Good morning, Bank of America's 34th Annual Financial Services Conference. This is Craig Siegenthaler, North American Head of Diversified Financials at the Bank of America, and it's my pleasure to introduce Doug Ostrover. Doug is the co-founder and co-CEO of Blue Owl, as well as chairman of the firm's board. Prior to founding Blue Owl in 2016, Doug also co-founded GSO in 2005, which he eventually sold, has become Blackstone's $500 billion private credit business. So it's actually the second time that Doug has done this. So Doug, thank you so much for joining us today.
It's great to be here. Is it $0.5 trillion now?
Yeah.
I should have stayed.
Well, you're pretty close now at $300 billion. So, so Blue Owl is an alt manager-
Mm-hmm
- that grew from zero to $300 billion AUM in less than 10 years. Its investment performance is good to great across the board, and its business mix is mostly in secular growth businesses, including private credit, digital infrastructure, and asset-backed finance. It's also a top two alt manager in the private wealth channel, which is the fastest growing channel over the last five years. So Doug, with that, let's get started on the macro front. We've entered year four for the bull market.
Mm-hmm, mm-hmm.
IPO and M&A are expected to accelerate. The Fed is cutting rates, credit spreads are tight, and maybe banks are going more on the attack now. So how does this macro backdrop play out in 2026 for the industry and also Blue Owl specifically?
Well, first of all, thanks for having me. I appreciate it. Thanks, everybody, for spending a few minutes today and listening to the Blue Owl story. From a macro standpoint, look, I view what we do is we're a little bit agnostic to where rates go. Obviously, when rates go up, it's a little bit better for us. They go down, it's a little bit worse. But if I were to look across the platform, private credit, M&A plays a big role, and we're expecting a nice uplift in M&A. I think I was here last year and said the same thing, and while M&A was fine, it just didn't materialize the way we had hoped. I think M&A is looking good.
If you look at the M&A stocks, which many of you, you know many of them, they're trading well. So, the only thing that makes me nervous is that when that's the consensus, it's usually wrong. But I'm cautiously optimistic. I will see a good M&A market, which will lead to good deployment. And I think you mentioned, you know, the banks are active, but they're active in the way they've always been active. And I'm not saying that in a negative way, but their model is to underwrite and distribute. And the market's robust, spreads are tight, but what we've been able to do over a long period of time, and we're still doing it today, is delivering anywhere from 200-300 basis points versus what you could get in the syndicated market.
Today, it's on the low end, it's been higher, but I expect deployment to be good, and hopefully, inflows will remain strong. And then across the rest of the platform, just real quickly, our alternative credit business is, the deal flow is quite strong, and I think deployment there will be good. Digital infrastructure backlog is the biggest it's ever been, and I'm sure we'll talk about that. And then on the real asset side, you know, we're seeing good capital formation and lots of investment opportunities. So I'm, you know, I'm definitely more on the optimistic side of where things are. The economy seems good. I'm sure we'll get into credit and what we're seeing. But across the board, things look pretty good for the strategies we're in.
Taking a step back, I wanted to talk about your strategic priorities for 2026. You've had a very active period of M&A. You added multiple products in secular growth verticals, but what are your key strategic priorities now for this year? And could we see another acquisition of Blue Owl again this year?
Well, let me start with the last question. We're we did make some acquisitions, which I'll touch on. I don't see us doing a strategic acquisition this year. We're not working on anything. I don't wanna say it's impossible, but it's improbable at this point. In terms of, you know, what we're trying to accomplish this year, and you and I have touched briefly on this, you know, if I look at 2024, we did make a bunch of acquisitions. We felt we needed some more diversification across the platform. 2025 was a period of integration, and now 2026 is about execution. So execution, first and foremost, is we've heard from the street, from our investors, we've got to improve margins. You're gonna see margins continue to improve. Not-- They're not gonna jump from where...
I can't remember exactly we're end of the year, 58, 58 and a little to 60, but you're gonna see gradually, quarter-over-quarter, year-over-year, margins going up. We're focused on FRE per share. You know, we, we said, I think Alan said for 2026, growth will be modestly better than 2025, and then we hope to see a real acceleration in 2027. That, obviously, we're very focused on. We had record fundraising last year, both in the wealth channel and on the institutional side. I think wealth could be a little bit more muted for the first six months, and then we hope to see it accelerate again in the second half of the year. And we're still, you know, very bullish on what we're gonna do institutionally. In terms of, you know, away from financials, fundraising is key for us.
We've got to finish up our GP Stakes Fund. We've got to finish up our real estate flagship fund. I think we ended the year at $4.5 billion. We have on the cover $7.5 billion. We want to hit that, maybe do a little bit better. We finished up our fundraise for asset-backed, and we'll be in the market in the second half of the year with hopefully a big number on the cover for digital infrastructure. We also were able to take some of those acquisitions and very quickly get them in the wealth channel, basically within a year of buying them. Digital infrastructure, we raised just under $2 billion. In the asset-backed side, we raised the largest interval fund or initial interval fund, and we're getting really good traction there.
So I think as I think about strategic initiatives, it's really, we've integrated things, and now it's taking each of those businesses and really getting out there and execute with a real focus on margin and growing FRE.
Doug, I wanted to talk about deployments. You hit on this briefly earlier, but when you're in a three- or four-year bull market, credit spreads tend to be pretty thin at that moment. At the same time, though, we are expecting a big pickup in M&A, which will provide new origination opportunities.
Mm-hmm.
But as you sit here today, what does the deployment outlook look like?
Well, look, deployment for us is really closely tied, in credit, is very closely tied to the M&A cycle. And, if there's M&A, I can tell you, not all firms, but most PE firms really like the idea of financing their buyouts day one with private debt. They like knowing who their creditors are. So the question I get all the time is: Why are people doing deals with you? You're more expensive than the public markets. Your covenants are tighter. These are savvy people on the other side. Why do they do it? And really, you've just got to take a step back and think about what the true cost is. It's really de minimis. You're buying a new business. It's an auction. It's like buying a house in a hot housing market.
You get somebody to do the inspection, you buy the house, you get in there, and then you start opening walls, and you realize it's quite, it's really not as good as you thought. I would tell you, in companies today, there's a lot of cash on the sidelines. When good assets come up for sale, it's a bit of a frenzy. And so by working with us, if, God forbid, there is an issue, you know who your creditors are. You know, if you need to go back, reach a quick deal, it might just be us, it might be us and a few others, but it's very manageable. So it's a very inexpensive insurance policy. Now, why do I say it's inexpensive? This is the negative to direct lending. We don't have a lot of call protection. Maybe we get 18 months or two years.
So think about it if you're a PE firm. You go buy the business, you figure out what you want to do with it. When things look good, 18 months, usually it's a 101 call, maybe 102. You've paid a little bit higher coupon, and then if you want, you can go to the syndicated market. So I bring this u
p because if we see, like everybody's expecting, an increase in M&A, you will see elevated deployment for us.
So, let's flip it and talk about digital infrastructure. So you bought a business in this space kind of at the perfect moment, right before this AI boom. So what do you like about IPI? Why did... And also, why did they choose to partner with Blue Owl?
Well, you know, I'm incredibly bullish on this space. It had been something I was really focused on. So let me, let me start with your question, why they chose us. IPI had two owners. One of the owners wanted to sell. The remaining owner had the ability to direct where it went, and you can imagine the usual cast of characters. All my competitors wanted to buy it. But this one firm who controlled it, a firm called ICONIQ, said, "We don't want it to go to auction. We just want to work with Blue Owl." So we were able to buy it at a very attractive price. So why was I so excited? Truth be told, I had been chasing after IPI for years, and the reason I got to it was we are the market leader in triple net lease.
Now, until we got involved in it, triple-net lease was really just a niche strategy. Now, we have tens of billions of assets in it. And for those who don't follow it, simply, it's we go, we go to an investment-grade company, we buy assets from them that we think are mission-critical, and they lease it back. It's triple-net, insurance, taxes, maintenance, it's all borne by the tenant. So we just get a cash flow stream.... And as I mentioned, market leader, we've generated an excess of 20% returns per annum in that business. Our clients, our tenants, for the most part, are triple-B companies. Many are weak triple-Bs. So at one point, I think we owned 10% of Walgreens stores. We've done deals with Cracker Barrel.
We recently did a deal with, well, you know, I don't know if I'm supposed to say, but a bunch of distribution and cold storage facilities for food distribution business. We're earning on average in those deals about a 7.5 cap rate, with a 3% escalator per annum over, let's say, 20 years. Triple-B, 7.5, 3% escalator. And then I started understanding what's going on in data centers, Microsoft, Meta, Google, Amazon, that you could get the same 7.5 cap rate, same triple net lease structure, same 3% escalator. But instead of financing a lot of triple-B companies who are great businesses, now we're providing capital to some of the largest companies in the world, on average, true weak double-A rated.
And so I knew it couldn't last, but I thought, I think we can—the projects are big. We can deploy a lot of capital. So we are getting from this type of tenant, oftentimes, we're starting out with an 8% cap rate, and it goes up by 25 basis points a year. Eight years from now, you could have a Google, Microsoft-type piece of paper at a 10 coupon. Google did a deal yesterday, a 40-year deal at 90 over. They're gonna print today a 100-year deal, and yet I think I can get very comparable credit risk and maybe make a 20, maybe more.
And just to give you, just quickly, when I talk to people about this, they're like, "Ugh, but the residual value of a data center 20 years from now may not be worth anything." Well, I can show you, if I start at an eight and I use leverage, if the data center, 20 years from now, is worth zero, thousands of acres of land, dozens of buildings, lots of equipment, it will not be worth zero. But if it's worth zero, as long as Meta, Microsoft, Google pay me, I make a 10%-12%. If I get back $0.30 on the dollar, I compounded almost a 17% return. So the bet I have to make is: Will those firms be able to honor a lease over 20 years?
The bond market would tell you, if 40 years, 90 over, it's a very low probability they're not gonna pay us. And so I look at that, and it's one of the best risk-adjusted returns I've ever seen in my life. I'll stop talking about it now, but one final thing. You know, when you have demand here and supply here, and they don't wanna finance on balance sheet, they've made the decision to use other people's money to buy real estate and build buildings, as long as that demand supply stays out of balance, we'll continue to generate these returns. But I think we all know, even in the high yield market or in any market, that arbitrage will disappear over time. It will especially disappear when your average tenant is a double A credit.
So I can't tell you, right now, you probably saw this, everybody came out and doubled their CapEx budget. It's now $650 billion, and for all of you, you know, obviously you're looking at the economy. I mean, we're working on projects right now. Our biggest deal is just under $30 billion for Meta. We're working on deals, I am not exaggerating, this is just for the shell and maybe some GPUs in there, $50 billion. I mean, in our lifetime, I never thought I'd be financing deals of that size, but I never thought I'd come across CapEx projects of that magnitude. So it's an exciting opportunity. I think it's gonna go on longer than I originally thought, and we're really gonna try to take advantage of that arbitrage.
So Doug, on that, I think one misconception is that you have a lot of private credit exposure to data centers, but it's actually coming out of the IPI, former IPI business, your data center business, through a lease. But, what is your private credit exposure to data centers?
Well, today, we don't do anything in private credit to data centers. We in terms of lending have nothing, and you know, there's a misconception. So remember, we're doing 20-year leases. So if I'm gonna do a 20-year lease, I've gotta make sure that I'm working with companies that can pay us back. And so let's just take a company like Anthropic. It's an amazing business. They're gonna go raise money at $400 billion. They're gonna go public at a much bigger value. But would I sign a 20-year lease with Anthropic today? And I know Dario Amodei. I spent. I just traveled with him. Amazing company, but I couldn't sign a 20-year lease. It just doesn't make any money yet. Same thing with OpenAI.
So, one, there's the misconception that we're working with companies that are not the best companies in the world. In terms of lending, when the Meta deal, there was a $25 billion bond deal, amortizing. We took a piece really in our insurance business because it was rated single or double A, and then PIMCO investment grade, we sold the rest to them. So in the credit side, no, it's not an area we're lending into right now. We might look at it out of the real asset side, a dedicated fund, but it would be primarily IG paper.
So, you know, given your focus on the picks and shovels around AI and AI, what are your thoughts on if we are entering an AI bubble here, especially around public market securities? And does it really matter that you, because you have these bulletproof 15 year+ leases to an investment-grade company that, you know, is fairly safe?
Yeah. Listen, I, I'm really not in a position to tell you whether we're in an AI bubble or not. But we do work with the biggest companies, the most sophisticated people when it comes to AI, and they think it's the equivalent of the Industrial Revolution, and it's gonna be life-changing. I will tell you that most of the people we talk to, who touch it the closest, think that Wall Street in general and investors have a tendency to overestimate its impact in the short term and underestimate its impact longer term. So I, I, as I said earlier, CapEx is gonna continue to grow. They think it's so big, it's the equivalent of having, like, an incredible product, but not having manufacturing. We're those manufacturing facilities. We create the compute.
But to answer the question you asked, we're not making an AI bet. What we are doing is making a bet that those firms, over a 20-year lease, let's say 15-20 years, are gonna be able to honor their obligations. And I think just based on where comparable debt securities trade, the marketplace would tell you that is a very, very low risk of default. I don't know the exact probability, but I have to guess it's under 1%-2%. And so if I can make a mid-teens base case with the potential to make in the 20s on, you know, taking the risk that those companies will continue to pay us, I think that's really compelling, and that's why you and I have talked about, I think it's one of the best risk-adjusted returns we'll see in our lifetime.
So let's switch it up to ABF, asset-backed finance. So Blue Owl acquired Atalaya, I think I pronounced it right, in 2024, which added a best-in-class ABF capability. How is this transaction tracked to date, and what do you see as the long-term growth drivers of ABF, and kind of how do you think about that TAM longer term?
Well, just to, you know, just give you a little history of it, if I went back to when Silicon Valley Bank and a few other regional banks went under, about six months later, we started getting calls from the teams, asset-backed teams at banks, that their lines of credit were being cut, and so the ability to generate historical profits had gone down, and they were looking for a home. And so we started doing a lot of work on it, and originally, we were gonna build it organically. We touched a lot of the markets they were in, and put together a game plan to do that, hire a few people, and then we got approached by Atalaya. Again, no auction, wasn't shopped, just senior people at our firm knew the senior team there.
As you mentioned, Atalaya, almost a 20-year track record, best-in-class, but they woke up to the reality that their world was getting more competitive. Firms like Apollo, you know, were now generating, you know, competing not just on the below-investment-grade space, but in the IG space, and they realized that they needed better distribution, I mean, access to capital, and so we very quickly cut a deal. It's off to a very good start. The TAM in that space, depending on who you're talking to, on the low end, is, let's call it $8 trillion-$10 trillion, and high-end, many multiples of that. The penetration, unlike direct lending, is negligible, and so it reminds me of where direct lending was maybe 15, 20 years ago.
But the difference is, you know, I was in the leveraged finance department at DLJ and Credit Suisse. It was very natural for us to say, "Oh, we understand credit. Let's go build this." But in the ABF space, if you go buy, you wanna go buy 20,000 loans from SoFi, you've got to have the systems to understand it, to track it. If someone doesn't pay, how do you collect? What do you do? And so they have this history, and the performance has been exceptional.... They joined a little over a year ago. We got it fully integrated. As I mentioned, we launched the wealth product, we finished the institutional product.
I believe they were a little over $10 billion, and we raised $4 billion of capital for them last year, and we're in the market with our interval fund, and I think it's a nice complement to what we do in direct lending. As I said, less competition, returns are more compelling. Just to give you an idea, our institutional fund, I think, last year, generated a 19% gross return. So, I'm really excited about it, and, you know, we'll see over time, but I hope to make that into a significant leg to the stool.
Great, so, let's jump into your private credit business, where Blue Owl is a leader, your first business, essentially. How would you sum credit quality trends to date?
So I'm glad you brought this up, because certainly, I've gotten this call from a lot of people because there's been so many negative articles about what's going on in credit. And so I'm just to give you an idea, at Blue Owl, our average company probably does $320 million of EBITDA. So we lend to big companies. Our average loan-to-value on the, on the, typical industrial is right around 40%, and on a software company, it's right around 30%. As you mentioned this earlier, our performance has been really strong. Over the 10-year period we've been operating, we've had 8 basis points of annualized losses, so, not quite zero, but de minimis losses.
I talk to a lot of CIOs, and it's very important for me to manage their expectations about what the returns are gonna look like for the next year, 'cause the last thing I want them to do is be blindsided, especially with so much negative sentiment. The truth is, and I'm sure you've heard this from others, or you'll hear from them today, the portfolios are all doing really well. The industrial side, we're having right around 10% EBITDA growth in the fourth quarter versus a year ago. Software is in excess of, well, let's call it 15%. Our non-accruals are not going up. Will we have some bankruptcies here and there? We definitely will. I mean, it's just part of the business. Some, I think, will get back par, some will get a discount, but net-net, over a 10-year period, very small losses.
And I can tell you, with a very high degree of certainty, over the next 18-24 months, that these portfolios will continue to perform exceptionally well. Now, will returns come down a little bit? Definitely. SOFR is down, spreads are a little tighter, but in terms of bankruptcies, it's gonna be de minimis. We expect recoveries to stay pretty consistent. And how do I know this? Well, the press loves to talk about two companies I'd never heard about till they wrote about it, First Brands and Tricolor. They're still writing about it. It's been, like, 7 months, but those were companies where there was fraud. So you had, and by the way, they weren't private debt issuers, so I'd never, I'd never seen it, but these were companies that traded at par, and the next day, they dropped precipitously.
As most of you know, in corporate credit, that's not how it works. We start to see some weakness, company misses budget, maybe it's starting to bump up against covenants. Do we have to work with the PE firm? Do we have to put it on a watchlist? Eventually, does it have to go to non-accrual? So it's a long process. We're just not seeing that today. The names where we have problems have been our problem names for a long time. A number of them have been problems since COVID. Just never recovered, relied on China, things never thought out there, just a variety of issues. But net-net, the funds, I believe, for the next 18-24 months, are gonna put up pretty good numbers. And by the way, without naming the firms, I have gone down,
I've gone out and met with the CEOs of my biggest competitors just to see: Are they having a similar experience? And, you know, very candid conversation, and they're saying the exact same thing. So I think we're gonna remain, despite all the negative rhetoric in the press, in a very benign environment. How much time do I have left?
I don't want to steal your time.
Oh, good.
Okay, we're good.
Okay, so real quickly, the one thing I do want to point out that I just find really curious, when I was doing a one-on-one or a little group meeting ahead of this. So we're senior secured lenders, and on average, we're about, let's call it 40% loan-to-value. That's 60% private equity underneath us. On my $0.40 that I'm putting in, or 40%, if I lose $1, I promise you, the PE firm is getting zero. And so if you're worried about direct lending at all, you've got to be really worried about PE. There are trillions and trillions of dollars at work, and yet nobody seems to be writing about it. Then if you go up the cap stack just a tiny bit, there's a multi-trillion-dollar high yield market. It's unsecured, it has no covenants.
They won't get zeros, but they'll get between 5- and 20-cent recoveries. So if you're worried about us at the top, those two are really vulnerable. The other thing that just people don't understand, and I, I'm not trying to debate, you know, bank CEOs, but I underwrote loans for a long, long time at a bank. Let's say I'm working with a big PE firm, I don't know, KKR, and I'm a bank. My goal is to get that bank the lowest price possible on their debt and the weakest covenants, because that's how I get the next deal. So a deal gets announced on a Monday, and it's printing on Friday. You get to do maybe 72 hours of work. In the direct lending space, we're working on these deals for months. We're negotiating every word in that indenture.
I can tell you, on the public side, you need to get money to work. You don't even have time to read the indenture. Now, I'm not saying it's a bad market, I'm just saying that really peel the onion back, this is a safer way. You get higher returns to play. You give up liquidity, but it is definitively a safer way than the syndicated market. But my point is this: there are trillions and trillions, it probably aggregates to $8 trillion, that I think is vulnerable if you're worried about direct lending, yet, well, you hear about cockroaches and shadow banking, but the rest of that cap stack, nobody really talks about. So, going back to where I started before I went on my, tirade here, I, I think it's gonna be good performance for the next couple of years.
Great. So I mean, to date, and even last year, your private credit funds did have good performance, yet we did see a pickup in redemptions in the fourth quarter. Maybe comment on what drove that was part of that seasonal, and I'm thinking the diversified U.S. fund, not OTIC.
Yep.
You know, since performance is good, but flows got a little worse, when do you think flows get better?
So look, here's the problem of the structure in wealth. There's no penalty for leaving, so it's just human nature. If you're an advisor, and there's some advisors in the room, and you start seeing all these stories, and your clients called, and they're concerned, there's no cost to saying, "Hey, you know what? Let's go out of the market. We'll go to cash for 30 days." To your point, we'll get to the end of the year, we'll see where things are in January, February. And so we weren't surprised by it, and I think you should assume, just with all the volatility in the markets across the board, you know, that we'll see elevated redemptions again in the first quarter. But the returns have been good, and that's what matters the most.
That's what attracts people to the capital to the asset class, why they want to be in. So, look, if I were to model it, you know, I would assume first, maybe second quarter is a little bit weak, and then we start to see it come back to historical levels.
Got it.
That's kind of how we're thinking about it.
So at the early 2025 Investor Day, you provided us FRE growth guidance of 20% per year. Now, a lot of us focus on FRE after tax per share. So I'm wondering, because there's different moving pieces there, how do you think of that metric? Because that metric probably drives what you plan to grow the dividend at in the future.
I'm not sure I fully understand the question, but let me give you my best guess. I think the way Alan addressed this on the earnings call, given what we're expecting for wealth in the first and second quarter, I think we're expecting FRE per share to, from a growth rate, to be modestly higher, modestly higher growth than what we saw in 2025. And then as things normalize, we're expecting things to accelerate. I think Alan also mentioned, probably about 2% issuance in shares. And we got some questions on tax. I don't want to give the wrong number, but tax rate just being just a few percentage points higher.
Got it. Maybe let's just... You know what? Actually, let's take a moment, because we're running out of time, and just see if there's any questions from the audience. So please raise your hand. We'll get you a microphone if there's a question. If not, I got one more up here. All right, so let me ask a private wealth question. You know, you're number two in the world at this, and you did this very early, too. What inning do you think we are in, in the migration to for alts to the private wealth channel? And, you know, private credit's been the best spot the last few years. Do you think we're undergoing a transition to private equity, which did outperform private credit last year, or even infrastructure, which is less sensitive to Fed funds?
... Well, in terms of where we are in innings, hard to say, but early. I'm second or third inning. And when we launched the wealth business 10 years ago, you know, I had left Blackstone, and I was trying to figure out, okay, we're a new firm, what can we do better than the big firms? And if you remember, 10 years ago, one, nobody was focused on wealth, and two, when they were focused, they had what was known as an advisor-sub-advisor relationship, where the- all these big alternative managers didn't want to distribute it, so they were the sub-advisor. And there were firms like Franklin Square, and CION, and CNL, and none of those relationships really worked. And I thought, day one, by bringing it in-house, I could give investors a better experience.
By better experience, what I said was, "In all of our institutional funds, all of our wealth funds, we're gonna invest in the same product. We're gonna give the wealth investor the identical experience as the institutional investor." That really allowed us to scale, and we've delivered. We've delivered good results, and so everybody's always asking, "Hey, why are you able to get your products, you're, you're not as big as these other firms, into these platforms?" We've built a very large team. We've shown we can raise a lot of money, and most importantly, we've executed in terms of performance.
In terms of where the market's going, I think at the end of the day, I think PE is having its moment in the sun, and raising good amount of money, but I think strategies that offer low volatility and high current income are gonna be the things that resonate the most. That's why private credit has done so well. I'm not sure many of you are aware of this, but we were the number one fundraiser last year in real estate. And we generated, Alan's here, I wanna say an 11% net return for investors, tax advantaged. And I, while I really like credit, and I think it will continue to grow, for many investors, it's a little bit tax inefficient. So finding something that can generate a double-digit return that's tax efficient, that's really exciting for wealth.
I think, as I think about the products that are gonna resonate, tax will play a role, and high current income will be the other piece.
Great. With that, we are out of time. So Doug, on behalf of all of us at Bank of America-
Thank you, everybody.
... thank you very much for joining us.
Appreciate it.