Release Date: August 01, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Blue Owl Capital Inc (OWL, Financial) reported a record quarter with 23% fee-related earnings growth and 19% distributable earnings growth year-over-year.
- The company has achieved 13 consecutive quarters of management fees and fee-related earnings growth, showcasing the stability and strength of its business model.
- Blue Owl Capital Inc (OWL) announced strategic acquisitions, including Atellica and Prima, which are expected to significantly enhance its alternative credit and real estate credit capabilities.
- The company raised $32 billion across equity and debt over the past 12 months, reflecting strong fundraising capabilities even in a challenging environment.
- Blue Owl Capital Inc (OWL) continues to see strong demand for its direct lending solutions, with a record quarter of deployment totaling $18.7 billion in gross originations.
Negative Points
- The acquisition of Atellica, while strategic, is expected to be margin-dilutive in the short term, potentially lowering overall margins by 2-3% in 2025.
- Despite strong fundraising, the management fee trend in the quarter was slightly disappointing relative to the positive AUM inflow.
- The company faces potential pressure on Part One fees due to expected rate cuts and tightening loan spreads, which could impact earnings.
- Integration of recent acquisitions may take time, leading to short-term margin compression and operational challenges.
- There is a risk of credit quality issues within the portfolio, as highlighted by the specific mention of Pluralsight, which could impact overall performance.
Q & A Highlights
Q: Can you discuss the deployment opportunities in private credit and direct lending, given the significant step-up in gross originations this quarter?
A: Alan J. Kirshenbaum, CFO: It's a great environment for direct lending. Despite the active syndicated market, we saw our biggest origination quarter, driven by broad activity including add-ons, new investments, and proprietary deals. This quarter is a strong indicator of continued demand for direct lending, even when the syndicated market is available. We expect healthy sponsor appetite and a robust outlook for direct lending.
Q: How do you ensure successful integration and growth of recent acquisitions, given the historical challenges in asset management M&A?
A: Marc S. Lipschultz, Co-CEO: Our acquisitions are about joining forces with best-of-breed investment capabilities and leveraging our infrastructure. We focus on cultural fit and maintaining the success of investment strategies. Oak Street is a template for successful integration, where we doubled AUM and increased permanent capital. We aim to replicate this success with new acquisitions like Atellica and Prima.
Q: Can you provide an update on credit quality across the portfolio and address concerns about potential credit stress?
A: Alan J. Kirshenbaum, CFO: Credit quality remains strong, with portfolio companies showing mid-10s EBITDA growth. We haven't seen significant changes in amendment requests or revolver usage. Pluralsight is an isolated case, and while disappointing, it doesn't reflect broader portfolio issues. We expect a smooth recovery process and remain confident in our overall credit quality.
Q: How do you plan to manage the impact of recent acquisitions on FRE margins and ensure long-term growth?
A: Alan J. Kirshenbaum, CFO: The Atellica acquisition has lower margins, which will temporarily impact our overall margins. However, we expect to improve these margins over time through integration and optimization. Our focus is on delivering high, predictable growth in FRE and dividends, and we remain confident in achieving our long-term margin targets.
Q: Can you elaborate on the expected contributions from the Cooper acquisition and its impact on future inflows?
A: Marc S. Lipschultz, Co-CEO: The Cooper acquisition adds significant AUM and provides a steady stream of inflows from insurance partners. In 2023, Cooper had $5.6 billion in flows, and we expect continued growth. This acquisition enhances our ability to originate long-dated fee-paying assets and complements our existing capabilities, positioning us well for future growth.
Q: How do you plan to achieve your dividend growth target and manage the payout ratio?
A: Alan J. Kirshenbaum, CFO: We target a low to mid-30% dividend growth for 2025, aiming for around $0.96 per share. This represents a 30% CAGR over 4.5 years. We expect the payout ratio to step up to the low 90s percent in the short term and then bring it back down over time. Our focus is on maintaining strong dividend growth while managing the payout ratio effectively.
Q: What are the key drivers for future growth beyond 2025, considering recent acquisitions and organic initiatives?
A: Marc S. Lipschultz, Co-CEO: We are focused on both organic and inorganic growth. Recent acquisitions like Atellica and Prima add strategic capabilities in alternative credit and real estate credit. We also have strong organic growth initiatives, including diversified lending strategies, healthcare verticals, and new real estate products. These efforts position us for sustained growth well beyond 2025.
Q: How do you plan to defend against potential pressure on Part one fees due to expected rate cuts and spread tightening?
A: Alan J. Kirshenbaum, CFO: While rate cuts may pressure Part one fees, we see offsets from continued strong fundraising and deployment in our BDCs. Our software lending BDC is not fully deployed, and we expect Part one fees to increase as we deploy more capital. We remain confident in our ability to manage and grow Part one fees despite potential rate cuts.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
