Blue Owl Capital Inc. Q2 FY2025 Earnings Call

Good morning, and welcome to Blue Owl Capital's Second Quarter 2025 Earnings Call. I'd like to advise all parties that this conference call is being recorded. I will now turn the call over to Ann Dai, Head of Investor Relations for Blue Owl.

Thanks, operator, and good morning to everyone. Joining me today are Marc 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 second quarter of 2025 reporting fee-related earnings, or FRE, of $0.23 per share and distributable earnings, or DE, of $0.21 per share. We declared a dividend of $0.225 per share for the second quarter payable on August 28 to holders of record as of August 14. 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. The results we reported for the second quarter of 2025 reflect a continued expansion of the breadth and depth of Blue Owl's business and highlight the increasingly essential role the firm plays within a modern capital markets landscape. We raised $14 billion of new capital during the quarter, bringing us to a record capital raise of $55 billion over the last 12 months or 28% of our assets under management a year ago. And these numbers do not yet reflect any meaningful contributions from our acquisitions this past year where we are anticipating significant synergies over the next couple of years. We have grown our FRE revenues by 29%, FRE by 23% and DE by 20% year-over-year on a last 12 months basis, continuing the steady march up and to the right, supported by our substantial permanent capital base. This momentum has been driven by the continued strength we see across fundraising and deployment reflecting 2 critical concepts. First, for investors, we are leveraging the benefits of Blue Owl's scale and incumbency in respective markets to drive differentiated results, and we are creating product structures to serve varying investor needs across the risk return spectrum. And second, we have placed ourselves in a position to offer the bespoke and scaled solutions that are increasingly in demand for users of our capital, and we have even more of those solutions on offer today as a result of the strategic actions taken last year. I want to spend a moment on some of the early wins from strategic investments we have made organically and through acquisitions over the past year, which we've summarized on Slide 4. Starting with alternative credit. We closed a private offering of $850 million for our new interval fund stemming from a diversified and global set of investors. We are pleased with this remarkable fundraising, which reflects both the strength of our global private wealth platform and investor confidence in our approach to credit solutions. It's been an incredible start for this product and even more impressive considering the market disruption we saw during April. In our view, alternative credit is a highly complementary addition to fixed income portfolios given its diversified collateral, modest correlation to other credit asset classes and attractive risk return anchored by current income. These alternative credit capabilities further diversify our product suite, and we should benefit greatly from the incumbency and leading position we've built in the private wealth channel to date. For our digital infrastructure strategy, the first half of the year was active from a fundraising and deployment perspective, leading us to a final close of our third flagship fund in April at a $7 billion hard cap. Notably, the fund has already soft circled more than half of the capital raised for investments. Looking ahead, we're working expeditiously towards the launch of a well-focused product in the foreseeable future, similar to the process we undertook with ORENT with significant investor interest already observed. Our real estate credit strategy has been extremely active deploying over $3 billion year-to-date, including opportunistic deployment during the market dislocation that generated outsized spread. Both real estate and alternative credit have been extremely active for our insurance channel with these teams and others across Blue Owl driving roughly $2 billion deployed in the second quarter alone at a spread of more than 200 basis points above similarly rated public corporate bonds. And as it relates to organic new strategy development, we have now raised $3.5 billion of capital across strategies that did not even exist 2 years ago, including $1.7 billion for GP-led secondaries, our BOSE strategy. We believe the strong reception we've encountered for these new offerings reflects the partnership-driven solutions-based mentality that anchors everything we do at Blue Owl. Taken together, you can see a substantial amount of forward movement in the early days of these new initiatives, and we are just getting started. The combination of these initiatives and broad-based momentum across our more established businesses drove the robust capital raising we saw during the second quarter. Alan will walk through our flows in greater detail, but let me call out some notable items. We held the first close of the next vintage of our net lease flagship strategy ahead of schedule with $2.1 billion raised and another $1 billion of co-invest. The total size of our 2020 vintage of this strategy was $2.5 billion in commitments and the entire net lease business was $12 billion of AUM when we announced that acquisition. We have more than tripled the size of this business in 3.5 years, a testament to the platform synergies generated through scale and access. This acceleration has not gone unnoticed with the recent article naming Blue Owl as the third largest real estate capital raiser globally over the last 5 years, trailing only Blackstone and Brookfield. In aggregate, we raised $5.1 billion of equity in net lease during the second quarter and a record $5.8 billion across our real assets platform. Mirroring the expansion trend in real assets, we also raised $5.8 billion of equity across credit in the second quarter, a record quarter for credit. On a year-over-year last 12-month basis, equity raised in credit has increased by 55% and flows have been balanced quite evenly between the private wealth and institutional channels. Last 12-month capital raised from EMEA and APAC investors has increased to 23% from 14% 2 years ago, reflecting the ongoing globalization of our business, embedded in the platform investments we've made for the long-term growth. And broadly, we saw resilience across our investor base despite fairly disruptive capital markets during the quarter, which speaks to the continued and secular demand for the strategies we offer and the strength of our private wealth channel. Turning to business performance. In direct lending, we continue to find high-quality deployment opportunities despite a relatively lackluster M&A backdrop, speaking to the advantages of being a partner of choice due to our scale and incumbency. As a reminder, M&A is only one component driving deployment activity for us. We continue to see sponsors pursue bolt-on and organic investment opportunities for their portfolio of companies, driving add-on activity for Blue Owl. And in the case of continuation fund transactions, the breadth of our loan portfolio means that we're often the existing lender and therefore, a logical and frictionless partner for new financing. Gross origination in the quarter was roughly $10 billion, bringing gross origination over the last 12 months to nearly $47 billion and net to $13.5 billion. Credit quality in direct lending remains strong with average annual realized losses at 13 basis points. We are not seeing any meaningful changes in the underlying metrics. This has been a constant theme over the last few years. In alternative credit, we continue to see positive network effects benefiting deployment with more partners looking to engage in repeat and larger financings with us. Recently, we renewed and upsized a forward flow agreement with LendingClub for up to $3.4 billion, yet another substantiation of the expanding role that private lenders are being asked to play in the alternative credit markets and across capital markets more broadly. This marks our alternative credit fund's third investment with LendingClub since 2023. Blue Owl also provided meaningful funding solutions to small business lenders. We recently upsized an existing transaction with a U.K.-based lender, Capital on Tap that funds both U.S. and U.K. small businesses. The alternative credit business continues to see strong demand for stable capital partners and benefited from the volatility in the public securitization markets during the second quarter. In real assets, we continue to see highly attractive deployment opportunities across net lease, digital infrastructure and real estate credit. As I mentioned earlier, our digital infrastructure flagship fund has already soft circled more than half the capital raised for investment despite its final close having just occurred. The tremendous capital needs in the data center space are creating an incredible moment in time where our investors can own mission-critical assets for tenants with an average credit rating of AA across 10-plus year durations and earn opportunistic returns for doing so. As we've said before, we truly believe this is the best risk-reward setup we've seen in our careers and feel fortunate to have such a scaled and experienced team at Blue Owl with which to lean into this generational opportunity. Across our digital infrastructure funds, we have leased capacity of 3.8 gigawatts or approximately 5% of the current capacity leased globally, making us one of the leading players in this rapidly evolving technology landscape. We expect to meaningfully participate in this evolution through our net lease strategy as well, which is financing the largest data center project in the United States. In aggregate, we believe there are very few firms that can provide the breadth of technical expertise and scale of capital we offer across Blue Owl to address the needs of hyperscalers today. And these strategies present a differentiated proposition, offering the ability to fund the leading edge of innovation, but to do so on products and structures that are designed to be income-oriented and downside protected. Our GP Stakes strategy closed on a second investment during the second quarter and on another one subsequent to quarter end. In total, these investments bring us to nearly 30% invested on our target size. We've continued to invest in some of the premier names in the alternative industry, household names with decades of experience and long track records of success and we believe these firms are the ones that will continue to be beneficiaries of this consolidation trend we have discussed. Over the years, we've seen validation of our strategy through the outsized growth of the partner managers in our funds relative to the broader industry. We've also generated positive outcomes concerning liquidity with our GP Stakes flagship funds having distributed more than $2.9 billion over the past year in a market where return of capital has been scarce, situating our funds within the top quartile on this important metric. There are 2 final items that I'd like to mention before Alan covers the financials for the quarter. And I think it's a testament to the very dynamic quarter we had across Blue Owl that we are only coming to these now. First, I'd like to mention our recent announcement of a new strategic partnership with Voya focused on delivering private market strategies in vehicles tailored for defined contribution retirement plans. We've observed the growing demand for alternative investment solutions within retirement portfolios and see this as an important first step to broadening access, to supporting plan participants in their quest to build more resilient portfolios and optimize outcomes. We are very excited about the long-term potential for the new frontier in Private Wealth and see Voya as an ideal partner given their leadership and deep expertise in the retirement market. Our strategies have also been included in multiple model solutions, Morgan Stanley, Wells Fargo, Sotera, iCapital and Case, just to name a few. This success is evidence of the strong strategic positioning we have in improving access to Blue Owl products via the scale of our Evergreen Fund franchise, our strong distribution footprint and our industry-leading education. Finally, during the second quarter, we completed the listing of our technology-focused BDC, OTF, which is now the second largest publicly traded BDC by net assets and the largest tech-focused BDC in the market. Over the past 6 months, our teams have worked relentlessly to merge the formerly private OTF and OTF II vehicles, evaluate efficient liquidity paths for all stakeholders and execute the listing seamlessly, all while navigating serious market turbulence. I want to acknowledge the efforts and collaboration we saw across the firm that culminated in this very successful endeavor. With that, let me turn it to Alan to discuss our financial results.

Thank you, Marc, and good morning, everyone. We are very pleased with the results we reported this quarter, marking our 17th consecutive quarter of management fee and FRE growth. Over the last 12 months, management fees increased by 32% and 87% were from permanent capital vehicles. FRE was up 23%, DE was up 20%, and this was a record quarter of equity fundraising for us. We raised over $12 billion of equity in the second quarter and over $36 billion over the last 12 months, an increase of nearly 90% from the prior year. Recognizing that fundraising is not linear, we also looked at the statistics on a multiyear basis. And as you can see on Slide 6 of our earnings presentation, equity raised over the last 2 years is about 50% higher than equity raised over the prior 2-year period. Each of our institutional and private wealth channels experienced record high quarters of equity raise with $7.6 billion across institutional, primarily driven by products in our net lease, direct lending, strategic equity, and digital infrastructure strategies. And in private wealth, we raised $4.4 billion of equity during the quarter with substantial market volatility. To break down the second quarter fundraising numbers across our strategies and products: In credit, we raised $5.8 billion, a record quarter for our credit platform; $4.3 billion was raised in direct lending, of which over $2 billion came from our non-traded BDCs, OCIC and OTIC. The remainder was primarily raised across diversified lending, our GP-led secondary strategy, our newly launched interval fund, investment-grade credit, and our first lien strategy. In Real Assets, we also raised $5.8 billion, a record for our real assets platform as well. Over $900 million was raised from ORENT. And as Marc mentioned, we held a first close for the seventh vintage of our flagship net lease strategy, bringing in over $2 billion. The remainder was in additional net lease products, digital infrastructure, insurance-focused products and co-invest dollars. And in GP Strategic Capital, we raised $0.5 billion during the quarter, bringing the latest vintage to over $7.5 billion. As we said on last quarter's earnings call, we expect the fund raise here to come in at similar levels in 3Q and then to wrap up with our $13 billion total fundraise goal through mid-2026. Turning to our platforms. In credit, our direct lending portfolio gross returns were 3% in the second quarter and 13.5% 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. On average, underlying revenue and EBITDA growth across our portfolios was in the high single digits to low double digits with no material increase in signs of stress, such as increased non-accruals, stress amendments, conversion requests, or watchlist names. And as Marc mentioned earlier, none of these metrics have changed meaningfully over the past several years. Turning to alternative credit. Our portfolio of gross returns were 2% in the second quarter and 15.7% over the last 12 months. In Real Assets, our first close of the seventh vintage of our flagship net lease strategy occurred less than 15 months after the final close of Fund VI, demonstrating both a strong pipeline for investment and robust interest from investors. We expect that Fund VI will have nearly committed to all of its available capital for investment by year-end and has deployed roughly 40% through June 30, with much of the remainder are slated for deployment over the next 12 to 18 months, as various build-to-suit projects reach completion. And our net lease pipeline continues to grow with nearly $41 billion of transaction volumes under letter of intent or contract to close. During the second quarter, in net lease, we committed $4.2 billion, bringing commitments year-to-date to $8 billion at a roughly 8% cap rate on average. Concurrently, we monetized over $320 million year-to-date at a 6% weighted average cap rate, continuing to drive spread compression at the point of sale. With regards to performance, gross returns in net lease were 4.1% for the second quarter. In real estate credit, we invested $1.4 billion in public securities at an 8.1% yield to maturity and 11.1% debt yield. During the first half of 2025 we maintained a leadership position in our area of focus, anchoring roughly 40% of the single asset, single borrower CMBS deals that priced during that period and about 1/4 of total CMBS deals. And in digital infrastructure, we held a final close for our third digital infrastructure flagship fund at its hard cap of $7 billion. In GP Strategic Capital, we continue to deploy out of the sixth vintage of our flagship GP Stake strategy, having made 3 investments thus far. Performance across these funds remains strong to net IRR of 22.5% for Fund III, 36% for Fund IV, and 15.3% for Fund V. Moving on to some housekeeping items for the quarter. We want to be sure to point out a few things that we think will be helpful. During the second quarter, we listed OTF, which we had previously said would drive approximately $135 million of incremental annual management fees for roughly $33 million per quarter. Given the timing of the listing in mid-June, we saw approximately $6 million of this in the second quarter. In conjunction with the listing, we saw a de minimis impact to NTI during the second quarter and the anticipated step-up of approximately $3 million in the third quarter. As a reminder, the capital raised for the seventh vintage of our net lease strategy primarily earns fees on deployment. In conjunction with the fee step down for the prior fund OREF VI, we expect third-quarter management fees in these 2 funds to be roughly flat compared to the second quarter. And for our alternative credit strategy, we anticipate seeing the impact of management fees from the private offering of the interval fund in approximately 12 months, similar to a fee waiver. Finally, we had a little over $7 million of catch-up management fees in the quarter. And as it relates to G&A, we had a few million dollars of one-time items. So to wrap up here, we feel like we're hitting on all cylinders across the business. Blue Owl sits at the intersection of many of the secular trends that we believe will define alternatives for the next decade, and we feel fortunate to be an incumbent across a number of these areas. Now all of these things take time and what you've heard from us today is that the investments we've made over the past year are beginning to bear fruit. But this type of progress is measured in years, not quarters and for shareholders, our setting and predictable financial profile allows you to focus on the big picture evolution of this market, not on the quarterly swings of realizations or capital markets fees. To us, that is a very valuable thing, and we think that over time, our stock will reflect the value of that certainty. Hopefully, what we've provided you today is a helpful mile marker on the growth road map we outlined during Investor Day. As you heard that day, we intend to grow FRE management fees to over $5 billion and FRE to over $3 billion, and we feel that we are very much on track with those long-term goals.

Can we please open the line for questions?

I heard your comments about enhancing the Lending Club and Cap on Tap partnerships. We're noticing significant growth in the asset-backed market, and you have new opportunities to explore. Could you elaborate on your current asset origination channels? Specifically, how do you categorize these channels regarding platforms, forward flow agreements, or portfolio purchases? Additionally, what are your objectives as you aim for growth in asset-backed finance?

Thanks, Glenn. The opportunity in asset-backed is huge, as you observe, and we are in a very distinctive position to win. Delivering the best results for our LPs, our investors leads to building a significant business. We have the template, as you've seen us already do it. We have onboarded the best team in the business. This is a high barrier to entry business. We have the best in the business as the team driving it. It's a team deep on data and data science expertise. We are using cutting-edge technology. We originate across various channels within the world of asset-backed finance. So we are in those markets and already have the pipeline. The difference here has been they had the pipeline built but not the endpoint for the capital. They've had a series of very successful funds. However, we are broadening the home with this new interval fund, which as you saw, we closed with enormous success just this quarter. We have the same exact approach with triple net lease, a business where, as you heard us say, we have tripled the assets in just 3.5 years with that business. So we have our asset-backed business fully integrated with our direct lending business and tied in with all the infrastructure built to our insurance platform. We have every piece in place. This is going to be a very good investment for our investors, and it's a wonderful complement to other strategies people have. It's a durable, much less correlated strategy.

Congrats on the record fundraising quarter. So our question is on the topic of privates in the 401(k) channel and your new partnership with Voya. So we're curious, where are you? And what are your thoughts on the build-out of a target date fund? And do you think target date funds are going to require one manager partner or do you see a world where there's multiple partnership models that are more likely?

The opportunity ahead is to bring the products we have been successfully delivering to a wide range of institutions and individuals. Institutions have benefited from access to products like ours for decades. We've pioneered access by individuals for over a decade and are probably #2 in the world in the wealth channel. We live in a world where if you are a defined benefit pensioner, you've been benefiting from what we do for years. If you're an affluent individual investor just with your own assets outside of a retirement account, you’re benefitting from what we do. And if you're a sovereign wealth fund, you benefit too. Yet, somehow if you have a 401(k), you don’t get this chance. Sorry, that’s not fair, and we see this as an essential opportunity to democratize access.

So we're a few quarters removed here from the series of acquisitions you made. There's clearly been a lot of upfront cost and investment, and I appreciate it will take some time for all these to scale. But what should we be looking for from the outside in terms of the integration and the scaling of these businesses really starting to inflect? Is it the trajectory of fundraising in flows? Is it an acceleration in management fees or is it as simple as an inflection in that FRE margin?

It's already happening. If you look at this quarter, you're already seeing the fruits of those benefits. The integration has occurred, and we are getting benefits from those integrations for all LPs. For example, in asset-backed, by being married to this much broader credit origination engine. Remember, we have 400-plus companies in our portfolio, many needing asset-backed financing solutions. So the benefits flow to asset-backed. The same thing applies to our collaborations with companies looking at asset-backed solutions. Integration has already happened. Look at digital infrastructure and our real estate business, our fastest-growing real assets business. The opportunity for expansion is substantial. You can start to see the benefits manifest in our fundraising numbers.

Sure, if I could just add to Marc’s point. We are already seeing improvement in margins. We have maintained a strong margin and feel good about our position in the industry. Over the long term, there are margin expansion opportunities available. We have seen record fundraising numbers which contribute positively to our growth trajectory.

In real estate, focusing on triple net lease, can you just talk about the competitive environment there? And if you're seeing more activity from others? You've definitely been a leader in net lease, but recently others have emerged as well. Are you noticing any shifts in the competitive landscape?

The data center opportunity has expanded dramatically, and it's better suited to both our triple net lease real estate and our digital infrastructure product. Concerning triple net lease, the market is expanding. However, we are not seeing any major changes. Our pipeline is growing, and trust is building with partners, maintaining our position as the partner of choice. We continue to have every one of the largest funds doing business with us. Investors have observed this opportunity, and there is an unquestioned market leader - that is, us.

Great. Maybe just to circle a little bit more of a narrow part of the conversation. I wonder if you could talk a little bit about activity levels on direct lending, maybe how the quarter itself transpired maybe the exit velocity and what you might be seeing into the third quarter. One of your peers had a very constructive update for the month of July. Any relatedly, I'm wondering if you could maybe speak to what you're seeing in terms of spreads on incremental capital deployed?

This environment is excellent for the direct lending business overall. Credit quality remains exceptional. Our portfolio has sustained average EBITDA growth. While we are witnessing some slowdown in refinancing due to significant prior movement through the system, we have recently seen a meaningful uptick in activity, presenting of some very interesting opportunities. We also have notable indicators suggesting favorable economic conditions. There's a good environment for transactions, and with substantial capital available, I believe we are set for continued success.

My question is on flows. I think last quarter, you've been talking about the picture looking much better in the second half than the first half. But given the big 2Q beat, is that still your view or did that beat pull some of that view forward?

We feel very good about the second half of the year, both for institutional as well as for our wealth products. The second quarter's performance supports our confidence.

Considering the digital infrastructure opportunity, how quickly could you be back in the market raising for your next flagship vehicle? Cultivate a context around future fundraising capacity relative to prior vintages.

We expect to be out in the market raising the next vintage next year. The scale of the opportunity set is massive, especially with the growing importance of data centers in the market. Our operational capabilities already positioned us to meet this demand. We foresee substantial future fundraising capacity relative to what we have today.

I wanted to zoom out a little bit. Given the broad range of strategies, the franchise continues to raise capital through additional vehicles. Can you help unpack the increase in management fees relative to the substantial capital raised?

We are excited. We've seen record fundraise quarter with substantial amounts going into AUM not yet paying fees. This positions us well for future deployment opportunities, which translates to higher management fees down the line.

Regarding M&A, look, while we have made several successful strategic acquisitions, that’s a minority part of our strategy. We remain committed to evaluating opportunities that align with our risk management process. Consolidation is a real part of the alternatives landscape, and we continue to explore options, but will be selective. To wrap up, it was a tremendous quarter, and we anticipated this. We are delivering and consistently achieving outsized growth. We are on track toward our long-term goals. We are in a very good position in the market, have demonstrated our commitment to our investors, and believe our stock will reflect that value over time.

This concludes today's conference call. Thank you for joining. You may now disconnect.