Blue Owl Capital Inc Q4 2024 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Glenn Schorr - Evercore ISI - Analyst : Maybe I'll ask on gross to net deployment, probably not the number you want it to be, but I'm curious how much you focus on that in credit in any given quarter? And do you think that's a function of the deal environment? Or does that say something about the attractiveness of deals out there? Just curious how we should look at that. Marc Lipschultz - Blue Owl Capital Inc - Co-Chief Executive Officer, Co-Founder, Director Yes. Thanks for the question, and great to have a chat with you this morning. So gross to net has a couple of dimensions to it. So look, the one observable fact is the net deployment, of course, relates to getting new dollars to work. But I guess I'd start with this. The incredibly active, both gross and ultimately net year in total. I would take as a sign of great strength. I mean this was a very tepid M&A year. And so when you think about how much we -- what activity we had in a year that was both low on M&A but with a very open syndicated market, I actually foretells of very good things to come in 2025 as we see the M&A market turn active again. Again, we're always all waiting for dam to break, and I'm not here to call the time it will happen. But clearly, there's already been an uptick in M&A pipeline and activities, compression of bids and asks. So I think we're like many people, pretty optimistic that 2025 will be a more favorable M&A environment. So I start with actually it's a pretty interesting baseline year because our most active overall origination year in a macro setting, you would not consider good for direct lending. Now, the gross to net itself has two dimensions. It's actually a really good news from the point of view of credit and it's really good news from the point of view of the power of incumbency because what you're seeing in gross to net often is obviously, as you know, is refinancings of credit facilities that were done some time ago. And so what we ended up getting to do, of course, is we look at the credit and redecide if we still want to own it. So it's really kind of a credit enhancing exercise, number one. Number two, speaks a lot to the power of incumbency, which is a huge advantage we have just a couple of others have, which is once these loans are in our system, they often stay with us. And I think that also is positive. So when we look at it, I have to say we don't look at a like a large gross loan net as a problem. We look at it as a set of data in context, obviously, we want some quarters that have big net. But we love some quarters that have big growth and loan that also. So the balance is good. I don't think -- the one thing I would say -- to me, it doesn't reflect anything about some market dynamic change. I think it's exactly what you'd anticipate would happen in a market that is more open and active again, but doesn't have tons of M&A. So people end up focusing on refis as opposed to new things. Now, eventually run out of refi. So I will say we've Obviously, a lot of companies have done their refi cycle. So odds are we'll start to see that compress in any case.

Question: Craig Siegenthaler - BofA Global Research - Analyst : My question is on organic growth. So you ended the year with strength in the fundraising front, almost $10 billion, a record quarter you've just recently planted seeds through 4 strategic acquisitions, which aren't even close to scale yet. And now the macro backdrop is strengthening. So without stealing too much thunder from your Investor Day tomorrow, what does the fundraising outlook look like for 2025? And maybe you could break apart some of the bigger drivers? Marc Lipschultz - Blue Owl Capital Inc - Co-Chief Executive Officer, Co-Founder, Director Sure. Well, I honestly couldn't encapsulate it better than you did. I think the overall take is we have big flagships, we have continued accelerating success in wealth, more platforms, we have some new wealth products. Our alternative credit continuously offered product, which we will be out with in 2025. I think it's going to do very well with, as you know, new acquisitions like data centers, again, we're continuing our flagship which has already been extremely successful, rapidly moving toward its hard cap -- and then we'll be back again with digital infrastructure and continues to outperform in not too distant future. And so yes, I think we have a lot more ways to win, frankly, a more probably kind of bullish animal spirited environment. So yes, we go in on a strong foot. And well, I guess we end the year on a strong foot without all those benefits yet and then those coming into play. Maybe Alan, I'll let you comment a little bit about direction of travel from there.

Question: Steven Chubak - Wolfe Research - Analyst : So wanted to ask a question on expense. So G&A was up 41% in '24. I recognize merger costs, higher wealth distribution expense, it's going to impact that growth rate. How should we think about the normal growth rate for OpEx, just given plans to continue to lean into retail, but also investing to help scale some of the more nascent strategies in ABS insurance and data centers? Marc Lipschultz - Blue Owl Capital Inc - Co-Chief Executive Officer, Co-Founder, Director So let me -- Steven, I take a crack at sort of the qualitative inputs of that, and then Alan will comment quantitatively. So number one, and you implicitly put your finger on it. Look, we invest in having the best people. We invest in having the best distribution. And our one of our core pillars is excellent. So we're going to do what we're going to do it great. And so sometimes that takes upfront investment. We've never unstated to do it, and we've been able to yield the benefits of it. With that said, to be specific, we've made a lot of those investments in the groups you've talked about. Acquisitions part of that bulking up those with additional team members adding to our credit platform. So you're indeed already seeing a lot of the investments we made this year in anticipation of the kind of continued very strong growth, like as we just referred to in fundraising and activity we expect in 2025. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 06, 2025 / 1:30PM, OWL.N - Q4 2024 Blue Owl Capital Inc Earnings Call So I would actually look at -- when you think about a year like this, it's more investing to support what's going to happen in 2025, not that we have to invest in 2025 to make what happens in 2025 occur. So with that, let me just turn down to Alan to give you a little more specifics on the numbers.

Question: Brian Mckenna - Citizens JMP - Analyst : I had a question on your BBB. So you just completed the BDC or BD merger -- and then you're obviously working on the OTF merger. Are there any updated time lines for the OTF merger getting done and when that could be uplisted and then beyond that, you're going to have two large BDCs in the public market. So how are you thinking about growth for both of these vehicles longer term from an equity and debt capital review perspective?

Question: Brennan Hawken - UBS Equities - Analyst : So I know there's going to be some movement here in real assets. and there already has been with Prima and now you've got IPI closed. When we think about 4Q and the fee rate for that business, is that the right jumping off point fully reflected of PRIMA? Or was there's some noise? And then what's the best way to think about -- I know you gave us the total AUM for IPI, but what's the fee-paying AUM? And how should we be thinking about the impact to the fee rate from that acquisition close?

Question: Brennan Hawken - UBS Equities - Analyst : And then last quarter, Alan, you gave an expectation thinking about 2025. And again, sort of awkward because we're all going to get together tomorrow morning. But -- and we'll talk about probably more than just two far longer time frames. But the last time on the third quarter call, you had laid out an expectation of FRE growth mid- to upper 20%s. Are you still feeling like that's the right way to think about it as we're updating our models? Or should we revise that one way or another?

Question: Alex Blostein - Goldman Sachs - Analyst : Thanks for the question. I'll keep the big picture -- we'll keep the big picture up to tomorrow. I did want to ask about some of the near-term pipelines on the deployment side you're seeing. So it's a little bit of a follow-up to Glenn's question from earlier. But if you look at the M&A pipelines, there hasn't been a tremendous amount of announcements so far this year. So curious what you're seeing kind of underneath the surface and conversations with sponsors and more importantly, what have been the recent spreads to which you're underwriting kind of newer loans to? Just trying to get a sense of the competitor of nature in that market today. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 06, 2025 / 1:30PM, OWL.N - Q4 2024 Blue Owl Capital Inc Earnings Call Marc Lipschultz - Blue Owl Capital Inc - Co-Chief Executive Officer, Co-Founder, Director Look, we see things early, but not the early yet, right? The M&A adviser will often see the earliest views of pre-pipeline and obviously, the PE firms know what they're spending their time the sell side. So I think what I can say is we continue to have a good, sound level of activity. We've not observed an uptick, yes, as I said, I think we're optimistic, and I don't mean that in a rose calling glass sense that 2025, we will see something more materially moving upward. But in terms of activity level, what I understand and hear from the M&A advisers, they objectively are seeing more activity in the pipeline, starting more processes, the people feel. I don't know if it's unleased or just, look, we're just through a lot of uncertainties from the fall and people are ready to undertake activity. So I don't have some grand insight by any measure to offer, but except to say that our planning, our thinking, what Alan just talked about, is not predicated on some sort of market rally. It's not predicated on a different environment than we've been confronting in this past year. So I would view that not so much is called upside to 2025 performance, but I would tell you that, that sort of dam break or uptick will certainly be welcome, but it's not necessary to our thinking. So that's kind of, I'd say, contextually where we are. It does seem it. But I can't tell you -- we will get on one of these calls where we telecare I see pipelines are that much thicker, that many more things flowing through as we've said prior quarters. That has not been the case yet. I can't say that's the case yet now. But I anticipate there will be a quarter this year where we'll be able to say that. With regard to spreads, I'd say it's now relatively stable. We go through these ebbs and flows. We've all talked about this. Things cycle up and needless to say, it is related to amount of activity, availability of public markets. And so we went to peak spreads in 2022. We came down in 2024 to back down again, 100 basis points probe on average across the portfolio, maybe 150 on a new originated loan. But we continue to hold on. This is what's interesting. When you look over time and you look at the spread to the broader marketplace, we continue to hold on to a pretty steady couple hundred basis points all in. So the product works. It's a durable all market product. And some ebbs and flows along the way, but we view it as very banded. So we're perfectly happy. I'm happy to take more spread. I mean, safe to say, but we're perfectly happy with the risk return we're seeing.

Question: Patrick Davitt - AllianceBernstein - Analyst : Good morning, everyone. We might get into this more, but you mentioned the new alternative credit retail products. But there are a few products in that asset class with a significant head start on you getting a lot of traction. So could you maybe speak a little bit about how you think your product fits in against the more established ones? Anything different about it, you would point to and your confidence in getting placement with several products already ahead of you. Marc Lipschultz - Blue Owl Capital Inc - Co-Chief Executive Officer, Co-Founder, Director Well, I'm going to say ahead of us, maybe is the eye of the beholder. I would actually suggest that we have probably one of the most advanced capabilities in alternative credit. Remember, [talaya] has been at this for 20 years. Yes, it's a hot topic today. years ago wasn't exactly on topic, but they've been doing it for 20 years to liver in spectacular results, incredibly low loss rates, great arrangements. We are a provider of choice in fact just this morning, other forward flow agreement that we announced of $2.6 billion with Atalaya. So I would actually prefer we may be much more ahead than people understood they have been focused on (inaudible) blowout alternative credit. In terms of product launch, yes, there's a couple of able to launch products in full respect. I think the infrastructure we have, and the track record REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 06, 2025 / 1:30PM, OWL.N - Q4 2024 Blue Owl Capital Inc Earnings Call we have and the reception we've already received in rolling out our credit platforms or to be direct to your question, we're already out with platforms and with RIAs and provide I think for a good reason, once you see the results, we are getting a very strong reception. So I feel great, frankly, about where we will land. I don't -- again, I don't take anything away from the fact that there are couple of other wonderful products in the category. I think that's going to be a typical structure, as you know, in these wealth categories. There'll be a few participants that are going to be really the bulk of a given subcategory, given asset class. I fully expect we'll be one of them in alternative credit. We are one of them in direct lending. We're net leader in real estate, and I think we will be one of the key leaders in digital infrastructure. So I think it's a very interesting market. We feel very fortunate to have started at it 10 years ago, which puts us in a position where kind of interesting gap, actually, which you'll find, we probably have the lowest brand recognition amongst the biggest firms, no shock there. But actually, if you look at how people view our brand, it's amongst the very best in the marketplace. That's a pretty nice gap to have. That gives us a lot of headroom.

Question: Crispin Love - Piper Sandler Companies - Analyst : Speaking of data centers, you've now closed IPI. There's articles about a potential Stargate investment out there. Can you discuss your views on data centers going forward, potential growth opportunities? And how you balance that in light of the recent deep see news out there, which could impact the industry broadly? Marc Lipschultz - Blue Owl Capital Inc - Co-Chief Executive Officer, Co-Founder, Director Absolutely. So you are correct. We have a very active and distinctive role in data centers. And you touched on 2 points, which I'm just going to call out II, which is now all digital infrastructure, a clear pioneer -- we were just talking with this yesterday, the scale of this market trillions was certainly not that when IPI had the foresight to become a leader in the space in a much, much, much smaller world, but that means they have many, many more skills and relationships and lessons learned. As a result, we have built and managed 85 different data centers with a gigantic active pipeline behind it. And so we have, I guess, I would dare say, a lot of insights into what's happening in that marketplace. And what we're seeing and hearing from the client base, and quite frankly, it's all -- you all know this well. It's people out in the public market talking. Look, Deep Seek is really, really fascinated. And we should -- look, it's all keep front of mind, Gavin's paradox, the idea that there's this disruptive technology, A, is to be expected hope for in the world of technology evolution. And in all likelihood, accelerates adoption. So it's not clear that what Deep Seek means exactly for ultimate compute, but here's what we can frame around that question. It may mean it all happens faster, it may happen broader. It may be a little less compute to train a model, but then you do more inference. I think it's hard to reason a conclusion other than what it tells us that AI is happening more, faster products. That's great news for our strategy. So what I guess I would -- what I take out of from where we sit at Blue Owl in Deep Seek is a good news story, which is the megatrend, the overall notion of AI adoption is only happening faster. And the whole reason you use our strategy, the whole reason to get the DNA of our business is downside protected, very attractive returns with stability and protection and income. So if you want to play in edges of AI, people may make great money on the cutting edge, or they may wake up and find out that someone is working on DeepSeek in China. We don't want any of those risks for our investors. So if you believe that 10 years from now, AI will be an important part of the kind of fabric of IT or the way we operate in this economy, then you want the picks and shovels. You want the infrastructure that goes with it, that's what we provide. So I would dare say we feel very, very good. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 06, 2025 / 1:30PM, OWL.N - Q4 2024 Blue Owl Capital Inc Earnings Call Now, let's add that to a few macro numbers, and then I'll move on. The announcements coming out of the people who really know what they're planning to do. And by the way, whose credit we ultimately get paid by, they made their positions clear. Even in the two weeks since DeepSeek. We've seen Meta come out and move their number to $65 billion. Microsoft, which when we signed our deal, think we thought they were going to be around $50 billion. I think they talked about with $80 billion. We're hearing $80 billion as a number around Amazon, I think, Google, $75 billion they announced yesterday. So the people that are spending the actual money have made their position clear and that's our client base, and then they pay us for 15 years with their near sovereign like credit ratings. So all that feels very good. Last thing I'll say, not because I want to pound on this, but we're all trying to get our minds around just the evolution of the market. If you look at the demand for compute and the multitrillion dollar opportunity that we're excited about and others, too, 75% of that was already anticipated to be for inference and to be for just cloud compute. So even when we get into does DeepSeek change, the fundamental need for raw compute power for training models, we're really talking about modulation around that last 25%. So all that taken together, if you believe in AI and you want to have a great way to make a really attractive risk return, then you go with a pioneer and actually go-to partner in building and managing these data centers, we have 1,000 people inside of our operations group more widely known as STACK. They're the experts on how to make that happen. It's a huge barrier to entry. So DeepSeek is fascinating. I think it means join our strategy. We want to make sure you play the foundation of it. And then you can also do the cutting edge and that will take technology skills that thankfully not decisions we have to make.

Question: Mike Brown - Wells Fargo Securities, LLC - Analyst : So good questions. I just wanted to narrow in on maybe the credit results this quarter. fees rose about $25 million quarter-over-quarter, and this would be the first full quarter with Atalaya. By my estimate, that should have added, I'd say, $20 million to $22 million in the quarter. So I guess, one, is that about right? And then two, can you just help us understand some of the other drivers beneath the service and maybe why the feed ex Atalaya didn't increase as much quarter-over-quarter? And then finally, sorry, just maybe also any color on incremental increase into 1Q as we think about the go forward?

Question: Alex Bernstein - JPMorgan - Analyst : This is Alex Bernstein on for Ken. At the roof double-clicking on the same topic again, just wanted to hopefully get a different flavor out of the delta between gross to net. You spoke about incumbency, which is definitely a key point. And maybe to help us better understand the power of that. As we look at what is actually that, which includes refi, as I understand it, that you're doing yourself for your own products? What's the difference between what is staying in the system and what might be exiting the system and specifically, what's happening with the broadly syndicated market and with bank competition. When we saw this topic first come up earlier in the year, so say, Q1 really when it sort of hit most people's attention spans it made sense that there was more refi from the DSL in the context of that market being closed and then rates moving down over the course of that period while that market was closed and when it opened. We don't have that same dynamic today. So I wanted to understand why that number was as a percentage, the conversion was lower in Q4 than it was for the whole year. Marc Lipschultz - Blue Owl Capital Inc - Co-Chief Executive Officer, Co-Founder, Director Yes, sure. So a couple of dynamics on pack. Again, I'll reinforce look, net-net, it's ultimately a pretty healthy dynamic in the portfolio or expected and healthy dynamic. It also is not to be lost. It does accelerate OID comes with prepayment benefit. So there's also not to be lost in this other benefits that come from these types of refinancings. With that said, you put your finger on a good point about sort of the, might call it the rush of refinancings in the first part of the year, which was indeed impacted partly by reopening of the BSL market. I think a lot of -- and I won't be able to give you an exact number on this, but I would say directionally, a lot of what we're seeing are companies that are doing well, coming back, have grown, delevered and saying, Look, the world is different from where it was a few years ago when I did my financing. And so I'd like to redo it. That does include redoing spread, often includes redoing and resetting the right size of the CapStack. So it's not been a drawdown or a draw away by the BSL market. We'll always have some things that move from us to the BSL market from the BSL market to us. I actually would characterize the refi now, again, as you said, has more about people just redoing cap stack in a healthier environment, those who have healthy, more delevered businesses than it is about the surge into BSL is back. And so people that were kind of waiting out their time shifted. So the BSL market, I guess I'd say the effect of having a very full bore available BSL market, that's already -- that's fully in the system. So as we enter 2025, that we've already experienced all that. And there will always be, again, loans that move back and forth. I think at the end of the day, for us now, late refinancing has occurred, there'll always be some tactfully because we have healthy companies that are doing really well. And rightfully sell, they have a chance to refinance and they come to us because they like working with us and they do it again.