All right. Good morning, everyone. Welcome to our next session here. If any of you don't know me, I'm Ben Budish. I cover the U.S. brokers, asset managers, and exchanges. For this next fireside from Blue Owl, we've got Doug Ostrover, our Co-CEO and Chairman. Doug, thank you so much for being here.
Thanks for having me. I'm looking forward to the conversation.
As am I. Doug, it's been a little while since this audience has heard from you. Excited to have you here today. Can you give us your view of Blue Owl today, just kind of a state of the world in your universe just to kind of level set as we get started?
Sure. First of all, thanks, everybody, for spending a little time with us this morning. I'll try not to dwell on this too long because I could use 30 minutes to describe it. For those who are not familiar with us, Blue Owl, $320 billion alternative asset manager. We went public about five and a half years ago, around $60 billion. So we've had about five turns of growth over the last, let's call it five and a half years. We're pretty narrowly focused, and that's by design. When we started the firm, we really were focused on let's find areas where demand is greater than supply, meaning demand for capital, and we can come in and fill that void, and let's go after things where the asset class has high current income, good downside protection.
That is really what we wanted to do, and that is what we have largely achieved. We have three areas. The biggest area for us is credit, but it is not credit with the way all of you would think about it. About a third of our capital of the firm is in traditional direct lending. The other 15% is in asset-backed lending and a little investment-grade credit. The second biggest area, which is our fastest growing area, is our real assets business.
We have two lines of business there. We have triple net lease and we have data centers, and I will touch on each of these in a moment. The third leg of the stool is GP stakes. If you look across the board at all of these businesses, and there is sub lines of business underneath them, we have had top quartile, and in many cases, top decile performance. The GP stakes business, we are by far the market leader. For those who is not familiar with it, GP stakes is where we go. We take an ownership stake in a leading alternative asset manager.
The capital is very long dated. We have no pressure like traditional private equity to sell that. We were just voted as the number one PE firm globally. It has had well in excess of 20% returns and a very high DPI. In our real assets business, which I am sure we will spend time talking about, that by far is our fastest growing business. I mentioned triple net lease. Triple net lease is where we go, we buy a mission-critical asset from an investment-grade counterparty, and we lease it back for upwards of 20 years. We bought that business under five years ago. We have grown it almost five-fold.
Again, in excess of 20% returns and really good DPI. Our data center business, we have 1,000-person team in that space. We have been at it for in excess of 10 years. We own and operate in excess of 140 facilities. About 15 GW of capacity makes us one of the largest players globally there. In credit, as I mentioned, we have our direct lending business, our asset-based business.
Asset-based, we bought a few years ago, generating today 13% in our core fund, close to 20% in opportunistic. Our credit business, which I am sure we will get into today, despite all the rhetoric in the press over the last six months, to give you an idea, credit has generated well in excess of 9% versus the leveraged loan index of 6% and the high-yield market, which is close to 4%.
I guess if I could leave you with just two thoughts about the business, since we are in conference season, I have not been up here for a while. One, the business is much more diversified than people realize and what they have been writing about. Secondly, if I took you back to the beginning, five and a half years ago, how we described our business, we are 100% of our revenue is from management fee.
None of our peers have that. Not quite 100%. Let us call it 98%. Carry the bulk of it goes to the teams. We take the management fee. We pay that out. I believe what we have created is really an annuity stream for our investors. So when I come in with my Co-CEO, Marc Lipschultz, the beginning of 2027, we are looking at the year ahead. We can look back at 2026 and say, "Okay, we know what we earned in 2026. We know we have tens of billions of dollars we've raised, and when that's deployed, we'll earn fees.
So what's our deployment going to be?" The next two variables are key. What are our margins going to be? Alan has been very clear. I think we've talked about 58 and change. Let's call it 58.5, and we're trying to take that up slowly every year. The big variable on this annuity stream is, what's our growth rate? Given all the press this year, as you can imagine, growth has come down a little bit. The question I think for everybody in the room is, can we get ourselves on a path in 2027 with our dividend, which is pretty high, we're yielding close to 9%? With that yield, can we accelerate growth again? If we can, I think we can have a stock that's poised to do pretty well.
Great. Well, thank you for all that great way.
Sure.
To set the stage. Let's dig in a bit, maybe starting with credit. Talk a little bit about the recent trends across your portfolio. How would you characterize the health of your borrowers, and what are you seeing in terms of revenue and EBITDA growth in recent months and quarters?
Sure. Look, I am referencing the press, not to be defensive, just I want to talk about the reality of what is going on versus the perception. The reality of what has happened, and this I can talk with certainty through the first six months of the year. Many of our companies, I get monthly financials, so I think this is pretty accurate. You should assume our portfolio is going to see revenue and EBITDA growth somewhere in the range of 7%-10% on the high end. Let us call it 8%, 8% or 9% on average. The portfolio, we have about 400-odd line items.
Average position size is about 20 basis points. That is by design. The idea is let us be highly diversified, so if we do get something wrong on a name, it does not have a material impact on the portfolio. Average EBITDA or cash flow of the business is around $300 million. Average loan to value is right around 40%. So, we have 60% subordination. Portfolio performance to date has been strong. As I mentioned, worst case, I get quarterly numbers. Many cases we are getting monthly numbers.
When you are looking at a credit, usually when you own something, it is not doing okay and then it just drops. It is usually a slow decline. So we have a pretty good insight into what is happening in the portfolio. We also I talk to my peers to try to get a sense, the big peers, of what they are seeing, and they are experiencing similar trends. So I guess, the big takeaway hopefully from today is credit quality remains pretty strong. I cannot look out more than a year, maybe 18 months, but I am anticipating that that will continue to be the case.
I will tell you one thing, if you get bored later, just to give you a sense of as you think about the credit markets, just to put it in perspective, go to ChatGPT, go to Claude and put in, what has the leveraged loan market done for the last 36 years, since 1990? If we had time, I am not going to eat into our time. I could make the case that what we do in direct lending is materially safer than the syndicated market.
It is not to say the syndicated market is bad, it is a good market. But I think if we spent time on it between our diligence, negotiating covenants versus having a bank as an intermediary, I think we can create a better portfolio. But let us just say they are equal. Here is what you will find. 36 years of data, syndicated loan portfolio has had three negative years. Two of those years have been 1% or less in terms of negative return.
So the big negative year was 2008, and everybody likes to point to that, but then you will see the data. Look at 2009. By June of 2009, if you held on because it was mostly mark to market, the decline, you were back in the money. So my point is this. 36 years of data would tell you that a well-diversified pool of loans has performed through rising rates, wars, inflation, whatever you want. It has had one materially bad year.
Maybe talk a bit about what you are seeing from a new deal perspective. As we are moving through the refinancing cycle, how are deal terms evolving, spreads, covenants, PIK utilization? I am curious if you could also comment on maybe how competition is changing given the lower BDC formation and what appears to be a greater willingness from banks to kind of reengage where you are active.
Sure. I may need you to run through all of those again, but I will try to. I think I got it.
Maybe first, what you are seeing on the new deal side.
Yeah
How loan docs are evolving, that sort of thing.
Yeah. It's no secret with some negative sentiment around the asset class, inflows have slowed down, especially in the wealth channel, across the board for everyone. I was hopeful that with inflows slowing, we could start to see spreads start to widen out. We've had some spread widening, but it's not been material, and that's really because the deal environment is somewhat benign.
We had a good first six months of deployment, but it was lower than we want. We did about $10 billion of activity. There's a lot of dry powder. It will pick up, but it remains relatively slow. In terms of what we're seeing from competitive landscape covenants have remained pretty robust in our market, much stronger than what you would find in the public markets. You should just know for us at Blue Owl, I think part of the reason as I look at our performance over the last 10 years, we've had about 12 basis points of loss per annum.
I think we've done a good job of analyzing credits, but I think we've done a really good job of making sure that when we have problems, we've negotiated covenants that protect us, and that there's not going to be asset stripping, there's not going to be creditor on creditor violence. We've assured ourselves that in that downside scenario, we can get a good recovery if we're right. That is still the case today. We're getting, as I mentioned, 10 billion of deals. We have a threshold for covenants. We're seeing that. From a competitive standpoint, there's been a lot of talk about the banks.
If I took you back many, many years ago, I worked at a bank, ran leveraged finance, and I want you to know, despite the bank saying they want to be in the business and they want to hold these loans, the single best risk-adjusted return for a bank is committed to a deal and selling it without writing a check. It's an infinite return on capital, and when it's a robust underwriting environment at every bank, the best area in fixed income is leveraged finance, underwriting loans and bonds. I bring that up because we're not seeing an increase in competition due to the banks. I think you mentioned PIK. For us, there are two types of PIKs in our portfolio. We have the PIKs, we call them PIK at origination. That means company, fast-growing business.
Sponsor says to us, "I'd like to take all that capital, redeploy it in the business, but in two years we'll be cash pay." Our PIK at origination, that's coming down sharply. You should know our PIK at origination never had a default, never had a loss, been a very good area for us to invest in. Likewise, PIK and that's 90-odd percent of our PIK exposure. Very de minimis amount are PIKed due to restructurings.
I'm pleased to say, last quarter we announced it came down, and I expect, in the upcoming quarters, it will continue to come down. So it's still a pretty good environment. I'd say the biggest negative in the environment right now is we wish deal flow was a little bit more robust. But away from that, underlying credit quality is good. Not seeing an increase in the number of defaults, names on watch list. As I said earlier, I feel pretty good over the next 12 to 18 months those trends will continue.
Maybe just digging a little bit more into the potential deployment trends, the pipeline. Your confidence in deployment picking back up. What do we need to see for that to happen? There's definitely another media narrative out there that there's tens of thousands of private equity companies that are sort of stuck. So what has to happen to kind of get things moving again and sort of drive your net deployment?
Well, there are a couple. I think what you're hitting on is true. I think there are vintages of private equity from 2019, 2020, 2021, maybe 2022, where a lot of PE firms probably overpaid for companies. It doesn't mean they have a material loss, but they don't have a meaningful gain. The best way to think about it is this. On the one hand, over here, we know there's at least $1 trillion, $1.5 trillion of dry powder with private equity firms. On the other side over here, to your point, I don't know if it's tens of thousands of companies, but let's call it thousands of companies that have been held for more than five years that aren't being sold. So we've got all this capital. We've got businesses here. Nothing is happening.
It's most likely because they don't have a meaningful gain, and they need more time. But in terms of what we're seeing, we have maturities that come up constantly. While M&A is muted, there's still a lot of M&A. We're just one firm. We put out $10 billion of capital in the first six months of the year. It's not what we hoped for, but it's not bad. That $1 trillion to $1.5 trillion, that will get deployed. One of the advantages a firm like Blue Owl has is we do have incumbency with thousands and thousands of companies. As those businesses think about buying a business, refinancing debt, even without a super active M&A environment, we're in a position to hopefully meet their needs and put out new capital.
Got it. Maybe just one last question on the credit side.
Sure.
What is the latest from the wealth channel? I think on the last earnings call, you guys indicated redemption requests were improving sequentially. I am just curious, I think you are in the middle of your U.S. tender period process. Is there any update you can share as you are kind of working through that? Then more broadly, how would you describe how retail investors and advisors are thinking about private credit more broadly?
Well, if it is okay with you, I would like to just broaden it out a little bit.
Please.
In terms of private wealth, we are still big believers. Penetration in that market is still very small, well below 5%. If you look at the traditional institution, it is approaching 20%, 25%. This is a market that is growing rapidly. We have massive amounts of wealth being created. You can see that for any of you who know anything about the RIA channel, the RIAs are trading at 20 to 25 times because there is a belief with all this wealth, they are going to continue to attract capital.
Same thing for us. We expect more and more of that capital to come into the market. It is going to come into the market because we think we are offering unique products that have really good risk-adjusted returns. We are big believers in wealth. We have a couple of funds, new products we launched. We have our Blue Owl Digital Infrastructure Fund in wealth.
We have what's called the OWLCX, which is our asset-backed business. Those have both exceeded expectations. We've hit $2 billion. ORENT, which is our non-traded REIT, it's the second biggest REIT in the market, still taking in meaningful inflows. It's at $16 billion. If I look back at digital infrastructure, we got to $2 billion quicker than ORENT. I'm not saying it'll grow that way to $16 billion, but I think it has a lot of upside. Same thing on the asset-backed side.
Much less competition, returns are very high. Most importantly, in those products, the redemptions are de minimis. In OWLCX and what we call ODIT, digital infrastructure, they're in and around a half of 1%. ORENT, which is continuing to take in lots of capital, we had our lowest redemptions, I think one and a half. Was right around there, Alan? Which is our lowest in eight quarters. That's what we're seeing kind of away from credit. In terms of our credit book, and the main fund is OCIC, which I think is right around $20 billion of capital.
That peaked in the first quarter. We saw a sequential decline in the second quarter. As you mentioned, we're in the middle of the tender period right now. It's too early for us to say, but I think on our call in the second quarter, we said we expect that to come down again. That's the trend we're seeing. I can tell you that what I'm pleased about is that we're not seeing an increase in the number of tenderers. We had over 90% of people in that fund say we want to stay in, that under 10%, they've continued to tender, but the number has gone down.
Hopefully with the negative rhetoric and the press dying down, we can start to take that down and over the next X number of quarters, eliminate that. I'm cautiously optimistic there. I'll give you one interesting stat, which I just saw. We had a meeting on this. Today at Blue Owl, and we have a lot of advisors, as you can imagine, 70% of those advisors have clients in more than one Blue Owl product. If I went back to the same time last year, that number was at 50. What that says is, even with the negative story, we've seen a really nice uptick in our advisors who have worked with us adding Blue Owl products in this environment. Many of the products I mentioned to you.
The other thing I just want to mention is, I think many of you, if you invest in long-only firms, you know when someone gets into a redemption cycle, the net assets of the firm go down and the earnings of the firm decline, and they can decline meaningfully. For us, our credit products, as I mentioned, are about 11% of our fee-paying AUM. At our peak, we were slightly over $4 billion of redemptions, which is just 2%.
I think people would be shocked if they drilled down, they would see in the second quarter, we actually had net inflows from wealth, even paying out the full 5% redemption. The business is growing, and I think Alan reiterated that we think we will beat consensus. I think it's moderating in credit, and we're hopeful to see it continue to accelerate in the other parts of the business.
Great. We spent a bunch of time talking about real assets, but maybe just quickly touching on your GP stakes business.
Sure.
Just what are your latest thoughts on LP interest in GP stakes as an asset class? If there is any update you can give us on the fundraising for your latest flagship, and any other thoughts on the longer-term prospects for that sleeve of the business?
Yeah. This is an interesting business. I do not say this with any ego at all, but we are the dominant player. We are bigger than our next three competitors combined. As I mentioned early on, this is an asset class. It is a niche product. I think we probably get on earnings calls maybe one question on this, maybe. Oftentimes zero. It is a really good business. The money is locked up for a very long period of time. The returns we have put out are exceptional. Think about this for a minute. Think about you have the ability to go, and these are private alternative asset managers, where you have the ability to go and effectively become a partner at one of those firms. You get the fee and carry just like any of the partners. That is what we share in.
You probably are aware of this, the bigger firms have gotten materially better, and we have shared in that upside. So the returns are really good. It is a very nice stream of income, and it is income with some meaningful cap gains. The biggest negative in the asset class that people struggle with is how do I get liquidity? I own a stake in a private company. What if they never monetize? What we have been able to do to address that is, as the portfolios have matured, we have been able, at a nice premium, to be able to take a strip of that fund. Let us say it is a fund three.
It might own 12, 14 managers, and go sell the fully funded strip to an insurance company who can look at that and say, "Oh, I see the income, and I want a really long-dated asset," which is hard to find, "that pays me an above-market current income." The MOICs have been high, and as I mentioned, current income has been great. So, really bullish on that business. It's not going to be a 20% grower.
It's going to be a slower grower for us, but we're spending a lot of time right now thinking about what are some other ways we can grow that business. We recently launched a mid-market firm, and we've been exploring opportunities in the wealth channel as well. More to come on that, but I'm pleased with where we are in that business.
Great. All right, let's turn to AI. Your real assets business, but.
Yeah
Really the topic du jour. AI specifically, there's been a lot of recent industry discussions focused on financing partnerships, capital formation. Maybe just to start out, remind us how exactly does Blue Owl participate in that sort of opportunity set?
So listen, I think it all starts with our triple net lease business. We are the largest player by far in triple net lease. Again, a triple net lease, we go to an investment-grade counterparty. We buy a mission-critical asset. They lease it back for upwards of 20 years. We could usually get close to a 3% escalator per year on that. We've generated really great returns in this product. Now, what does triple net lease mean?
We get our income, all the expenses of that building we acquired, they're borne by the tenant. Insurance, maintenance, taxes. That's pretty unique. For all of you for your PA, I'm telling you, spend time looking at this. The reason I bring this up is if I were to look at the credit quality of our average tenant, for a while, we own 10% or close to 10% of Walgreens stores.
We will do mission-critical retail as well. But on average, it is around a triple B. Then all of a sudden, there was this new market that emerged, the data center market, where we could go and provide capital, same triple net lease, but where the tenant, on average, was a Microsoft, a Google, a Meta, an Amazon. AA or better rating on average. Same terms, same 20-year lease.
In fact, we have hit this inflection point in this market where we are earning more on a double or triple A than we are on a triple B. When we saw that, we knew we were in a unique position to go and provide capital to one of those firms who maybe was outsourced the building of that facility, and we did that. Then we came across the opportunity to actually become one of the builders.
We acquired a business a few years ago, where today, I cannot say we are the largest, but we are one of the largest builders and operators of data centers globally. Over 140 data centers we have built over the last 10 years. Again, there are others who are close. I think we are one of the biggest, if not the biggest in terms of things we are owning and operating today. Now, by buying the land, by getting the power, by coming in and building it, we get to make extra spread, especially if we are doing it somewhere that is a little bit more remote. We are in this very unique time period where we are seeing demand like this, and the supply has actually dropped way off.
When I bought the business, or when we bought the business a number of years ago, my biggest fear was, what if we hit this inflection point where demand flattens out and supply catches up to it? Can we still get a great return for our investors? I thought we could. But what has happened in this environment, again, demand has been much greater than we thought, and supply has shrunk.
Cap rates have remained exceptionally high. Eight plus for double A type credits, sometimes even higher, depending on where the land is located. The question I get all the time is, "Sounds like a great opportunity. What is the downside? What if there is an overbuild? What am I missing?" You should know when we are spending time and evaluating these deals, there are a couple of risks. One is the tenant credit worthy?
For example, overseas, our largest tenant is Amazon. We feel really good that they are a creditworthy tenant. Then the question is, at the end of 20 years, I own all this land, I own millions of square feet of buildings, lots of infrastructure. What is that worth? That is hard. Now, I will tell you how we run our models. We run our models assuming it is worth zero. If it is worth zero, can we still get an adequate rate of return somewhere between 7% and 10%, sometimes a little bit higher? In all of our deals, we will not do the deal, we have to be able to earn that in a zero-recovery scenario. I would tell you, we think it is very improbable owning thousands of acres, millions of square feet of buildings that are pristine, that it is a zero.
Best example I can give you, I talked about this in one of our earlier meetings. We own and operate a data center that was built for AOL, You've Got Mail. Literally was built in the late 1990s. It went from AOL, it went to LinkedIn, it went to Microsoft, it's at Oracle, and we have a long-dated lease there. The useful life of these is quite long. It's funny, we are part of the AI ecosystem. I would tell you, when I sit down with our investors, Anthropic comes through, ChatGPT, whoever it might be on the latest AI, LLM or something else that touches it's hard to figure out what the value is and where it can go.
I can tell you on the infrastructure side, we believe this is a place where people can put out large sums of capital and rest easy that you're going to make an adequate rate of return. I think there is the potential to make 20%, 30% and many multiples on your money in this asset class. We're quite bullish on it. We're finishing up our latest fund. It's done quite well. Our backlogs at Blue Owl for demand for the land we have, I'm not allowed to give the number, but the backlogs are the biggest we've ever experienced.
Well, you answered most of my next question, which was going to be the risks, how you think about the potential for overbuild. Maybe I'll just ask.
We're just in sync. I knew where you were going.
It's almost like you knew the questions in advance. Maybe I'll just ask, is there any context around the news that came out over the weekend, any additional color that investors should be thinking through or kind of sounds like what you're saying is the backlog is so immense that it's, I wouldn't say meaningless, but it is not slowing you down. But any other color on sort of the AI slowdown potential headwinds that we've been seeing?
Yeah. Look, I think the news that's come out over the last 10 days or so is cause for concern. I'm not an expert. I've been reading what everybody else has been reading, talking to a lot of people, and there's a lot of unknowns. I think my takeaway from this is the demand for compute is growing exponentially, and there is no slowdown. I think safety guards, safety rails are key, and I hope they're enacted, but they need to be enacted globally.
But for all of us in this room, using AI to make our lives easier and to become more efficient, and for every room like this around the world, I don't see that slowing down. All you have to do is look at Anthropic's revenue, how it's been growing tenfold every year. There's never been anything like it. We're seeing it. We are seeing this insatiable demand for compute.
I will tell you long-term, when I talked about that supply-demand, at some point, we will get to equilibrium where we have enough data center capacity, we have enough compute, and we hope at that point we have really attractive Microsoft, Amazon, Google, Meta paper in our portfolios, so that when one of those companies says, "I'm not financing at an eight anymore, I'm financing at five," we've got a bunch of paper that all of a sudden the market becomes five. I think that's how it's going to play out. But I don't see any slowdown in the demand and the efficiencies it affords all of us. So I think we're well-positioned for the next few funds.
How should investors think about translating all this into Blue Owl earnings power? As the segment keeps scaling, you mentioned before Real Assets is your fastest-growing segment. How do we think about triple net lease, the flagship fund, the wealth fund, ODIT, all these contributing to overall fee growth and earnings power? How would you kind of frame that up?
Yeah. We haven't come out with 2027 guidance. I think Alan will address that later in the year or early in the first quarter. Yeah. I talked about this earlier. Our growth has been slower than we'd like this year. Not surprised, given everything that went on. The question is, how do we grow quicker next year? I gave you the example of advisors, the number of advisors who now have more than one product.
I think the best way to think about is, what's going on in the core of the business? In credit, we're still bringing in money. In real assets, we launched our, I think it's Fund seven. We went out at $7.5 billion. We're right around $8 billion. We got permission to go above 8. I don't know where we'll end up, but let's call it around $8.5 billion. So well above our target.
We went out with the European net lease business. We think Europe, much less competition. We believe we're one of the first movers there. We wanted to raise $1 billion, we raised $1.5 billion. Across the board, I'll just list a couple others. We have our Blue Owl Strategic Equity Fund. We wanted to raise between $1 billion and $2 billion. We raised $3 billion. That's a continuation vehicle, which I think has the potential to be quite large.
We're working on credit secondaries now. I mentioned GP stakes is in the market with a middle market fund. We launched other credit verticals, real estate credit, digital infrastructure credit. Each of those will be well in excess of $1 billion. And we think we have the potential to build something really significant. We didn't talk about insurance. A lot of our peers, there's a lot of noise in insurance today, with one firm in particular. But we create a lot of product that is quite good for insurance companies. But we're a relatively small player in insurance.
We outsource it. We sell to a lot of our peers. And we brought in the CIO of an insurance company called Prosperity Life Insurance Group. Was owned by Elliott Investment Management. They started it de novo, and sold it for billions of dollars. His name's Deva Mishra. We've got major focus on how do we grow that line of business. So I like how we're positioned.
I like our assets. At the end of the day, when there was a lot of negative press, the one thing that we could control at Blue Owl, and I think this is really important, I talked to the team about it, is performance. Performance, I started with this across the board, has been exceptional. And if we can continue to identify markets where demand is greater than supply, and we can come and continue to create alpha for our clients, I think we're well poised to have meaningful growth in the future. And that's what we're going to continue to do.
Well, great. Unfortunately, we are out of time.
Great.
We will have to leave it there.
Well, thanks for having me.
Thank you so much.
Yeah. I really appreciate it. Thank you, everyone.