Blue Owl Capital - Q2 2024

Transcript

Operator (participant)

Good morning, and welcome to Blue Owl Capital's Second Quarter 2024 Earnings Call. During the presentation, your lines will remain on listen only. 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, and good morning to everyone. Joining me today are Marc Lipschultz, Co-Chief Executive Officer, and Alan Kirshenbaum, our 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 2024, recording fee-related earnings, or FRE, of $0.21 per share, and distributable earnings, or DE, of $0.19 per share. We also declared a dividend of $0.18 per share for the second quarter, payable on August thirtieth to holders of record as of August twenty-first. 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 Marc.

Marc Lipschultz (Co-CEO)

Great. Thank you very much, Ann. Blue Owl had a very active second quarter, reporting another record quarter of earnings and announcing highly strategic acquisitions that further diversify our business. Over the last 12 months, we have generated 23% fee-related earnings growth and 19% distributable earnings growth from the prior year period. And since becoming a public company, we've had 13 consecutive quarters of management fee and FRE growth, highlighting both the stability and strength of our business. Our disciplined investment approach and compelling track record have appealed to a growing pool of investors looking for uncorrelated and income-driven returns. We continue to expand the types of financing solutions we offer, making us an increasingly important counterparty, and in conjunction, we continue to expand the range of strategies and product options we offer to our investors.

Recently, we announced our intention to acquire one of the leading alternative credit managers in the market today, Atalaya Capital Management, adding substantial scale to Blue Owl's alternative credit capabilities and complementing our leading position in direct lending. Atalaya brings deep expertise in asset-based finance with a strong eighteen-year record through market cycles, and we believe our counterparties and clients will be very excited about the platform synergy opportunities we'll be able to create with the Atalaya team on board. Alternative credit is a multi-trillion dollar market, where legacy participants are pulling back, and we think we have exactly the right team in place to become an increasingly significant player in the space. Looking back to when we announced the Oak Street acquisition in 2021, Oak Street's AUM was roughly $12 billion.

About two and a half years later, we have more than $28 billion of AUM in triple net lease alone, and I think this is a great case study for what we hope to achieve with Atalaya. Alan will talk more about this in a few minutes. More broadly, we now have added critical capabilities in alternative credit and real estate credit, further building out the waterfront of solutions we offer. Both are deeply disrupted markets with huge addressable opportunity sets. And with the acquisition of Kuvare Asset Management, we now offer a holistic asset management solution to insurance companies, broadening our potential investor base substantially. We expect integration of these businesses to go very smoothly, given that there is generally very little overlap between Blue Owl's existing footprint and that of the businesses we are acquiring.

The vast majority of the employees will see very little change in their day-to-day, with investment teams remaining focused on their areas of expertise and continuing to be led by their founders or existing senior management teams. Our goal is to enhance what each firm is already doing well and create incremental opportunities for the combined entity. Critically, all of these were proprietary acquisitions not done through auctions. The leaders of these firms, or the insurance partner in the case of Kuvare, wanted to grow their businesses as a part of Blue Owl. They're not selling to Blue Owl, but rather joining Blue Owl. We plan to leverage Blue Owl's scale to benefit each of these businesses through our 700+ sponsor relationships, our leading wealth distribution platform, a global and growing institutional platform, and greater efficiency and best-in-class corporate infrastructure.

We're very excited about the collaborations we can create across the Blue Owl platform and look forward to sharing more about those in the quarters to come. Moving on to the quarter. We continue to see good fundraising progress across the business. Gross flows into our perpetually distributed products reached $2.8 billion in the second quarter, over 30% higher than the first quarter, and more than double what we raised in the second quarter of 2023. Notably, redemptions in the perpetually offered products remained nominal, despite upticks across the industry, totaling less than $325 million across all, or under 20 basis points of our beginning AUM. That means we raised nine times more than what left the system in these products.... Total gross flows from private wealth were $3.2 billion.

Our incumbency position as one of the leaders in the private wealth channel is a result of the relationships and the level of trust we have built with distributors through thoughtful partnership, strong performance, and high touch service at every level of these organizations. What's remarkable about the opportunity in private wealth is the overall very modest amount of allocation to alternative products, which is in the low- to mid-single-digit percentages. We think we're in the very early innings of the adoption of alts by individual investors as they begin to see the benefits of diversification and uncorrelated asset classes in their portfolios. We also raised $2.2 billion from institutional investors across a number of strategies, including GP stakes, primarily in lending, liquid credit, diversified lending, and GP-led secondaries, complementing our robust flows in private wealth and reflecting the ongoing diversification of fundraising across our business.

To zoom out slightly, we have raised $32 billion across equity and debt over the past 12 months in an environment that most continue to describe as challenging. That's equivalent to over 20% of our AUM a year ago that we've raised in 12 months. A more than solid showing in our view, and we continue to bring new capabilities to market. Turning to business performance, in credit, we had a record quarter of deployment with more than $18.7 billion of gross originations, primarily across new deals, add-ons, and refinancings, where we decided to participate in the new loan. Repayments were $6.9 billion, resulting in a higher quarter of net deployment. We continue to demonstrate that borrowers are drawn to the three Ps of direct lending: predictability, privacy, and partnership.

That value proposition is compelling, whether the syndicated markets are active or not. The longer-term secular trend of sponsors gravitating more and more towards direct lending remains in place, and we see healthy sponsor appetite to deploy incremental capital and monetize existing investments over time. Direct lending metrics remain strong. On average, underlying revenue growth was in the high single digits, and EBITDA growth was in the mid-teens across the portfolio, with no significant step-ups in non-approvals or amendment requests. If you think about the keys to our success in direct lending, there's a very straightforward formula we follow. One, start by limiting loan losses through rigorous underwriting and being highly selective. This is evident in our seven basis points of annualized realized losses since inception. And two, when there is a default, do everything we can to ensure a high recovery.

I think we have demonstrated both of these tenets very successfully over the prior years, and more broadly, our portfolio companies continue to perform extremely well. We are pleased with what we're seeing across the business. In our GP stakes business, our partner managers continue to benefit from two meaningful secular trends, growing allocations to alternatives and GP consolidation. Collectively, our partner managers now manage over $1.8 trillion, giving us an unparalleled view over the alternative asset management industry. The ongoing diversification and scaling of all managers, the emergence and rapid growth of asset classes, such as direct lending and alternative credit, the partnerships being formed in insurance asset management solutions, and the expansion of opportunity in private wealth, these are all trends readily observable across our partner managers and one for which Blue Owl's business is well-positioned.

This past quarter, we have also observed an uptick in the asset sales for some of the partner manager portfolios, which could reflect sponsors' greater willingness to monetize assets in older vintage PE funds. During the second quarter, we made our first investment for our mid-cap GP stake strategy and have two additional investments agreed to in principle, which we expect to close in the third quarter. As for our large cap GP stake strategy, we remain on track to have Fund V substantially committed by the third or fourth quarter of this year. We closed on an additional $1 billion for the latest vintage of the strategy during the second quarter, and anticipate the fundraising in the third quarter could be similar based on current visibility. Keep in mind, we're not focused on the timing of closes quarter to quarter.

What is important is that we remain very focused and confident in our ability to achieve our $13 billion goal over the next 18 months. In real estate, we continue to actively deploy capital at attractive cap rates behind our four major themes: digital infrastructure, onshoring, healthcare real estate, and essential retail. The capital needs in each of these areas is very significant, and we are making good progress in deploying Fund VI, which we just finished fundraising during the last quarter. We believe we'll be approximately 60% committed for this fund by year-end, which would put us ahead of expectations in deploying capital, demonstrating the strong demand for our net lease solutions. Earlier, we spoke about the disrupted dynamics in alternative credit and real estate credit.

The same dynamic applies to triple net lease, where we think we're seeing some of the very best risk-reward this space has seen in a very long time. We are buying great properties at cap rates in the mid to high sevens, facing generally investment-grade tenants, and there are very few others doing what we do. That's a compelling proposition, and we are leaning into it. We continue to see nice step functions upward in the fundraising for ORENT. Second quarter flows were 130% higher than a year ago, bucking the trend seen across competitor non-traded REIT products, and we continue to launch on additional distribution platforms. To bring it all together, there's a lot of growth happening across Blue Owl, organically and inorganically. But the big picture is very simple.

We're an alternative asset manager with leading positions in our direct lending, GP stakes, and triple net lease strategies. We have a leading position in private wealth distribution and an expanding global presence in institutional and insurance markets.... We're adding scaled alternative credit and real estate credit capabilities with teams that have generated strong track records over decades. Our P&L model is very simple. Almost all of our revenue comes from durable permanent capital, with best-in-class fee rates, and our earnings are made up entirely of fee-related earnings. We think this makes our business quite unique and compelling, and well-positioned for strong and stable growth to come. With that, let me turn it to Alan to discuss our financial results.

Alan Kirshenbaum (CFO)

Thank you, Marc, and good morning, everyone. We're very pleased with the differentiated and strong results we continue to post quarter after quarter. As Marc mentioned earlier, we have been able to achieve 13 consecutive quarters of both management fee and FRE growth due to the durability of our asset base, anchored by permanent capital and strong investor demand for the strategies we offer. Let's go through some of our key highlights on an LTM year-over-year basis through June thirtieth. Management fees are up 21%, and 92% of these management fees are from permanent capital vehicles. FRE is up 23%, and DE is up 19%. As you can see on slide 12, we raised $5.4 billion of equity in the second quarter, and $19.2 billion of equity for the last 12 months.

I'll break down the second quarter fundraising numbers across our strategies and products. In credit, we raised $3.4 billion. $2.4 billion was raised in our diversified and first lien lending strategies, of which $1.7 billion came from our non-traded BDC, OCIC, double what we raised in the second quarter of 2023. Inclusive of the July 1 close, we have now raised over $12 billion for OCIC since inception. The remainder was raised across software lending, liquid credit, and strategic equity. In GP Strategic Capital, we raised $1.3 billion across our large cap strategy and co-invest vehicles. And in real estate, we raised over $650 million, primarily in ORENT, our perpetually offered net lease product.

We're pleased with the increasing breadth of fundraising across strategies and products, which will continue to expand with our new insurance solutions offering and the Prima and Atalaya acquisitions. Prima closed in June, adding approximately $11 billion to AUM, and in early July, our acquisition of Kuvare Asset Management also closed, adding approximately $20 billion to AUM for the third quarter. Pro forma for Atalaya closing, which is expected to add approximately $10 billion, our AUM will be over $220 billion. As a reminder, we also have substantial embedded earnings in our business. AUM, not yet paying fees, was $15.9 billion as of the end of the second quarter, corresponding to roughly $200 million of incremental annual management fees once deployed.

We also have approximately $135 million of incremental management fees that will turn on upon the listing of our remaining private BDCs over time. These two items alone would represent an increase of almost 20% from our last twelve months FRE revenues. These aspects, combined with our business model of being virtually all permanent capital and 100% FRE, just gives us a higher quality of earnings than any of our peers in the industry. Moving on to our credit platform, we had gross originations of more than $18.7 billion for the quarter, a record high, and net funded deployment of $7.2 billion. This brings our gross originations for the last twelve months to over $40 billion, with $15.5 billion of net funded deployment.

Our credit portfolio returned 3% in the second quarter and 16.4% over the last 12 months. Weighted average LTVs remained in the high thirties across direct lending and in the low thirties, specifically in our software lending portfolio. For our GP strategic capital platform, total invested commitments for our fifth GP stakes funds, including agreements in principle, are over $11.5 billion of capital, with line of sight into over $3 billion of opportunities, which, if all are signed, would bring us through the remaining capital available in Fund V. Performance across these funds remains strong, with a net IRR of 24% for Fund III, 41% for Fund IV, and 12% for Fund V. In our real estate platform, our pipeline continues to grow, with nearly $10 billion of transaction volume under letter of intent or contract to close.

As Marc mentioned earlier, we think we could be roughly 60% committed for Fund VI by year-end, reflecting the strong demand we're seeing for our net lease solutions. Many of these opportunities are built to suit arrangements which are very capital efficient for the tenant, and where we get a premium cap rate for providing a flexible, balance sheet-friendly solution to our partners. These can take between 18-24 months to fully deploy the capital we've committed, and as a reminder, we charge management fees mostly on invested capital, so we will earn incremental management fees as this capital is deployed. With seeing such strong deployment opportunities, this could position us well to be out in the market with the next vintage of this strategy before the end of next year.

With regards to performance, gross returns across our real estate portfolio were 2.5% for the second quarter and 6.7% for the last twelve months, comparing favorably to the broader real estate market over this time period. The net IRR across our fully realized funds has been 24% for investment grade and creditworthy tenant risk... reflecting the favorable value creation driven by our scale and solutions-based partnerships. Okay, let's wrap up with a few closing thoughts. We continue to track to be in or around our $1 per share goal for 2025. We've talked about the four things, now three things, that need to happen to be on track for this goal, which are, first, accretive acquisitions, which we achieved through Kuvare, Prima, and the announcement of Atalaya. So check that.

Three remaining things: one, continued strong fundraising levels for OCIC, OTIC, and ORENT. We continue to see strong fundraise levels coming through for these products, and especially in the case of ORENT, where we have seen a step function upwards with another step-up expected in the back half of this year. So overall, on this first one, we expect we are on track. Two, a successful fundraise for our large cap GP stakes fund, and we are pacing at a good level here. As we have noted previously, our expectation is this will be a little more back-ended, with more fundraise expected in 2025 than 2024. Overall, on the second one, we expect we are on track. And three, the listing of some of our BDCs. We completed the listing of OBDE earlier this year.

We continue to deploy capital in OTF II, and for the BDCs that remain private, we are focused on executing on the strategy we outlined during last year's BDC Investor Day. So overall, on this third one, we expect we are on track. Bringing this all together, we feel good about being in or around our $1 per share dividend goal and reporting a very strong dividend growth rate for 2025 in the low-to-mid 30% range, resulting in a dividend CAGR of 30% since going public. Now, let's talk a little more about our Atalaya acquisition for a moment, where we think there is a meaningful opportunity akin to what we saw for Oak Street. Marc mentioned earlier that we have more than doubled Oak Street's AUM in just under three years. So let me put some color around how we've achieved that.

Since acquiring Oak Street, we have doubled the net lease team, including the addition of Jesse Hom as CIO of the platform. We have created new product offerings for the private wealth channel and are in the process of launching a European net lease product. The investments have started to pay off, with ORENT outraising all of our peers on a net basis and Fund VI well exceeding its $5 billion hard cap. Bringing it all together, we have been able to accomplish a great deal in a relatively short amount of time in our net lease business. We have more than doubled AUM. We have almost tripled permanent capital. We have tripled FRE revenues, and we have grown our average management fee rate by over 30%.

Most importantly, based on the increase in FRE that we have generated in our triple net lease platform, we have created almost $1 billion of additional value for our shareholders in just a few years, in a very tough environment to raise real estate funds. We are equally excited about our Atalaya acquisition. The Atalaya team is one of, if not the best, in the alternative credit industry, and we have a lot of runway ahead of us to grow this business together. We've mentioned that this acquisition is modestly accretive in 2025, and we think much more accretive as we really ramp this business over the next number of years, similar to Oak Street. It is, however, margin dilutive for Blue Owl. As we continue to do acquisitions, we won't always find businesses with the same FRE margins. The margins here are well below our level.

We believe we can increase them over time, but may not ultimately get up to 60% with each of our acquisitions. That's okay. We expect this deal will be very value accretive for us over time and fills a very strategic product area for us in a huge industry growth area. So as we go into the next year or so, we can see margins for the remainder of this year being slightly below the 60% level, and for 2025, being 2%-3% lower. On a last note, we have led the alternative asset management industry in growth since we listed in 2021, and we have every intention on continuing to lead the industry for this foreseeable future in the key metrics that matter to all of us: management fees, FRE revenues, FRE, and dividend growth.

We feel very confident we will accomplish these goals through continued organic and inorganic growth and reinvestment back into our business. With that, I'd like to thank everyone who has joined us on the call today. Operator, can we please open the line for questions?

Operator (participant)

Thank you. And the floor is now open for your questions. So to ask a question this time, please press Star then the number one on your telephone keypad. As a reminder, you'll be provided the opportunity to ask one question for this Q&A. We'll just pause for just a moment to compile the Q&A roster. Our first question comes from the line of Alex Blostein with Goldman Sachs.

Alex Blostein (Managing Director)

Thanks. Hey, good morning, everybody. So first question may be on the deployment opportunities in private credit and direct lending. Very big step up in the quarter on gross originations and net as well. And that's obviously despite a fairly high level of syndicated market activity, as well as higher refi volumes across the industry. So maybe talk a little bit about how broad-based was the deployment you saw this quarter, anything in particularly kinda lumpy that you would call out? And I guess, how would you characterize gross and net deployment backdrop for the rest of the year?

Marc Lipschultz (Co-CEO)

Thanks, Alex. Look, it's a great environment for direct lending, and I actually think this quarter is very revealing about the power of the model.

... You know, given this is also a time where the syndicated market is as open as it's ever been, and PE activity remains actually, I think, by our collective measure, tepid relative to the dry powder. You know, that, that's the backdrop, and yet, as, as noted, you know, it was by far our biggest origination quarter. And I take those three together, and I would actually say, yeah, that is meaningful, which is to say, no, there are not sort of special one-time items, if you will, in the ultimate net originations number. There's a lot of broad activity. We, we thankfully have a combination of add-ons, which of course, are proprietary. People that are, you know, assets that are being sold, and we're the incumbent, and that often gives a pretty proprietary angle on things.

And then, of course, just new investments, and, you know, we are, I think, well-positioned to continue to do very well in that marketplace. So I look at this quarter as a pretty strong indicator going forward, and every quarter will vary based on indeed the exact volume, what we choose to do. But I think what we can read from this is the continued demand for direct lending by users of capital is extremely strong, even when the syndicated market is widely available.

I think that's actually a really meaningful data point, because people have always sort of overread this idea that, "Oh, it's when the market's closed, then direct lending is the solution." I think what we're seeing is the extreme durability of having long-term capital to provide long-term solutions and deliver the three Ps, predictability, privacy, and partnership, to the users of the capital. The part that I think gets us excited, and again, I'm not going to try to time the moment this happens, but starting from what we just said, you know, there are a few things going on. One, as I just said, there is the relatively tepid PE activity. That will pick up. There's a huge amount of dry powder, as we all know. It will get deployed.

We can read from this quarter that whether the syndicated market is wide open or not, direct lending gets a big piece of that. Well, at some point, either we're going to have a less active syndicated market, that's inescapable at some point, given the relative strength today, and we're going to have a more active PE market. So combine that with what we're seeing in this environment, so that's a very robust outlook from our point of view. And, you know, if you want to add one more cherry to that, you know, a slight moderation in interest rates, which seems to be forthcoming, will be good. That'd be really good for continuing accelerated interest by people in doing financings and doing deals. So yeah, we're feeling like it's a pretty good moment.

Operator (participant)

Thanks, Alex.

Before we move to the next question, I'd just like to let people know that if you have a follow-up question, you can hop back to the queue. Then our next question comes from the line of Brian McKenna with Citizens JMP.

Brian McKenna (Director of Equity Research)

Okay, great. Thanks. So, just a question on all the recent M&A you've done. You know, strategically, all these deals make sense and round out the capabilities across the firm, but how should we think about the incremental growth from these deals relative to the legacy Blue Owl growth rate? It would seem like the revenue opportunities for all of these are quite a bit better than their legacy historical growth rates, similar to the outcome with Oak Street. So, you know, I'm just trying to figure out, you know, if these deals will ultimately be accretive to the firm-wide growth rate of Blue Owl over time.

So the acquisitions, as of course, you observe, have been really important parts of our strategy, and I think it's important to make two core observations before we get into the sort of specifics of the actual underlying businesses. The acquisitions in the context of Blue Owl are really people not selling to us, but joining us. And I said this in the, in my remarks a moment ago, but it's really important framework when you think about what Blue Owl is doing. What we have done before and are continuing to do is say, look, where there are best-of-breed investment capabilities, and there's a great fit between that organization and ours, and those leaders and our leadership group, then we can make, you know, the overly used one plus one equal... You know, I'm not going to use three.

Marc Lipschultz (Co-CEO)

I think it's 4 and 5. We're going to really try to combine, not change the world-class investment capabilities, but be able to bring our infrastructure and kind of the, if you will, the origination synergies, the intellectual capital synergies between the businesses. And it works. Look at Oak Street. Oak Street, at the time we announced it, had $12 billion of AUM. Today, $28 billion of AUM. And we have dramatically increased the amount of permanent capital. We have created the wealth product. We've had a record, you know, the largest real estate fund ever completed last year was in our product suite. So I think we've seen that we know how to bring these world-class capabilities together with the Blue Owl platform, and that's a winner for our LPs and a winner for our shareholders.

So that's sort of, I think, key observation, well, two observations, really, which is joining, not selling. We're buying things in an auction and someone exits, they join us. We are so fortunate to have, you know, Marc Zahr, you can see it in the leadership of the firm and in the leadership of real estate. We have Ivan Zinn joining us, leading Atalaya. I mean, he is a superstar of the world of asset-based finance, and it goes on. So that's the way I would read the collection of assets. Now, what does it mean for our business? And Alan, I'm sure, will add to this. These are accretive acquisitions just on their face.

And so we'll, we'll see the benefits of that, but they're kind of inconsequential, if you will, in the scheme of the very near term, but they're critical for the long term. What we're doing now is setting the stage for the years beyond 2025. What we're doing is setting up products that have very large addressable markets, where we have distinctive capabilities. That, again, distinctive capabilities is key. So we look at things like alternative credit, asset-backed credit. The next 10 years look a lot like the last 10 years did in direct lending.

You know, when we came to direct lending with this notion of, "Hey, listen, what we're gonna do is go offer private solutions, and we want to finance the best credits from the best users of capital, not lender of last resort, and provide those three Ps that people value, that certainty." We're gonna do the same in asset-backed credit. It's a bigger market. It's a $7 trillion market. It's only 5% penetrated by private solutions today. And now, Blue Owl, combined with, with Atalaya. Atalaya, it's a great idea on Wall Street today, asset-backed. Atalaya has been doing it for nearly 20 years. 20 years with spectacular results.

So now you have the Blue Owl credit platform married with one of kind of the couple best in the world, probably in this business, and that gives us the legs we need for, you know, not even just the next handful of years, but what we think can be the next decade version of direct lending. Prima, our leg into real estate credit. You say real estate credit, everyone thinks, oh, my gosh, you know, look at all the problems there. Prima has been doing this business for over 30 years. They've had two losses. Two losses in 32 years. So there are ways to go into each of these markets with exceptional talent and the very focused strategies that I will characterize as the boring versions. We're very into doing boring products, products that deliver in and out, up and down through all markets.

And it turns out, when you do that over and over and over again, that turns out to be pretty exciting. So that's where we bring Prima to the mix. Prima, that's probably a $5 trillion addressable market in the case of real estate credit. So we're looking at these as critical pieces along with our insurance, now distribution. Remember, we're not getting an insurance business, but we've now created an insurance alternative of management capability, where we can package capabilities. No coincidence to things like the Prima and asset-backed credit are perfect marriages with that delivery to the insurance channel. So, you know, all this really kind of comes together around setting the stage for what comes, we know, in, in the next five and 10 years for us.

Alan Kirshenbaum (CFO)

Brian, to broaden that a little bit, we—you know, I talked in my prepared remarks about the few things left for our in and around the $1 a share goal. Now, as Marc's talking about, everything else, all the things we've talked about this year so far on the road when we're meeting with our investors, are all growth initiatives beyond 2025. How do we keep this industry-leading growth level well beyond this in and around the $1 a share goal? So you sprinkle in these acquisitions, very targeted, focused acquisitions. We're gonna continue to grow inorganically, but then you layer in the organic growth.

You talk about our credit products, our evergreen diversified lending strategy, our evergreen first lien fund strategy, our healthcare vertical, our GP-led secondary product, and then you add in some real estate products or European triple net lease, which is getting really good traction, are growing our real estate finance products. Potentially gearing up, as I said, by the end of next year for our real estate Fund VII. As Mark said, Fund VI, we, you know, had a record year with where we ended up with Fund VI, and then our new mid-market GP stakes product. So when you layer in the organic and inorganic growth, this is what we've been talking about all year. How do we really keep that industry-leading growth level well beyond 2025?

Operator (participant)

Question comes from the line of Glenn Schorr, Evercore ISI.

Glenn Paul Schorr (Senior Managing Director and Senior Research Analyst)

Hi, thank you. So maybe another angle on the deal activity. So I agree, Oak Street seems to be textbook purchase, integration, and accelerated growth story. When you think about just—you just did three deals in a reasonably short period of time, is something different in the deal environment that has brought these companies to your doorstep, and why? So one, asking about what's going on with the deal environment. And two is, history hasn't been great in asset management land for companies to buy a bunch of other companies, half leaving alone, half lever them. It usually hurt margins, and eventually you had some grew, some didn't. It leaves a bad taste in investors' mouths.

I think the underlying growth of the alternatives backdrop is significantly better than what we're looking at, but my question is, how do you make sure you integrate enough, that you are one firm enough, that you lever the brands and the best things and don't learn from or do learn from the mistakes of the past of the traditional asset managers? Thanks.

Marc Lipschultz (Co-CEO)

Sure. So these coming together in this form, I think mostly we ought to look at as just a reflection of the right opportunity at the right time. These are businesses that came to us. These are, you know, one-off, as we noted. So this is really about finding strong partnerships, and I think that does start to address this question of how do you get the best of both worlds. You know, this is us working in tandem with the leadership team of Prima, working in tandem with the leadership team of Atalaya, continuing in our partnership with Kuvare, remaining in the insurance business and remaining a strategic partner. To us, we're providing asset management services. So-...

I think the key for us here is these are one-off opportunities that are about joining us, and we assess that not just on, is it a good strategy, and is it a world-class team at investing, but is it a tremendous fit for our firm? I can tell you, the cultural assessment we go through when we think about something like a Prima or an Atalaya, is as important as the financial assessment. I can tell you, by the way, it scores just as high. These are great people, and they are very much a part of the Blue Owl. As we talked about, everyone's gonna wear the Blue Owl jersey, and that is how we work. This is not a constellation of activities. It is absolutely one firm. That's how we operate.

But what we don't change is the success of the investment strategies, and that's been the model for Direct Lending, it's been the model for GP Stakes, it's been the model for Oak Street. So actually, it's been done multiple times for us here, how to get the best of investment performance with the full integration of the businesses into the firm. So I have to say, we feel very good about the muscles we have built for that, and everything is, you know, moving along in the right direction. So I, I would tell you, we're feeling like we understand very much the, the questions, the caution, if you will, that you're noting in, any M&A, and M&A in financial services. But in this case, you know, Oak Street, to me, is a much better template to look at.

In fact, because that's actually ours, actually a very analogous-sized business, actually an analogous set of circumstances, where the senior leadership team came and joined this firm to be a part of the leadership of Blue Owl, didn't sell to this firm.

Alan Kirshenbaum (CFO)

Go ahead.

Operator (participant)

Our next question comes from the line of Patrick Davitt from Autonomous Research.

Patrick Davitt (Partner)

Hey, good morning, everyone. I think the management fee trend in the quarter was probably a little disappointing relative to the very positive FPAUM inflow and AUM surprise. So were there any timing issues with, like, big deployments skewing later in the quarter that maybe aren't showing up in, in the full quarter? And if so, maybe the level set, do you know what the run rate for management fees would have been with a full, full quarter of all those, a full quarter of Prima, et cetera?

Alan Kirshenbaum (CFO)

Thanks, Patrick. I don't have the run rate off the top of my head. I could tell you that we had some closings at the very end of the quarter, so didn't really have any time to accrete in for the quarter. And in 1Q, we had some small catch-up fees, both in real estate and in GP stakes, that elevated just slightly 1Q's numbers.

Operator (participant)

Our next question comes from the line of Craig Siegenthaler with Bank of America.

Craig Siegenthaler (Managing Director)

Good morning, Marc, Alan. Hope everyone's doing well. We wanted to come back to Alan's margin commentary near the end of the prepared remarks. So with the 2025 FRE margin now at 57%-58%, longer term, as you scale digest these mergers, where do you see the long-term target? Is that still 60% or, or maybe a little higher? How should we think about that?

Alan Kirshenbaum (CFO)

Potential growth numbers over the next few years, and it fits a very strategic area for us in a very big addressable market, as Marc was talking about. So let's talk for a minute about what are we creating here. When I look backwards just for a minute, and I look at our management fee growth, for our real estate business on an LTM basis, since we acquired the Oak Street business, we haven't had a quarter go by where we haven't had 50% growth on an LTM basis in management fees there. And overall, Blue Owl, we haven't had a quarter go by that's been less than 20%. And when you take that up to the Blue Owl FRE revenues, we haven't had a quarter go by that's been lower than 25% revenues. And so that's looking backwards, what we've created.

Now, looking forwards, when you think about the things that we have out there, AUM not yet paying fees, GP Stake six fundraise, the OCIC and OTIC fundraises over 2024 and 2025, and then the BDC step-ups in fees, that's another $1 billion of revenue from where we were at the end of 2023. So that's a 60% growth just from those few things, and that doesn't include all the other things that I just rattled through in a previous question about growth initiatives beyond 2025. When I think about fundraising, we think we're gonna almost double our equity fundraise versus where we were last year. And so what we're doing, it's working. We're reinvesting back into our business. It's fueling industry-leading growth, and it's accelerating between now and the end of 2025.

So when you think about that 25% revenue number we just posted on an LTM basis, that growth, we think, will accelerate to approaching 30% growth for this year and for next year. And again, I wouldn't change the longer-term 60% FRE margin. Thanks, Craig.

Operator (participant)

Our next question comes from the line of Steven Chubak, Wolfe Research.

Steven Chubak (Managing Director)

Hi, good morning.

Marc Lipschultz (Co-CEO)

Good morning.

Steven Chubak (Managing Director)

Wanted to ask a question on Part One fees. Just given the expectation for rate cuts on the horizon, loan spreads tightening over the last 12 months,

... There's some concern that Part One fees could come under greater pressure as the higher-yielding back book begins to roll off. Now, recognizing there's going to be a meaningful offset from ramping deployment activity, and certainly the comments there were quite constructive, but was hoping to get a-- just to mark to market for where current origination yields sit today relative to the back book. And maybe just speak to the ability to defend, I guess, what would now be a high 50s FRE margin in 2025 amid deeper rate cuts and spread contraction.

Marc Lipschultz (Co-CEO)

Sure. Thanks for your question, Steven. Look, we have a BDC business that continues to grow, and so, yes, as rates come down, we will see some pressure on Part One fees. We also see, from a number of perspectives, Part One fees going up. So we still have our software lending to BDC that's not fully deployed. As we continue to deploy that capital, Part One fees are going to continue to go up vis-a-vis the prior quarter, and we still have some ways to go to fully deploy that capital. We still have two BDCs, and we'll continue to have two BDCs, OCIC and OTIC, that are fundraising at very strong levels today and will continue to for everything that we see on the go forward.

So we will continue to see Part One fees stepping up, quarter-over-quarter, as it relates to our fundraising efforts and these continually offered products.

Operator (participant)

Our next question comes from the line of Crispin Love with Piper Sandler.

Christian Powell (Associate)

Thanks. Good morning, everyone. Appreciate you taking my question. Can you just give us an update on credit quality across the portfolio? What you're seeing, are you seeing any degradation in the portfolio? And then when you look at Pluralsight specifically, how confident are you that that is a one-off in the portfolio versus a potential for other credit stress elsewhere, thanks.

Marc Lipschultz (Co-CEO)

Yeah, credit quality is very good. You know, this is a strong environment. Our portfolio on average grew EBITDA in the teens, mid-teens. So we continue to see very strong overall performance. We have not seen any material change in amendment requirements or requests or changes in demand for, you know, payment in kind if they were cash paid before, running down the revolvers. And we look, we will always have one-off companies that have their challenges. That's, of course, the nature of the beast. We fortunately, as I described, look, we have a pretty simple system in theory, very complicated in execution, which is to find, you know, through rigorous work, great companies that are very likely to perform really well, and the handful of times they don't perform well, make sure we get a strong recovery.

And so that I think actually leads us right to overall credit quality, you know, continues to march on very, very steadily and very well. In terms of Pluralsight, look, Pluralsight, it's probably worth commenting on one thing. We care a lot about Pluralsight's performance in every credit and ultimately every recovery. For the Blue Owl shareholder, again, let's remember, we're a fee-based business, so really the underlying yields of the funds are not really directly a part of the Blue Owl business. We get fees. We don't have carry. So I just want to put that again as a flag. Now, we care a tremendous amount about the performance.

Also, context is let's for those who don't know, Pluralsight is an IT training business that was bought by Thoma Bravo, and that we led the financing of with several other private lenders. But very sorry, Vista, apologies. It is, it is not a software business, just to make sure we're all clear on where it lands. But look, Vista is a great sponsor, make a lot of great investments, and we do a lot of business together. You know, this one didn't work. I mean, obviously, that's disappointing to, to them. It's disappointing to us. It's not where we all like to be. It's, at the end of the day, a small loan. It's a little over $300 million out of our almost $100 billion portfolio. And, you know, now we'll end up owning it without a lot of Sturm and Drang.

Again, it's not what Vista or we wanted to be the outcome, but actually it's kind of a study in private lending working, which is, you know, here will be a smooth handoff, I expect, and we'll carry on in supporting the management and the business. Stay tuned for the next few years, and we'll find out what the exact recovery is. You know, do we- do we get all our money back? Do we get most of our money back? We'll... you know, we'll all find that out together in the next few years, but that's the, that's the limit of the drama. It just doesn't really matter to our business, and, no, I don't think you can extrapolate anything from it.

Operator (participant)

Our next question comes from the line of Brennan Hawken with UBS.

Brennan Hawken (Managing Director and Senior Equity Analyst)

Good morning. Thanks for taking my questions. Alan, I wanted to follow up on... and apologies if you hit on this. My line cut out a bit during your response to the question on the margin outlook. But it seems as though the margin compression is impacted by some of the deals that you guys have recently done. And you also reiterated your confidence to be at or around the dollar dividend. And so is the bridge there better revenue growth? And can you just confirm whether or not some of the recent deals are really what's pulling down the margin rather than anything beyond that that would be idio?

Marc Lipschultz (Co-CEO)

Yeah, that's right, Brandon. Thank you for the question. In particular, the Atalaya transaction, Atalaya as a business, has roughly half the margin that we do. We know we can grow this over time. We just don't know yet whether we can get it up to the same margin as where we are today, and we're investing in these acquisitions. So as I outlined, what we did with Oak Street, so we could have some slight downward momentum before it swings back up. But we feel very confident and very strong about the long-term trajectory of keeping that 60% or higher margin over time. And it is driven by the acquisitions that we're making and the investment we're putting into these acquisitions.

Operator (participant)

Our next question comes from the line of Bill Katz from TD Cowen.

Bill Katz (Senior Equity Analyst)

Okay, thank you very much. I just want to unpack the dividend a little bit further. So you affirmed the $0.72 this year, and you think you can grow that in the low-to-mid 30% range year-on-year, and it does sound like top line driven. So if I take 35% as a reasonable proxy, I get to about $0.97. And so as I look at the year-to-date dynamics between distributable earnings and the dividend, the payout rate's been about 100% round numbers. So I'm wondering if you could just talk about the algorithm in terms of capital allocation and why the import on the dollar, and is there a broader argument here to potentially move away from a dividend growth story and think about a broader capital return opportunity? Thank you.

Marc Lipschultz (Co-CEO)

Sure. Thank you, Bill. So that's right. We're targeting a low to mid dividend growth for 2025 versus 2024. That low to mid would put us somewhere around the $0.96. That is a, you know, approaching, if not 100% dividend payout ratio. That's really what we've been communicating to investors. It's where, you know, we've seen this year will step up to a, you know, 90, low 90s% payout ratio, and then we would look to bring that back down over time as we get past 2025. So we've continued to keep our eye on that in and around the dividend, in and around the $1 share dividend goal, and then over time, we'll bring that payout ratio back down a little bit.

Operator (participant)

We're happy to follow up. Patrick, I think you're on for a follow-up.

Patrick Davitt (Partner)

Oh, hey, thanks, guys. Kuvare just closed on July first. Could you update us on how we should think about kind of the regular way, annuity-type quarterly inflow you'll start to see from that, given the kind of ongoing annuity issuance from the insurance partner there? Thank you.

Marc Lipschultz (Co-CEO)

Yeah. The Kuvare acquisition is a very exciting one for us, and I want to reframe importantly, you know, what we did buy and what we didn't buy. So we bought the Kuvare Asset Management business, getting paid fees to manage assets in fashions that are packaged, delivered, both in terms of abilities and structures for insurance companies. We did not buy the insurance operations. We are not in the insurance business. We don't have a, you know, a spread-related earnings concept. We continue to have fee-related earnings. That's very important to our business model. So Kuvare remains very active in the insurance business and very successfully so. That is to say that they continue to be very successful in issuing annuities.

They have been, in fact, for an insurance company their size, I, I think it's quite impressive what they've accomplished in terms of access, for example, to the Japanese market. In 2023, there was $5.6 billion of flows. The expected growth rate this year has been higher for them in terms of total originations. They've had a good, strong start to the year, so we continue to expect, you know, again, that was 2023, and we're rising from there. So this is something that will be contributing over time, done, you know, the, the way we expect it will, you know, billions of dollars of flows for us on an annual basis, and in fact, on a quarterly basis.

So we are very happy to have this additional leg to our stool, along with being, you know, one of the key leaders in wealth. Remember, there, we had $3.2 billion in the wealth channel, institutional, great continued growth in institutional and access to new accounts, and now we add insurance, where we have another set of flows, you know, starting off with this base of $20 billion of assets we just took. And as you note in your question, as there are inflows, those come to us to manage. So this is yet another engine for us to continue to originate exactly what we want, which are long-dated fee-paying assets. So the insurance addition, married, as I mentioned, with these other capabilities that, by the way, not a coincidence, that something like Prima and, and asset-backed lending are perfect strategies for insurance users.

I think we're going to have something pretty special to offer out to the marketplace.

Operator (participant)

Our next question comes from the line of Brennan Hawken, UBS.

Brennan Hawken (Managing Director and Senior Equity Analyst)

Hey, thank you for taking my follow-up. I would just like to make sure I understand. I'm putting together the pieces correctly here. It seems like what's happened is you guys have had some good deals come together, and you've done several deals rather quickly. You're realizing it's gonna probably take a little bit longer to get all of these pieces put together, and so we're gonna see some margin compression next year. You guys still feel good about the dividend and getting to the dividend, but you're kind of getting there via the higher payout rate ratio. And so it's more driven by that ratio rather than the earnings growth. Do I have that right, and or would you course-correct me in anything there?

Marc Lipschultz (Co-CEO)

Yeah, let me, let me try to course-correct a little bit, and, and Alan can add, too. It's not that it's more complicated to, to integrate, it's not that it's anything unexpected. It's, it's math. If you acquire, at the time, a lower margin business, it's going to, for some short period of time, be an impact to margins until we complete, as planned, the full integration, and then continue to optimize across the whole integrated business. So you know, it's, it's. I, I don't want to say it's anything about a change in expectations, but again, if I acquire something, which we do, with a lower margin and integrate and then operationalize, we'll return, we expect, fully to our 60% plus margin.

But it would be essentially a near mathematical impossibility to buy something with a meaningful lower margin and not have it in the short term impact the margin. So no, I think it's pretty transitory. But I also would emphasize, from our point of view, and I would suggest from our investors' point of view, what you want to do is continue to encourage us and focus we will on how do we continue to deliver very high, predictable growth in FRE and dividend. And margin is it's obviously a measure of obviously the profitability, but we'd rather have more revenue and have more growth and more opportunity, whether that absolute what we want to do is drive absolute dollars.

It happens to be the case that here we expect this to be, yes, a short-term dilution from acquisitions and return to the 60%+. But I, but I actually don't think that ought to particularly be the measure of success. The measure of success is, are we substantially growing our per share absolute FRE, DE, and dividend? And that's exactly what these acquisitions are augmenting for us in the short term and absolutely positioning us for the long term.

Alan Kirshenbaum (CFO)

I'll just add to that, Brennan, the guidance of low- to mid-30s dividend growth is right on top of our in and about $1 a share that we've been talking about, obviously, well before, you know, we had our eye on, frankly, any of these acquisitions. Let's just pick 96. If 96 is the number, that's a... I made this comment in my prepared remarks, it's a 30% CAGR over four and a half years for our dividend. So we feel fantastic about that. We feel really great about it, and we feel even better about what our future trajectory looks like for growth, as we talked about, well beyond 2025.

Marc Lipschultz (Co-CEO)

Okay. I don't think we have any further questions. So look, we appreciate everyone's time. It was an exceptional quarter. I mean, we are really pleased with where things stand. We're pleased, most importantly, with the returns for our LPs and all of our strategies. We're extremely pleased to be here, you know, telling you the, you know, second verse, same as the verse, which is we keep delivering, marching forward, our thirteenth straight quarter of increases. We see our continuing trajectory looking very bright. With the acquisitions, we have set the stage, which of course, we'll talk about in much more detail in the future, set the stage to continue our highly predictable and stable growth plan, and our very strong, steady march on FRE and dividends. So we're very happy with where things, we're standing.

We think we've got very exciting opportunities ahead. So we look forward to keeping you all posted, and we think you'll all share our enthusiasm as you start to see us reveal the positives of what we can develop out of our continuing organic strategies and these inorganic additions.

Alan Kirshenbaum (CFO)

Thank you, everyone. Enjoy the rest of the summer.