Blue Owl Capital Inc. Q2 FY2024 Earnings Call

Good morning, and welcome to Blue Owl Capital Second Quarter 2024 Earnings Call. During the presentation, the lines will be in listen-only. I would like to advise the participants, this conference 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 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 Capital's 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 second quarter of 2024 recording fee-related earnings or FRE of $0.21 per share and distributable earnings or DE of $0.19 per share. We also declared a dividend of $0.18 per share for the second quarter payable on August 30 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 Marc.

Great. Thank you very much, Ann. Blue Owl had a very active second quarter reporting another record quarter of earnings and announcing highly strategic acquisitions that further diversify our business. Over the last 12 months, we have generated 23% fee-related earnings growth and 19% distributable earnings growth from the prior year period. And since becoming a public company, we have had 13 consecutive quarters of management fee and FRE growth, highlighting both the stability and strength of our business. Our disciplined investment approach and compelling track record have appealed to a growing pool of investors looking for uncorrelated and income-driven returns. We continue to expand the types of financing solutions we offer, making us an increasingly important counterparty, and in conjunction, we continue to expand the range of strategies and product options we offer to our investors. Recently, we announced our intention to acquire one of the leading alternative credit managers in the market today, Atalaya Capital Management, which adds substantial scale to Blue Owl's alternative credit capabilities and complements our leading position in direct lending. Atalaya brings deep expertise in asset-based finance with a strong 18-year record through market cycles, and we believe our counterparties and clients will be very excited about the platform synergy opportunities we will create with the Atalaya team on board. Alternative credit is a multitrillion-dollar market where legacy participants are pulling back, and we think we have exactly the right team in place to become an increasingly significant player in the space. Looking back to when we announced the Oak Street acquisition in 2021, Oak Street's AUM was roughly $12 billion. About 2.5 years later, we have more than $28 billion of AUM in triple net lease alone. I think this is a great case study for what we hope to achieve with Atalaya. Alan will talk more about this in a few minutes. More broadly, we have added critical capabilities in alternative credit and real estate credit, further building out the waterfront of solutions we offer. Both are deeply disrupted markets with huge addressable opportunity sets. With the acquisition of Kuvare Asset Management, we now offer a holistic asset management solution to insurance companies, broadening our potential investor base substantially. We expect integration of these businesses to go very smooth, given that there is generally very little overlap between Blue Owl's existing footprint and that of the businesses we are acquiring. The vast majority of the employees will see very little change in their day-to-day, with investment teams remaining focused on their areas of expertise and continuing to be led by their founders or existing senior management teams. Our goal is to enhance what each firm is already doing well and create incremental opportunities for the combined entity. Critically, all of these were proprietary acquisitions not done through auctions. The leaders of these firms or the insurance partner in the case of Kuvare wanted to grow their businesses as a part of Blue Owl. They're not selling to Blue Owl but rather joining Blue Owl. We plan to leverage Blue Owl's scale to benefit each of these businesses through our 700-plus sponsor relationships, our leading wealth distribution platform, a global and growing institutional platform, and greater efficiency and best-in-class corporate infrastructure. We're very excited about the collaborations we can create across the Blue Owl platform and look forward to sharing more about those in the quarters to come. Moving on to the quarter, we continue to see good fundraising progress across the business. Gross flows into our perpetually distributed products reached $2.8 billion in the second quarter, over 30% higher than the first quarter and more than double what we raised in the second quarter of 2023. Notably, redemptions in the perpetually offered products remain nominal despite upticks across the industry, totaling less than $325 million across all or under 20 basis points of our beginning AUM. That means we raised 9 times more than what's left the system in these products. Total gross loans from private wealth were $3.2 billion. Our incumbency position as one of the leaders in the private wealth channel is a result of the relationships and the level of trust we have built with distributors through thoughtful partnership, strong performance, and high-touch service at every level of these organizations. Remarkably, the overall allocation to alternative products in private wealth is in the low to mid-single-digit percentages. We're in the early innings of the adoption of alternative investments as individual investors begin to see the benefits of diversification and uncorrelated asset classes in their portfolios. We also raised $2.2 billion from institutional investors across a number of strategies, including GP stakes, first-lien lending, liquid credit, diversified lending, and GP lending secondaries, complementing our robust flows in private wealth and reflecting the ongoing diversification of fundraising across our business. To zoom out slightly, we have raised $32 billion across equity and debt over the past 12 months in an environment that most continue to describe as challenging. That's equivalent to over 20% of our AUM a year ago that we've raised in 12 months, a more than solid showing in our view, and we continue to bring new capabilities to market. Turning to business performance, we had a record quarter of deployment with more than $18.7 billion of gross originations, primarily across new deals, add-ons, and refinancings where we decided to participate in the new law. Repayments were $6.9 billion, resulting in a higher quarter of net deployment. We continue to demonstrate that borrowers are drawn to the three Ps of direct lending: predictability, privacy, and partnership, and that value proposition is compelling whether the syndicated markets are active or not. The longer-term secular trend of sponsors gravitating more and more towards direct lending remains in place, and we see healthy sponsor appetite to deploy incremental capital and monetize existing investments over time. Direct lending metrics remain strong. On average, underlying revenue growth was in the high single digits and EBITDA growth was in the mid-teens across the portfolio with no significant step-ups in non-accruals or requests. As we think about the key to our success in direct lending, it's a very straightforward formula we follow. One, start by limiting loan losses through rigorous underwriting and being highly selective. This is evident in our seven basis points of annualized realized losses since inception. And two, when there is a default, we do everything we can to ensure a higher recovery. I think we have demonstrated both of these tenets very successfully over the past years. Our portfolio companies continue to perform extremely well. We are pleased with what we see across the business. 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 over $1.8 trillion, giving us an unparalleled view over the alternative asset management industry. The ongoing diversification and scale of the alternative managers, the emergence and rapid growth of asset classes such as direct lending and alternative credit, the partnerships being formed in insurance asset management solutions, and the expansion of opportunity in private wealth, these are all trends readily observable across our partner managers and one for which Blue Owl's business is well-positioned. This past quarter, we observed an uptick in asset sales for some of the partner manager portfolios, which could reflect sponsors' greater willingness to monetize assets in older vintage private equity funds. During the second quarter, we made our first investment for our mid-cap GP stake strategy and have two additional investments agreed to, in principle, which we expect to close in the third quarter. As for our large-cap GP stake strategy, we remain on track to have Fund V substantially committed by the third or fourth quarter of this year. We closed on an additional $1 billion for the latest vintage of the strategy during the second quarter and anticipate that fundraising in the third quarter could be similar based on current visibility. However, keep in mind, we're not focused on the timing of closes quarter-to-quarter. What is important is that we remain very focused and confident in our ability to achieve our $13 billion goal over the next 18 months. In real estate, we continue to actively deploy capital at attractive cap rates behind our four major themes: digital infrastructure, on-shoring, healthcare real estate, and essential retail. The capital needs in each of these areas are significant, and we are making good progress in deploying Fund VI, which we just finished fundraising for during the last quarter. We believe we'll be approximately 60% committed for this fund by year-end, which puts us ahead of expectations in deploying capital, demonstrating the strong demand for our net lease solutions. Earlier, we spoke about the disruptive dynamics in alternative credit and real estate credit. The same dynamic applies to triple net lease, where we think we're seeing some of the best risk-reward situations this space has seen in a long time. We're buying great properties at cap rates in the mid-to-high 7s, facing generally investment-grade tenants, and there are very few others doing what we do. This is a compelling proposition, and we are leaning into it. We continue to see nice step functions upward in fundraising for ORENT. Second quarter flows were 130% higher than a year ago, bucking trends seen across competitor non-traded REIT products, and we continue to launch additional distribution platforms. To bring it all together, there's a lot of growth happening across Blue Owl organically and inorganically. The big picture is very simple: we're an alternative asset manager with leading positions in our direct lending, GP stakes, and triple net lease strategies. We have a leading position in private wealth distribution and an expanding global presence in institutional and insurance markets. We're adding scale, alternative credit, and real estate credit capabilities with teams that have generated strong track records over decades, and our P&L model is very simple. Almost all of our revenue comes from durable permanent capital with best-in-class fee rates, and our earnings are made up entirely of fee-related earnings. We think this makes our business quite unique and compelling, well-positioned for strong and stable growth to come. With that, let me turn it to Alan to discuss our financial results.

Thank you, Marc, and good morning, everyone. We're very pleased with the differentiated and strong results we continue to post quarter after quarter. As Marc mentioned earlier, we have been able to achieve 13 consecutive quarters of both management fee and FRE growth due to the durability of our asset base anchored by permanent capital and strong investor demand for the strategies we offer. Let's go through some of our key highlights on an LTM year-over-year basis through June 30. Management fees are up 21% and 92% of these management fees are from permanent capital vehicles. FRE is up 23% and DE is up 19%. As you can see on Slide 12, we raised $5.4 billion of equity in the second quarter and $19.2 billion of equity for the last 12 months. I'll break down the second quarter fundraising numbers across our strategies and products. In credit, we raised $3.4 billion; $2.4 billion was raised in our diversified and first lien lending strategies, of which $1.7 billion came from our non-traded EDC, OCIC, double what we raised in the second quarter of 2023. Inclusive of the July 1 close, we have now raised over $12 billion for OCIC since inception. The remainder was raised across software lending, liquid credit, and strategic equity. In GP strategic capital, we raised $1.3 billion across our large cap strategy and co-invest vehicles. In real estate, we raised over $650 million, primarily in rent or perpetually offered net lease products. We're pleased with the increasing breadth of fundraising across strategies and products, which will continue to expand with our new insurance solutions offering and the Prima and Atalaya acquisitions. Prima closed in June, adding approximately $11 billion to AUM, and in early July, our acquisition of Kuvare Asset Management also closed, adding approximately $20 billion to AUM for the third quarter. Pro forma for Atalaya closing, which is expected to add approximately $10 billion, our AUM will be over $220 billion. As a reminder, we also have substantial embedded earnings in our business. AUM not-yet-paying fees was $15.9 billion as of the end of the second quarter, corresponding to roughly $200 million of incremental annual management fees once deployed. We also have approximately $135 million of incremental management fees that will turn on upon the listing of our remaining private BDCs over time. These two items alone would represent an increase of almost 20% from our last 12-month FRE revenues. These aspects, combined with our business model of being virtually all permanent capital and 100% FRE, just give us a higher quality of earnings than any of our peers in the industry. Moving on to our credit platform. We had gross originations of more than $18.7 billion for the quarter, a record high, and net funded deployment of $7.2 billion. This brings our gross originations for the last 12 months to over $40 billion with $15.5 billion of net funded deployment. Our credit portfolio returned 3% in the second quarter and 16.4% over the last 12 months. Weighted average LTVs remain 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 funds, including agreements in principle, are over $11.5 billion of capital with line of sight into over $3 billion of opportunities, which if all our signs, would bring us through the remaining capital available in Fund V. Performance across these funds remains strong with a net IRR of 24% for Fund III, 41% for Fund IV, and 12% for Fund V. In our real estate platform, our pipeline continues to grow with nearly $10 billion of transaction volume on the letter of intent or contract to close. As Marc mentioned earlier, we think we could be roughly 60% committed to Fund VI by year-end, reflecting the strong demand we're seeing for our net lease solutions. Many of these opportunities are build-to-suit arrangements, which are very capital efficient for the tenant and where we get a premium cap rate for providing a flexible balance sheet-friendly solution. These can take between 18 and 24 months to fully deploy the capital we've committed. As a reminder, we charge management fees mostly on invested capital, so we will earn incremental management fees as this capital is deployed. We're seeing such strong deployment opportunities, this could position us well to be out in the market with the next vintage of this strategy before the end of next year. With regards to performance, gross returns across our real estate portfolio were 2.5% for the second quarter and 6.7% for the last 12 months, which compares favorably to the broader real estate market over this time period. The net IRR across our fully realized funds has been 24% for investment-grade and credit-worthy tenant risk, reflecting the favorable value creation driven by our scale and solutions-based partnerships. Let's wrap up with a few closing thoughts. We continue to track to be in or around our dollar per share goal for 2025. We've talked about the four things, now three things, that need to happen to be on track for this goal: first, accretive acquisitions, which we achieved through Kuvare, Prima, and the announcement of Atalaya, so check that. The remaining things are: one, continued strong fundraising levels for OCIC, OTIC, and ORENT. We continue to see strong fund raise levels coming through for these products, especially in the case of ORENT, where we've seen a step function upwards with another step-up expected in the back half of this year. So overall, on this first one, we expect we are on track. Two, a successful fund raise for our large-cap GP stake funds, and we are pacing at a good level here. As we have noted previously, our expectation is this will be a little more back-ended, with more fund raise expected in 2025 than 2024. Overall, on the second one, we expect we are on track. And three, the listing of some of our BDCs. We completed the listing of OBDE earlier this year. We continue to deploy capital in OTF II, and for the BDCs that remain private, we are focused on executing the strategy we outlined during last year's BDC Investor Day. So overall, on the third one, we expect we are on track. Bringing this all together, we feel good about being in or around our dollar per share dividend goal and reporting a very strong dividend growth rate for 2025 in the low to mid-30% range, resulting in a dividend CAGR of 30% since going public.

Now let's talk a little more about our Atalaya acquisition for a moment, where we think there is a meaningful opportunity akin to what we saw for Oak Street. As Marc mentioned earlier, we have more than doubled Oak Street's AUM in just under three years. So let me put some color around how we've achieved that. Since acquiring Oak Street, we have doubled the net lease team, including the addition of Jesse Holm as CIO of the platform. We have created new product offerings for the private wealth channel and are in the process of launching a European net lease product, and the investments have started to pay off with ORENT out raising all of our peers on a net basis and Fund VI well exceeding its $5 billion target. Bringing it all together, we have been able to accomplish a great deal in a relatively short amount of time in our net lease business. We have more than doubled AUM, we have almost tripled permanent capital, we have tripled FRE revenues, and we have grown our average management fee rate by over 30%. Most importantly, based on the increase in FRE that we have generated in our triple net lease platform, we have created almost $1 billion of additional value for our shareholders in just a few years in a very tough environment to raise real estate funds. We are equally excited about our Atalaya acquisition. The Atalaya team is one of, if not the best, in the alternative credit industry, and we have a lot of runway ahead of us to grow this business together. We've mentioned that this acquisition is modestly accretive in 2025, and we think it will be much more accretive as we ramp this business over the next number of years, similar to Oak Street. It is, however, margin dilutive for Blue Owl. As we continue to do acquisitions, we won't always find businesses with the same FRE margins. The margins here are well below our levels. We believe we can increase them over time but may not ultimately reach 60% with each of our acquisitions. That's okay. We expect this deal will be very value accretive for us over time and fills a very strategic product area in a huge industry growth area. As we go into the next year or so, we can see margins for the remainder of this year being slightly below the 60% level and for 2025 being 2% to 3% lower. On a last note, we have led the alternative asset management industry in growth since we listed in 2021, and we have every intention of continuing to lead the industry for the foreseeable future and in the key metrics that matter to all of us: management fees, FRE revenues, FRE and dividend growth; and we feel very confident we will accomplish these goals through continued organic and inorganic growth and reinvestment back into our business. 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 the line of Alex Blostein with Goldman Sachs.

So first question maybe on the deployment opportunities in private credit and direct lending, very big step up in the quarter on gross originations and net as well, and that's obviously despite a fairly high level of syndicated market activity as well as higher refi volumes across the industry. So maybe talk a little bit about how broad-based was the deployment you saw this quarter. Anything in particular kind of lumpy that you would call out? And I guess how would you characterize gross and net deployment backdrop for the rest of the year?

Thanks, Alex. Look, it's a great environment for direct lending. I actually think this quarter is very revealing about the power of the model. Given this is also a time where the syndicated market is as open as it's ever been, and PE activity remains actually, I think, by our collective measure tepid relative to the dry powder. That's the backdrop. And yet, as noted, it was by far our biggest origination quarter. I take those three together, and I would actually say, yes, that is meaningful, meaning there aren't sort of special one-time items, if you will, in the ultimate net originations number. There's a lot of broad activity. We thankfully have a combination of add-ons, which, of course, are proprietary. People that are assets that are being sold and we are the incumbent, which often gives pretty proprietary angles on things. And then just new investments, and we are, I think, well-positioned to continue to do very well in that marketplace. So I look at this quarter as a pretty strong indicator going forward, and every quarter will vary based on indeed the exact volume, what we choose to do. But what we can read from this is the continued demand for direct lending by users of capital is extremely strong even when the syndicated market is widely available. I think this is a really meaningful data point because people have always sort of overread this idea that it’s only when the market's closed, then direct lending is a solution. I think what we're seeing is the extreme durability of having long-term capital to provide long-term solutions and deliver the three Ps: predictability, privacy, and partnership to the users of capital. The part that I think gets us excited, and again, I'm not trying to time the moment this happens. But starting from what we just said, there are a few things going on: one, as I just said, there is the relatively tepid PE activity. That will pick up. There's a huge amount of dry powder as we all know. It will get deployed. We can read from this quarter that whether the syndicated market is wide open or not, direct lending gets a big piece of that. At some point, either we're going to have a less active syndicated market—that's escapable at some point given the relative strength today—and we're going to have a more active PE market. So combine that with what we're seeing in this environment, that's a very robust outlook from our point of view. I want to add one more cherry to that: a slight moderation in interest rates, which seems to be forthcoming, will be good. I mean really good for continued accelerated interest by people in doing financings and deals. So, yes, we're feeling like it's a pretty good moment. Thanks, Alex.

And our next question comes from the line of Brian Mckenna with Citizens JMP.

Okay. Great. Thanks. So just a question on all the recent M&A you've done. Strategically, all these deals make sense and round out the capabilities across the firm. But how should we think about the incremental growth from these deals relative to the legacy Blue Owl growth rate? It would seem like the revenue opportunities for all of these are quite a bit better than their legacy historical growth rates similar to the outcome with Oak Street. So I'm just trying to figure out if these deals will ultimately be accretive to the growth rate of Blue Owl over time?

So the acquisitions, of course, you observed, have been really important parts of our strategy. I think it's important to make two core observations before we get into the specifics of the actual underlying businesses. The acquisitions in the context of Blue Owl are really about people not selling to us but joining us. I said this in my remarks a moment ago, but it's really an important framework when you think about what Blue Owl is doing. What we've done before and are continuing to do is say, look, where there are best-of-breed investment capabilities and there's a great fit between that organization and ours, and those leaders and our leadership group, then we can make overuse of one plus one equal—not three, but I think it's four or five. We're going to really try to combine—not change the world-class investment capabilities—but bring our infrastructure and the origination synergies, the intellectual capital synergies between the businesses, and it works. Look at Oak Street: at the time we announced it had $12 billion of AUM, today $28 billion of AUM, and we have dramatically increased the amount of permanent capital. We created the wealth product. The largest real estate fund ever completed last year was in our product suite. I think we've seen we know how to bring these world-class capabilities together with the Blue Owl platform, and that's a winner for our LPs and a winner for our shareholders. So that's the key observation, which is joining, not selling. We are not buying things in an auction where someone exits; they join us. We're fortunate to have Marc Zahr in the leadership of the firm and in the leadership of real estate. We now have Ivan Zinn joining us, leading Atalaya. He is a superstar in the world of asset-based finance, and it goes on. That's how I would read the collection of assets. Now what does it mean for our business? And Alan, I'm sure, will add to this. These are accretive acquisitions just on their face, and so we'll see the benefits of that, but they're kind of inconsequential in the near term, but they are critical for the long term. What we're doing now is setting the stage for the years beyond 2025. We are establishing products that have very large addressable markets where we have distinctive capabilities. Distinctive capabilities is key. We look at things like alternative credit, asset-backed credit in the next 10 years looking a lot like the previous 10 years did in direct lending. When we came to direct lending with this notion of offering private solutions, we want to finance the best credits from the best users of capital, not lenders of last resort, and provide those three Ps that people value. We're going to do the same in asset-backed credit. It's a bigger market. It's a $7 trillion market. It's only 5% penetrated by private solutions today, and now Blue Owl combined with Atalaya brings together one of the best in the world, probably in this business—it has been doing it for nearly 20 years with spectacular results. So now you have the Blue Owl credit platform married with Atalaya. Prima, our leg into real estate credit—when you say real estate credit, everyone thinks, oh, my gosh, look at all the problems there. Prima has been doing this business for over 30 years. They've had two losses—two losses in 32 years. We are looking at these as critical pieces along with our insurance distribution. We are not getting the insurance business, but we've created an insurance alternative management capability, allowing us to package capabilities. Like Prima and asset-backed credit are perfect marriages with that delivery to the insurance channel. All this really comes together around setting the stage for what comes in the next five and ten years for us.

Brian, to broaden that a little bit, I talked in my prepared remarks about the few things that need to happen in and around our $1 a share goal. Now as Marc's talking about all the things we've discussed so far this year when we are meeting with investors are all growth initiatives beyond 2025. How do we keep this industry-leading growth well beyond this in and around a $1 a share goal? We will continue to grow inorganically, but then you layer in the organic growth to talk about our credit products, our evergreen diversified lending strategy, our evergreen first lien fund strategy, our healthcare vertical, our GP-led secondary product, and then you add in some real estate products or European triple net lease, which is gaining good traction, are growing our real estate finance products, and potentially gearing up for our real estate Fund VII. As Marc said, with Fund VI, we had a record year where we ended up with Fund VI, and our new mid-market GP stakes product. Layering in the organic and inorganic growth is what we've been discussing all year—how to maintain industry-leading growth levels well around 2025.

Next question comes from the line of Glenn Schorr with Evercore ISI.

So maybe another angle on the deal activity. So I agree, Oak Street seems to be a textbook purchase integration and accelerated growth story. When you think about you just did three deals in a reasonably short period of time, is there something different in the deal environment that has brought these companies to your doorstep and why? I'm asking about what's going on with the deal environment? Two, history hasn't been great in asset management land for companies to buy a bunch of other companies, half leaving alone, half leveraging them. It usually hurts margins. And eventually, you had some grow, some didn't, which leaves a bad taste in investors' mouths. I think that the underlying growth of the alternatives backdrop is significantly better than what we're looking at. My question is, how do you make sure you integrate enough that you are one firm, leverage the brands and the best things, and do learn from the mistakes of the past of traditional asset managers?

Sure. These deals coming together in this form, I think mostly reflect the right opportunity at the right time. These are businesses that came to us. These are one-off opportunities. This is really about finding strong partnerships. That does start to address how to get the best of both worlds. We are working in tandem with the leadership team of Prima, working in tandem with the leadership team of Atalaya, and remaining in our partnership with Kuvare. We think that it is important to get the best of both worlds. The success of the investment strategies has been the model for direct lending. It has worked before, and it continues to for us. We feel very good about the muscles we have built for that, and everything is moving along in the right direction. I would tell you that we understand very much the questions and caution you're noting regarding M&A in financial services. In this case, Oak Street is a better template to look at. It’s a very analogous sized business, and it's a parallel of circumstances where the senior leadership team came and joined this firm to be a part of the leadership of Blue Owl instead of just selling to this firm.

Our next question comes from the line of Patrick Davitt with Autonomous Research.

I think the management fee trend in the quarter was probably a little disappointing relative to the very positive FAUM inflow and AUM surprise. Were there any timing issues with big deployments skewing later in the quarter that maybe aren't showing up in the full quarter? And if so, maybe to level set, do you know what the run rate for management fees would have been with the full quarter of all those, a full quarter of Prima, etc.?

Thanks, Patrick. I don't have the run rate off the top of my head. I can tell you that we had some closings at the very end of the quarter, so didn't really have any time to accrete in for the quarter. In 1Q, we had some small catch-up fees, both in real estate and in GP stakes that elevated just slightly 1Q's numbers.

Our next question comes from the line of Craig Siegenthaler with Bank of America.

We wanted to come back to Alan's margin commentary near the end of the prepared remarks. With the 2025 FRE margin now at 57% to 58%, longer-term as you scale and digest these mergers, where do you see the long-term target? Is that still 60% or maybe a little higher? How should we think about that?

We are looking at potential growth numbers over the next few years, and it fits a very strategic area for us and a big addressable market, as Marc was talking about. So let's talk for a minute about what we are creating here. When I look backward and see our management fee growth for our real estate business. On an LTM basis, since we acquired the Oak Street business, we haven't had a quarter go by where we haven't had 50% growth on an LTM basis in management fees there. Overall, Blue Owl, we haven't had a quarter go by that was less than 20%. And when you take that up to the Blue Owl FRE revenues, we haven't had a quarter go by that's been lower than 25% revenues. Looking forward, considering the things that we have out there—AUM not yet paying fees, GP stake Fund VI fundraising, and the BDC step-ups in fees—that's another $1 billion of revenue from where we were at the end of 2023. That's 60% growth just from those few items, and that does not include all the other growth initiatives I mentioned earlier. When I think about fundraising, we think we're going to almost double our equity fund raise versus where we were last year. And so what we're doing is working. We're reinvesting back into our business. It's fueling industry-leading growth and it's accelerating between now and the end of 2025. So when you think about that 25% revenue number we just posted on an LTM basis, that growth, we believe, will accelerate to approaching 30% growth for this year and for next year. Again, I wouldn't change the longer-term 60% FRE margin.

Our next question comes from the line of Steven Chubak with Wolfe Research.

I wanted to ask a question on Part 1 fees. Just given the expectation for rate cuts on the horizon, loan spreads tightening over the last 12 months, there's some concern that Part 1 fees could come under greater pressure as the higher-yielding back book begins to roll off. Recognizing there's going to be a meaningful offset from ramping deployment activity, and certainly, the comments there were quite constructive, but I was hoping to get just a mark-to-market for where current origination yields sit today relative to the back book? And maybe just speak to the ability to defend what would now be a high 50s FRE margin in '25 amid deeper rate cuts and spread contraction?

Sure. Thanks for your question, Steven. Look, we have a BDC business that continues to grow. Yes, as rates come down, we will see some pressure on Part 1 fees. But we also see Part 1 fees going up from several perspectives. We still have our software lending BDC that's not fully deployed, which continues to ramp, leading to increased Part 1 fees quarter-over-quarter as it relates to our fundraising efforts and these continually offered products.

Our next question comes from the line of Crispin Love with Piper Sandler.

Can you just give us an update on credit quality across the portfolio? What are you seeing? Are you seeing any degradation in the portfolio? When you look at Pluralsight specifically, how confident are you that is a one-off in the portfolio versus the potential for other credit stress elsewhere?

Yes, credit quality is very good. This is a strong environment. Our portfolio on average grew EBITDA in the teens, mid-teens. We continue to see a very strong overall performance. We have not seen any material change in amendment requirements or requests or changes in demand for payment in kind if they were cash-paid before running down the revolvers. We will always have one-off companies that have challenges; that's the nature of the beast. Fortunately, we have a fairly simple system in theory, very complicated in execution, which is to find through rigorous work great companies that are likely to perform well, and the handful of times they do not perform well, ensure we have a strong recovery. Overall, our credit quality continues to improve steadily. In terms of Pluralsight, we care a lot about its performance and every credit and ultimately every recovery. For Blue Owl shareholders, we need to remember, we are a fee-based business, so the underlying yields of the funds do not directly impact us. We do care a tremendous amount about the performance. For context, Pluralsight is an IT training business bought by Thoma Bravo, and we led the financing with several other private lenders. It is not a software business, just to clarify where it lands, but Vista is a great sponsor and made many excellent investments. This one didn't work out; it is disappointing for them and us. It is a small loan, a little over $300 million out of our nearly $100 billion portfolio, and we will end up owning it without much string and drag. While it is not the outcome we wanted, it shows private lending working; there will be a smooth handoff, and we will support the management and the business, and we'll find out the exact recovery over the next few years. We don't think this situation extrapolates anything significant.

Our next question comes from the line of Brennan Hawken with UBS.

Alan, I wanted to follow up on—and apologies if you hit on this, my line cut out a bit during your response to the question on the margin outlook. But it seems as though the margin compression is impacted by some of the deals you guys have recently done. You also reiterated your confidence in getting to the dividend, and so is the bridge there better revenue growth? Can you confirm whether or not some recent deals are really what's pulling down the margin? If there is anything beyond that, that would be ideal.

Yes, that's right, Brennan. Thank you for the question. In particular, the Atalaya transaction has the—it has roughly half the margin that we do. We know we can grow this over time. We just don't know yet whether we can get it up to the same margin as where we are today. We are investing in these acquisitions. As I outlined with Oak Street, we could have some slight downward momentum before it swings back up, but we feel very confident about the long-term trajectory of keeping that 60% or higher margin as we absorb our acquisitions.

Our next question comes from the line of Bill Katz from TD Cowen.

I just want to unpack the dividend a little further. You affirmed the $0.72 this year, and you think you can grow that in the low- to mid-30% range year-on-year, and it does sound like top-line driven. If I take 35% as a reasonable proxy, it gets about $0.97. As I look at the year-to-date dynamics between distributable earnings and the dividend, the payout rate has been about 100%, round numbers. I'm wondering if you could just talk about the algorithm in terms of capital allocation and the importance on the dollar, and if there is a broader argument here to potentially move away from a dividend growth story and think about a broader capital return opportunity?

Sure. Thank you, Bill. So that's right. We're targeting a low to mid dividend growth for 2025 versus 2024. That low to mid will put us somewhere around $0.96, approaching if not 100% dividend payout ratio, which is essentially what we've been communicating to investors. We've seen this year; we will step up to a low 90% payout ratio. Then we would look to bring that back down over time as we get past 2025.

Patrick, I think you're on for a follow-up.

Kuvare just closed on July 1. Could you update us on how we should think about the regular way annuity-type quarterly inflow you'll start to see from that given the kind of ongoing annuity issuance from the insurance partner there?

Yes. The Kuvare acquisition is a very exciting one for us, and I want to reframe importantly what we did buy and what we didn't buy. We bought the Kuvare Asset Management business. We are getting paid fees to manage assets in fashions that are packaged and delivered both in terms of abilities and structures for insurance companies. We did not buy the insurance operations. We are not in the insurance business, so we don't have spread-related earnings concepts. We continue to have fee-related earnings. That is important to our business model. Kuvare remains very active in the insurance business and is successful. For an insurance company of its size, I think it's impressive what they've accomplished in terms of access, for example, to the Japanese market. In 2023, there was $5.6 billion of flows, and the expected growth rate this year has been higher for total originations. They have had a good start to the year. We expect this will contribute over time, which will be billions of dollars of flows for us on an annual basis. This gives us another engine to continue to originate exactly what we want: long-dated, fee-paying assets.

And our next question comes from the line of Brennan Hawken with UBS.

I would just like to make sure I understand what—make sure I'm putting together the pieces correctly here. It seems like what's happened is you guys have had some good deals come together, and you've done several quickly. You're realizing it's going to probably take a little longer to get all of these pieces put together, so we're going to see some margin compression next year. You guys still feel good about the dividend and getting to the dividend, but you're getting there via the higher payout ratio. Is it more driven by that ratio rather than the earnings growth? Do I have that right? Or would you course correct me on anything there?

Yes. Let me try to course correct a little bit, and Alan can add too. It is not that it is more complicated to integrate; it is simply a mathematical issue. If you acquire a lower-margin business, it will impact margins temporarily until we full integrate, plan, and then optimize across the whole integrated business. We don’t want it to be perceived as a change in expectations. If we acquire something with a significantly lower margin, it is not going to impact the margins considerably in the short term. That’s pretty transitory, but we want to emphasize, from our point of view—and I would suggest from our investors’ point of view—the focus should be on generating substantial growth in per-share FRE, DE, and dividends. The margin is important, of course, for profitability, but we would prefer more revenue, growth, and opportunities, regardless of the margin performance in the near term. We expect short-term dilution from acquisitions but will return to the usual margins. We primarily want to drive absolute dollars in our returns.

And I'll just add that the guidance of low to mid-30s for dividend growth is based on our $1 per share target that we've already been communicating. The low to mid growth gets us around $0.96, which is nearly a 100% payout ratio, around 90% low payout ratios. We would then look to bring that ratio down a bit as we get past 2025.

Okay. I don't think we have any further questions. We appreciate everyone's time. It was an exceptional quarter. We are very pleased with where things stand. We are especially pleased with the returns for our LPs and all our strategies. We're extremely pleased to conclude this quarter, marking our 13th straight quarter of increases. Our trajectory looks very bright. With these acquisitions, we have set the stage for our predictable and stable growth plan for our FE, DE, and dividends. We're very happy with where we stand and look forward to continuing to share exciting opportunities in the future. Thank you all for joining, and enjoy the rest of the summer.

The meeting has now concluded. You may now disconnect.