Blue Owl Capital Inc.

Good morning and welcome to Blue Owl Capital's second quarter 2021 earnings call. During the presentation, your lines will remain on listen only. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star one on your telephone. I'd like to advise all parties that this conference is being recorded. I will now turn the call over to Ndai, Head of Investor Relations for Blue Owl.

Thanks, Operator, and good morning to everyone on the call today. Joining me this morning are Doug Ostrover, our Chief Executive Officer, Mark Lipschultz and Michael Reese, our Co-Presidents, and Alan Kirschenbaum, 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 would also like to remind everyone that we'll refer to non-GAAP measures on the call, which are reconciled to GAAP figures in our press release, available on the Investor Resources section of our website at blueowl.com. This morning, we issued our financial results for the second quarter of 2021 and reported adjusted fee-related earnings, or FRE, of $0.10 per share and adjusted distributable earnings, or DE, of $0.09 per share. We also declared a dividend of $0.04 per share payable on September 8th to shareholders of record as of August 24th. We'll be referring to the earnings presentation throughout the call today, so please have that on hand. With that, I'd like to turn the call over to Doug.

Thank you, Anne. Good morning, everyone, and thank you for joining us today for our first Blue Owl earnings call. We are very appreciative of the time that you're taking to join us on our call today, and we look forward to seeing you all in person, hopefully sometime soon. Given that this is our first earnings call, I thought I would start with a brief introduction to the Blue Owl story and highlight our vision for the combined platform and the tremendous growth we see ahead. Mark and Michael will then provide their perspectives on what we're seeing across the industry before providing color on business performance for direct lending and GP solutions. From there, Alan will cover our financial results, and then we will be happy to take any questions. So let me start with a very high level view of Blue Owl's position in the marketplace. We are a leading solutions provider to the private markets with $62 billion of assets under management, of which $8.5 billion does not yet earn fees, but will once that capital is deployed. And notably, 97% of our management fees come from permanent capital. So we have very high visibility into our earnings growth over the next 6, 12, and even 18 months. We support the entire ecosystem of alternative asset managers through two businesses, direct lending, where we provide capital to sponsors to finance their portfolio companies, and GP Solutions, where we provide capital to the alternative asset managers themselves. Essentially, we are selling the picks and shovels to the industry. Or said another way, we are the equivalent of SaaS providers to the alternative asset management space. Our long-term goal is to continue to expand meaningfully in these businesses and add additional capabilities that also fit this mandate of serving the private markets ecosystem. As I think about the market landscape for Blue Owl today, I see two businesses which are primed to benefit greatly from the continued growth in the alternative asset management industry. We remain in a historically low-rate environment, with investors searching for incremental yield and increasingly expanding their allocations to alternative assets. As the alternatives world expands further, we expect Blue Owl to continue to take market share as we provide capital solutions to these more mature, larger segments of the industry. What we've also seen is that during challenging markets, such as the financial crisis of 2008, the managers with experienced investment teams and strong track records attract the most capital as investors look to protect their portfolios we firmly believe blue owl will fall into that category as well in addition to the strong growth we see ahead for each of direct lending and gp solutions on a standalone basis we see significant opportunities for synergies between the two businesses. Today, we have just 2% overlap in our LP base, which tells us two things. One, that our combined reach across the investor universe has grown dramatically through this transaction. And two, that there are many opportunities for us to introduce our LPs to unique yield and return opportunities that they may not have had on their radars. We also see the potential for synergies on the investment side, as there will be times when direct lending can bring unique investment opportunities to GP solutions and vice versa, translating into additional value for our limited partners and shareholders. Given that some of the audience may be newer to the Blue Owl story, let me back up and provide a brief history of our businesses. I'm going to start with Alrock. We started Alrock with the goal of building one of the premier firms in direct lending. We saw a meaningful opportunity in the upper middle market lending space. and knew that we could raise a significant amount of capital to address that opportunity. We were confident that we could leverage our combined market experience and relationships to build a wide funnel of deals, select those with the best risk reward opportunities, create downside protection through disciplined risk management, and ultimately generate strong returns for our investors. And we thought by doing all of that, we could create an institutional quality, best in class lending platform. Over the past five and a half years, I think we've certainly achieved that goal. Our ability to deliver timely and flexible solutions in scale has resonated with the market as we have originated 35 billion of loans since we started our business. We've established ourselves as a leading competitor in the upper middle market lending space with over $31 billion of AUM. And our strict underwriting, strong covenant, and focus on portfolio diversification have resulted in industry-leading returns for our investors. COVID was an unexpected test for our platform, much as it was for the broader U.S. and global economies. And we as a firm made it through this very difficult period exceptionally well. The $35 billion we have originated has been across 300 investments. And we have had only two realized losses of original principal through June 30th, with notional on those investments of just $255 million. or less than 1% of what we've originated. And we still own both of those investments. This speaks to the quality and resiliency of the portfolio. We have built one of the largest dedicated direct lending investment teams in the industry with nearly 70 investment professionals, including 23 managing directors with average experience of 20 years. And despite the impressive growth that we've experienced in our direct lending business since we launched five and a half short years ago, I truly believe the best is still ahead. Now turning to GP Capital Solutions. Dial is the clear leader in its market, having founded the industry and taken stakes in over 50 alternative asset management firms since inception. And that number continues to grow. In addition to providing growth capital for new and existing businesses, Dial offers great strategic value to its partner managers, to its business services platform team, and also offers debt financing solutions. The partner managers in Dial's funds collectively manage roughly $1 trillion of AUM, giving Dial a unique and very broad perspective on trends in the alternative asset management industry. We will endeavor to share the insights we garner from this special perch with you. I think Michael and the team have built a terrific business, and it really fits well with what we focus on at Alrock. We want to be market leaders in a space. We look for unique value propositions that allow us to generate strong performance for our investors. And we like businesses where we can create scale. The dial business falls into all of those categories. Shifting now to Blue Owl's financial profile, and Alan's going to cover this in greater detail later in the call, we've had the benefit of watching what other companies in our space have done And we've seen what works and what doesn't. We believe the market has told us that it values a steady and predictable earnings stream with high growth potential. And that's exactly what we offer at Blue Owl. FRE currently constitutes 100% of our earnings, meaning our revenues come from management fees, which are highly predictable each year. When it comes to AUM, we are not on the hamster wheel raising capital because when we raise incremental AUM, we keep it since almost all of our AUM is permanent. We are not required to return capital to investors. We like to think of it as a layer cake. As we raise capital, we just add a new layer of capital to our existing permanent capital base. unlike most alternative asset managers, we don't have to raise $20 billion to grow our AUM by $10 billion since capital doesn't lead the system. And that's a big differentiator for our platform. Because of this, we have industry-leading growth generated from highly visible drivers and best-in-class profitability and FRE margins. We have a track record of investment outperformance and diversified and growing distribution capabilities across the institutional investor and retail distribution channels. We offer a healthy 2.5% dividend yield based on our June 30th closing stock price, and we're hopeful that our quarterly dividend could double by the fourth quarter of next year. Our balance sheet is strong with almost 600 million of liquidity, and we are committed to maintaining our investment grade ratings over time. And importantly, we have an industry leading fully aligned management team. We did not sell any shares in the transaction and we own about 25% of Blue Owl outstanding shares. So we are well aligned with our shareholders. In addition, we as a management team have personally invested a substantial amount into our funds, meaning we are also very aligned with our LPs. Internally, we have an undertaking that we call Project Bright Blue, which has three primary objectives. One, we want to outperform the FRE expectations set forth for us. two we'd like to pursue strategic acquisitions that complement our current best-in-class businesses and three we would like to trade at parity with or better than our closest peers in the public markets if we can achieve these objectives we believe we can drive significant shareholder value over the course of the next few years finally Before I turn the call over to Mark, I'd be remiss if I didn't spend a moment on something that carries a lot of weight for us as a management team, which is culture. We've built our firm on a culture of being entrepreneurial and nimble and treating everyone with respect. As we've grown, we've spent a lot of time and effort focused on maintaining these core tenets. And we believe it has been and will continue to be a key differentiator for Blue Owl in our investment performance and our financial results. With that, I will turn it over to Mark and Michael, who will provide their perspectives on the state of the alternatives industry today, and then we'll cover business performance for the quarter. Thank you very much. Mark, I'll turn it over to you. Great. Thanks, Doug. I'd also like to extend a warm welcome to our new and prospective public shareholders. One of the questions we get most often when we meet with shareholders now is this. How do we expect the alternatives industry to continue to evolve, and how does Blue Owl's business fit within that evolution? So before I provide some background on our direct lending business and talk about where we're going, I thought I'd take a step back and share some thoughts on the broader alternatives industry. I think you all know well the tailwinds that support the continued growth for alternative asset managers. Investors are looking for attractive risk-adjusted returns in a market where that can be very hard to find. Allocations to alternatives have continued to rise as investors realize they can trade some amount of liquidity for excess returns and for what we believe is a much better overall risk-adjusted return. As more traditional quote-unquote alternative products such as private equity and real assets have grown, new alternatives market segments such as direct lending, GP minority stakes, and secondaries and co-investments have really emerged and flourished. At a high level, Blue Owl's role in the market is to provide capital to the alternatives ecosystem, which continues to expand in size, scale, and complexity. And while the larger alternatives industry continues to grow at a robust 12% average annual growth rate, areas such as direct lending and GPU minority stakes are expected to grow even more quickly. So let's break that down for direct lending. By some estimates, there is $1.5 trillion of dry powder just in private equity alone, and $3.3 trillion across private markets more broadly, with more being raised every day. Now, compare that to the size of the entire direct lending market, with just over $300 billion total across drawdown funds and public and private BDCs. When you consider that direct lending continues to take market share within the credit space, that suggests some very strong growth ahead for the direct lending industry with great visibility. Which really brings me to the background on Owl Rock. So when we came up with the idea of building a market leader in growing direct lending and formed Owl Rock, we set some very big goals for ourselves. Sitting here today, I think we have both met and surpassed those goals. We've grown our direct lending AUM to $31 billion in under six years. And the strong pace of growth reflects the demand we've seen from LPs for the products that we offer, and the need for capital in the companies in which we invest. It also shows investors great need for yield in this market environment. Today, we offer four investment strategies, our largest being diversified lending with $20 billion of AUM. We also have dedicated technology, first lien, and opportunistic lending strategies, each of which is growing very nicely. We believe our technology lending strategy, which we launched back in 2018, and has now grown to over $6 billion in AUM, is already the market leader in providing structured solutions to the upper middle market technology industry. There continues to be a tremendous opportunity for tech, particularly given the outstanding 13.5% net IRR for our tech BDC, with zero losses since inception and not a single non-accrual. Now, it's one thing to raise large pools of capital, and another to put it to work in a disciplined, thoughtful way. While we've originated $35 billion of loans since inception, with gross originations over $5 billion this quarter alone, I think it's notable that our broad ecosystem allows us to be extremely selective in the deals that we do. To provide some context, we've looked at over 5,800 deals since inception, and just over 300 of those have made it to the finish line. We have a very wide funnel for deals that continues to grow, but we invest in only the highest conviction investment opportunities that we see, which is about 5% of the deals reviewed. Our discipline and diligence doesn't end there. We perform rigorous portfolio monitoring with a focus on capital preservation, and we remain in continuous close contact with the sponsors and the management teams. This meticulous focus on downside protection and portfolio management really worked to our advantage as the U.S. and global economy shut down during the COVID-19 pandemic. The fact that we were often the only lender for a borrower or one of a few made it easier to provide dedicated support and to have timely, comprehensive discussions about liquidity, covenants, and potential credit events that could arise from this unprecedented situation. We made it through the pandemic thus far with very strong performance. we have had only two realized losses associated with a total of $255 million of notional value in loans relative to the $35 billion of origination in our firm's history. Ultimately, the pandemic was a very important test for our platform that we fortunately passed with flying colors thus far. Across the direct lending platform, annualized realized losses have been just five basis points since the inception of our firm, outperforming what investors can get in the public markets and putting us amongst the very top of our peer group. Looking ahead, and I don't mean to sound Pollyannish about our growth prospects, but we really do see tremendous runway to continue expanding our direct lending business. We've grown to $31 billion of AUM, but we're still very small relative to the total market opportunity. and our pipeline looks very strong. Sponsors like our business model because we can provide flexible and bespoke lending solutions at scale. We can act quickly, and we have permanent capital, so borrowers and sponsors don't have to worry about our funds coming to the end of their investment periods. We're singularly focused on lending, which means we are not competing with their private equity businesses. And if their portfolio companies need to borrow more to do a transaction or fund incremental growth, that's easy for us to do because we've been in constant dialogue and we can underwrite something in a very timely fashion. So there are a number of avenues that will drive our future growth. One is expansion of our sponsor relationships. We have over 500 relationships today, and we expect that number and depth to increase meaningfully, in part due to the synergies we see with the GP Capital Solutions business. As for existing relationships, we expect to grow with them as the sponsors raise larger funds and expand their product offerings. In addition, we believe direct lending as an asset class will continue to expand meaningfully as borrowers see the benefits of having that one-on-one relationship, which was very clearly on display during the pandemic. And we will certainly continue to pursue adjacent opportunities in terms of future growth, new product launches, and new investment strategies. With that, please let me turn it to my partner, Michael, to discuss the GP Solutions business in more detail. Thank you, Mark. Let me start by framing the market opportunity in the GP solution space and provide some additional color about the history of the Dial business. And then I'll spend a minute on how the business is doing and where we're going from here. Since our founding in 2010, the Dial team recognized the tremendous growth in the alternative segment and saw a need for growth capital to assist founders and management teams in achieving their business objectives. We launched the Dial business to be the premier provider of such capital. The strong growth in the alternative industry and the overall private markets was driven by institutional investors increasing their adoption rate for the products that these firms offer. With the industry's maturation, the need for our type of growth capital has only increased. We believe that these great businesses investors in private equity, private credit, infrastructure, real estate, and other similar strategies will continue to play a major role in the investment portfolios of institutions and individuals for decades to come. And we want to be the leading provider of capital at the GP level for this industry. Our business model is quite simple. We raise permanent capital funds. We're raising our fifth as we speak. And we invest this money into passive minority stakes in the leading companies in the alternative investment space. We typically take passive minority stakes between 10 and 25%, which allows the investors in our funds to participate in what we believe to be the attractive economics of these businesses. For Blue Owl shareholders, the ability to continue to raise funds to address this market opportunity drives our fee income, and we see a very attractive runway ahead. Across our five funds, we have over 50 minority states, and we believe we are the market leader in this category. The overall private market industry totals about $7.5 trillion in AUM and is expected to approximately double in five years. As leading players in this market seek to grow and expand their business, they will require capital to invest in their funds, to seed new strategies, and to grow their organizations. We've purpose-built our organization to meet these capital needs from our funds. but also to provide strategic assistance to the firms we invest in. The initial catalyst for an investment might be a firm's need for capital, but once on board, our partner managers also benefit greatly from our business services platform, which is a team of 40 employees dedicated to helping and supporting the growth of our partner managers. Through this business services platform, we have created an ecosystem to support dials, partner managers in building their institutional networks and seeking to deliver best in class capabilities across all aspects of their business. The feedback on this platform has been extremely positive and we believe it has contributed greatly to our market leading position. Our investment pipeline has been very strong and we've been putting capital to work quickly. Notably, we've already committed approximately 30 percent of the capital that we expect to raise for Dial Fund 5 through four investments, and we only held our first closing for that fund last November. We have a number of other attractive investments that we hope to complete throughout the balance of 2021. Our performance in the strategy for our fund investors has been extremely strong, with the net IRR of 24 percent for Dial Fund 3, which had its final close in 2016, and a net IRR of 62% for Dial Fund 4, which had its final close in 2019. For our current fund, Fund 5, we've already seen quite significant early results, with the portfolio already marked 20% above where our capital was put to work. Looking ahead, we continue to see significant runway for this business as private markets continue to grow at a robust pace, as institutional investors continue to allocate to the space, and as retail and high network investors increase their allocations to alternatives. In addition to this strategy, we're in the process of launching and growing funds focused on GP lending, co-investments, and secondary investments. All of it will complement our existing minority equity investment strategy and benefit greatly from the deep relationships we have with the private market firms across all of Blue Owl. Finally, we kicked off our business unit focused on investing in sports and media industries. Dial Home Court, our fund focused on taking minority stakes in teams within the National Basketball Association, launched and has two existing minority investments, one with the Phoenix Suns and one with the Sacramento Kings. With that, I will turn things over to Alan to discuss our financial results. Thank you, Michael, and good morning, everyone. I'm going to start off by first pulling the lens back and framing our business for everyone. Then I'll take us through the relevant numbers and metrics for this quarter. When I get to the numbers, I'll make references to pages in our earnings presentation, which we posted to our website this morning. So please feel free to have that available to follow along. At a high level, we have a very simple business model. One, we earn management fees to manage our BDCs and funds, which are highly predictable cash flow streams. Two, we don't have the volatility of carried interest revenues. And so, at one level, the performance of our funds doesn't matter to Blue Owl shareholders. Of course, we care very deeply about how our funds perform. But unlike other alt managers, the returns of our funds do not really matter to our Blue Owl shareholders. That said, our strong performance has continued to support our fundraising goals. And three, virtually all of the capital we manage is permanent. This also helps provide significant visibility into future earnings. Now, to break all of this down a little more, we are a 100% FRE business. Our revenues come from steady, consistent, predictable management fee cash flow streams. We have built a strong, high-cash-flowing business. Ninety-seven percent of our management fees are from permanent capital. When we raise capital, it's like a layer cake, adding to our existing AUM. We are not on a hamster wheel, having AUM fall away every quarter. We demonstrate best-in-class growth and best-in-class EBITDA NFRE margins. We expect to pay a strong competitive quarterly dividend with the potential to double our dividend by the fourth quarter of next year. We have a very strong balance sheet with a significant amount of liquidity. We are well aligned with our Blue Owl shareholders. We as a management team hold about 25% of the outstanding shares of Blue Owl, and we are well aligned with our BBC shareholders and LPs across our platform as we have personally invested a substantial amount into our products. to also touch on the key drivers of our short- and intermediate-term growth. These include, one, deploying the capital that we've raised as we generally earn management fees on the total assets of our funds for direct lending. Two, some of the products moving to full fees after their initial fee discount period, like our technology BDC products. And three, raising new equity capital in products like Dial Fund 5. Okay, so let's get into some of the numbers and financial metrics of our business. Overall, we continue to be on track with the guidance we have previously provided for 2021 and 2022. As a reminder, our reported results include numbers for only half the quarter for GP Solutions, since the transaction closed approximately halfway through the second quarter. While for direct lending, we are reflecting numbers for the full quarter. Starting off on slide 10, in the adjusted QQ21 column, if we were to reflect the GP Solutions numbers on a full quarter basis, as if the transaction closed on April 1st, 2021, our total revenues would have been $210 million, total expenses $78 million, fee-related earnings $130 million, or $0.10 per share, and distributable earnings $108 million, or $0.09 per share. we believe this is a better indication of the full earnings power of our business for this quarter. And I will reiterate our expectation to grow our distributable earnings by over 25% next year as we continue to raise and deploy capital across the platform. Our adjusted EBITDA margin and our FRE margin were both 62% this quarter, assuming a full quarter for the dialed business, making good progress towards our target range of 65% to 70%. And our adjusted compensation expense as a percentage of total adjusted revenue was 29% this quarter, assuming a full quarter for the dial business, already inside of our target range of 25 to 30%. Moving on to our AUM numbers, you can see on slide 12, we reported AUM of $62.4 billion, fee-paying AUM of $42.8 billion, and AUM not yet paying fees of $8.5 billion. AUM grew 8% to $62.4 billion quarter-over-quarter, driven primarily by capital raising, deployment of capital and direct lending, and portfolio appreciation across the platform. Fee-paying AUM grew 7% to $42.8 billion quarter-over-quarter, driven primarily by capital raising and deployment and direct lending. As a reminder, for GP Solutions, we earn management fees when the capital is raised, not deployed. And for direct lending, as I mentioned earlier, we generally earn management fees once the capital is deployed, typically based on total assets. AUM not yet paying fees reached $8.5 billion. This AUM, once deployed, corresponds to an increase in expected annual management fees totaling $120 million. For direct lending, the second quarter saw record gross deployments of $5.1 billion and net funded deployments of $3.2 billion. the difference being paydowns of existing loans during the quarter. And our last 12-month deployment was $12.9 billion on a gross basis and $7.5 billion on a net funded basis. So, of the $8.5 billion of AUM not yet paying fees I just mentioned, $6.1 billion is for direct lending. So, based on our average net funded deployment over the last 12 months as a deployment base, it would take us less than three quarters to fully deploy this capital. Finally, I'll close out my remarks today with an overview of the firm's strong financial condition and some other closing comments. We have a balance sheet-like model, and as you can see on slide 19, we have almost $600 million of liquidity as of June 30th, with a long-dated capital structure that is comprised of $700 million of 10-year debt and an undrawn $150 million senior secured revolver with almost three years of maturity remaining. Our net debt is approximately $250 million, or approximately 0.5 times net debt to annualized adjusted EBITDA. Our board declared a dividend of $0.04 per share for the second quarter of 2021, which we've calculated by looking at the full quarter results I just mentioned, distributable earnings of $108 million, and using half that number for our dividend payable since we closed the transaction roughly halfway through the second quarter. Although our dividend policy is to pay approximately 85% of our distributable earnings on a quarterly basis, this represents 100% for the quarter. Going forward, you should generally expect us to maximize the amount of our dividend each quarter with a target of 85% of DE. Finally, our board approved a $100 million discretionary stock buyback plan during the quarter. To wrap up, When I look down the road, we believe our investment performance, our focus on delivering institutional quality products across all distribution channels, and the overall brand we've built will drive our growth for the future. We are still in our early days of entering new markets and growing our business. And once again, I want to thank all of our stakeholders for joining us today. We believe our business to be a very differentiated story in the alt space with a compelling financial model, and we look forward to spending more time with all of you in person in the coming months and quarters. With that, operator, can we please open the line for questions?