets to which we provide capital solutions. First, we made a preferred investment into Kuvare and announced our intention to acquire Kuvare Asset Management, reflecting a creative and accretive way to broaden Blue Owl's value proposition to the insurance space. The global life and annuity market is over $20 trillion in size, and an increasing number of insurance companies are looking to partner with specialized asset managers that can create better risk-adjusted returns through differentiated sourcing, underwriting, and structuring. By adding a set of more investment-grade-focused credit and real estate capabilities to Blue Owl's existing and scaled origination platforms, we can bring a more comprehensive insurance asset management solution to the marketplace. We will also benefit from Kuvare as we expect they will continue to take market share in an expanding annuities market. Acquiring Kuvare Asset Management adds $20 billion of AUM, not inclusive of incremental growth at Kuvare. I think we approached this acquisition in a very Blue Owl way, which means we came from a mindset of providing solutions rather than competing with our clients. We had no desire to become balance sheet heavy or to become an insurance company. Instead, we plan to partner with them and allow them to continue to do what they do best, underwriting liabilities while we focus on what we do best: managing assets. This solutions mentality is in keeping with what you see across the rest of our business. In direct lending, for instance, we provide financing solutions to sponsors for their portfolio companies. In GP stakes, we provide capital to the sponsors themselves. We prefer to help them grow their businesses as opposed to competing with them in those businesses. Now turning back to M&A. The second transaction we announced recently was our intention to acquire Prima Capital, an investment manager focused on real estate lending, with approximately $10 billion of assets under management. Structurally, we see an increasing need for capital to finance real estate and have been interested in expanding our capabilities in this area. Prima struck us as a great fit for Blue Owl, given its leading position, high-quality portfolio, and strong historical track record through cycles, and we expect to leverage Blue Owl's scale and expertise to accelerate expansion. Pro forma for these two transactions, Blue Owl AUM would exceed $200 billion, crossing another meaningful milestone. Now moving on to business performance. In credit, we saw a fairly constructive environment for deployment with elevated repayment activity. As a reminder, the return of syndicated market activity reflects greater market participant confidence, which, over time, will enable increasing M&A activity. We've proven we can deploy significant capital when syndicated markets are active, and we believe we're well positioned to do it again. Knowing the outsized market share direct lenders have seen over the past 1.5 years, the longer-term secular trend has been one in which sponsors have increasingly gravitated towards direct lenders for the value proposition they offer, and we see this trend continue. We see healthy sponsor appetite to deploy incremental dry powder and monetize existing investments over time and expect Blue Owl to play a meaningful role in new capital deployment and refinancings. As Alan will detail, direct lending metrics remain strong. We have had just 7 basis points annualized realized loss, which has largely been offset by realized gains. And the underlying revenue and EBITDA growth of the portfolio remains in the low double digits on average. High level, our observation is that the economy is sound and rates are likely to be higher for a while. While we would have loved for spreads to stay 100 basis points wider as they were a year ago, we believe the opportunities we're seeing today offer very compelling spreads for the risks we're being asked to take. In our GP stakes business, our partner managers continue to benefit from two meaningful secular trends: growing allocations to alternatives and GP consolidation. Collectively, our partner managers now manage nearly $1.8 trillion, giving us an unparalleled view over the alternative asset management industry. Over the past decade, we've observed significant diversification across the industry, including the emergence and scaling of notable asset classes such as private credit, as well as the expansion in the universe of investable assets for private capital. We've also seen market share accrue to the most established, largest private market managers, where our flagship funds have a leading market share. Additionally, now that we've closed on some initial capital for our mid-cap strategy in partnership with Blue Net, we also are able to invest in the most exceptional managers that were not the right fit for our existing mandate. We're ready to capitalize on a visible pipeline of differentiated managers, and we think investors are very excited about this opportunity as well. In real estate, we continue to actively deploy capital at attractive cap rates close to 8% behind our four major themes: digital infrastructure, onshoring, health care real estate, and essential retail. The capital needs in each of these areas is very significant, and we have a good line of sight into capital deployment. In addition to the success we saw with our drawdown fund raise, which is now finished, we continue to see a meaningful step-up in private wealth flows. First quarter flows in our perpetually offered net lease product were 45% higher than in the fourth quarter, as a result of the stronger production from new distribution platforms. In summary, we're pleased with the continued expansion of our existing business, and to supplement the robust growth we're already generating, we've announced some new acquisitions in areas that we find adjacent, strategic, and synergistic, which could become quite substantial in the coming years. With that, let me turn it to Alan to discuss our financial results.

Thank you, Marc. Good morning, everyone. Thank you for joining us today. To start off, we are pleased with the strong results we continue to report, with the first quarter of 2024 being our 12th consecutive quarter—every quarter since we listed—of both management fee and FRE sequential growth, the only public alternative asset manager that has demonstrated this over this period. We've been able to achieve this because of our differentiated asset base and earnings profile, with long-duration assets creating a recurring revenue profile while fundraising adds new layers to our layer cake of management fees and FRE. So let's go through some of the key highlights on an LTM year-over-year basis through March 31. Management fees are up 22%, and 92% of these management fees are from permanent capital vehicles. FRE is up 24%, and our FRE margin is right on top of our 60% target, and DE is up 20%. As you can see on Slide 12, we raised $4.7 billion in the first quarter and $16.7 billion for the last 12 months. Inclusive of debt capital, new capital raised was over $28 billion over the last 12 months. I'll break down the first quarter fundraising numbers across our strategies and products. In credit, we raised $3 billion; $2.6 billion was raised in our diversified and first lien lending strategies, of which $1.3 billion was raised in our non-traded BDC, OCIC, up over 100% compared to the first quarter of 2023. The remainder was raised across software lending and our newly launched strategic equity strategy. In GP Strategic Capital, we held an initial close of approximately $600 million for our new mid-cap strategy. In real estate, we raised approximately $1 billion, with nearly $500 million for the sixth vintage drawdown fund, bringing that fund to its final close at $5.2 billion; and over $500 million in our non-traded REIT rent, up more than 70% compared to the first quarter of 2023. We are seeing increased engagement on the distribution platforms that added our rent in late 2023 and continue to see opportunities to expand distribution globally for this product. We're pleased with the increasing breadth of fundraising across strategies and products, which will continue to expand with the expected closing of our announced acquisitions of Kuvare and Prima. In addition, we've had very few assets leaving the system, with distributions, redemptions, and capital return aggregating just 4% of our average AUM over the last 12 months. We believe this number is approximately double for our peers and could increase further for them during more active monetization environments, highlighting Blue Owl's more durable asset base. Finally, to supplement the staying power of existing AUM and the benefit of ongoing fundraising, we have substantial embedded earnings that we will unlock over time. AUM not yet paying fees was $16.8 billion as of the first quarter, corresponding to roughly $240 million of incremental annual management fees once deployed. This equates to a fee rate of approximately 1.4%. We also have approximately $135 million of incremental management fees that would turn on upon the listing of our remaining private BDCs over time. These two items alone would represent an increase of over 20% from our 2023 total FRE revenues. Moving on to our credit platform. We had gross originations of $8.9 billion for the quarter and net funded deployment of $2.9 billion. This brings our gross originations for the last 12 months to $24.9 billion, with $9.8 billion of net funded deployment. Our credit portfolio returned 3.7% in the first quarter and 17.4% over the last 12 months. Weighted average LTVs are in the high 30s across Direct Lending and in the low 30s, specifically in our software lending portfolio. For our GP Strategic Capital platform, total invested commitments for our fifth GP stakes fund, including agreements in principle, are over $11 billion of capital with line of sight into over $3 billion of opportunities, which, if all signs hold, would bring us through the remaining capital available in Fund V. And performance across these funds remained strong, with a net IRR of 23% for Fund III, 42% for Fund IV, and 15% for Fund V, which compare favorably to the median returns for private equity funds of the same vintages. In our real estate platform, our pipeline of opportunities continues to grow, with nearly $4 billion of transaction volume under letter of intent or contract to close. With regards to performance, we achieved gross returns across our real estate portfolio of over 6% over the last 12 months, comparing very favorably to the broader real estate market as a result of our distinctive net lease strategy and the timing of capital deployment. The net IRR across our fully realized funds has been 24%, which we think is impressive for essentially an investment-grade and creditworthy tenant risk profile. Okay. Let's wrap up with a few closing thoughts. On taxes, just a reminder that we expect to return back to a low single-digit rate, say, 2% to 3%, for the remainder of 2024, which should result in a roughly 5% tax rate for the full year, as I discussed on our last earnings call. In light of the recent acquisition announcements, I want to reiterate our outlook for a 60% FRE margin for the foreseeable future, investing dollars back into the business to drive long-term growth. Subsequent to the quarter end, we closed a $750 million, 6.25% 10-year bond offering. We were pleased to see such strong levels of interest, with the deal nearly 4 times oversubscribed from both investors who have been longtime supporters of our business, as well as many debt investors that are new to our need. Finally, I'd like to touch on the significant shareholder transition that we've achieved since Blue Owl went public. In May of 2021, about 10% of our shares were held by public investors. Our float was about $1.5 billion. The other 90% of our shares were owned primarily by Neuberger Berman, management, and private phase investors. Over the past three years, we have largely replaced our legacy private phase investors with long-term oriented public shareholders, and we've also seen strong demand from public shareholders for the occasional sales by Neuberger Berman over the same period. Today, we have more than a third of our total shares in the hands of public investors, increasing our float to more than $9 billion, six times greater than where we started. As for management, our lockup expired about a year ago, and there has been essentially no selling outside of charitable donations and estate planning. We're very pleased with the progress we've made in working through the technical overhang in Blue Owl stock, and think that the shifting demand-supply balance is a factor in how the stock has traded recently. With that, I'd like to thank everyone who has joined us on the call today. Operator, can we please open the line for questions?

Our first question comes from Alex Blostein from Goldman Sachs. Your line is now open.

Alex, we can't hear you.

Really nicely. You highlighted that, I think, in your prepared remarks as well. Can you pull back the layers a little bit and talk through sort of sources of increased sales? Is it same platforms, addition of new platforms? To what extent is it also including some broadening of the existing FA base within the platforms that you're already on? So just to kind of help us frame how to run rate the current pace of sales on a go-forward basis.

Alex, the very beginning of that, we didn't hear. Can you just repeat the very beginning, please? Apologies.

Sorry. Yes. So I was just asking about the wealth channel trends you guys are seeing so far in the second quarter. It looks like April 1 subscriptions were really strong. So I was hoping to get a little bit more detail around the sources of strength in terms of new products or new platforms rather or sort of expanding footprint within the existing platforms and how to think about the run rate on a forward basis.

Thank you, Alex. Wealth continues to perform strongly. As you know, we have spent nearly a decade building our platform, and we now have a solid embedded position with several products that are growing through increased usage. We also have new products that are expanding as they enter more platforms. In the wealth segment, we're seeing increased adoption, with more financial advisors and clients utilizing our tech income products. This positive cycle is evident across many platforms where we’ve achieved impressive results for investors. More financial advisors are realizing how effective our products are as a core allocation. In credit, the primary growth is driven by more financial advisors and customers engaging with our offerings. There's significant room for growth since our penetration is still low. When we dive deeper into the specifics, such as sales data and client engagement per financial advisor, we become very optimistic about future opportunities. The macro numbers also support this, especially when comparing alternative investments to the expansive retail market, regardless of how it’s defined. As a market leader in the credit platform, we’re at a very early stage and have been achieving excellent results. Real estate presents another opportunity, demonstrating the benefits of deeper penetration. We're still in the early stages of expanding our real estate platform this year, with plans to add several new platforms, which is broadening our audience. Our product offers a 7% tax-advantaged return plus appreciation in a market where many are facing negative returns. We are not only growing but adding to our offerings. The trend is clear: we are seeing considerable growth in wealth as part of our ongoing product expansion. Additionally, in April, we raised $1 billion in continuously offered products. It's important to recognize that not all capital raised holds the same value. When we raise $1 billion in high-quality products, it significantly differs from raising the same amount in commoditized products. To illustrate this point, the revenue generated from our $1 billion is like raising $10 billion in a typical commoditized product. Thus, our focus remains on high-value products, and this distinction is crucial in our discussions about raised capital.

Next question comes from Brennan Hawken from UBS. Your line is now open.

We've heard a bit more recently about spread compression in private lending markets. So I was hoping to hear your perspective on what you're seeing on the ground. And if we are seeing some spread compression, what you think that might mean as far as the outlook for FRPR that's begun to come through on the P&L for you?

Absolutely. There's been some compression in spreads, which is a fact. A year to a year and a half ago, there was some expansion, and before that, spreads were tighter. Over the course of our approximately $100 billion in originations, it’s clear that spreads fluctuate. The key to our business is our strong focus on credit, principal preservation, downside protection, and delivering strong income results. We currently have a 7 basis point realized loss rate, indicating that we are executing our strategy effectively. Our growth in business enhances our fee-based income, and we are committed to delivering on our credit promise, where we excel. Unlike many alternative products that depend heavily on timing for entry and exit to achieve great returns, we approach this differently. Instead of focusing solely on timing, I see it as a range where the critical factors are the quality of the credits and the returns we receive. The good news is that although spreads have compressed, they are still attractive. We are currently at a 532, 90-day LIBOR. I actually prefer the wider spreads we had a year and a half ago, but what we see now is not much different from three years ago when we also had attractive loans and returns. While I would always favor higher spreads, what truly matters to us is that we are earning a very good return with moderated risk, and we are confident we are operating within that range. Regarding FRPR, we are also in a tight band, and I’ll hand that over to Alan.

Thank you, Marc. Brennan, I guess what I would add to that is a few things. We continue to expect to see our Part 1 fees coming up quarter-over-quarter and year-over-year as we go through 2024. There's a series of reasons for that. One, Marc just touched on the very strong fundraising we continue to see in our non-traded products like CIC and TIC. We continue to deploy good capital in products like OTF 2. So as we continue to deploy fundraise, we're going to continue to see strong increases in Part 1 fees. Also, if you go back to the end of last year, where the SOFR curve was and where it is today, throughout, let's say, 2024, we're still averaging, let's say, 20 basis points or 30 basis points higher. And in 2025, where the curve is, we are 60 basis points to 80 basis points higher today than where we were back in December. So we will continue to see strong returns on our Part 1 fees, at least we would expect to because of all these things.

Our next question comes from Glenn Schorr from Evercore ISI. Your line is now open.

Big picture question on credit. Obviously, direct lending, you're an animal; you're expanding in health care infrastructure. You got expanding real estate lending, and Kuvare brings investment grade. Yet, I'm still going to ask the question of, do you feel like you have enough across private credit broadly? And maybe that's just really a question on what do you already have in asset-backed finance and what's your plan in terms of expanding there?

Thanks, Glenn. And it's a great question. First, I want to reinforce, we indeed consider ourselves credit animals. Thank you for that. With regard to the range of offerings, you characterize well, we certainly have built out adjacencies that take us from diversified direct lending, that led us, of course, a long time ago now to understanding the great merits of software lending, which has really worked; it led us to first lien lending, another derivative thereof that's really worked. We now have, as you point out, with our new acquisitions with Prima, we add—it's a very strong rated real estate-oriented debt at a time when that market is deeply disrupted—with Kuvare, we add, of course, other adjacent investment-grade or stronger credit derivative opportunities. So we definitely have widened that range, and we like that. To answer your question very spot on, we have some parts of alternative credit very strongly. As we've commented, but I'll share the skin, beneath the surface, we actually do a lot of lending in areas that people don't particularly share of our large business may not focus on, but we have developed very strong skills in railcar leasing, aircraft leasing, ABL finance with Wingspire, life settlements, royalties, and health care, as you pointed out. We've done about $13 billion of loans. So there's a lot we have built organically, and we will continue to utilize that capability for both our diversified products and over time as appropriate in other specialized or asset-backed products. So we have the organic tools. Are there other areas to put it rhetorically, that we could add in alternative credit or asset-based credit? Absolutely true. So we continue to look at build, buy, and they're neither mutually exclusive nor mutually required, which is to say we've got a lot of tools to be successful in asset-based finance. We would be perfectly open to and interested in adding more tools, and we have our eyes open for that.

Our next question comes from Steven Chubak from Wolfe Research. Your line is now open.

Now that you've added both real estate debt and insurance capabilities to the platform, I was hoping you could just speak to your confidence level in hitting or approaching the dollar dividend in 2025. It might be helpful to outline the roadmap similarly to actually, Alan, how you laid it out last earnings call, just given the building block should look a little bit different than before.

Yes. Yes, thank you. Look, it is our favorite topic, as we talk about all the time, which is continued path to the dollar dividend. And sitting here today, we continue to feel the same way. We are moving right forward being in and around that dollar. And every quarter where we march forward, up into the right, to quote, I think, Glenn's title or the Blue Street continues, I think, to use yours. We move a quarter closer, and the band effectively gets tighter. When we complete steps of these, and it's not enormously complicated ladder or set of steps. But when we get things done, like this quarter, we said, look, we expect it will include strategic acquisition as part of it. We did two this last quarter. We expect we'll take other BDCs or some of them public over time. We did that with BDC, which is trading really well. And meantime, BDC trades at a premium to book. So we're slowly ticking it off in the sort of I'm going to compile, and I'll also add Brennen's title as well. We think we are the boring Blue Street moving up and to the right. So I think I've merged with proper attribution, three titles together. And that the destination, the goal is to get to that dollar, and we continue to feel good about being in and around that level. So let me turn it over to Alan to give you the building blocks to go with that.

We are on track to reach around the $1 share mark. I want to approach this from two angles. First, we have considerable embedded earnings potential within our business. There is approximately $1 billion in revenues that could increase our 2023 revenues by over 60% through three different avenues. This $1 billion represents a quarter of the $240 million we expect to gain by deploying assets under management that have yet to earn fees, which we have already raised. Additionally, we have over $200 million in BDC step-up fees, of which we activated about $80 million earlier this quarter in January. Those two elements combined could contribute nearly $0.5 billion, translating to an over 25% increase in our 2023 revenues. Furthermore, when we factor in fundraising for our GP Stakes 6 product and our two non-traded BDC products, we anticipate another $600 million over this year and the next, raising revenues by over 60%. Focusing now on the $1 a share target, as Marc mentioned, we have many exciting initiatives underway, most of which are investment-heavy and will likely be dilutive to achieving the dollar share in the short term. We are committing resources to ensure our industry-leading growth continues beyond 2025. Currently, we have three remaining objectives to reach the $1 a share target. Last quarter, we identified four actions, but one has been completed, and we have executed an accretive transaction. So that leaves us with three tasks. Regarding these three objectives, the first is to raise funds for our non-traded products at CIC, TIC, and Oren. As I mentioned earlier, we are on track and performing well toward our fundraising goals for those products. The second objective is fundraising for GP Stakes 6, which is generating significant interest, and we expect to meet our $13 billion target, so that is also on track. Lastly, the third task is to list one of the two software lending BDCs. While I won’t discuss the timing for either, we believe there are opportunities to explore in that area within this year or next. Overall, we are making good progress toward being around that $1 a share target for 2025.

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

I think they got my last name better on your call than the last one. So my question is on M&A. You've added real estate debt and insurance just this year. And I think this morning, the FT is citing infrastructure as the next lightly white space. So I wanted to get your updated thoughts on M&A and real specifically, what do you think of infrastructure equity and infrastructure debt?

Sure. Let me take a step back to outline our business, which has a very clear focus. We prioritize being deeply engaged in a specific range of products that are closely related. We have previously discussed different strategies, including the broad approach taken by many successful peers. In contrast, our approach can be seen as a specific path where we aim to be leaders in our chosen lanes. We are clearly leading in areas like triple net lease, GP Stakes, and Direct Lending, with few competitors in our space. Additionally, we've made strides in adjacent areas, such as real estate credit, where we have been exploring opportunities for a long time. Throughout our history, we have been presented with numerous real estate loans but have chosen to focus on our diversified offerings rather than pursue real estate loans directly due to tighter spreads and higher leverage compared to corporate loans. Despite this, the current market has become quite disruptive, providing a unique opportunity for us to leverage our expertise in both real estate and credit. By strategically bringing in specialists, we are well-positioned to navigate this market. With our acquisition of Prima, we gain significant capabilities, especially in handling single asset and single borrower risks. This addition strengthens our position without needing to delve into the uncertainties typically associated with real estate lending. Furthermore, in the insurance sector, we are now addressing a gap in our capabilities, enabling us to offer well-structured solutions tailored for insurance users, complementing our wealth and institutional offerings. Overall, these developments enhance our ability to deliver customized financial products to our users, without competing directly with the existing insurance industry. As for the FT article, while the title may exaggerate our focus on infrastructure, it does align with our strategy of pursuing lower-risk opportunities that emphasize principal preservation and strong returns, whether in debt or equity. Our approach is to remain deeply focused on our strengths while being open to adjacent opportunities, aligning our strategy with our core capabilities.

Our next question comes from Bill Katz from TB Colin. Your line is now open.

So just one of the debates comes up a lot is just a higher-for-longer backdrop. And how does that sort of the ebbs and flows of that, the puts and takes. So I was wondering, I think the Part 1 fees are pretty straightforward. But I was wondering if you could talk a little bit about just the resilience of the platform, particularly on the credit side, if we were to stay in the higher-for-longer. And how to think through the bear case that it would have a pickup in credit losses against a portfolio that has improvement over prior credit cycles as currently put together.

Sure. And Alan, I can probably comment on it, but let me start with the headline. Look, we do floating rate debt that is our business for our investors. And that is mathematically, definitionally means when rates are higher, the absolute returns for our investors are on average higher. And when rates are lower, on average, they'll be a little bit lower. Sitting here today, and look, there's a lot of things we've been right about and wrong about, and that will continue to be true. But I will say that a year ago, and everyone on this call probably can check us on this one, we have been talking about the higher for longer case for quite a long time. And we see it through our portfolio. Remember, we have almost 400 companies that we lend money to, and we study them and work with them very, very closely. And what we have seen consistently for the last year and still today, is inflation has not gone away. Now that's a consensus view. It seemed like a only voice in the words a year ago, even four months ago. We don't have this conversation when the world was talking about seven rate cuts. Now we're in a world where it's somewhere balanced between zero rate cuts and one right back to the new consensus. And that's a reality of what's happening from the ground up. We see wage pressures continue. You see cost pressures continue. Importantly, we see all these companies raising their prices. Someone's paying for that. So when you add it all together, inflation is not, of course, ranging the way it was 1.5 years ago; it's very real. So look, that does bring us to the higher-for-longer view from the ground up or not macro experts. But as a result of that, in a higher-for-longer world, which now seems pretty likely, of course, that does flow through in ever higher returns for our investors and to agree FPR. Remember, what's really important, though, other than the small amount of variance around fee related, which is not the RPR, which is a modest part of our revenue base. You have to remember, we at Blue Owl, you know this, but I'm saying it more broadly, we have Blue Owl paid fees to manage the business. There's no carry. We have no capital markets fees. We don't have all these other variable fees that other people have to manage, which is complicated. Our business is very straightforward. And even with gyrations in spread or whether we do have a rate cut or don't have a rate cut, really, really moderate impacts on our business. So I'm going to let Alan comment on that, and then I'll come back to the credit question you had, and it's the case.

So two points here, I guess. One, I made the comment earlier in 2025 when you look at the curve today versus at the end of the year, we're at 60 basis points to 80 basis points higher on the curve than where we were to translate that to how that impacts our business. I mentioned in the last quarter's call when asked about a rate decline question. I had said that about 100 basis points of rate decline would be about $40 million of increased or decreased. And now in this case, it's increased as opposed to the question last quarter, which would be decreased about $40 million of increased annual management fees.

I want to revisit the credit question from a couple of angles. First, as I've mentioned before, in our credit business, credit is our primary focus from day one. We target the larger segment of the market and prioritize low loan-to-value ratios, which average in the 40s for our portfolio. Our latest results show that, on average, EBITDA and revenue for our portfolio companies have seen double-digit growth in the last quarter we've analyzed. We remain aware of the potential for a credit downturn, which is closely tied to the overall economic climate. However, I believe we've managed our credit well. Our portfolio continues to grow robustly on average, even though there may be specific companies facing unique challenges. Our nonaccruals stand at well below 1% of our book, and historically our loss rate has averaged only 7 basis points per year. This puts us in a strong position. There are two key takeaways here. We are extremely committed to managing credit. As investors in Blue Owl stocks, remember that we can earn management fees from these funds, so concerns about credit may not significantly impact Blue Owl shareholders. It’s important to us, and it matters greatly to our limited partners, which is our priority every day. While discussions about credit may bring up uncertainties related to private credit, I want to clarify that this isn't a new field; it has been tested, but perhaps not under the current, more stable format. We have a substantial amount of data from nearly $100 billion in loans that have weathered various economic challenges, including pandemics and banking issues. We are making loans to similar companies with tighter documentation and lower loan-to-value ratios than those in the syndicated market from the 2000s, so we are familiar with the landscape. Even in worse scenarios, we see potential strong returns—currently, unlevered returns range from 10% to 12%. Significant changes in defaults could still yield compelling risk-return profiles. Many perceive this market as untested, but it is actually well-tested on different terms. When we face those tests again, I believe we will likely see lower loan losses because the parties involved have aligned incentives, all aiming for the success and repayment from the companies. Unlike issues in the syndicated market, our arrangements do not rely on complex credit derivatives. Therefore, while we might encounter some similar challenges in private credit, I suggest that our experience will be more favorable when we face those issues again.

Question comes from Patrick Davitt from Autonomous. Your line is now open.

My question is on Kuvare. Could you help us frame maybe how much run rate organic flow you expect from the insurance entity post close? Maybe how fast that has been growing? And then more broadly, contrast how you see alt's insurance TAM versus others, given your asset classes are generally outside of the lower fee fixed income replacement assets, most of the other alts are focusing on.

Sure. So I don't want to speak on behalf of Kuvare, the insurance company, which remember, we are buying the asset manager, and we're an asset manager, so balance sheet light provider of management services, and they are a really strong insurance originator. So that's their side of the equation. I don't mean that in a lack of partner way. We're very much partnered, but I want to understand that they are the insurance company; we are their partner asset manager. With that said, we know that, for example, last year, they grew their book by $5.6 billion. So part of this whole exercise was to get more capital freed up and focused on supporting the growth of their insurance company, including our $250 million preferred investment. So last year was $5.6 billion. They were looking for more capital to continue to grow, and to grow, I think we'll continue to see very healthy growth. They have a great origination business. I've mentioned this before, but they punch way above their weight. Here's a firm of a size that is in the Japanese market, which is one of the most discerning markets, as I understand it, for these types of annuity products. And they're right in there with the very biggest and the very best. And I think it's a real credit to what they've done on the insurance origination and management side. So I won't forecast their number for them, but I think it is safe to say that given the growth they've had in the past, we expect to see that kind of growth continue; that's why they want the capital.

And the vast majority of that growth is going to come from assets that we manage going forward.

Yes. We now encompass the entirety of our asset management business, allowing us to fully offer the product capabilities previously mentioned. This provides us with the means to deliver the comprehensive solution you referenced regarding others. Our emphasis isn't on low fee products, but we are equipped with these capabilities, and we haven't simply lacked a complete set of solutions. This will also contribute to our growth strategy moving forward. In terms of the addressable market, it's a fascinating topic. The relationship between insurance and asset management, or alternative asset managers, is changing, and there are various models; I don't believe there is a single correct approach. Our model focuses on excelling in asset management while allowing insurance companies to excel in their field, positioning ourselves as partners rather than competitors, which aligns with our approach. We offer capital solutions, providing resources to general partners, facilitating the growth of their businesses. We also extend capital solutions to real estate corporate owners to support their growth. Additionally, we supply financing solutions to private equity portfolio companies and now offer GP Continuation Capital through our strategic equity. All of these represent solutions for private equity firms, not competition. Our focus is clear, and similarly in insurance, we are their partners, dedicated to assisting their growth instead of competing for theirs.

Our next question comes from Crispin Love from Piper Sandler. Your line is now open.

You hit on this a little bit with a prior question, but just with the announced acquisition of Prima. You explain why you did the deal and how you do the credit work. But can you discuss what opportunities you're most interested in once the deal closes? Would you expect to be active in distressed areas such as deals in office or be active in multifamily or kind of other areas like CMBS in addition to deals more related to your triple net lease product, but on the debt side? Just curious, your thoughts here on where you might add capital in this part of the business when the deal closes.

Sure. Well, let me start with this observation on every acquisition we make; our mission is to have a best-of-class team as a part of that, and we have that with Prima, which also means first job is to make sure we only enhance doing well at they already do, we once combined. And that's been true. Look at our Oak Street business, now the real estate business. That's a business that has thrived because they're great at what they do, again, now we, but is phrasing, I'm purposely trying to be intentional about this idea of not ever disrupted only enhancing the investment process. So our first job is to continue to do a fantastic job for Prima LPs in the products they have. Now with their capabilities and ours, there are opportunities for us to deliver great results to their existing or new LPs and do so well for our shareholders. When you think about where we'll go, remember we also have now brought on a world-class real estate finance professional, Jesse Hom, who is quite well-known in the world of real estate finance, having led this at GIC, will be joining us to lead this overall initiative. So Prima comes on board; we'll keep doing Prima really well. And then we will extend—to answer your question, again, remember our DNA and our comfort; our idea is to go into a market and find ways to take risk out and are really attractive, stable returns. So that would tend towards leaning our mindset not toward opportunistic stress, let's go find a messy office building; rather it, hey, this is a dysfunctional market now. We can go in and do very high-quality things that are much lower leverage, much less deep in the cap stack and earn a very active return providing that capital. So I think that frame of reference is likely to be more where we live than all of a sudden trying to move out to the periphery of return seekers; that's not our mission. Our mission is to have sleep-at-night well money for our investors and deliver really good returns for it.

Our next question comes from Brian McKenna. Your line is now open.

Most questions have been asked, but just a quick one for me. So you've clearly been active on the M&A front, and you've also made a number of senior hires as well. So I think integration of all these businesses and people will be important to the longer-term growth and success of Blue Owl. So what are you doing to make sure integration of all this is successful over time? And I guess what I'm getting at is how do you make sure one plus one equals more than two?

That is exactly what we focus on, and we believe we have developed the skills to do it well. We think integration is essential. The goal is to enhance the strong investment performance and practices of our businesses without disrupting them, utilizing our intellectual capital and operational capabilities to help these companies excel in their investment activities. I want to emphasize that while we have discussed M&A extensively, the majority of our growth is organic, and M&A activity has a relatively moderate impact when considering the number of people involved. For instance, Prima is a fantastic business with a great team, but its integration is fairly straightforward. We differentiate between complicated acquisitions and simpler ones like Prima, which we do not aggressively pursue. Nevertheless, we are optimistic about our growth strategy. Looking at our real estate sector, when we acquired Oak Street, our real estate business had about $70 million in FRE, and we have since increased that to about $200 million. This growth was significant, tripling that business. Marc Zahr and his team have integrated well into our firm, and Michael Reiter's work in operations has served as a model for us. While we acknowledge that we are not perfect, we feel confident in managing these acquisitions. We will carefully evaluate both organic and inorganic growth opportunities, but it is important to remember that the majority of our growth has been, and will likely continue to be, organic and sustainable.

We don't have any questions at this moment. I'd now like to hand back over to Marc for final remarks.

Great. Thank you all very much. Really appreciate the time and your patience and your interest, and we're going to go away and be credit animals and try to do some more boring quarters for you. But we do appreciate it very much, and back to it. Thank you.

Thanks for attending today's call. We hope you have a wonderful day. Stay safe.