2023-05-06 05:15:34 ET
Summary
- I started coverage on Blue Owl Capital recently with a BUY rating.
- OWL reported earnings recently and showed that they're able to fundraise and keep redemptions low even when other funds are struggling.
- I present my thesis and upgrade the stock to a STRONG BUY.
Dear readers/followers,
Recently I wrote an article on Blue Owl Capital (OWL) here on Seeking Alpha, highlighting OWL's superb growth prospects and rating it as one of the most promising alternative asset managers. My bullish thesis was predicated on the fact that the company will be able to grow its assets under management by at least 18% per year for the next five years. In order to get this 18% growth I assumed that OWL will not be able to gain any new market share in any of the three segments it operates in and it will simply ride the wave as the direct lending space as a whole continues to grow at its historical CAGR of 23% and capital solutions at 12%. Given the current economic uncertainty and high interest rates, I even assumed no growth in their Real Estate business. As you can see these assumptions are quite conservative and I was even called out on it by some fellow investors who commented on my article and I agree, these are conservative assumptions. And that's the point! If the investment can generate 20% annual returns with conservative assumptions that it's a clear buy and if it beats those assumptions, then great, that's further upside.
In either case, given the visibility of their sticky fee-related earnings and a large portion of permanent capital which cannot be easily withdrawn, the future performance of the investment will depend almost entirely on management's ability to grow fee-bearing assets under management (FBAUM). Yesterday the company reported their Q1 2023 earnings so now is a great time to look through them and see how their doing.
The general sentiment I'm seeing around alternative asset managers is fairly bearish, that's why prices are quite low for all the major funds including the likes on Blackstone ( BX ) and Brookfield ( BAM ). I can think of a couple reasons why this is. Firstly alts fall under Financials and it's no secret that Financials have been hammered with the recent banking crisis caused by a failure of a few small banks in the US, followed by the collapse and subsequent buy-out of Credit Suisse. Moreover, we hear in media that fundraising has slowed significantly and that not only are assets under management unlike to grow, some funds could even see their AUM shrink as investors withdraw their money. Anyway that's the sentiment right now.
Looking through the earnings report, at first glance it seems there are no issued with fundraising at all. If we look a bit closer, we'll see that fundraising has indeed slowed, but remains at reasonable levels. First let's have a look at the number the way management presents them. In particular the fund fundraised $3.8 Billion during the first quarter of the year which was basically on par with Q1 2022 ($3.9 Billion). They also conveniently show that over the last 12 months fundraising was more than double compared to last 12 months this time last year ($24.7 Billion vs $11.3 Billion) which is kind of obvious given the steep growth trajectory they've been on. But a closer quarter over quarter comparison reveals that fundraising has slowed significantly over the past year. While it's true that it totalled $3.9 Billion in Q1 2022, that was followed by two really strong quarters of $7.2 Billion and $8.8 Billion, respectively and a solid Q4 2022 with $4.9 Billion. That makes the average quarterly fundraise last year $6.2 Billion. With this comparison it becomes quite clear that not only did fundraising slow, it was only about two thirds of last year's average.
On the flip side, redemptions have been extremely low. Notably, a very large part (80%) of OWL's asset under management is permanent capital, but as highlighted in their earnings call they do have a handful of products which offer quarterly redemptions. In total $248 Million in redemptions was requested during the first quarter. This is quite low as it represent less than 1% of their AUM and importantly was offset by over $1 Billion raised in those same products. This is quite reassuring, because it shows that OWL's earnings really are sticky and highly visible.
Their overall results show that their average fee and margin have remained stable. I want to point out that due to their unique products the average fee of 1.5% that they're able to charge on their FBAUM is about 50% higher than what BX or BAM charges. Moreover a 60% margin is also nothing to laugh at. The only slightly worrying thing here, is somewhat similar to what we saw with fundraising earlier. They present the results in a convenient way which makes it seem like Q1 was a great quarter when really it was somewhat average - not that necessarily bad given the tough economic conditions we're in. On a QoQ basis, their revenue was only up by 2.4%. Fee-related earnings grew by just under 2% QoQ and distributable earnings ((DE)) came in 2.8% lower.
I'm not particularly worried with these results, because if we zoom out a bit, the company is still growing extremely fast. Don't forget that over the last year they grew both their AUM and FBAUM by 40% and a good part of that was during tough economic times. It's only natural that things slow down a bit at some point, but what's important is that things are not nearly as bad as the sentiment (and stock prices) shows. Their operational metrics remain industry leading and though fundraising has slowed, we shouldn't forget that they were still able to grow AUM by over 4% just in the past 3 months.
To close off, they have confirmed the $0.56 per share dividend for this year (+35% YoY), which represents a yield of above 5%. Previously management has stated that they expect a 35% increase in dividend in 2024 and in 2025, targeting $1 per share by 2025. This time they weren't as specific on the earnings call but said that they expect the dividend to grow "meaningfully".
To conclude the earnings call the CEO said the following:
We are really proud of our results this quarter, especially in light of what's been going on in the markets, and we're grateful for the support and partnership. I have to add, though, on a personal note, I don't understand how our stock is trading at $10.60. You've heard from the team, our income streams are very predictable. Margins are consistent. We've got permanent capital. And I would say that our revenue is probably the most predictable of any alternative asset manager. Most importantly, our dividend yield is now 5%, and we've signalled that our dividend will be materially higher next year and the year after. So it feels like to me and the team that this is going to be a very good entry point for investors.
And I have to say that I agree, OWL trades at just 15.6x annualized FRE which is significantly below peers and it has shown that it can continue to grow its business even during very difficult fundraising times. I therefore upgrade OWL to a "STRONG BUY" here at $10.30 per share and post Q1 earnings. I have already build a sizeable position in the stock and plan to make it my second biggest alternative allocation after Brookfield Asset Management (BAM).
For further details see:
Blue Owl Capital: Able To Fundraise Even During Tough Times