Blue Owl Capital Inc. Q4 FY2024 Earnings Call

Good morning, and welcome to the Blue Owl Capital's Fourth Quarter and Full Year 2024 Earnings Call. During the presentation, your lines will remain on listen-only mode. After the speakers' prepared remarks, there will be a question-and-answer session. I'd like to advise all parties that this conference call is being recorded. Thank you. I will now turn the call over to Ann Dai, Head of Investor Relations for Blue Owl. Please go ahead.

Thanks, operator, and good morning to everyone. Joining me today are Mark Lipschultz, our 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 statements. We'd also like to remind everyone that we'll refer to non-GAAP measures on the call, which are reconciled to GAAP figures in our earnings presentation, available on the Shareholders 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 fourth quarter of 2024, reporting fee-related earnings, or FRE of $0.23 per share and distributable earnings or DE of $0.21 per share. For the full year 2024, we reported FRE of $0.86 per share and DE of $0.77 per share. We declared a dividend of $0.18 per share for the fourth quarter, payable on February 28 to holders of record as of February 19. And we also announced an annual fixed dividend of $0.90 for 2025 or $0.225 per quarter, starting with our first quarter 2025 earnings, up 25% from the prior year. 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 so much, Ann. We capped off a highly successful year for Blue Owl with a record quarter of fundraising, reflecting the ongoing diversification of our business and high levels of investor interest in our differentiated products. This brings our total equity raise in 2024 to $27.5 billion, about 75% higher than 2023. And including debt, we raised over $47 billion, also a record for us. On top of our robust fundraising, we deployed substantial amounts of capital across the business, including a record $52 billion gross deployment in credit, driving 26% FRE growth for the year. Taking a step back, we have now grown FRE at least 25% each year since we've been public, despite highly inflationary periods, geopolitical events, rate volatility, and a significant slowdown in capital markets. To us, this has been an incredible test of the durability of our business and the power of permanent capital. We've had a very active year across the business with some simple themes that find our direction of traffic, innovation, diversification, and scale. And thinking about what we've accomplished this year, I'd like to call out a few highlights that exemplify these themes. On innovation, we've been very aligned with the ongoing evolution of the alternatives industry, focused on asset classes such as direct lending and GP stakes that have expanded to meet the financing needs of the private markets. Net lease has followed a similar trajectory, becoming a truly institutional category. All of these market opportunities have significant runway ahead of them, and we expect to meaningfully participate in that growth given our leadership positions in each area. And thinking about where the puck is going next, we have made strategically important acquisitions in markets with growing capital needs, namely alternative credit and digital infrastructure. We've also expanded our insurance capabilities to deliver a more holistic solution in that market. And we brought on a real estate credit manager with an incredible 30-year record to take advantage of the disintermediation we're seeing there. It's clear to us that private solutions providers are going to take an increasingly larger role in the financing of all of these markets. We plan to meet these opportunities head-on with differentiated strategies, product innovation, and best-in-class market leaders that have invested in these asset classes for decades. On diversification, it's apparent even in our 2024 results how much more diversified our business is today than a couple of years ago. This diversification spans investment capabilities, sources of capital, and geographic footprint. Looking ahead, we see tremendous growth for both the newer businesses under our umbrella and our existing capabilities. We plan to continue expanding our global distribution while introducing new strategies and product structures that further strengthen Blue Owl's value proposition for institutional, private wealth, and insurance clients. On scale, we ended the year at $0.25 trillion of AUM, and pro forma for the acquisition of IPI, which closed on January 3, we now have $265 billion of AUM. Over the past decade, we have seen the largest managers consolidate market share in the alternatives industry. We expect this trend to continue for the next decade, and we fully expect to be one of those consolidated managers. With the full suite of capabilities we have today and our scale permanent capital, we're able to create even more of the bespoke solutions that counterparties are looking for further positioning ourselves to be the first call. And subsequent to year-end, we closed the merger of Owl BDC and Owl BDE, our publicly traded diversified lending BDCs, resulting in the second largest publicly traded BDC with assets under management of about $21.5 billion. We're also working towards the proposed merger of OTF and OTF II. Once merged and listed, we expect to have the largest technology-focused BDC in the markets. Zeroing in on the fourth quarter, we had our highest quarter fundraising with $9.5 billion of equity capital raised and over $18 billion, including debt raised. Private wealth fundraising remained very strong at nearly $4 billion, driven by our perpetually distributed products and fundraise for GP stakes. For the year, Private Wealth drove over $13.5 billion of equity commitments, an increase of 50% year-over-year. And we are excited about what 2025 will bring with an alternative credit product launching shortly and currency-specific solutions coming for OCIC and OREP, in addition to the ongoing cross-selling and expansion on existing platforms. We had our highest quarter of fundraising in our institutional channel, raising $5.6 billion across a variety of strategies, including a number of mandates within credit, large-cap and mid-cap GP stakes, insurance solutions, and real assets. For the year, institutional fundraising drove half of total capital raised and has doubled from the prior year. As of this week, we're approaching $1 billion committed for our European net lease strategy headed towards our $1.5 billion hard cap, and we are also approaching $1 billion of capital committed to our GP-led continuation strategy. Our fourth quarter results reflect the impact of both organic new product development and recent acquisitions that are happening on the range of fundraising across Blue Owl, and we see much more to come ahead. The over $47 billion we have raised organically across equity and debt over the past 12 months is equivalent to 29% of our AUM a year ago. Now turning to business performance. In credit, we had another solid quarter of deployment. Specifically, for direct lending, gross and net originations were over $13 billion and $2 billion for the quarter, reflecting a high level of repayments and refinancings that stayed within our system. Taking a step back, consider the environment we've been in this past year. The CLO market returned in full force at the beginning of 2024, supporting historically high levels of broadly syndicated market activity, driven by refinances. In the midst of that environment, we deployed nearly $52 billion on a gross basis and $16.6 billion on a net basis in 2024. So even in a tepid M&A market, with active broadly syndicated markets competing, we doubled net deployment year-over-year. And I think it's a great demonstration of the power of scale and incumbency coming together to drive strong origination outcomes for the investors in our products. Credit quality metrics and direct lending continued to reinforce the strength of our underwriting. On average, underlying revenue and EBITDA growth was high-single-digits across the portfolio with no significant step-ups in nonaccruals or amendment requests, and our average annual realized loss rate was 11 basis points. As for alternative credit, the team is already well integrated and working with direct lending and ensured solutions on transactions, having completed several deals that bring together the sourcing and execution capabilities of our combined credit platform. During the fourth quarter, we announced a sizable forward flow agreement with Upstart and have subsequently seen significant demand from large lending platforms looking to partner with us as a source of stable capital. More broadly, we view the additional alternative credit as a strategically important expansion of our credit capabilities, focused on lending to Main Street segments such as consumer spending, small business borrowing, and residential finance. These complement the corporate lending of our direct lending businesses very nicely. Not only is the Main Street opportunity set very significant in its own right, but having a scaled alternative credit capability under the umbrella sharpens our 30,000-foot view of the broader credit marketplace, enhancing outcomes for investors across the board. Finally, we're making great progress towards launching a new alternative credit product for both the wealth and institutional markets, and look forward to providing an update in the coming quarters. In GP stakes, 2024 was a year that proved our long-standing thesis that the largest and most diversified managers are best suited to navigate and thrive in this next stage of the alternatives industry. Over the past year, the AUM of our partner managers increased by approximately 11%, and we continue to see significant interest from managers looking to source growth capital for their businesses to better position themselves in a market landscape that favors scale. As we mentioned in our last earnings call, we completed two strip sales during the third and fourth quarters, returning significant capital to our LPs and bringing new investors into the strategy. These sales generated $1.4 billion of gross proceeds at a 4.1x gross multiple on invested capital, and 2.7x net. Between the strip sales, other opportunistic liquidity events, and regular distributions for partner manager earnings from our flagship products, we distributed $2.4 billion GP stake fund investors in 2024 during a period where many GPs struggled to provide liquidity to their LPs. This not only benefits the current investors in our strategy but also provides an excellent case study for prospective investors. In real assets, we continue to actively deploy across our drawdown fund, our non-traded REIT, and now real estate credit. In net lease, we are over 75% committed on 6 at year-end after having just completed fundraising in the first quarter of 2024. This sets us up extremely well to be back in the market in 2025. Market dynamics in the net lease market remain fairly unchanged for us as we utilize our scale and proprietary relationships to drive premium cap rates and monetize a meaningful spread. During the fourth quarter, we deployed nearly $4 billion of capital, bringing full year deployment to over $7.5 billion at an average 8% cap rate. Concurrently, we monetized over $0.5 billion during 2024 at an average 5.9% cap rate, reflecting incredible spread capture. As we look at the quarter and into the first half of 2025, we have a number of new products and structures to talk about, underscoring the ongoing diversification of real assets. For instance, we raised over $0.5 billion during the fourth quarter for our European net lease strategy, which is now approaching our $1 billion target and is well on our way to the $1.5 billion hard cap. On top of that, we anticipate a co-mingled real estate credit product to be launched in the first half of the year. And of course, the IPI acquisition closed on January 3, adding more than $14 billion of AUM on a pro forma basis. This figure reflects an incremental $3.3 billion raised during the fourth quarter prior to the closing of the transaction. Since the transaction announcement, AUM has already increased by 35%, driven primarily by capital raising. We expect to finish up the current vintage of our flagship digital infrastructure fund at the hard cap of $7 billion in short order, and we are very excited to show the market what we can do with this business. In fact, you'll hear more about our plans tomorrow at Investor Day. Bringing it all together, we're highly confident in how Blue Owl is positioned for the future. There's a lot more to say on this front, but I think we'll save that for Investor Day. We're looking forward to seeing you in person or on the webcast, and I think it will be a very illuminating and educational morning as we lay out our five-year strategic plan for Blue Owl and show you the chessboard we have in front of us. With that, let me turn it to Alan to discuss our financial results.

Thank you, Marc, and good morning, everyone. We're ending 2024 on a strong note with over $0.25 trillion of assets under management. Our 15th consecutive quarter of management fee and FRE growth and a record fundraising quarter for the firm. Some additional highlights for the year include management fees up 30% and 91% of these management fees are from permanent capital vehicles. FRE up 26%, DE up 22%. And as you can see on Slide 12, we raised $9.5 billion of equity in the fourth quarter and $27.5 billion in 2024, an increase of 74% from the prior year. And inclusive of debt, we raised $47.5 billion in 2024. To help break down the fourth quarter fundraising numbers across our strategies and products, in credit, we raised $4.3 billion; $3.1 billion was raised in our direct lending strategies, of which $1.7 billion came from our non-traded BDCs, OCIC and OTIC. We also closed on approximately $1.4 billion across SMAs and ODL, our institutional Evergreen product. The remainder was raised across investment grade credit, alternative credit, and our GP-led secondary strategy. Overall, for the year in credit, we raised $13.9 billion, including $7.3 billion in our dedicated wealth products, OCIC and OTIC. In GP Strategic Capital, we raised $3.2 billion during the quarter, including another $1.7 billion for our large cap strategy, bringing the latest visits to $7 billion. We've always expected the fundraise here to be somewhat back-ended, which means overall, we're a little ahead of where we thought we would be with our $13 billion target. I would continue to assume more fundraising comes in back-ended this year than straight line. We also held a second close for our mid-cap strategy, bringing it up to $1 billion raised to date. And in Real Assets, we raised $1.9 billion, primarily from ORENT, European net lease, and SMA and insurance solutions. As Marc mentioned earlier, we are approaching $1 billion raised for our European net lease strategy. Overall, for the year, in Real Assets, we raised $4.9 billion, including $2.5 billion in our dedicated wealth product program, in which we expect to see an increase to the $2.5 billion level for 2025. We've mentioned the ongoing breadth and diversification of fundraising, and this quarter is another great example of the power of our organic growth engine. We generated robust flows from our established direct lending, QPC, and net lease products while approaching the $1 billion mark for three new strategies: European net lease, our GP-led secondary strategy, and our mid-cap GP stake strategy. Over 30% of our capital raised in the fourth quarter came from products which did not exist or were not part of our platform a year ago. We're very proud of the progress we have made in expanding Blue Owl's suite of capabilities, and we'll have a lot more to talk about regarding the diversification of our business tomorrow at Investor Day. We continue to have high levels of visibility on earnings growth with substantial embedded earnings driven by future deployment and the listing of our software lending BDC. AUM not yet paying fees was $22.6 billion as of the end of the fourth quarter, corresponding to over $300 million of incremental annual management fees once deployed. This number has increased from $14.5 billion this time last year, reflecting robust fundraising and products that earn fees upon the plan. Upon the listing of our software lending BDC, we will have approximately $135 million of incremental management fees that will turn on. These two items alone would represent an increase in management fees of nearly $450 million or 20-plus percent growth from our 2024 management fee level. These aspects combined with our business model of being virtually all permanent capital and 100% FRE provide us a higher quality of earnings than any of our peers in the industry. Focusing now on our credit platform, our credit portfolio gross returns were 3.1% in the fourth quarter and 13.9% 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. As Marc mentioned earlier, our overall portfolio continues to perform extremely well. For our GP Strategic Capital platform, total invested capital for our fifth GP stakes fund, including agreements in principle, is over $11.6 billion of capital, with line of sight into over $4 billion of opportunities, which if all our signs would bring us well through the remaining capital available in fund time. Performance across these funds remained strong with a net IRR of 22% for Fund III, 39% for Fund IV, and 19% for Fund V. And in Real Assets, we continue to deploy meaningful amounts of capital in our latest net lease drawdown funds, which are over 75% committed. Even with robust deployments, our net lease pipeline continues to grow with approximately $34 billion of transaction volume under letter of intent or contracted close. With regard to performance, gross returns across our real estate portfolio was flat for the fourth quarter and 4% for the last 12 months and continue to compare very favorably to the broader real estate market over this time period. The net IRR across our fully realized net lease funds has been 24% for investment grade and creditworthy tenants, reflecting the favorable value creation driven by our scale and solutions-based partnerships. Okay, let's wrap up with a few remaining items to cover. On our effective tax rate, we ended the year at just under 4%, in line with where we guided everyone to at the beginning of this past year. For 2025, you can expect an effective tax rate in the mid- to high-single digits. And for the few years beyond, you should see our effective tax rate increase a little each year, maybe a few percent per year. So overall, the story here remains the same. You should expect our effective tax rate to be lower for loans. As a reminder, we pay our tax receivable agreement out during the first quarter, so expect a higher level for the first quarter of 2025. This is the same timetable as in 2024, higher effective tax rate in the first quarter and much lower for the second, third, and fourth quarter. As we announced earlier, our dividend for 2025 is $0.90 per share. We are very pleased with our 2024 results, our industry-leading growth and how we built a differentiated business, a steady, consistent, predictable cash flowing business that will continue to pay the bulk of our earnings out in dividends. As a final note, from the entire management team here at Blue Owl, it's been an extremely successful few years, and we're very proud of what we've accomplished for Blue Owl's shareholders. At our Investor Day tomorrow, we're looking forward to laying out what we think is a very achievable path for continuing to lead our industry with robust long-term growth. We look forward to seeing you in the audience or on the webcast.

We are now opening the floor for the question-and-answer session. Your first question comes from Glenn Schorr from Evercore ISI. Your line is now open.

Hi, thanks very much. Maybe I'll ask on gross to net deployment, probably not the number you want it to be, but I'm curious how much you focus on that in credit in any given quarter? And do you think that's a function of the deal environment? Or does that say something about the attractiveness of deals out there? Just curious how we should look at that.

Thank you for the question; it's great to speak with you this morning. The gross to net has several aspects to consider. One key point is that net deployment is about putting new funds to use. Overall, I view this year, which has been very active both in gross and net terms, as a sign of significant strength. This year was relatively quiet for mergers and acquisitions, so when looking at our activity during a year low in M&A but with an active syndicated market, it suggests positive prospects for 2025 when the M&A market is expected to regain momentum. While I won't predict the exact timing of when that will happen, we've already noticed an increase in M&A activity and a narrowing of bid-ask spreads. Like many others, we are optimistic that 2025 will present a more favorable M&A environment. It's important to recognize that this year has been notable for overall origination in a macro context that wouldn't typically favor direct lending. Regarding the gross to net situation, it’s positive from the perspective of credit quality and demonstrates the power of incumbency. The gross to net often involves refinancing credit facilities established some time ago. This allows us to reassess the credit quality and decide if we still want to maintain those loans. This process enhances credit quality. Additionally, once these loans are in our system, they tend to remain with us, which is a significant advantage we have over some competitors. When analyzing the gross loan to net ratio, we don’t view it as a problem but rather contextual data. While we prefer quarters with substantial net figures, we appreciate quarters that also show good growth in loans. The balance between these is healthy. I want to emphasize that this situation doesn’t reflect any change in market dynamics; it aligns with what we would expect in an increasingly open market that isn’t fraught with M&A, leading to a focus on refinancing instead of new transactions. Eventually, the refinancing opportunities will diminish, and given that many companies have completed their refinancing cycles, we anticipate that we will begin to see some compression in that activity.

Thanks, Marc.

Marc, Alan, good morning. Hope everyone is doing well.

Good morning.

My question is on organic growth. Good morning. So you ended the year with strength in the fundraising front, almost $10 billion, a record quarter you've just recently planted seeds through four strategic acquisitions, which aren't even close to scaled yet. And now the macro backdrop is strengthening. So without stealing too much thunder from your Investor Day tomorrow, what does the fundraising outlook look like for 2025? And maybe you could break apart some of the bigger drivers?

Sure. Well, I honestly couldn't encapsulate it better than you did. I think the overall take is we have big flagships, we have continued accelerating success in wealth, more platforms. We have some new wealth products. Our alternative credit continuously offered product, which we will be out with in 2025, I think it's going to do very well with, as you know, new acquisitions like data centers, again, we're continuing our flagship which has already been extremely successful, rapidly moving toward its hard cap, and then we'll be back again with digital infrastructure and continues to outperform in not too distant future. And so yes, I think we have a lot more ways to win, frankly, in a more probably kind of bullish animal spirited environment. So yes, we go in on a strong foot. And well, I guess we end the year on a strong foot without all those benefits yet and then those coming into play. Maybe Alan, I'll let you comment a little bit about direction of travel from there.

Sure. Thanks, Craig, for the question. Good morning. Look, we are, as Marc said, very bullish about what we think we can do in fundraising in '25. Well, obviously, we'll hit a number of aspects of this tomorrow, during Investor Day, and we'll take that out a number of years, not just 2025. But we certainly are expecting a meaningful increase from our level in 2024 when we think about equity fundraise and what we can do in 2025.

Hi, good morning, Marc. Good morning, Alan. Thanks for taking my questions.

Hi, Steven.

All right guys. So wanted to ask a question on expense. So G&A was up 41% in '24. I recognize merger costs, higher wealth distribution expense, it's going to impact that growth rate. How should we think about the normal growth rate for OpEx, just given plans to continue to lean into retail, but also investing to help scale some of the more nascent strategies in ABS insurance and data centers?

So let me address the qualitative aspects of that, and then Alan will provide some quantitative insights. First, you've touched on a key point. We focus on hiring the best talent and ensuring top-tier distribution. One of our main principles is action, so we strive to excel in our initiatives. This sometimes requires upfront investment, which we have never underestimated. We have been able to reap the benefits of these investments. Specifically, we have made substantial investments in the areas you mentioned, including acquisitions and adding team members to enhance our credit platform. Therefore, you are already witnessing the outcomes of our investments made this year, which are aimed at supporting continued strong growth that we anticipate in fundraising and activities for 2025. I would characterize this year as more about investing to support what we expect in 2025, rather than needing to invest in 2025 to achieve those outcomes. With that, I’ll pass it over to Alan for more detailed insights on the numbers.

Thank you, Marc. Steven, I appreciate the question. Let me approach it in a couple of ways. Overall, we came in slightly under budget on expenses, a bit lighter on compensation, and a bit heavier on general and administrative costs. Specifically for G&A, I want to highlight that we are seeing our acquisitions being integrated. In the fourth quarter, there were some one-time items for the quarter, but not related to distribution costs. Overall, we are aligned with our guidance for a 59% FRE margin for 2024. For 2025, our guidance remains 57% to 58% FRE margin. To give you a better understanding of our run rate levels, for 2024, we anticipate about 12% G&A as a percentage of revenue and around 28.5% for compensation. For 2025, you can expect a similar ratio for G&A, roughly 12%, and with margins at 57% to 58%, that positions compensation at about 30% to 31%. I hope that was helpful.

Thanks. Good morning everyone. I had a question on your BDC. So you just completed OBDC, OBDE merger and then you're obviously working on the OTF merger. Are there any updated timelines for the OTF merger getting done and when that could be uplisted and then beyond that, you're going to have two large BDCs in the public market. So how are you thinking about growth for both of these vehicles longer-term from an equity and debt capital raising perspective?

Good morning, Brian. Thank you for your question. I'll address this, and Mark may add some insights afterward. We have successfully completed the merger of OBDE into OBDC, which is now the second largest publicly traded BDC. Currently, we are in the process of merging OTF and OTF II, and we have publicly stated that this is on track to close in early Q2. Everything is proceeding well, and you can expect a listing shortly thereafter. We will discuss more details about this during our Investor Day tomorrow. Upon the listing of the merged software lending BDC, we anticipate an additional $135 million in annualized management fees. Therefore, we expect that by the end of this year, we will have two publicly traded BDCs with slightly different strategies. OBDC represents our diversified lending publicly traded BDC, while we expect to introduce our software lending BDC publicly traded as well. In terms of expanding these BDCs, we will consider strategies similar to our peers, such as an ATM program for capital raising, applicable for both OBDC and the software lending BDC once listed. On the debt side, we continue with our established methods. In 2024, we have significantly increased our revolvers across our BDC, raised capital through SPV drop-down structures, secured bilateral structures with banks, and continue to accrue substantial unsecured debt. We have multiple avenues available to raise both equity and debt for our publicly traded BDCs.

Good morning, Marc and Alan. Thanks for taking my question.

Good morning, Brennan.

I understand there will be some changes in real assets, and we’ve already seen some with Prima and now IPI has closed. Considering the fourth quarter and the fee rate for that business, is this the appropriate starting point fully accounting for Prima? Or is there some additional influence? Additionally, you provided the total assets under management for IPI, but could you clarify the fee-paying assets under management? How should we assess the impact on the fee rate from that acquisition closing? Thank you.

Sure. Thanks, Brennan. On the first one, yes, pretty much fully loaded into our AUM, fee-paying AUM, and average fee rates. So that's reflective. When you think about the acquisition of IPI, IPI was running at about 115 basis points on fee-paying AUM and so when we closed, we had about 14 and change billion of AUM, and about almost $11 billion of fee-paying AUM for IPI. So those are those two numbers. And on a go-forward basis, you could think of IPI running maybe a little higher than the 115 level, but that's how it blends into our real assets business. Last quarter, Alan, you shared an expectation for 2025. It's a bit awkward since we will all meet tomorrow morning, but we will likely discuss more than just 2025 and longer time frames. During the third quarter call, you mentioned an expectation of FRE growth in the mid to upper 20 percent range. Do you still believe this is the appropriate way to approach it as we update our models, or should we reconsider that in some way? No worries at all, Brennan, and appreciate the follow-on. So yes, we're going to talk a lot more about all of that tomorrow, very excited to get into all that specifically for 2025. I'm happy to talk about that now. Last quarter, to your good point, I talked about FRE revenue growth for 2025 in the upper 20% or more, fully on track, no change to that guidance. I talked about on last quarter's earnings call, FRE growth in the mid- to upper 20s percent fully on track, no change to that guidance. And on a per share FRE per share, you can think of that as about 20%.

Good morning everyone. Thank you for the question. I'll focus on the broader topic tomorrow. I wanted to ask about the near-term pipelines regarding deployment. This is a follow-up to Glenn's earlier question. Looking at the M&A pipelines, there haven't been many announcements this year, so I'm curious about what you're observing beneath the surface in discussions with sponsors. More importantly, what are the recent spreads you're seeing for underwriting new loans? I'm trying to understand the competitive dynamics in that market today. Thank you.

We are noticing early signs but not yet significant changes. M&A advisers typically have insights into pre-pipeline activity, and private equity firms are aware of their engagements on the sell side. I can say that we are maintaining a decent level of activity. While we haven't seen an uptick yet, we remain optimistic, and I don't imply that this means we will see a major upward shift in 2025. Based on feedback from M&A advisers, there appears to be an increase in activity within the pipeline as more processes begin, and it seems people are ready to move forward after a period of uncertainty since last fall. I don’t have profound insights, but our planning and thoughts, as Alan mentioned, are not based on a market rally or a different environment from what we've faced over the past year. Therefore, I wouldn’t characterize this as a positive indication for 2025 performance, but any increase in activity would certainly be welcome, even if it’s not essential to our strategy. That reflects our current state. However, I cannot confirm that pipelines are significantly thicker or that there’s a substantial flow of new deals yet. I do expect there will be a quarter this year when we can highlight that. Regarding spreads, they are relatively stable, experiencing typical fluctuations over time. We've previously discussed that these cycles align with activity levels and public market availability. After reaching peak spreads in 2022, we saw a decline in 2024, averaging about 100 basis points across the portfolio, with maybe 150 on newly originated loans. What’s noteworthy is that over time, we have maintained a relatively consistent spread of a few hundred basis points in comparison to the broader market. The product we offer proves effective and resilient, accommodating some fluctuations but remaining very stable. We are quite satisfied with the current risk-return balance we are experiencing.

All right, it sounds good. Thanks for all of that. See you guys tomorrow.

Hey, good morning everyone.

Good morning, Patrick.

We might get into this more, but you mentioned the new alternative credit retail products. But there are a few products in that asset class with a significant head start on you getting a lot of traction. So could you maybe speak a little bit about how you think your product fits in against the more established ones? Anything different about it, you would point to and your confidence in getting placement with several products already ahead of you? Thank you.

I believe that our position in alternative credit is stronger than people realize. Atalaya has been in this space for 20 years, and while it may not have been a popular topic back then, they have consistently delivered impressive results with very low loss rates. This morning, we announced a significant forward flow agreement of $2.6 billion with Atalaya, reinforcing our status as a preferred provider. Our infrastructure and proven track record position us well for product launches, and we've already received positive feedback as we roll out our credit platforms with RIAs. While there are several excellent products in the market, I expect us to be a leading player in alternative credit, just as we are in direct lending and real estate. Although we may have low brand recognition among the biggest firms, our brand reputation stands out favorably in the marketplace, creating an advantageous position for us going forward.

Thank you. Good morning, everyone. I appreciate the opportunity to ask my question. Regarding data centers, I see that you have now closed the IPI. There are articles discussing a possible Stargate investment. Could you share your thoughts on the future of data centers, potential growth opportunities, and how you plan to navigate this in light of the recent deep-sea news that could affect the industry as a whole?

Absolutely. You are right. We have a significant and unique role in data centers. I want to highlight two points. IPI, which is now fully focused on digital infrastructure, is a clear pioneer in this area. We were just discussing yesterday how the scale of this market has grown to trillions; it was much smaller when IPI made the strategic move to lead in this space. This gives them a wealth of skills, relationships, and lessons learned. Consequently, we have built and managed 85 different data centers with a substantial active pipeline supporting them. As a result, we have valuable insights into the marketplace. What we observe and hear from our clients, as you all know, is that public market discussions are showing interesting developments. The insights regarding DeepSeek are quite compelling. There's an expectation that this disruptive technology will accelerate adoption in the realm of technological evolution. While it's uncertain what DeepSeek specifically means for overall computing, we can frame our understanding around it. It might lead to faster or broader developments, possibly requiring less compute power for training models while increasing inference. One conclusion we can draw is that AI is becoming more prevalent and producing products at a faster pace. This is positive for our strategy. Now, let’s consider some macro numbers before I move on. Companies who are well-versed in their planning have been transparent about their positions. In the two weeks since the emergence of DeepSeek, we’ve seen organizations adjust their projections significantly. For example, Meta has revised its outlook to $65 billion. Microsoft initially projected around $50 billion when we signed our deal, and now estimates $80 billion. Amazon is also discussing an $80 billion figure, while Google recently announced $75 billion. The entities that are actually spending money have indicated their stance, and they form our client base, providing us with long-term contracts supported by solid credit ratings. Lastly, it’s important to consider the evolution of the market. The demand for compute represents a multitrillion-dollar opportunity that we are excited about, along with others. It’s projected that 75% of this demand will be for inference and cloud computing. Even if DeepSeek modifies the fundamental requirement for raw computing power used for training models, we’re primarily addressing the modulation of that last 25%. Taking everything into account, if you believe in AI and want to pursue a solid risk-return opportunity, aligning with a pioneering partner in the development and management of data centers is a wise choice. We have 1,000 talented professionals in our operations group, known as STACK, who are experts in making this happen. This presents a substantial barrier to entry. Therefore, I find DeepSeek to be fascinating, and I invite you to join in our strategy, which lays down the foundation and encompasses cutting-edge technology skills that thankfully are not decisions for us to make. Thank you.

Hey, good morning, Marc, Alan, and Ann.

Good morning, Mike.

So let's go to questions. I just wanted to narrow in on maybe the credit results this quarter. Fees rose about $25 million quarter-over-quarter, and this would be the first full quarter with Atalaya. By my estimate, that should have added, I'd say $20 million to $22 million in the quarter. So I guess, one, is that about right? And then two, can you just help us understand some of the other drivers beneath the surface and maybe why the fee ex Atalaya didn't increase as much quarter-over-quarter? And then finally, sorry, just maybe also any color on incremental increase into 1Q as we think about going forward? Thank you.

Sure. Thanks, Mike. I think your numbers are directionally correct on the Atalaya add. We certainly saw increases across all of our products in terms of management fees quarter-over-quarter. So we had a strong growth quarter in management fees across credit. We also raised capital during the quarter at higher fees. So you'll see an increase in that management fees from AUM not yet earning fees. And you'll see a little drop down in Part I Fees, effectively flat, but I think it was down about $2 million quarter-over-quarter. As we think about Part I Fees, what I mentioned on last quarter's call, as you can think of 3Q, 4Q as kind of a jumping off point as a run rate level, if you will. It will move up a little or down a little quarter-over-quarter, and then you'll see a step function upon a listing of the software lending BDC.

This is Alex Bernstein on for Ken. Thanks for taking our questions.

Good morning.

At the risk of double-clicking on the same topic again, just wanted to hopefully get a different flavor out of the delta between gross to net. You spoke about incumbency, which is definitely a key point. And maybe to help us better understand the power of that. As we look at what is actually that, which includes refi, as I understand it, that you're doing yourself for your own products? What's the difference between what is staying in the system and what might be exiting the system and specifically, what's happening with the broadly syndicated market and with bank competition? When we saw this topic first come up earlier in the year, so say, Q1 really when it sort of hit most people's attention spans it made sense that there was more refi from the DSL in the context of that market being closed and then rates moving down over the course of that period while that market was closed and when it opened. We don't have that same dynamic today. So I wanted to understand why that number was as a percentage, the conversion was lower in Q4 than it was for the whole year. Thanks so much.

Yes, certainly. There are a few factors to consider regarding the portfolio. Overall, it's a positive trend. It's important to note that the increase in OID comes with benefits from prepayments. You raised a valid point about the wave of refinancings earlier this year, which was influenced by the reopening of the BSL market. Many companies that are performing well and have reduced their debt are looking to refinance, recognizing that the landscape has changed since their last financing. This process often involves adjusting spreads and recalibrating the capital structure. The BSL market does not detract from our position; there will always be transactions that shift between us and the BSL market. I would describe the current refinancing activity as largely companies restructuring their capital in a healthier environment, rather than a complete resurgence in BSL activity. Some companies that were holding off have now decided to make moves. The comprehensive availability of the BSL market is already reflected in the system. As we approach 2025, we have largely seen the effects of this. While a significant amount of refinancing has taken place, there will always be some strategic moves because we have healthy companies that are keen to refresh their financing arrangements and continue to work with us.

Bradley Hayes on for Bill Katz.

Good morning, Brad.

You reached about $300 million in management fees from deploying AUM not yet paying fees. How should we be thinking about the cadence of deployment? Any color on the opportunity to deploy some of this dry powder into '25?

Sure. I'll take that, Bradley. So when we think about that AUM not yet earning fees, it's a little over $300 million of management fees. That, by the way, combined with the $135 million of annualized management fee increase from a software lending BDC increase. It's almost $450 million; those two items alone would represent over a 20% increase from our 2024 management fee level. Kind of time frame, obviously, hard to tell. Generally speaking, most of that, I would expect can get deployed within the next year. And so maybe some of that tails into 2026, but we think we can deploy that roughly in about a year, and we're expecting deployment opportunities to be able to put that capital to work.

Thank you all for your time. I want to make a few final remarks. This quarter was outstanding in terms of results. It's not just about the numbers, but also about the resilience of our model and growth. Despite the volatility in the world over the past few years, we've maintained a strong upward trajectory. This quarter demonstrated that durability once again. Despite everything going on globally, we continue to grow at rates that significantly outpace the market and our peers. We will elaborate on how we plan to maintain this momentum as we look ahead to the next five years. I’m also looking forward to sharing more details with you tomorrow and discussing how we integrate all these elements. Doug will share his insights, and I believe you will find his vision exciting as well. We will have more conversations about this and address your questions. Finally, I want to express our gratitude for your time, support, and confidence in us, and we will keep striving to seize opportunities for you. Have a great day.

Thank you for attending today's conference call. You may now disconnect. Have a wonderful day, everyone.