2023-06-16 13:07:12 ET
Summary
- Blue Owl Capital is a well-positioned traditional asset manager with $144 million in assets under management and a focus on lending, capital solutions, and real estate.
- The company has industry-leading margins, a solid balance sheet, and management expects significant growth in assets under management, earnings, and dividends over the next five years.
- Investing in OWL could yield a 7% dividend by 2025, earnings growth of 15-20% per year, and a potential upside of 20%+ from multiple expansion, making it a buy at $12 per share.
As outlined in my recent article on Brookfield Asset Management ( BAM ), I'm very bullish on alternative asset managers. This is because it's an industry that is expected to grow significantly over the rest of the decade, with most major players targeting 15% annual growth rates, and at the same prices are quite reasonable at the moment as the Financials sector has largely fallen out of favor following the collapse of Silicon Valley Bank back in March. Today I want to cover a smaller asset manager, but one that I believe to be extremely well positioned to capitalize on the growth of the industry - Blue Owl Capital ( OWL ).
OWL is a traditional asset manager, which means that it tries to attract capital to invest (assets under management) and earns a fee for investing that capital. The company operates in three primary segments:
The lending business is all about providing private loans to middle-market businesses that might have a hard time getting their capital from traditional financial institutions. This segment is especially well-positioned to take advantage of the currently tight credit market. The capital solutions business brings nice synergies to lending as it also allows the fund to take on creative debt and equity investments in the companies it lends money to. Finally, real estate is exactly what it sounds like. In particular, recently, the company more than doubled their real estate exposure by acquiring a net lease REIT STORE Capital. This in my opinion speaks volumes, as STORE was one of the best net lease REITs on the market and notably a holding of Warren Buffett.
In total, OWL has $144 million in assets under management, so it's not as big as Blackstone ( BX ) or Brookfield Asset Management but isn't small either. In fact, I think it's right in the sweet spot where it's big enough to attract capital, but not too big to still have a significant growth runway ahead of itself. What's important is that the AUM has grown by 40% YoY. Since this is the single most important driver of earnings, it's great to see that a large portion of AUM is fee-paying and classified as permanent capital, which means that it cannot be easily withdrawn, making for more sticky earnings.
I also want to point out that the fund maintains one of the highest average fees of any major alternative manager (about 1.5% on average vs 1% market standard) as well as industry-leading margins of 60%+. In Q1 2023 , OWL generated $0.16 per share in fee-related earnings, up 33% from last year, and paid a dividend of $0.14 per share. OWL's target is to payout close to 90% of distributable earnings in dividends, which makes it a really appealing dividend growth play.
What's particularly great is that management expects their AUM, as well as earnings and distributions, to grow very significantly over the next 5 years. In fact, management has said many times, including on their most recent earnings call , that they target a $1 per share dividend by 2025. Since the dividend currently stands at $0.56 per share, that means growth of nearly 80% over the next two and a half years. If the company is to achieve this, their AUM and fee-related earnings will have to grow by a similar magnitude. The goal may seem ambitious, but it actually represents a slowdown in growth relative to the past 12 months and with significant tailwinds as the industry grows, I think it's achievable.
And here's the thing, even if management doesn't deliver on their goal and the dividend is just $0.85 per share in 2025, that is still over a 7% dividend yield on cost relative to today's share price of $12. Relative to peers, the stock isn't particularly expensive, either. Established peers such as BX or BAM trade between 22-25x fee-related earnings, but OWL trades at just 18x, which leaves plenty of upside.
Meanwhile, OWL maintains a solid BBB-rated balance sheet with abundant liquidity and an extremely low cost of debt of 2.9%. Their maturities are extremely long duration, with maturities spread between 2031, 2032, and 2051.
So realistically buying at today's price could yield a 7% dividend by 2025, earnings growth of at least 15-20% per year, and an upside of 20%+ from multiple expansion. That's a recipe for a triple-digit total return over the next 3 years or so. It may be hard to believe, but I believe that's the base case for OWL. Of course, any investment comes with risk. The main one I can see here is slower-than-expected growth in case we enter a prolonged recession and credit remains tight. In that case, OWL would likely not hit their target as their AUM would grow significantly slower than forecasted. Still, the company would likely do better than other alternative asset managers as their lending strategy thrives in tight credit market conditions. In any case, paying 18x earnings for a company of this quality with a very appealing dividend strategy and significant potential upside is very reasonable, That's why I rate OWL as a buy here at $12 per share.
For further details see:
Blue Owl Capital: A Great Asset Management Play For A Tight Credit Market