Blue Owl Capital: Deep Dive Analysis
Note: This is not financial advice, and any investment commentary is strictly opinion only. This is analysis for educational purposes only. Consult with a licensed professional before investing.
What is Blue Owl?
Blue Owl Capital, also known as Blue Owl, is an American alternative investment asset management company that is currently listed on the New York Stock Exchange under the ticker symbol $OWL. The company is headquartered in New York City and has additional offices in Hong Kong, Singapore, and other locations.
Blue Owl was formed in December 2020 as a result of a merger between Owl Rock Capital Group and Dyal Capital Partners, a deal valued at $12.2 billion. The transaction was completed, and Blue Owl was listed on the New York Stock Exchange in May 2021. Since its inception, the company has continued to grow through acquisitions and expansions. For instance, it acquired Oak Street, a private equity real estate firm, for $950 million in October 2021, and Ascentium Group, a business development office based in Hong Kong, in December 2021 as part of its plans to expand in Asia.
What Makes Blue Owl Unique?
Blue Owl Capital's predominant focus on permanent capital in its AUM sets it apart from other alternative asset managers. As of the end of the first quarter, 79.15% of the total AUM was permanent capital, accounting for approximately $114.3 billion. This concentration of permanent capital reduces volatility and enables steady growth in AUM against disruptive macroeconomic backdrops. Notably, Blue Owl's operational model does not depend on the traditional 20% carried interest charged to returns over minimum hurdle rates but rather on management fees from this ever-growing base of permanent capital.
Permanent capital refers to capital available for an unlimited time horizon and is typically managed using a permanent capital vehicle (PCV). These PCVs do not seek to draw down their principal at any point in time due to their perpetual nature. They are generally utilized for long-term capital growth and are less concerned with the short-term performance of a financial product. This type of capital is seen as "always reliable" and can come in various forms, such as partnerships, trusts, or corporations. Endowments, partnerships, corporations, and certain types of trusts are common examples of situations that create a PCV.
The concept of permanent capital investments is relatively new and is considered to be the "holy grail" of alternative investments. Public market investors have often shown hesitance towards the volatility of alternative asset managers’ fee income, which is subject to investors redeeming their money and relies on performance fees that can be highly variable.
For instance, Blackstone had to limit investor withdrawals from its $69 billion real estate income trust in December of last year following a surge in redemption requests, marking an unprecedented event for the firm's asset management operations.
Permanent capital offers a solution to this issue by providing a steady and reliable source of fee income. In this light, Blue Owl's model, with its emphasis on permanent capital, provides a predictable and resilient revenue stream, which has driven steady AUM growth even amidst several disruptive macroeconomic factors.
Business Model
Blue Owl Capital offers three major product lines: Direct Lending, GP Capital Solutions, and Real Estate. These products are structured as BDCs, REITs, and private investment funds.
Direct Lending
Direct lending involves non-bank creditors providing loans to businesses without the use of intermediaries, such as investment banks. Blue Owl focuses on lending to defensive businesses in recession-resistant industries or non-cyclical markets. Direct lending investments typically have floating-rate, short terms to maturity, strong covenants, and low correlation with public markets.
Direct lending has several benefits, including protection from rising rates and shorter durations than fixed-rate debt. However, direct lending also carries certain risks, such as failures in establishing a robust sourcing pipeline, conducting proper due diligence, structuring the investment, sustaining active management, and navigating a restructuring.
Why Would Companies Choose Direct Lenders Over Traditional Banks?
Direct lenders have been taking share in the public credit universe for a number of years (estimated at about 20% today, up from about 3% in 2010). The growth in market share of direct lenders in the public credit universe can be attributed to several factors:
Flexibility: Direct lenders can offer customized financing solutions tailored to a company's specific needs. Unlike traditional banks, which often have rigid lending criteria, direct lenders can work closely with borrowers to structure loans that suit their unique circumstances. This flexibility enables businesses to access capital that may not be available through conventional channels.
Speed: The decision-making process at direct lending firms like Blue Owl is typically faster than at traditional banks. Direct lenders have leaner organizational structures, enabling them to make quick credit decisions and disburse funds more rapidly. This speed can be crucial for businesses requiring immediate capital access for growth, acquisitions, or other time-sensitive needs.
Expertise in niche industries: Direct lenders often specialize in specific sectors or types of loans, allowing them to develop deep industry knowledge and expertise. Blue Owl, for instance, focuses on technology lending, among other strategies. This specialization enables direct lenders to better understand the unique risks and opportunities associated with certain industries, making them better equipped to provide tailored financing solutions.
Non-dilutive capital: Direct lending can offer an alternative to equity financing for companies seeking to minimize dilution for existing shareholders. By providing debt capital, direct lenders like Blue Owl allow businesses to access the funding they need without issuing new shares, thus preserving the ownership stakes of current shareholders.
Access to capital for underserved segments: Direct lenders can serve as an important source of financing for businesses that may be overlooked or underserved by traditional banks. This includes smaller or middle-market companies, businesses in specialized industries, or those with unique credit profiles that may not fit within conventional banking criteria.
While near-term stress on the U.S. banking system has decreased, there are still concerns regarding the impact of recent stresses on lending standards and borrowing activity in the future. Early surveys show a continued tightening of bank lending standards, particularly from small banks, which are expected to tighten credit more aggressively. According to J.P. Morgan, in 2022, U.S. high-yield and bank loan volumes fell 70% YoY to $359bn, marking the lowest issuance total since 2010.
This is extremely beneficial to direct lenders such as Blue Owl to step in and offer alternative financing solutions.
Blue Owl's Direct Lending Strategies
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