Blue Owl Capital - Q2 2023

Transcript

Operator (participant)

Good morning, and welcome to the Blue Owl Capital Second Quarter 2023 Earnings Call. During the presentation, your lines will remain on listen only. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, please press star followed by one on your telephone keypad. To withdraw your question, again, press star one. I'd like to advise all parties that this conference call is being recorded. I will now turn the call over to Ann Dai, Head of Investor Relations for Blue Owl.

Ann Dai (Head of Investor Relations)

Thanks, operator. Good morning, everyone. Joining me today are Doug Ostrover and Marc Lipschultz, Co-Chief Executive Officers, Michael Rees, Co-President, and Alan Kirshenbaum, Chief Financial Officer. I'd like to remind our listeners that remarks made during the call may contain forward-looking statements, which are not a guarantee of future performance or results and involve a number of risks and uncertainties that are outside the company's control. Actual results may differ materially from those in forward-looking statements as a result of a number of factors, including those described from time to time in Blue Owl Capital's filings with the Securities and Exchange Commission. The company assumes no obligation to update any forward-looking statements. We'd also like to remind everyone that we'll refer to non-GAAP measures on the call, which are reconciled to GAAP figures in our earnings presentation, available on the Investor Resources section of our website at blueowl.com.

Please note that nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase an interest in any Blue Owl fund. This morning, we issued our financial results for the second quarter of 2023, reporting fee-related earnings, or FRE, of $0.17 per share, and distributable earnings, or DE, of $0.16 per share. We have declared a dividend of $0.14 per share for the second quarter, payable on August 31st to holders of record as of August 21st. During the call today, we'll be referring to the earnings presentation, which we posted to our website this morning, so please have that on hand to follow along. With that, I'd like to turn the call over to Doug.

Doug Ostrover (Co-CEO)

Thank you, Ann. Good morning, everyone. Today, we reported another strong quarter of results for Blue Owl, again demonstrating the steady and resilient growth that we believe sets us apart in the alternative asset management space. When we became a public company, the thesis that we laid out for our investors was a simple one: We would generate substantial growth through a variety of market environments, anchored by our base of permanent capital, and we would provide an earning stream that looked much less volatile than peers, with earnings supported almost entirely by management fee streams. Over the past two years, markets have shifted rapidly from a zero interest rate environment and robust capital markets to over 500 basis point Fed funds rates and meaningful declines in M&A and public issuance.

The world changed overnight multiple times, and many companies face sizable challenges as a result, including supply chain difficulties, inflationary pressure, and capital funding issues. Over this period, Blue Owl was able to step up and increasingly demonstrate the value of our capital solutions to a broad swath of partners. We provided necessary capital to businesses across nearly every industry in our credit business and have seen minimal credit losses as a result of our disciplined underwriting. Our GP Strategic Capital platform supported the continued growth of the private markets ecosystem, and in real estate, we offered crucial and scaled alternative solutions to large companies seeking liquidity and capital flexibility. It has always been our perspective that robust private markets support the health of both public markets and the broader economy, and we feel these past two years have been a validation of that view.

Also, over this period, Blue Owl strategies provided much-needed recurring income, downside protection, and inflation hedging to investors. Our credit and real estate returns have been in the double digits on a last twelve-month basis, contrasted against very volatile public markets. We believe the trust that we've built with investors is reflected in the $32 billion of fee-paying AUM we've raised so far in 2022 and 2023, which compares to our fee-paying AUM of $61 billion at the end of 2021, or over 50% growth. This is substantial growth in any market environment, much less the one we've faced over the past year and a half, and we continue to see strong demand for our strategies.

In addition, the diversification of our business between institutional and wealth channels continues to serve us well, with roughly half of our fundraising over this period coming from each of these areas. On the institutional side, last year, we completed or made significant progress towards raises for some of our larger funds, such as our GP Stakes V and our second vintage of tech lending BDC. As a result, we expect that our institutional fundraising for 2023 will be more diversified between separate account mandates, new product launches, and next vintages of smaller funds.

In wealth, we have returned to seeing steady increases in monthly flows for our wirehouse distributed products, and we've continued to see very modest redemption requests from the small percentage of our products, which offer a quarterly redemption feature, with just over $160 million requested in the second quarter, or 0.5% of AUM in those products. This compares to over $1.3 billion raised in those same products, another very solid quarter of net inflows. If you take a step back to look at our flows across Blue Owl, from the first quarter of 2022 to the first quarter of 2023, we saw nearly 6.5 times more inflows than we did outflows. In other words, for every dollar that left our system as a result of distributions or redemptions, we raised almost $6.5.

By comparison, our peers on average raised just $2 for every dollar that left their platforms. During robust fundraising periods, this dynamic may not be as noticeable, but in a more challenging environment, such as the one we've been experiencing, you can clearly see that the assets we raise, which are higher fee, are also relatively stickier, and that is the advantage of permanent capital. In summary, we continue to feel very well positioned for many different market and economic environments as investors seek trusted, scaled managers to provide safe yield and differentiated returns. We continue to see LPs growing their alternatives allocations and consolidating their asset manager relationships, and we are confident Blue Owl will be one of the beneficiaries of this long-term secular trend.

All of this is captured in the steady, yet extraordinary growth that we have achieved over the past two years, increasing AUM by 140% and distributable earnings by 110%. Recently, we completed a full rebrand towards a unified Blue Owl name. Going forward, the legacy brands of Owl Rock, Dyal Capital, and Oak Street will be known as Blue Owl's Credit, GP Strategic Capital, and Real Estate Platforms. This evolution marks another milestone in Blue Owl's journey, driving towards our long-standing vision of synthesizing multiple complementary businesses into a market-leading provider of capital solutions. We plan to continue adding to our capabilities, further broadening the ways in which Blue Owl can be valuable to our partners and the products that we offer to our investors.

With that, I'd like to turn the call over to Marc to give you an update on our credit and real estate businesses. Marc?

Marc Lipschultz (Co-CEO)

Great. Thank you, Doug. The second quarter was characterized by many of the same themes we saw earlier in the year, with uncertainty around the trajectory of interest rates and pace of economic growth constraining overall market activity. In our credit business, we continued to deploy capital into high-conviction, attractive opportunities, providing essential capital for our portfolio companies. Over the last 12 months, we originated nearly $15 billion of loans, providing crucial financing to the M&A market. During the second quarter, gross originations were $3.4 billion, with $1.4 billion of repayments, allowing us to redeploy capital into attractive, high-yielding opportunities. Gross deployment has slowed a bit in keeping with lower market activity, with U.S. M&A down nearly 40% on a year-on-year basis. As we've highlighted in prior quarters, direct lending has continued to occupy a larger share of the market.

We believe much of the market share that direct lending has taken over the years reflects a permanent shift in borrower behavior, driven by the value of our lending proposition, namely the benefits of privacy, predictability, and partnership. Credit quality remains very strong. Despite a more challenging macro backdrop, we continue to see good revenue and EBITDA growth on average at the portfolio companies. We have not seen any meaningful change in our internal watch list, nor have we seen any material step-up in amendment requests or non-accruals. Weighted average Loan-to-Values remain in the low 40s across our entire direct lending portfolio and in the low 30s across our tech-dedicated portfolio. Across the $78 billion of loans we've originated since inception, annualized realized losses have been approximately six basis points, and those have been fully offset by realized gains over that same period.

With regards to performance, the direct lending portfolio achieved gross returns of 4.3% for the second quarter and 18.9% for the last twelve months. Moving on to real estate. We continue to see high levels of interest in our net lease strategy, with corporate borrowing costs elevated and financing markets more challenging. Our pipeline of opportunities remains robust, with roughly $3.8 billion of transaction volume under letter of intent or contract closed, and a near-term pipeline of about $30 billion of potential volume. Inclusive of announced acquisition activity, we have invested or committed all of the equity in our fifth closed-end fund and have started deploying capital out of our sixth vintage, for which we have already raised $3.7 billion of capital.

We expect we'll reach our hard cap of $5 billion in the second half of this year, which would make this fund twice the size of the prior one. During the second quarter, we added a large wirehouse distribution partner for our perpetually offered real estate product, and anticipate adding to this syndicate meaningfully through the rest of this year and into 2024. With regards to performance, we achieved gross returns across our real estate portfolio of 2.3% for the second quarter and 14.2% for the last 12 months. Despite the substantial increase in interest rates, we continue to buy assets with a significant margin of safety to where they trade on a marketed basis and monetize at meaningful spreads to our entry points. Notable during a period when many in the industry are facing challenges in this regard.

To contextualize this, during the second quarter, we sold or signed letters of intent on over $150 million of assets at an average cap rate of 5.6%, achieving net IRRs of 30% and net MOICs of 1.7x. Taking a step back, what we've been able to achieve so far with our real estate business is indicative of our playbook for future strategic M&A, and how we look to create value for our shareholders. When we acquired this business, it had about $8 billion of fee paid AUM, and a year and a half later, we've achieved 60% growth. As I mentioned earlier, expect to raise a next vintage fund double the size of the prior fund.

In addition, we have launched a wealth-distributed product in scale, raising $1.7 billion in under a year, despite asset class headwinds and outflow dynamics for our peer products. Over time, we expect this will be a tremendous growth vertical for Blue Owl, and we think this has a lot to do with our decision to approach real estate a bit differently from our peers. This is the same mindset with which we approach future M&A for Blue Owl: to find parts of the market that are less crowded, where we can create unique value for our investors and accelerate growth and scale by bringing businesses into our ecosystem. With that, let me turn it to Michael to discuss GP Strategic Capital.

Michael Rees (Co-President)

Thank you, Marc. Our GP Strategic Capital business continues to serve as an important resource for the private markets ecosystem, providing growth capital to some of the largest and most diversified alternative asset managers. Most recently, we announced a minority investment in Stonepeak, a leading alternative investment firm specializing in infrastructure and real assets with over $55 billion in AUM. With a robust and expanding pipeline, total invested commitments for our fifth GP Stakes fund, including agreements in principle, have reached approximately $11 billion of capital, or roughly 85% of the fund. We currently have a line of sight into approximately $2 billion of new opportunities, which, if all signed, would bring us through the remaining capital available in Fund V. Our focus on larger firms within the alternatives universe has positioned our platform well within the current fundraising environment.

Of note, one of our managers, CVC, recently closed its latest flagship fund with EUR 26 billion of commitments, surpassing its fundraising target and is private equity's largest-ever buyout fund. Performance across our GP stakes funds remains strong, with a net IRR of 24% for Fund III, 49% for Fund IV, and 28% for Fund V, all of which compare favorably to the median returns for private equity funds of the same vintages. Looking ahead, we are looking forward to launching conversations on our sixth vintage fund in our GP stakes strategy and continue to anticipate a first close in early 2024. Finally, I would like to address the rumors and speculation that have been in the press. I am 100% committed to Blue Owl's long-term success and will continue leading the GP Strategic Capital business.

As a show of alignment for the long term, I have elected to receive 100% of my compensation for 2023, 2024, and 2025 in Blue Owl equity. I look forward to continuing to drive value for our shareholders. With that, I will turn things over to Alan to discuss our financial results.

Alan Kirshenbaum (CFO)

Thank you. Good morning, everyone. I'm going to start off by walking through the numbers for this quarter and the last 12 months, and then I'll touch on a few other items I want to cover today. I'll be making references to pages in our earnings presentation, so please feel free to have that available to follow along. To start off, we are very pleased with our second quarter and LTM results. Another quarter of strong industry-leading growth. Some key highlights of our results through June 30th include: total revenues up 37%, FRE up 34%, DE up 32%, and our dividend is up 33%, all on an LTM versus a year-ago basis. All of this was because we built our business differently than our peers. We built our business with a foundation of permanent capital and steady, predictable management fee cash flows.

To step through our results through June 30th in more detail, management fees are up $459 million or 46% for the LTM period versus a year ago. Broken down by strategy, credit management fees are up $272 million or 53%. GP Strategic Capital management fees are up $123 million or 28%, Real estate management fees are up $64 million or 175%. Keeping in mind, we acquired our real estate business at the end of 2021, we don't have a full year in our prior year LTM results. This is obviously very considerable growth that we've been able to accomplish. Compensation expense came in at just under 28% comp to revenue for the LTM period.

Overall, we are trending in line with our guidance of our comp expense ratio, sitting in the 25%-30% comp to revenue range, likely towards the higher end of that range, due to further growth and investment in our business. G&A expense came in at $192 million for the LTM period, and $39 million for the quarter. Overall, we are trending in line with our guidance of G&A expense, trending up a little in 2023 from last year, with placement costs down and regular way G&A higher, driven by the overall growth of our business. FRE is up $227 million or 34% for the LTM period versus a year ago.

With our comp percentage up a little and our overall G&A percentage down a little, we continue to be right on track with our 60% FRE margin target for 2023. We announced a dividend of $0.14 per share for the second quarter. For the LTM period, we have paid $0.53 in dividends versus $0.40 for a year ago. That results in a 33% increase in our dividends. I'd like to spend a moment on our fundraising efforts, in which the environment continues to prove challenging, but we're seeing some positive indicators I'll talk about in a moment. As you can see on slide 12, we raised $2.9 billion in the second quarter. Over the last 12 months, we raised $20.4 billion, 19% above the prior year period.

I'll break down the second quarter numbers across our strategies and products. In credit, we raised over $1.5 billion. $1.3 billion raised in our diversified and first lien lending strategies, including almost $800 million raised in our wealth-distributed core income BDC, OCIC, and over $200 million raised in our tech lending strategies, almost all raised in our wealth distributed tech lending BDC, OTIC. In GP Strategic Capital, we raised approximately $200 million. In real estate, we raised approximately $1.1 billion, approximately $700 million in our Real Estate Fund VI, and approximately $300 million in our net lease trust product, ORENT, our non-traded REIT. Although we had a lower level of institutional closes in the second quarter, we continue to see strong institutional interest in our products.

In the wealth channel, we have continued to see good interest in our strategies, with steady increases in our fundraising levels quarter-over-quarter. We believe that will continue to build on itself through the end of the year. Not only are the gross fundraising levels improving, but we continue to be very encouraged by the net fundraising levels we are seeing from our products that have quarterly redemption features. As Doug pointed out, we are still seeing strong net positive inflows with these products, with gross inflows for the second quarter running at about eight times the level of outflows for the small set of products we offer a quarterly redemption feature.

All in all, we've raised approximately $32 billion of fee-paying AUM since January 1, 2022, and our overall fee rate is significantly higher than our peers at over 150 basis points versus our peer average of below 100 basis points. As we discussed on last quarter's call, overall, as we progress through 2023, we continue to expect fundraising to tilt institutional, although, as I've said previously, timing is always challenging to predict. As it relates to our AUM metrics, on slide 11, AUM grew $30.5 billion to $149.6 billion, a 26% increase from the second quarter a year ago. Fee-paying AUM grew $16.1 billion to $93.6 billion, a 21% increase from the second quarter a year ago.

Both metrics are driven primarily by capital raised and deployed in credit, capital raised in GP Stakes Fund V, and capital raised in Real Estate Fund VI, ONLP, and ORENT. Permanent capital grew $23.1 billion to $118.6 billion, a 24% increase from the second quarter a year ago. As a reminder, 93% of our management fees are from these permanent capital vehicles. AUM, not yet paying fees, was $12 billion, including $8.1 billion in credit, $1.1 billion in GP Strategic Capital, and $2.8 billion in real estate. This AUM corresponds to an expected increase in annual management fees totaling over $170 million once deployed, which equates to a fee rate of 1.4%.

In Credit, we had gross originations of $3.4 billion for the quarter and net funded deployment of $1.6 billion. This brings our gross originations for the last 12 months to $14.6 billion, with $9.2 billion of net funded deployment. As it relates to the $8.1 billion of AUM not yet paying fees and credit, it would take us approximately one year to fully deploy this capital based on our average net funded deployment pace over the last 12 months. Deployment has obviously been running at a much slower pace, so there could be some upside to this. Turning to our balance sheet, we continue to be in a strong capital position. As you can see on slide 17, we currently have a significant amount of liquidity, with an average 13-year maturity and low 3% cost of borrowing.

Summing it all up, another strong quarter of growth for our business. As it relates to our 2023 goals that we spoke about at our Investor Day in May of 2022, we continue to track well against our goals of $1 billion of distributable earnings and $50 billion of fee-paying AUM.

We are currently about one quarter behind our original target timeline in achieving these 2023 goals, which we are very pleased with, considering the market and fundraising environment we've all been in. Standing here today, we continue to see our path in achieving a $1 per share dividend for 2025, driven by continued strong FRE growth anticipated for the next two and a half years. We are very pleased with our results. We delivered exceptional growth in all of our key metrics: AUM, fee-paying AUM, management fees, FRE, and DE, and expect to see continued strong growth for the foreseeable future. Thank you again to everyone who has joined us on the call today. With that, operator, can we please open the line for questions?

Operator (participant)

At this time, I would like to remind everyone, in order to ask a question, please press star, then the number one on your telephone keypad. Your first question comes from Glenn Schorr with Evercore ISI. Your line is now open.

Glenn Schorr (Senior Managing Director and Senior Research Analyst)

Hi, thank you. I appreciate all the commentary. I wonder if you can help us aggregate in terms of your comments on first close for GP, the next net lease fund being twice the size and maybe any guesstimates on private credit. Maybe just lump that into, I don't know, next 12 months, what kind of numbers does that add up to? Then when thinking about the part of it is market-related cyclicality, part of it is rate-related cyclicality, but when thinking about the cyclicality of your current mix of business, how do you think about broadening the platform in an effort to reduce that cyclicality? Thanks so much.

Alan Kirshenbaum (CFO)

Thanks, Glenn. Appreciate the question. Good morning. When we think about our flagship real estate product, Fund VI, we are still fundraising there. We do expect to hit our goal, our, our goal of $4 billion, but, but, we think we can bring that to a $5 billion close that would double the size of Fund V. We're, we're super excited about that, especially in, in the market environment we're in, especially with the real estate sentiment that's out there right now. GP Stakes Fund VI, you know, we've, we've surpassed the 75% invested.

We expect to be out with investors in the back half of this year, we expect that we can do a closing in early next year, and maybe we can accelerate that, but let's, let's see how the next couple of months go. We're excited to raise a big Fund VI there. We think, you know, we certainly have the fund performance to, that we're excited about to go out to the market with. On the credit side, we're, we're seeing a lot of interest in the credit products as we've talked about previously, and I'm happy to hand that over to Doug to elaborate.

Doug Ostrover (Co-CEO)

Yeah. Thanks for the question. Look, when you, when you mention the word cyclical, we don't really view it as cyclical. It's really just more, fundraising is episodic, when we talk about being a quarter behind, it's really, I gotta get the exact number, it's just a few billion dollars of fundraising have a big impact on that delta. Maybe I, I can just address it in a little more detail. Look, the pipeline looks really strong, as I said, it's hard to predict timing, we are seeing a lot of enthusiasm for the strategies. Let me just start maybe with private wealth, and then I'll roll into institutional as well. Remember, the funds, they generate a lot of income. They're downside protected. It's definitely resonated.

If you look on the wealth side for continuously offered credit products, I think we are up 32% quarter-over-quarter. One quarter certainly doesn't make a trend, but we're seeing a lot of positive momentum in our wealth credit strategies, and we're expanding the syndicates. Real estate across the industry, I think because there have been redemptions in funds, lots of chatter about office, real estate flows have definitely been slower, but we're starting to see some real excitement about our Triple Net Lease strategy, and we're gonna have some meaningful growth to our syndicate this quarter. I'm really excited, as you know, about what we can do with this product. We're seeing it on the institutional side, and I think now on the wealth side, we're gonna be able to grow. Most importantly, we've had minimal redemptions across all of our products.

In wealth, we're, we're very, very excited about this channel. Again, it's just one quarter, but I'm cautiously optimistic. On the institutional side, we're still seeing a tremendous amount of interest in our credit strategies. You have to remember, this is a bit of a, a strange quarter for us. We're not in the market with any flagship funds. As you know, we just finished raising $8 billion of fee-paying assets at very high fees for our Tech II product. I, the way I would think about it is we will be in the market with new credit products over the next few quarters. We've already gone out, talked to investors. We're seeing a lot of interest.

If I think about this quarter and last quarter, the best way to think about what we've been doing is we're really dealing with more bespoke mandates, really more SMAs. And it's really hard to predict the timing on those. By the way, these SMAs are large, but it's not like we have a fund, and we can say, "The timing is we're closing August 31st, you have to be in." These are much more negotiated, and I think, you know, between now and the end of the year, you'll start to see some of those hit. As Alan mentioned, we'll finish up fundraising in Real Estate VI. We're in the market with our continuation fund, and we expect to be in the market with GP Stakes Fund VI as well. Since I have the mic, I can't help myself. Just one last thing.

I know everyone is very fixated on asset growth. We'd like to start changing the conversation a little bit to the type of assets we're raising and why we're different. Our average fee today is about 1.6%, our average management fee. When I look across our peers, many are at 1%, but many are well below 1%. Not every dollar raised is the same. In addition, our capital doesn't leave, as Alan touched on. We're really excited. We think the trajectory and the destination are still really strong. You know, I'll have more to say on fundraising in the upcoming quarters as we launch some of these new credit funds.

Marc Lipschultz (Co-CEO)

I wanna amplify one last thing, which, which Doug commented on earlier, but just touched on again, which is the nature of the capital. Again, just as we set out to build this business, we really did set out to build a very different kind of alts management firm. I mean, in this context, as a shareholder, in terms of the business model. Quality of assets, the, the fee rate on the assets, the value add, if you will, on the assets, really important, as is that duration. Remember, we talked a little earlier, for every dollar that leaves our system, we are raising $6.5.

That's literally multiples of our peer set, and it relates to the fact that we have permanent capital, so you don't have the dollars flowing out, but we do have dollars flowing in. When you think about what those two things combined mean for the power and trajectory of this model, and the predictability of that trajectory, for set aside any given quarter or quarter to quarter, but predict that the steepness of that slope and the predictability of its destination, when you have the 1.6% fee rate and $6.50 being raised for every dollar that exits the system, it really is a different business model.

Glenn Schorr (Senior Managing Director and Senior Research Analyst)

All right. Thank you for all that.

Operator (participant)

Our next question comes from Alex Blostein with Goldman Sachs. Your line is open.

Alex Blostein (Managing Director)

Hey, good morning, everybody. Hey, Doug, I was hoping we could build a little bit more on, on the discussion around how you're thinking about building out institutional credit business for you guys. You mentioned SMAs, new, new fund launches, and obviously there are some next vintages, albeit from smaller funds. Can you help maybe contextualize what that looks like in terms of the pipeline size, LP types, kind of how that's evolved? Just a little bit more meat around the bones could be helpful there, 'cause it's, it's sort of opaque in the context of the of, of the whole firm, and it sounds like it could be a bigger business for you guys, but some, some incremental color would be helpful there.

Doug Ostrover (Co-CEO)

Yeah, listen, as I think about the credit business in particular, remember, in the past, we've done, which has been a good strategy, a lot of BDCs, now we're transitioning into some more longer duration GPLP strategies. So the most obvious, you know, we will be in the market with a diversified strategy, really geared towards the international markets. Without going into too much detail, coming up with a structure that really works well. Then, you know, I'm happy. We're not ready to disclose it, but just like in tech, I think today we are about $16 billion-$17 billion dedicated software capital. I think you're gonna see us launch other industry verticals that we think could be quite large.

Combination of we're gonna do other BDCs, but also introduce more GPLP funds, where we can be in the market on a more regular basis. If you think about our peers, they do Fund I, the money leaves, they come back with Fund II. Our BDCs, the capital doesn't leave, but, you know, there's not always the opportunity to come back with the subsequent funds. We'll start to build more of that GPLP sequence and more industry-focused funds.

Alex Blostein (Managing Director)

Gotcha. All right, thanks for that. My, my second question maybe is around the Real Estate business. Kind of a two-parter there, so apologize. I guess one, an update on where you guys are with adding to the syndicate. It sounded like you, you plan to add more this quarter and just generally in the back half, but overall flows in the retail channel for the Real Estate products have been a little soft. Maybe commenting your expectations there. When we look at the Fund VI, where are you guys in terms of deployed capital in that fund?

How frequently do you ultimately think the LPGP style funds there could, could be coming back to the market, seeing how you guys, I think, are one of the largest players in that market, and you could deploy that capital pretty quickly?

Doug Ostrover (Co-CEO)

Let me start with the syndicate. We are planning to launch on two very large wires. As you know, we've been primarily in one wire where we've had really meaningful market share there, and we are about to launch on two new wires. I think we've raised about $2 billion, just under $2 billion to date. Look, you know, I, I think this is a really exciting product. It's tax advantage. It generates high current income. You heard in our comments, even in this rising rate environment, we've been able to sell assets and generate meaningful capital gains. I'm really optimistic about where we can take this product on the wealth channel, and, you know, over the next couple weeks, hopefully we'll announce who the two big wires are.

You know, we're basically done there. On the institutional side, I'll let Marc comment on where we are in terms of deployment and when we can be back in market.

Marc Lipschultz (Co-CEO)

Look, it's a good environment, Glenn, to your point about, you know, just behind this question. It's a very good environment for what we do in Triple Net Lease. I say that both from a fundraising point of view, because, of course, it's a very predictable, stable, safe product space, but also users of the capital. In a world of corporate costs rising, uncertainty about capital availability, Triple Net Lease looks like a fantastic option for many corporate users. Anyway, with regard to the Fund VI, Alex, we have $3.8 billion in the pipeline, as we mentioned in our remarks. You know, if that comes to fruition. Now, remember, we do use leverage.

If I just rough out the math, a turn of leverage for a turn of equity, then assuming we hit our $5 billion target, that's $10 billion of purchasing capacity. $3.8 billion of, of signed agreements is not a small increment toward that goal, and we have $30 billion in the, you know, broader pipeline. I, I, I'm not by any means getting ahead of ourselves, but we're still raising Fund VI, so we're not here to talk about Fund VII. We really do have a distinct proposition for the market. We're the very, very clear market leader in Triple Net Lease for, you know, strong creditworthy and IG counterparties, and demand interest in both the product and the use of the capital is growing. We're very excited about this.

We're very excited about this channel, and much like direct lending over the last year, I think we're now in the year or the period of time where there's this recognition that not all real estate is created equal, not all strategies are created equal. I, again, I think this speaks to the distinctive nature of the Blue Owl business. We really take a view of whatever we're doing, we're looking for ways to reduce risk, reduce volatility, increase predictability, and basically deliver the same or better returns with lower risk and lower volatility. Triple Net Lease is shining through. You know, take a look at our returns for the last 12 months in Triple Net Lease.

Our Triple Net Lease business in a world of obvious real estate, you know, maybe havoc would overstate the case, but it's a pretty chaotic market out there, and we've delivered a 14% return in our real estate business because of the safety and security and nature of what we do.

Alan Kirshenbaum (CFO)

I would just add, Alex, that, all, all three of our platforms have very strong growth that we've experienced since our IPO and, and for the foreseeable future, we expect that to continue. The real estate platform, we continue to expect to have the strongest growth of the three platforms.

Alex Blostein (Managing Director)

All righty. Thanks so much.

Operator (participant)

Your next question comes from Craig Siegenthaler with Bank of America. Your line is now open.

Craig Siegenthaler (Managing Director)

Thank you. Good morning, Doug, Alan. Hope you guys are doing well. My question is on the international markets. Asian sovereign wealth funds, European pension plans, Asian private banks, you know, it seems like you have a lot of upside potential with these very large pools of capital. You know, including and excluding the potential for GPLP drawdown funds, which you just commented on, can you provide your perspective on current penetrations and the total growth potential for Blue Owl with non-U.S. investors?

Doug Ostrover (Co-CEO)

Good morning, and thanks for the question. I think you're right. It is a massive opportunity for us. I actually spoke to the firm last night about this. We are really starting to see some significant penetration throughout Asia and the Middle East. You know, I don't wanna get ahead of ourselves, but as we, for example, as we round out Fund VI in real estate, I think the bulk of that will come from overseas investors. Certainly, it's a big area of focus for us. We've spent a bunch of money building out the team throughout Asia, specifically in Korea, Japan, Hong Kong, Singapore. To answer your question, I think we will, as I've always said, I think we will get more than our fair share from those markets.

Craig Siegenthaler (Managing Director)

Thanks, Doug. My follow-up's a quick one. How many large wealth management platforms should we expect Oak Trust and ORCIC to be on by year-end?

Alan Kirshenbaum (CFO)

I think the answer to that, Craig, is we continue to, we're starting from one, right, on the real estate side. We certainly see that increasing significantly over the next, say, 6-12 months. By year-end is a little harder to triangulate. We've got a couple new ones that we're onboarding over the next several weeks and months. We're gonna see a significant growth on the real estate side. OCIC, to get the right new acronym, is a much more mature product that is on a lot more platforms, so it's got quite a, quite a running head start on our real estate REIT. We continue to add platforms where we can opportunistically there as well.

I certainly see a few being added over the next 6-12 months.

Doug Ostrover (Co-CEO)

Yeah, I think the best way to think about it, and I'm sorry I can't give you a number because I'm trying to run through it in my head. I think we're gonna be able, and I don't wanna say it'll definitely happen within six months, I think basically, we will be on virtually every major platform in the market with one of our products, which is really significant. There have been a few firms that have been somewhat elusive, and we haven't been able to get on, and now, they've agreed to put one of our products on. Look, we view ourselves as the clear number two player in this marketplace.

As I said in my comments, and early on, we've always been excited about it, and our penetration continues to grow, and we remain very optimistic about what we can do.

Craig Siegenthaler (Managing Director)

Thank you, Doug.

Alan Kirshenbaum (CFO)

Thanks, Craig.

Operator (participant)

Your next question comes from Patrick Davitt with Autonomous Research. Your line is open.

Patrick Davitt (Partner)

Hey, good morning, everyone. first one, I imagine the pace of credit deployment is at least a part of the reason you're running a quarter behind on, on the DE target. Through that lens, it does seem like we're starting to see a pickup in some bigger announcements. Could you frame how the direct lending pipeline trended through 2Q and how you feel about second half deployment relative to one half deployment now that it feels like things are unlocking a little bit? Thank you.

Marc Lipschultz (Co-CEO)

Yeah, deployment certainly is part of it. You know, we certainly can't defy the M&A cycle, as I commented, but direct lending share and our share in particular, you know, continues to be really strong. We like where it positions us as the M&A cycle takes the other turn, and it does seem to be firming. I mean, there's little doubt our activity and activity in large opportunities has been accelerating. Again, hard to predict that to any given month or quarter, but the movement is the correct direction. Yeah, I think you saw out this morning, the buyout of New Relic, Blue Owl is leading that financing. You know, again, our leadership in the world of software, I think, continues to shine through.

These are, these are great opportunities for us, significant and again, sort of significant signs of life, again, would, would probably overstate, because frankly, it wasn't that it was more than before in these markets, but it's picking up. Yeah, I think another one of the reasons to, to sort of feel good as we turn into the back half, but again, I'll restate that so as not to get trapped into an excessively quarterly cycle. As we turn into the sort of next six and 12 months, yeah, it does seem like activity is picking up nicely, and I think there's an awful lot of pent-up demand for PE deployment, and we're in a great position to garner a very large share of that.

Patrick Davitt (Partner)

Thank you. My follow-up is a little higher level. It looks like Europe could finally be picking up some share in direct lending. Could you update us on your appetite to get much bigger there? Do you think you could do that organically, or do you think you need to buy something? Thank you.

Marc Lipschultz (Co-CEO)

Let me start with, look, we love the markets we're in. The U.S. market has served very well. It's by far the most robust and largest, of course, and very important. I never, ever wanna, you know, wanna misstart any conversation about credit without credit quality. The credit quality for both the opportunities and the way we have particularly built into this market, over $78 billion of originated credit, our running loss rate is 6 basis points. In software, we have never had a loss. I, I, I put that first and foremost in any decision we make. That said, do agree that Europe is, much like other capital markets, sort of starting to follow suit with the U.S., and that presents an opportunity. I think we will look to attack it both ways.

We already do a tremendous amount of business with the firm. I mean, these are all global firms, and in many cases, even European-based firms. In our GP Stakes business, for example, we own stakes in firms all over the world, including, for example, CVC, who just raised the world's largest buyout fund. Our network, our ecosystem, certainly spans well into Europe. Organically, we already do episodic opportunities there. We readily can build organically by putting more origination resources. It's the same credit work, of course. We have well over 100 people doing credit work. Organically, I think we can and, and will continue to sort of participate or look to accelerate our participation, but we're open to an acquisition in the world of, of, of lending in Europe.

It would be, of course, a jump start. With the right team and the right platform, we can do as we just talked about with, with the former Oak Street, now real estate business. I think we can do some pretty special things when we integrate into the Blue Owl platform. Certainly open-minded about it, but otherwise or in addition, we'll pursue it organically over time.

Patrick Davitt (Partner)

helpful. Thanks.

Marc Lipschultz (Co-CEO)

Thanks, Patrick.

Operator (participant)

Your next question comes from Brian McKenna with JMP Securities. Your line is open.

Brian McKenna (Managing Director of Equity Research)

Thanks. Good morning, all. It would be great just to get some more color on your new PE Secondaries business. You made a senior hire earlier in the year to run this business, so could you talk about this hire, why now is the right time to start building out this business, and then what the opportunity is longer term in both the retail and institutional channels?

Marc Lipschultz (Co-CEO)

We've actually made multiple hires now. Indeed, we started with great leadership with Chris Crampton, a multi-decade veteran of the private equity industry. But we've actually since now have three more people that have joined that team. We have more coming. We've assigned additional internal resources. We, we have a fully built capability to address what we think is a very, very large opportunity. What are we doing specifically in, in the secondary era? What we're really supporting are our partner firms. That is to say, all the 600 firms that we finance today, or the 60 firms we own stakes in, and offering them another private capital solution in this Blue Owl ecosystem. People have wonderful assets they've bought.

I can tell you, I personally have been in private equity since the 1990s. Since that time, people have talked about. Look, the thing about private equity is, you buy a great business, you find out it's a great business some number of years later, but then you have to sell it. Everyone wants to keep them. GP-led secondaries continuation is the solution to this challenge. It allows the GP to maintain ownership of an asset they know well, can manage well, and know has a lot of value, create liquidity as an option, but not an obligation for the LPs, so that's flexibility, crystallize returns for prior funds. It really is a way of meeting the needs of a lot of different stakeholders in private equity. There's trillions of dollars of assets.

Just ask yourself this, any given firm, if you could pick one asset to keep managing and owning, compounding your carry and opportunity on, what would it be? We're here to facilitate people keeping those assets with this strategy, and it's a very distinctive strategy, 'cause remember, this is what we do every day for the private equity community. We finance the GPs, we finance their portfolio companies. We're adding another solution in that trusted set of partnerships we have. We say, "Here, bring us your trophy asset, or we'll elicit from you your trophy asset, and you can continue owning it, and we'll provide some liquidity for those who choose not to go forward." We think it's a very, very substantial opportunity and meets the needs of a lot of people in the market today.

Doug Ostrover (Co-CEO)

Yeah, if you think about how our business, our entire model is really set up to be a solutions provider. We have 650 PE firms we cover. On the credit side, we have stakes in over 60 private markets firms, and we're not in the PE business. We're not a competitor. So we've gone out, and they've said to us, "Our most pressing need," as Marc was saying, "is how do we hold on to our best assets longer?" We think we can come in and provide that capital. I have to tell you, when we look at the market, when we look at the demand from these PE firms to hold on to these assets, the demand for capital is enormous. The supply of capital is de minimis.

Whenever you're in an environment where the demand is so much greater than the supply of capital, we think we can generate outsized returns for our investors. In terms of fundraising, we are dual tracking it. We're in the institutional market. We're also in the wealth channel. Let's just focus on wealth for a minute. Think about the average investor trying to access the PE market. Maybe they can find one firm, two firms. Usually, it'll be one of the big brands. We're gonna give them a way to come in. We'll go out, we're gonna say, "These are the top 150 firms, and we're gonna focus on the deal flow from those 150 firms." You'd never be able to get that kind of access.

We think we're gonna create a better way, especially for the wealthy investor, to invest in PE. You know, it's early days, and, you know, it's not gonna have a huge impact on 2023 numbers, but as Marc alluded to, the TAM here is very, very large. I think if we come in and we execute, and we think we can generate top quartile results, hopefully better, I think we can create something potentially that's gonna be quite large.

Brian McKenna (Managing Director of Equity Research)

Great. Thank you, guys.

Marc Lipschultz (Co-CEO)

Thank you.

Operator (participant)

Your next question comes from Adam Beatty with UBS. Your line is open.

Adam Beatty (Director of Equity Research)

Thank you, and good morning. I just want to follow up on credit deployment. On the one hand, you've got strong, kind of, secular tailwinds, and then, as Marc mentioned, you know, some choppy deal activity recently. Want to ask about two other aspects. One is the slower/episodic fundraising and, you know, i.e., capacity constraint, and how much that might play into the recent deployment trends, and whether some of the near-term fundraising that you've talked about might loosen that up. Then also, just in terms of pricing and the cost of funds, whether you're seeing any hesitancy on the part of borrowers, just as that's so elevated these days. Thanks very much.

Marc Lipschultz (Co-CEO)

Adam, thank you. In terms of activity, I think the fundamental constraint to activity has really been just absolute market levels of activity. Our share is high, our role is distinctive. Blue Owl really plays a pretty special role in that capital solutions- center, but at the end of the day, there's only so much activity. The activity has been upticking, as we just talked about. We have, we have capacity, but I will say we and the industry, it's not excess capacity. You know, that is to say, we've talked about this before, the dry powder in private equity very much outmatches the dry powder in private credit.

While I would certainly not suggest that the slower deployment in Q2 was a lack of capacity to deploy capital, I would equally say it's not as if we have excess capacity. Fundraising will continue to be very important to having adequate firepower to support the private markets ecosystem. You know, as we continue to go through these disruptions in the banking system and disruptions in syndicated markets, I think what probably all can take away is to have a healthy economy and to have a healthy capital market system, we need a healthy private lending system.

You know, thankfully, it's very healthy today, but it can use more capital, and that's what we've been talking about and are pursuing, and by putting together GPLP format funds, by accessing the, the foreign markets, as Doug talked about, places we just have underpenetrated over time, we think that can help us get the capital that, that not just that we need to pursue our business, but frankly, the market needs to have a healthy flow of capital and a healthy available leverage pool.

Doug Ostrover (Co-CEO)

Yeah, Marc talked about the demand from PE versus supply of capital. I, I think one thing that is not discussed a lot is, you know, the big players like ourselves, who are sitting with these large capital bases, when rates were lower and M&A was robust, we could have 20%-25% of our loans get refinanced in a quarter. We had so much money to deploy because you take what's refinanced plus what's coming in. Today, there's very little being refinanced. There's very little M&A. What we have to put to work is really just new capital coming in. It's, it's a very good time. Look, you know, the positive for us are, you know, our returns have basically, on an unlevered basis, have gone from 6%-7% to about 12%.

Clearly, PE firms have to use less leverage because the interest burden is that much greater. Look, as Marc said, its deployment is really driven by M&A volumes right now, and it feels like it's picking up, but, you know, it's, it's too early to tell.

Marc Lipschultz (Co-CEO)

To your latter question about, is the absolute cost of capital or the higher cost of capital impacting PE appetite or activity, I don't want to pretend I know all, all, all decision makers' decisions, but I would say at a meta level, no. At the end of the day, that's, that's math, right? That, that gets into the clearing price of an asset. If you know what your cost of capital is, and remember, one of the great strengths of direct lending is predictability. You know, we tell you the terms, you know what it will cost, that's positive, then you can price that into your investment decision. I think it speaks more to how you have to price equity transactions, and that probably has led to the slowdown when you get these gaps between what buyers want to pay and sellers want to take.

Over time, markets function, and it'll just price in this cost of capital. It will probably mean less leverage, to Doug's point, and that'll probably mean lower purchase prices for certain assets, but that all can be solved by, you know, changing the numbers on the, so to speak, on the page. No, I don't, I don't think cost of capital, cost of debt is likely to provide any meaningful drag. You've got $1.5 trillion of private equity dry powder. Private equity has shown its ability to thrive in high-rate environments, low-rate environments, strong economies, weak economies. It's a good asset class, and it'll be a good asset class going forward.

Adam Beatty (Director of Equity Research)

Very much appreciated. Thank you both.

Marc Lipschultz (Co-CEO)

Thank you.

Operator (participant)

Your next question comes from Ken Worthington with JPMorgan. Your line is now open.

Ken Worthington (Senior Equity Research Analyst)

Hi. Good morning. Thanks for taking the questions. Maybe to follow up on Patrick's earlier question, in terms of activity, to what extent was April an outlier and thus a drag on originations for the quarter? Then to what extent is competition from the banks, reemerging in the sponsor direct lending market? You know, would you expect, as competition sort of reemerges, that this will impact sort of pricing and what you can kind of get on your transactions?

Marc Lipschultz (Co-CEO)

The value proposition for us in direct lending is about predictability, privacy, and partnership. I mean, of course, the syndicated market matters. Of course, that around the edges, people are making decisions that include the fact that in the syndicated market, you might very well be able to achieve better terms, so to speak, as a borrower. What does better mean if you're a private equity firm making a long-term decision? I would proffer that the incremental cost of capital for private debt and the incremental involvement, depth of diligence, stricter agreements, all of those things are well worth it to have the partnership and the predictability of capital. Yes, I hope the syndicated markets will return. It's still pretty nascent. We don't see it as a meaningful factor in the marketplace today.

It's not meaningful to our business today. I hope the syndicated market returns. You know, it's, it's, it's not a win-lose proposition. I'm not sure sometimes why, whether, you know, alternative asset managers on the one hand or banks on the other, you know, kind of turn toward each other and say, "Oh, well, if I'm winning, you're losing." I think they're about having multiple solutions in a marketplace. We need capital depth. Capital depth will unlock M&A, and, you know, we'd be glad to have the syndicated markets return and facilitate a more robust M&A environment. Frankly, there's a lot of things a syndicated market will finance, we won't. We don't finance deep cyclicals. We don't finance businesses that have extreme customer concentration.

We don't there's a reason that we've been able to deliver 6 basis points of annualized loss, because we do very specific kinds of credit selection. We're not here to solve every capital structure, but for great firms buying great businesses that want a great capital partner, we're here to solve that. I think I I, it hasn't meant much yet. Yes, the banks are probably open a little bit for business now, but we, we hope, we hope they'll come back sooner and in, in fuller force. We're quite happy to, you know, quote, "Compete" in that arena. We, we deliver a solution that is worth it for the people that use our capital.

Ken Worthington (Senior Equity Research Analyst)

Fair, fair enough. Then just on April, was April bad enough that it impacted, you know, the overall quarter, or was it really not that big an outlier?

Marc Lipschultz (Co-CEO)

Sorry, what, what specifically about April, do you mean?

Ken Worthington (Senior Equity Research Analyst)

In terms of, you know, you're, you're sort of in the hangover period from the sort of mid-cap banking crisis seems to be on pause. From your perspective, was that enough of an outlier to, I guess, maybe it was an outlier in the first place, and if so, was it enough an outlier to sort of impact the overall sort of origination numbers for the quarter? If we exclude that, you know, do things look kind of better than they would have if April was normal? That's sort of where I was going.

Marc Lipschultz (Co-CEO)

I, I understand where you're coming from. I, I can't answer that with any precision. You know, our business, unlike traded markets, you know, the rhythm is not measurable in weeks, maybe not even months, depending on the, the particular timeline of a transaction. I, I, I think it wouldn't be right for me to say, "Oh, okay, well, March directly impacted April." However, there is little doubt that the hangover, the malaise, the disruption of the May, you know, I don't, bank crisis, mini-crisis, certainly impacted markets, ours included, in the sense that it just kind of froze up, right? The system froze up, people froze up, and anything that people were deciding on, by and large, probably got deferred. I, by no measure, it could be as scientific or prescriptive as that. I appreciate the, the, the nature of the question.

Safe to say Q2 suffered from a lot of economic uncertainty, a lot of interest rate uncertainty, and then, of course, this, this, shock to the system from banking. Yeah, it was, it was a kind of tough quarter for market participants. Nothing particular to Blue Owl, of course, but to market participants.

Ken Worthington (Senior Equity Research Analyst)

Okay. Okay, great. Thank you very much.

Marc Lipschultz (Co-CEO)

Thanks, Ken.

Operator (participant)

Your next question comes from Brian Bedell with Deutsche Bank. Your line is now open.

Brian Bedell (Director)

Great. Thanks. Good morning. Thanks for taking my question. Maybe one on the wealth channel and the unified branding. I guess, to what extent do you think, you know, the implementation of that unified branding is, may, may help over the next, you know, year or so, in, in traction with advisors that you're working with currently on those platforms? Does it make it easier for you to extend in new platforms? I guess the overall question is, to what extent do you think the unified branding can, can, enhance fundraising over the next one to two years?

Doug Ostrover (Co-CEO)

Yeah, thanks for the question. I'm, look, you raise a good and important point, and that's why we went to a unified brand. I'm, especially in the wealth channel, when we were out with different brands, I'm not sure people even knew it sat under one roof. Where we really saw it was in the international markets. Look, our goal is to create a brand that's the equivalent of the Blackstone, the Ares, the KKR, Carlyle, TPG around the world. Having three or four different brands, we just thought was cumbersome. I think that ability, as you think about wealth or the institutional market, the ability to cross-sell and to understand and say, "That's a trusted partner. We've done well with them." When we walk in with that new strategy, we have instant credibility.

To answer your question specifically, when we had hired a consultant about, I don't know, 18 months ago to study this for us, we did go out to the wealth channel, all of them, all of the major wirehouses came back and said it would make their lives so much easier to have it all under one brand. We've implemented it, we've gotten great feedback, and as I said, I think it'll be help us over time to really cross-sell all of our products.

Brian Bedell (Director)

Yep. That, that's great, Colin. Thank you. Maybe just one last one on the direct lending. A lot of my questions have been asked and answered there. Any view on the Basel III endgame rules that were proposed for the banking system? Is it pretty much in line with what you, what you expected? You know, the strong secular trend there, of course, longer term for, you know, for direct lending to become a larger source of, of, of bank lending. Do you see things in the proposed rules that make you even more excited longer term about, about your role in bank lending?

Marc Lipschultz (Co-CEO)

The, look, the continued stabilization and focus on regulation of the banking sector, and look, we just went through March, and we saw again you know, what does happen sometimes when you take very long-term commitments with very short-term capital. Again, I've said this before, it's not, it's not private lenders versus the banks. It's really not. These are ecosystems that, taken together, solve problems. I know some people just seem not to, don't take it that way, it's the case. At the end of the day, look, we have long-dated capital from long-dated investors to provide long-dated solutions, and that just makes sense. Look, we don't have depositors. We don't present systematic risks. We don't have, you know, government explicit or implicit guarantees, so we can provide a different kind of risk-based, different kind of duration capital.

Look, it does appear that when you look toward Basel III and kind of other recent conversations about increased capitalization of banking, look, we don't, we don't have an opinion on that. That, that is to say, that's, that's a world that's adjacent to ours. Wonderful banks in this country doing a wonderful job. As I said, we, we welcome a healthy banking market alongside the healthy private credit market. We're, we're not deep, and I don't wanna opine on the specifics of the regulations, but I think what we are seeing develop are adjacent systems with different kinds of capital, different kinds of risks, different kinds of providers of capital, and it works, and that's healthy. Private capital has continued its step function climb upward to providing solutions that are durable and therefore healthy for our economy in total.

I, I feel good about where we're headed, and, you know, I, I won't, I'll leave it to the banks to, to sort out the right answer for the banking sector. I think that we can coexist quite healthily in, in a way that will be good for, for debt markets in total.

Brian Bedell (Director)

Okay, great perspective. Thank you.

Operator (participant)

There are no further questions at this time. I will now turn the call back over to Doug Ostrover.

Doug Ostrover (Co-CEO)

Well, thanks, everyone. We appreciate everybody spending so much time and for the excellent questions. Hopefully, we gave you a good overview, and hopefully, it comes through just how excited we are about the business and where we can take it. We look forward to talking to some of you after the call and staying in touch. Thanks.

Operator (participant)

This concludes today's conference call. You may now disconnect.