Earnings Call Transcript - OWL Q2 2022

Operator, Operator

Good morning. My name is Joseph, and I will be your conference operator today. At this time, I would like to welcome you to the Blue Owl Second Quarter 2022 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. Ann Dai, Head of Investor Relations, you may start your conference.

Ann Dai, Head of Investor Relations

Thanks, operator, and good morning to everyone. Joining me today are Doug Ostrover, our Chief Executive Officer; Marc Lipschultz and Michael Rees, our Co-Presidents; 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 Investor Resources section of our website at blueowl.com. This morning, we issued our financial results for the second quarter of 2022 and reported fee-related earnings (FRE) of $0.14 per share and distributable earnings (DE) of $0.13 per share. We also declared a dividend of $0.11 per share payable on August 29th to shareholders of record as of August 22nd. During the call today, we'll be referring to the earnings presentation, which we posted to our website this morning, so please have that on hand to follow along. With that, I'd like to turn the call over to Doug.

Douglas I. Ostrover, CEO

Thank you, Ann, and good morning, everyone. As you can see on Slide 7 of our earnings presentation, we reported yet another strong quarter of results for Blue Owl, with AUM up 91%, management fees up 63%, and FRE up 52%, all from the second quarter of last year. We continue to experience growth across all verticals, underpinned by secular tailwinds, demand for our differentiated strategies, and expansion of Blue Owl's distribution platforms globally. Our significant permanent capital base, accounting for 92% of our management fees, in conjunction with our 100% FRE-based earnings, creates resiliency and stability in our financial profile. Many of you were either in the audience or listening via webcast when we had our Investor Day a couple of months ago. And when I think back on the key messages from that day, the business that you heard us describe is one that really stands out during markets like the one we're seeing now. For those of you that weren't able to tune in for Investor Day, we talked about three key milestones for our business: raising $50 billion of fee-paying AUM across 2022 and 2023; achieving after-tax DE of $1 billion in 2023; and paying $1 dividend per share in 2025. We've always said we're striving to build a different type of alternative asset manager. We want to give you growth that is better than our peers, but with downside protection and absent the volatility of carried interest running through our financials. You've seen that clearly shown in our results this quarter, and I expect that to play out even more next quarter. We look forward to continuing to demonstrate the strength of our differentiated model. Our view has always been that investors should appreciate and ascribe higher value to stable, steady, and growing management fee streams. We are now getting the chance to display that stability against a volatile and challenging market backdrop for our peers. With that in mind, let me first offer some commentary on the broader market environment and Blue Owl's positioning before I cover our second quarter results. In a continuation of the trends we saw during the first quarter, inflation, interest rates, and global GDP growth have remained in the spotlight, driving ongoing public markets volatility. This is exactly the type of environment where we can differentiate our business model and the value of our strategies. At the Blue Owl level, we have patient and permanent capital and resilient management fees, providing underlying support to our existing earnings profile even as we continue to grow, the layer cake analogy, and we anticipate a net positive impact to earnings as rates rise, particularly for our direct lending business, where Part 1 fees benefit from higher rates. At the strategy level, that same permanent capital allows us to provide flexible financing solutions to sponsors, corporations, and alternative asset managers during a time when liquidity is scarce and public markets are closed or much more expensive than they used to be. For the investors in our strategies, our products offer attractive qualities in volatile uncertain markets: income generation, downside protection, and structural inflation hedges. All this to say, we feel very well positioned to navigate the current market environment. Pipelines remain robust across the business as we continue to see market share come our way in direct lending despite lower industry M&A volumes. We believe our scale and capital base create meaningful competitive advantages. This is one of the most favorable environments we've seen for direct lending since our inception seven years ago. We fully intend to capture the attractive risk-adjusted opportunities we're seeing. Moving on to our second quarter results, we continue to demonstrate steady and robust growth, with management fees growing 14% quarter-over-quarter and 63% year-over-year. Fundraising for the quarter was well diversified with over $7 billion of capital raised across strategies from both institutional and private wealth investors, up from $1.2 billion in the second quarter of 2021. That brings our last 12-month equity capital raised to $17.3 billion for organic growth of 28%. As we mentioned during our recent Investor Day, we launched our new wirehouse-distributed tech lending product, ORTIC during the second quarter, closing on over $700 million through August 1st, primarily driven by one wirehouse in one geography, and we are in the process of expanding the distribution for that product substantially over the coming quarters. This is in addition to the multiple closings we've had for our other tech lending BDC, ORTF2, which has now exceeded $3 billion of equity and which remains in the market. We continue to see good traction for a diversified lending strategy as well. Through August 1st, we have raised an additional $2 billion across direct lending, of which private wealth constituted over half. In GP Solutions, we raised $3 billion for Dow Fund V during the quarter, and through August 1st, we've raised the subsequent $200 million to take the fund to approximately $10 billion. We anticipate wrapping up fundraising later this year, which we expect will bring the fund to over $10.5 billion. In real estate, we expect the second half of the year to be very active as we come to market with new products and next vintages of existing clients. What we hear often from our investors is that the defensive nature of our strategies and their focus on income generation and principal preservation are highly desirable during good markets, but they stand out even more during challenging environments.

Marc S. Lipschultz, Co-President

Great. Thanks so much, Doug. I'd like to pick up where Doug left off in his earlier comments about the terrific opportunities we're seeing in our direct lending business. We've been able to generate strong growth in that business through very constructive market environments, but these choppy markets are even more advantageous for us to deploy capital and are especially where direct lending strategies shine. As a scaled player in direct lending with patient permanent capital, we are well positioned to provide much-needed capital solutions at a time when liquidity is scarce, and our market-leading position in tech lending has served us well. We continue to lead a number of large financings for large software firms, achieving attractive spreads and low loan-to-values. Our continued capital formation puts us in a position to lead the biggest deals happening in the market today, such as Zendesk and Anaplan. So to use a recent example, we were recently named the admin agent on the senior credit facilities for Hellman Improvement and Premier's acquisition of Zendesk, a scaled and fast-growing market leader in the customer support service market for midsize and enterprise customers. Zendesk's revenue is highly recurring with attractive retention metrics driven by a strong value proposition and expansion within its existing customer base, precisely the type of characteristics we look for when we've enhanced a software company. For the first half of the year, we looked at nearly 50 deals with facility sizes in excess of $1 billion, exceeding the over 40 investments of that size we evaluated in all of 2021 for the full year. Our pipeline remains very robust as sponsors sit on meaningful dry powder and continue to find attractive opportunities. This is an excellent market with favorable supply-demand characteristics for us. For the second quarter, as you can see on Slide 13 of the earnings release, gross originations of $7.6 billion were up nearly 50% year-over-year and over 55% quarter-over-quarter. For the last 12 months, gross originations in direct lending have been $28.9 billion, more than double what we originated in the prior 12-month period. Although we expect capital markets activity will likely remain under pressure in the near term, we're cautiously optimistic that the back half of this year will remain quite active for our direct lending strategy. Credit quality across our direct lending portfolio remained very strong, and we are proud to say we have not had a single new non-accrual or default in the quarter. Our annualized net realized losses have remained at approximately 5 basis points since inception. We continue to focus on downside protection, with a weighted average loan-to-value in the low 40s across our direct lending portfolio and in the low 30s across our tech portfolio. The interest coverage ratio across direct lending is roughly 3.3 times; we expect that even with a further 200 basis point rise in interest rates, interest coverage will remain above 2.5 times, so our portfolio is very healthy. So far, we have seen great resiliency in the ability of our portfolio companies to pass costs along to their other customers, protecting their businesses from margin compression. Now turning to performance for the last 12 months, the direct lending portfolio appreciated 8% for the second quarter, while metrics were negative due to spread widening on how we value our existing loans. As a result, our portfolio continued to fundamentally perform very well. Let me take a second and comment on how we think about mark-to-market. You've heard me say this before, but it does bear repeating. While we care very deeply about the performance of our products, and it very much matters to us and to the investors in our funds for this particular audience, performance, and in particular unrealized mark-to-market, is not really impactful to our shareholders. As you saw during the quarter, there was negligible impact on our management fees as a result of marks, as evidenced by the management fee growth in direct lending during a period in which public credit markets traded off significantly. Said another way, what we ultimately care about is good credit quality and that we get paid back on our investments, and everything in between is simply noise. Unrealized marks from changes in spreads do not impact the overall performance of our investments or our dividends to our investors. Now moving on to fundraising, we raised $3 billion in our direct lending strategies during the second quarter, of which $1.9 billion constituted private wealth. This incorporates $500 million closed for our new tech income fund and ongoing closings for our core income fund. Furthermore, we've experienced very limited tenders in our core income fund. During the second quarter, investors requested tenders for a negligible $28 million, which compares to $10 billion of AUM in this fund. Subsequently, at the end of the second quarter, we closed an additional $2 billion across direct lending and, more broadly, we continued to expand the distribution for all of our direct lending products.

Michael Rees, Co-President

Thank you, Marc. We continue to see a very constructive fundraising and investing environment for our GP Capital Solutions business, particularly given our positioning as an attractive and scaled source of capital for growing private managers. Continued growth across the alternative asset manager space not only drives our investable opportunity set as more firms seek growth equity but also drives cash flow from our partner managers as they continue to raise and deploy capital. As Doug mentioned earlier, during the second quarter, we closed on roughly $3 billion of new commitments for Dial Fund V, bringing total commitments to $9.8 billion. So far in the third quarter, we've raised an additional $200 million, taking the fund to $10 billion. We are excited about the strong momentum and anticipating wrapping up fundraising later this year, which we expect will bring the fund to over $10.5 billion, exceeding the $9 billion we had on the cover. At $10.5 billion, the size of Fund V will be a record in the GP stakes industry and nearly twice as large as the next competitor. This puts us in a position to continue deploying capital into large firms with leading track records. As we've highlighted at our Investor Day, our market share of deals above $600 million in check size has been approximately 88%. We remained active on the capital deployment front as well, adding two positions in leading firms that are new partner managers as well as three commitments to firms we have funded previously. As you can see on Slide 16 of the earnings presentation, this brings total commitments for Dial V to $7.4 billion. Having already surpassed Fund V's target size by $1 billion as of August 1st and with additional capital expected to close this year, we anticipate the launch of Fund VI towards the end of 2023 with fees turning on in 2024. Performance across the Dial funds remained strong with a gross IRR of 31% for Fund III and 112% for Fund IV. Looking ahead, we're very optimistic about what the next 12 months holds for the GP Capital Solutions business. Not only is Dial well positioned within a very small set of firms that have the scale and capability to provide growth capital to fund these managers, but we continue to partner with managers who are the greatest beneficiaries of flows to alternatives and GP consolidation. Overall, we see ample opportunities to take advantage of this dislocation in the current market environment.

Alan J. Kirshenbaum, CFO

Thank you, Michael. Good morning, everyone. I'm going to start off by walking through the numbers for this quarter, and then I'll touch on a few other items I want to cover today. I'll be making references to pages in our earnings presentation, as Ann mentioned, so please feel free to have that available to follow along. Okay, let's start off by covering our quarterly results. We closed our acquisition of Wellfleet on April 1st, so you will see those numbers included in our results today. Our second quarter was another quarter of strong growth for our business. FRE revenues are up $45.2 million, or 17% from last quarter, and up 51% from the second quarter a year ago. Management fees are up $36.7 million, or 14% from last quarter, and up 63% from the second quarter a year ago. Broken down by divisions, direct lending management fees are up $12 million, or 9% from last quarter and 39% from the second quarter a year ago. GP Capital Solutions management fees are up $22.6 million, or 21% from last quarter and up 70% from the second quarter a year ago. When you adjust for catch-up fees in Dial Fund V, we are up $12.8 million and real estate management fees are up $2.1 million, or 12% from last quarter. FRE is up $25.7 million, or 15% from last quarter and up 52% from the second quarter a year ago. FRE margins are roughly flat from last quarter at approximately 62%. We expect this will tick down for the second half of this year due largely to distribution costs we expect to book in the remainder of the year. Our ratio of compensation as a percentage of revenue is roughly flat to last quarter at 27%. We announced a dividend of $0.11 per share for the second quarter, up from $0.10 per share last quarter. All of this is in line with our expectations and what I noted on our earnings call last quarter and in February. We continue to be on track with reaching our 2022 goals of $1.3 billion of revenues and an FRE margin of 60%. I wanted to spend a moment on our fundraising efforts as we put up very large numbers over the past four months. In the second quarter, we raised $7.2 billion, and since quarter-end, we have raised an additional $2.2 billion. So in total, we have raised $9.4 billion of equity commitments from April 1st through today. I'm going to break down these fundraising numbers across our products, so everyone has more transparency here. In direct lending, we raised $5 billion. $1.8 billion was raised for our core income BDC, OR CIC, which is now over $4.5 billion of equity. $1.7 billion was raised for ORTF2, which is now over $3 billion of equity, surpassing the size of ORTF. As a reminder, we earn fees on total assets for these two products, which, including ORTIC, we have now raised approximately $7 billion of equity. With a turn of leverage, that's approaching $15 billion of total assets for our tech-dedicated products: $700 million in ORTIC, our Technology Wealth platform products, and $500 million in CLOs. In GP Capital Solutions, we raised $4.2 billion; $3.2 billion was raised for Dial Fund V and an additional almost $1 billion of co-invest, which is fee-free. In real estate, we raised $200 million and are in the process of launching two new products, as you heard in more detail from Marc a few minutes ago. As it relates to our AUM metrics on Slide 11, we reported AUM of $119.1 billion, fee-paying AUM of $77.5 billion, and total permanent capital of $95.5 billion. AUM not yet paying fees was $8.8 billion as of June 30th. AUM grew $17.1 billion to $119.1 billion, an increase of 17% from last quarter and a 91% increase from the second quarter a year ago. Fee-paying AUM grew $11.9 billion to $77.5 million, an 18% increase from last quarter and an 81% increase from the second quarter a year ago. Both metrics driven primarily by deployment of capital and direct lending, capital raised in Dial Fund V, and when looking at the growth from a year ago, the addition of our real estate and CLO businesses. Permanent capital grew $9.9 billion to $95.5 billion, an 11% increase from last quarter and a 68% increase from the second quarter a year ago, driven primarily by deployment in direct lending, capital raised in Dial Fund V, as well as the addition of our real estate business when compared to a year ago. AUM not yet paying fees was $8.8 billion, including $6.4 billion in direct lending, $0.8 billion in GP Capital Solutions, and $1.6 billion in real estate. This AUM corresponds to an expected increase in annual management fees totaling over $105 million. As Marc highlighted earlier, we had another strong quarter of deployment in direct lending, with gross originations of $7.6 billion and net funded deployment of $4.6 billion. This brings our gross originations for the last 12 months to $28.9 billion, with $16 billion of net funded deployments. As it relates to the $6.4 billion of AUM not yet paying fees in direct lending, it would take us less than two quarters to fully deploy this based on our average net funded deployment pace over the last 12 months. Turning to our balance sheet, we continue to be in a strong capital position. As you can see on Slide 22, we currently have over $1 billion of liquidity with an average 14-year maturity and low 2.9% fixed cost. So, to wrap up here before getting to Q&A, there are a few last items I want to cover. On distribution costs, last quarter, I talked about a large one-time upfront distribution or placement fee expense on certain equity dollars raised. Some of that we closed during 2Q, and the rest, the majority of what I was referring to last quarter will close in the second half of the year. During the second quarter, we had distribution costs elevated by upper single-digit millions versus the first quarter, and the majority of what we expected will now be booked in the second half of the year. On our Investor Day, we held in May, we put out some financial milestones we wanted to achieve. These milestones included achieving $1.3 billion of revenue this year and a 60% FRE margin, as well as milestones for 2023, which included doubling our 2021 revenues to $1.8 billion, hitting $1 billion of after-tax distributable earnings, and raising $50 billion of fee-paying AUM during 2022 and 2023 combined. As I noted earlier, although we're all facing a pretty choppy market environment with strong headwinds, we are on track with our 2022 goals, and I'll note here, we are also on track with our 2023 goals, including our $50 billion fundraising goal. Of the $50 billion, we have raised $10.5 billion through June 30th and an additional $2.2 billion through today. At the end of June, we were added to the Russell 1000 and 3000. That was a process we have been very focused on being a part of, and we're glad to be included in these indices. Both on last quarter's earnings call as well as at Investor Day, I commented on the rising rate environment we're in and the potential impact that could have on our business. I've included here again on Slide 14 the impact of rising rates on our direct lending business. We are expecting to see a lift in our management fee line in the third quarter due to rising rates as well as another possible lift in the fourth quarter. If the Fed continues to raise rates, we would expect continued increases to our management fee line due to an increase in Part 1 fees across our BDC business. So summing it all up, we are very pleased with our results again this quarter, delivering double-digit growth quarter-over-quarter in all of our key metrics: AUM, fee-paying AUM, FRE revenues, FRE, and DE. We are hitting in all of our key metrics, and we continue to have very exciting growth plans ahead of us as outlined during our Investor Day, which we feel we continue to be well positioned to execute on. Thank you again to everyone who has joined us on the call today. With that, operator, can we please open the line for questions?

Operator, Operator

Your first question comes from the line of Alex Blostein. Your line is open.

Alexander Blostein, Analyst

Hey, good morning everybody. Thank you for the question. So maybe we could start with just more details around the retail channel. Obviously, it's a huge growth opportunity and a focus for you guys, and nice to see traction there. The environment has changed pretty materially, but it doesn't seem like there's been a lot of negative impact on you guys just based on some of the reduction comments that you had earlier in the prepared remarks. I was hoping to get a better sense in terms of how much of the net flows are coming from sort of existing platforms versus maybe some of the newer ones that you've added, just to get a better sense of kind of same-store sale dynamics? And then you mentioned a lot of numbers, so I was hoping to unpack this a little bit. But the $2 billion that you raised so far in direct lending in the third quarter, I just want to double-check that that's effectively through early August, and maybe you can give us a sense of sort of the open-ended products versus kind of continued fund rate towards the up to?

Douglas I. Ostrover, CEO

Why don’t I — good morning Alex, I'll have Alan start on the $2 billion direct lending piece, and then I can address retail.

Alan J. Kirshenbaum, CFO

Thanks, Doug. Hey, good morning Alex. The answer is yes, it grew effectively today. So it includes the August 1st close as well as the July 1st close for our wealth distributed products.

Douglas I. Ostrover, CEO

And then let me just start by saying in fundraising this quarter, we were really pleased. It was a great quarter. We raised $7.2 billion. I think, as Alan mentioned, $3.6 billion of that came from wealth, and that's versus $2.2 billion in the first quarter. I think I have this number right; it's about $1.3 billion that has been raised from wealth, quarter-to-date. So we continue to do well, definitely seeing a little bit of weakness. We're reiterating our $50 billion of fundraising goal for the next 2022 and 2023. We mentioned that our tenders have been deminimis, just $28 million in the second quarter out of $10 billion. Over the intermediate and longer term, our views haven't changed. We're confident in our ability to continue to raise capital from wealth. The products we're offering in the channel have attributes that really resonate: lots of income generation, downside protection, positive leverage to rising rates, especially in direct lending. I think at our last call, we talked about the wealth channel and how allocations remain very low. At Investor Day, you'll remember we put up a number that we thought the wealth channel would control $220 trillion by 2025, and that an incremental 20% of that could move into the alternative market, that's $40 trillion to $50 trillion. So when we talk about wealth, our enthusiasm hasn't waned at all. In fact, we're more excited than ever. We have spent a lot of time building our brand. Our distribution now is truly global and as good as anyone in the market. You know we've been at this since the day we launched approximately seven years ago. I think we're in a really unique position to not only continue to maintain market share but to grow market share in that channel for the next number of years. Just to reiterate, super excited about it, and hopefully Marc mentioned this, you'll start to see that as we roll out our non-traded REIT.

Alexander Blostein, Analyst

Great, thanks for all that color. My second question is probably for Alan, around the G&A commentary on the distribution cost, understanding that, that could be pretty lumpy, obviously, based on this quarter's results, and sounds like that number is coming up next quarter. But I guess, a) maybe you could just kind of help us clean up what you actually expect G&A dollars to be for Q3, Q4, just to get some of the noise out of the way. But more importantly, as you guys are expanding into more distribution platforms, can you just kind of help us think about the framework of how holistically distribution costs work for you guys, whether it's a basis points on retail AUM or some framework around that would be helpful?

Alan J. Kirshenbaum, CFO

Yes, of course, Alex. Thanks for the question. So, look, when I think about placement costs for the rest of this year, for Q3, we could expect $20 million to $25 million incremental from our Q1 level. For Q4, we could potentially expect — and look, this is subject to obviously where we end up actually fundraising and where fundraising levels end up in Q4, but an additional $15 million to $25 million incremental from Q1. Please don't extrapolate the amount of fundraising that we did in Q2 relative to the placement cost and extrapolate fundraising to Q3 and Q4. The costs vary and I'll talk — I'll answer your second question in a second. The costs vary quite a bit across different wealth and wirehouse platforms. Just to pull the lens back for a minute, although these — some of these numbers are big numbers for our G&A line, I would pay these costs every day of the week, right. I've talked about last quarter, if we raised, let's say, $1 billion as an example and we pay, let's assume $20 million to $25 million in placement costs for that, and that's blended across different wirehouse and wealth platform costs; that would over time equate to roughly $30 million or $40 million of annual management. So it effectively, it does pay itself off in one year. To answer your second question, there are some platforms that charge everything upfront. There are some platforms that charge a small amount upfront and an annual trail over time. Generally speaking, we could pay 2% to 4%, either upfront or over time, depending on that platform.

Alexander Blostein, Analyst

Got it. But just, I guess to close this topic, the elevated distribution costs that you guys can see from placing these products in the back half of the year, is that largely a 2022 dynamic because you're getting the new platforms, and you obviously have RCF2 and a couple of other large kind of launches or do you think the distribution expense run rate could ultimately be higher in 2023 as well?

Alan J. Kirshenbaum, CFO

I think we're going to continue to ramp up what we're doing across the retail and wealth platform channels. It certainly could be something that you'll see for the foreseeable short and intermediate term. With that said, keep in mind in my prepared remarks, I commented on where we think we're going to be in 2022. Our guidance continues to be spot on with where we expect to end the year, right. The $1.3 billion of revenue, 60% FRE margins, which equates to $780 million of FRE, and the 2023 goals that we put out there, the milestones that both Doug and I commented on the call, in our prepared remarks, we continue to feel very good about those milestones and we continue to feel that we will achieve those milestones. Everything we just talked about for placement costs is already embedded in our expectations for 2022 and 2023. So there's nothing — there's no new incremental distribution costs here that we see today or in the foreseeable future that would change the guidance we've already given.

Alexander Blostein, Analyst

Very helpful, thanks so much.

Alan J. Kirshenbaum, CFO

Of course. Thank you. Thank you very much, Alex.

Operator, Operator

Your next question comes from the line of Glenn Schorr. Your line is open.

Glenn Schorr, Analyst

Hello, thanks very much. A question on the direct lending side. I think I got the numbers right. You mentioned 50 deals in the first half, over $1 billion versus 40 of all last year that you've looked at. So the question I have is if you could help peel back the onion of what is it that's driving this higher activity level because it's not just you. It seems like that marketplace is expanding. You happen to be great at it, but is it the deal structures that you can provide the relationships, anything to do with rates, maybe lower capital ratios at banks? Just curious on how you're sourcing them and the big picture drivers there? Thanks.

Marc S. Lipschultz, Co-President

Great. Thanks, Glenn. First of all, definitely, I want to echo your comment. I think we're great at it. So here's what's happening: We're seeing a continued market share evolution. Look, at the end of the day, there’s a very big marketplace out there for capital solutions. Direct lending is a minority portion of it and will probably remain a minority portion of it for a very long time. That said, there’s $2 trillion of dry powder in the hands of private equity firms. Just assuming one turn of leverage, that’s $2 trillion of incremental demand for financings, plus you’ve got to refinance the trillions of dollars of financing that are already in place in the market. From the point of view of where Blue Owl sits, it's nearly limitless sort of white space, so to speak. What’s happening for us in particular, as you know, the market in total for direct lending has been growing, and it’s been growing for a few reasons. One, of course, has been the expansion of the depth of the pools of capital we have to offer. Our relevance to ever larger financing opportunities has changed over the last five years. You can see in those same calculations that 50 deals over $1 billion that we looked at; you go back to, say, 2016, and there were none of that scale that were relevant to direct lending. So it is an evolution of the depths of capital pools. It's also very importantly, I think most importantly, that we’ve been able to prove that the model for direct lending, when we started Blue Owl, we really had a view that what we wanted was to take a direct lending business whose legacy had been a lender of last resort, for the companies that sort of couldn't get financed elsewhere, and turn it into the lender of first choice for the best companies and the best sponsors. That meant creating a value proposition. Today, what we call the 3P is predictability, privacy, and partnership. People call them, in many cases, the very best firms and the best companies to say, look, I understand we pay more spread. I understand it's a tougher document, but I really appreciate the value proposition that comes with it. Today, think about this: We, at Blue Owl, have led Anaplan, a $10 billion plus take-private, and we've announced that we're leading Zendesk, another $10 billion plus take-private. You may have seen that Tomarabo announced Ping; we’re the lead in financing the Ping take-private. I think you've just seen this model and its value proposition to these world-class companies and sponsors prove out.

Glenn Schorr, Analyst

Okay. I appreciate all that. Whoever wants to take this one, I'm just curious on what factors we should be looking at or what you're looking at that might indicate closer towards listing of the BDCs? Thanks.

Alan J. Kirshenbaum, CFO

Sure. Of course, Glenn. We obviously can't comment on the timing of an IPO with an SEC registrant. I would comment that the ORTF portfolio is fully invested, fully deployed, and fully levered. Our shareholders are enjoying a great cash-on-cash return, dividend, IRR, and the ORCC 3 portfolio is fully invested, fully deployed, and fully levered. ORTF, we're just now continuing to ramp. We've now exceeded the size of ORTF, as I mentioned on the call. But we have a long way to go in terms of deploying that capital. So maybe I'll leave it there, if that's okay.

Glenn Schorr, Analyst

Sure. If you're not able to comment on just the factors that lead to it, not the timing, in other words, what market conditions might make it more reasonable?

Alan J. Kirshenbaum, CFO

Sure. The factors I just mentioned are certainly a large contributor towards the timing. The ORCC 3 is a more recently raised product. But ORTF, we raised in 2018. ORCC, we did about a little less than three and a half years from the initial close to the IPO, ORTF we raised in 2018. So that's been about four years. The factors, like I said, fully invested, fully deployed, and fully levered are certainly contributing factors. And now we're just looking for a good market environment, which just isn't there right now.

Douglas I. Ostrover, CEO

Yes. I'll just make one quick comment. At the end of the day, we want to give our investors liquidity. They want it. We want to give it to them. But we're all in agreement that we want to do it at a time where we feel really good that when we list, it will trade well. We're certainly not in that environment today. There's virtually no IPOs. So as you think about the right environment, think about an environment where it's a fairly robust environment to get IPOs done. I think we will be one of the firms that list and get a good reception because, as Alan mentioned, it's a mature portfolio doing well. I think when the time is right, our marketplace will find it interesting.

Alan J. Kirshenbaum, CFO

Yes. Another factor, just to add, maybe one more component is you want a really good portfolio to take to the market, really pristine from a credit perspective. You really couldn't ask for more with ORTF. We've had no defaults, no arrears. Our portfolio has been performing incredibly well since inception. That is certainly another factor when you think about taking something to the market; that's certainly a material component of how we think about it.

Glenn Schorr, Analyst

Thank you for all that.

Operator, Operator

Your next question comes from the line of Patrick Davitt. Your line is open.

Patrick Davitt, Analyst

Hi, good morning, everyone. First question is on kind of the tenor of transaction fees. It looks like your deployment and funding was more like Q4 2021, but the transaction fee was meaningfully below the $39 million you reported then. Could you flesh out the dynamics around those kind of disconnects between deployment and the actual transaction fees again as we think about how it looks going forward?

Alan J. Kirshenbaum, CFO

Sure, I'm happy to help, Patrick. As I mentioned in previous calls, there can be times when originations increase while transaction fees remain flat or increase only slightly. They're not always going to move in perfect alignment. It really depends on the specific deals we lead and participate in, and there are several factors at play. You might notice that transaction fees have risen significantly compared to Q1, which typically is a slower quarter for transaction fees. Overall, transaction fees are generally where we expected them to be this quarter.

Patrick Davitt, Analyst

Thank you. I want to revisit the distribution discussion. You indicated expectations of $25 million to $30 million in mid-Q2 placement fees, which I assume means you had good visibility on that number. What factors contributed to it being significantly lower than anticipated? Does this imply that the guidance for Q3 and Q4 is somewhat variable?

Alan J. Kirshenbaum, CFO

When I spoke last quarter, it was really due to the timing of when we closed the capital. Some of that was expected to come in Q2, but part of it moved to Q3. I feel very positive about the Q3 guidance I provided. However, the Q4 guidance is based on certain fundraising levels that we can’t predict right now. But I am comfortable with the Q3 numbers I discussed.

Douglas I. Ostrover, CEO

Thank you, Patrick.

Operator, Operator

Your next question comes from the line of Craig Siegenthaler. Your line is open.

Craig Siegenthaler, Analyst

Hey, good morning everyone. Hope you are all doing well.

Douglas I. Ostrover, CEO

Thanks, Craig, doing great.

Craig Siegenthaler, Analyst

So my question is on the Wellfleet acquisition, which closed on April 1st. Do you guys have handy what the management fee and FRE contribution was in the second quarter? And as we're forecasting into Q3 and Q4, is this a good run rate to build off of for Q3?

Alan J. Kirshenbaum, CFO

So we don’t take divisions down to the FRE level, Craig. But I can certainly tell you that the revenue contribution to the direct lending business from Wellfleet was in the mid to upper single-digit millions. Yes, that you can anticipate that as a run rate going forward; we will grow that business. So certainly, we’ll look to add to that over the coming quarters as we continue to launch CLOs, but that’s a good base to start with.

Craig Siegenthaler, Analyst

Great, thank you Alan. Just as my follow-up, I know you hit on retail flows overall, earlier in the call, but how have ORCIC's flows trended since June 30th?

Alan J. Kirshenbaum, CFO

We had closes on July 1 and August 1. Those numbers have decreased slightly, not significantly, but they have decreased a bit, which aligns with our expectations. I would argue they are somewhat better than what we've been observing in the industry.

Craig Siegenthaler, Analyst

Great, thank you Alan. Take care, everyone.

Alan J. Kirshenbaum, CFO

Very well, thank you.

Operator, Operator

Your next question comes from the line of Brian McKenna. Your line is open.

Unidentified Analyst, Analyst

Great, thanks. So just to follow up on direct lending. There's clearly a significant amount of deployment opportunities across the market, and this is just going to steadily increase over time for a number of reasons that you already touched on. But how do you think about the size of your investment team in place today to continue to successfully underwrite deals? And what's the expectation for related headcount growth in the business longer term?

Marc S. Lipschultz, Co-President

Thanks for the question, and you hit on a really important point, which is, to do this business well, it is a very people-intensive business. That is to say it's a very intensive work exercise. We have to do a tremendous amount of investing in origination to find the thousands of opportunities that we look at to do the very small number we ultimately do. Deep due diligence, extensive work on credit agreements, which, as we've said before, to sound arcane, is really an important part of what we do in terms of protecting capital. So this is a business that we've had to invest very heavily in building the team. Now we have done that. We have one of the largest dedicated teams in the world to do this. We have coming up on 100 professionals doing direct lending, and that's really what we live and breathe. So I think we're very, very well-staffed to support the level of activities we have. We'll always be continuing to look to build our team and make sure we have the best team on the field, and we're always being proactive in finding the best opportunities. We look back to our activity levels in Q4 last year, look at this quarter; we're in very good shape to support the kind of level of activity that we're talking about and seeing.

Unidentified Analyst, Analyst

Got it. Helpful. And then just broadly, you've done a couple of strategic transactions recently, but I'm curious, just given the backdrop more broadly today, are conversations picking up at all for additional M&A, and what are some of the more interesting areas you would potentially look to expand into inorganically?

Marc S. Lipschultz, Co-President

The discussions around potential opportunities have accelerated, as you've pointed out. This increase in activity refers to the availability of opportunities and conversations to engage in. We will remain very selective in our approach. With Oak Street, we have established ourselves as a market leader with outstanding risk-return results, a strong team, and effective leadership from Mark Zar. This creates an excellent cultural fit, which is essential for any acquisition. We will seek similar attributes in potential targets, though on a smaller scale and with a strategic focus. We prioritize having a fantastic team and a good cultural fit that complements our core business. Our focus is on providing capital solutions, and we are actively looking for opportunities that allow us to incorporate adjacent solutions. We aim to be a reliable source of capital within the private markets ecosystem. Our presence in real estate is solid, and we see potential for further exploration in this expansive market. Currently, our operations are primarily U.S.-centric, but we are open to opportunities outside the U.S. You can expect us to remain actively engaged, especially in a landscape where IPOs for managers are no longer a viable option for many. We plan to continue collaborating with those who can grow, benefiting from the advantages of being part of a larger platform, and we hope to selectively enhance our platform.

Unidentified Analyst, Analyst

Thanks, Marc.

Adam Beatty, Analyst

Hello, thanks very much. I wanted to ask about the vastly increased pipeline in direct lending that you're seeing. It’s a multiyear theme. You call it out at the Investor Day of banks pulling back from some of that. I imagine, given the current environment, that stepped up a bit. You also mentioned kind of non-sponsor activity being a little bit more prominent. My question is, how sustainable is that, particularly on the non-sponsor side? Would you expect a little bit of reversion, or is the pie just growing from here in the future? Thanks.

Marc S. Lipschultz, Co-President

I think, and obviously, time will tell, the pie will continue to grow because there's a great value proposition. Really, at the end of the day, again, we're clear. Our loans – we charge more, and there's no doubt that our documents are more restrictive and rigorous, but we offer people absolute certainty on their capital. They're going to have the money at the time and place they want it on the terms that they want it, that predictability. Private equity, and you want to be able to take a long-term view to build these businesses. We're the match to that. We're the private credit. We bring the whole system together and take a view of where you want to be three years from now to have a bigger, better business and partnership. When things like the pandemic hit or current uncertainties in the world arise today, knowing you can speak to your partner, the person who owns, in our case, on average, lending through kind of the low 40% value of an enterprise, we are going to call that person saying, let's talk about the future and getting from here to there, that's worth it. I think we're seeing two things happening in today's market: the continued overall secular trend, which is, hey, that's a great value proposition. Once people try it, many great sponsors and private businesses alike return to it. They say that was a really good experience; I'm going to do that again. That becomes a kind of step function increase in the marketplace that we work with. Then there's another thing happening today that we should keep an eye on: there is basically no meaningful syndicated market. Today, if you want to make a large acquisition, really, direct lending is the primary option. There’s certainly also a bit of a cyclical element right now in terms of available opportunities for direct lending. It’s a combination of both that we’re seeing; the secular trend being the more powerful one and I think as long as we continue to develop pools of capital and deliver the value proposition, that should continue. I will say that one of the greater challenges from where we sit and I think where the market will sit is we just don’t have enough capital to meet the need. We don’t have enough capital to make the loans that frankly today we deem very attractive. We’re seeing some of the best risk-return opportunities we’ve seen since inception, and we don’t have the capital to meet it nor does the industry for that matter. The bigger challenge I think gets down to capital allocators deciding and recognizing the opportunity here to have a safe floating-rate experience, which is what we offer, and delivering the capital so that we can in turn deliver it through our platforms to these great companies.

Adam Beatty, Analyst

That's interesting, yes, about the constraints around capital. Maybe kind of to that point, you talked a little bit about resources around direct lending in terms of underwriting and diligence and what have you. In terms of distribution, maybe ramping up the capital gathering even more. Where do you see — how far along are you in kind of the build-out of that globally? How much more in terms of resources should we expect to meet your fundraising targets or maybe go a little bit beyond that in the coming years? Thank you.

Douglas I. Ostrover, CEO

Yes. This is Doug. Thanks for the question. Look, since the Dial merger, we've really ramped up our global distribution. One of the things we got really excited about when we merged with Dial and then with Oak Street was there was very little overlap between our LP base. In fact, shockingly, like 2% to 3%. We are in the very early stages of cross-selling one another's products to each of these LPs. I don't want to get ahead of myself, but we are having really good success. To answer your question, I'd say we're probably 85% of the way there. There’s one or two jurisdictions that will probably add a few people. But from a cost standpoint, I think it's a deminimus cost and I don't think it will have any impact on the financials.

Operator, Operator

Your next question comes from the line of Ken Worthington. Your line is open.

Kenneth Worthington, Analyst

Hi, good morning. Thanks for squeezing me in here. First, on direct lending credit quality, there seems to be a fair amount of anxiety about credit quality going into the second half or the latter half of the year. You seem sanguine about credit today; you highlighted the low LTVs and high coverage. But this anxiety persists. Is investor anxiety misguided? What are your thoughts here?

Marc S. Lipschultz, Co-President

I think people should be anxious about markets, but not just now. I mean that is to say our business in direct lending is built for exactly this environment. So we performed very well during strong times as we have for the past many years, but we really shine in times like this; this is what we're built for: senior secured loans against very large companies, very high-quality businesses with world-class sponsors, floating-rate exposure. This is really the market we're built for. I wouldn't say that anxiety is misplaced; it's a very uncertain world out there. Investors should be kind of anxious, but because you're anxious is the reason you go to direct lending. You say, I want to be senior secured, I want to be at the top of the capital structure, I want to be protected from interest rate changes, and I want to do that with people that do vigorous underwriting, deeply in origination, work with the best sponsors, and the best companies. This is our particular position in the market for specifically because that's really our strike zone, which are the best companies and best sponsors; that's a particularly strong place to be. It's really important to note for this audience is we all care tremendously about the performance of our portfolio. Presumably, I think shows our since inception performance was 5 basis points annualized loss rates. For the shareholders, people on this call it doesn't matter really at all. We are an entirely fee-based business, right. 100% of our revenues are fee based. So unlike anybody else in the marketplace where there's carry heavily embedded in their alt structures, we don't have that carry component. We care a lot about credit quality, and we’re — fair to say we’re one of the best at it. It doesn't affect the results.

Kenneth Worthington, Analyst

Okay. Perfect. And I apologize if I missed this; what were the catch-up fees this quarter?

Alan J. Kirshenbaum, CFO

Catch-up fees were $12.8 million.

Kenneth Worthington, Analyst

Okay, awesome. Thank you very much.

Douglas I. Ostrover, CEO

Thank you, Ken.

Operator, Operator

Your next question comes from the line of Chris Kotowski. Your line is open.

Unidentified Analyst, Analyst

Yes, good morning, and thanks. I wonder if you can just give us a bit more color on the handoff from Dial V to Dial VI. I think we're all kind of used to the typical private equity structure where you raise a X billion dollar fund, and then it gets invested over three, four, five years, whereas the Dial funds seem to be more on a pays just-in-time kind of fundraising basis. Is that what you anticipate for Dial VI, and any idea when you start fundraising for it and then how much a year comes in? Is it coming in at a couple of billion a year over four years, or how is it going to work?

Michael Rees, Co-President

Yes, well thanks for the question. As we look at the business for GP Solutions, Q2 and into Q3 is really highlighting the strategic position of our business and the Dial funds. We are seeing increased demand from investors, so our fund size, we were able to increase. We're also seeing a really strong and building pipeline of continued deals with the biggest and what we believe to be the best players in this space. So we are, at the same time, raising a larger fund but we're deploying it in real-time. It means that we'll be back out on the road in calendar 2023. We'll have plenty of dry powder to get us into the beginning of 2023, but we want to make sure that Fund VI, that handoff is ready at some point in that calendar year, and we expect the fees to turn on towards the end of the year or very beginning of the following. It's important for us to have ample capital but our investors like to see some of the portfolio names and the strength of it as we go, which is why having this market-leading position, we believe we have partners like CBC and Veritas, HIG, Dragonair, and many, many others like it, is such a strong position to market from. I hope that answered your question, but I'm really proud of the quarter and the way we were able to put the Fund V finishing touches on and then start setting our sights on Fund VI.

Douglas I. Ostrover, CEO

And Chris, I want you to know all of us in the room are really grateful that you asked a question about the GP Solutions business because, as Michael said, I think there was some skepticism in the market of us hitting our target. We've exceeded it handily, and that fund is doing really well. The investors are thrilled and, as you alluded to, I think it’s setting us up for a really successful Fund VI sometime in the not-too-distant future.

Unidentified Analyst, Analyst

Great, that’s it for me. Thanks.

Michael Rees, Co-President

Thank you, Chris.

Operator, Operator

There are no further questions at this time. CEO, Doug Ostrover, I turn the call back over to you.

Douglas I. Ostrover, CEO

I want to thank everyone for joining us today. Hopefully, you got a sense that our business continues to have really good momentum. Just to reiterate one thing we talked about at Investor Day, we put up a slide at the end with three words: stability, predictability, and growth. I think what this quarter demonstrated is that we have a unique model. We have more permanent capital than any of our peers with best-in-class growth. So we're excited for what lies ahead. We're grateful for everyone's support, and I hope everyone enjoys the rest of the summer. Hopefully, we'll have a chance to see all of you soon. Thanks again.

Operator, Operator

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