2024-01-10 02:23:39 ET
Summary
- Blue Owl Capital has experienced a 40% CAGR in management fees since its IPO, thanks to successful fundraisings in private markets.
- The macro-level conditions support the future growth of Blue Owl's asset base, particularly in the private credit space, thereby rendering the future dividend prospects attractive.
- Both the underlying portfolio and external leverage load for OWL are well-structured and position the Company in a great spot to extract benefits from secular tailwinds in a profitable fashion.
- In this article, I elaborate on details and provide specifics on why I think that OWL is a great investment to consider for yield-chasing investors, who also want exposure to dividend growth.
Blue Owl Capital ( OWL ) is a mid-sized asset manager with a market cap of ~$20.8 billion that went public relatively recently (Q2, 2021). Since the date of IPO, OWL's management fee (or revenues) has registered a 40% CAGR, which to a large extent could be attributable to successful and sizeable fundraisings that have taken place in vibrant private markets.
As OWL's focus is purely on private markets, it is clear that from the "macro-level" the tailwinds are there to support the future growth of the underlying asset base. For example, the prevailing dynamics in the private credit space in which OWL also carries a notable exposure indicate a sustained growth potential driven by increased banking regulation, relatively shallow public markets and the inherent flexibility of private credit players to provide more tailored financing.
If we look at and compare OWL's total return performance (starting from the date when it went public) with that of the overall BDC market, we can even notice strong similarities in terms of the overall directionality.
Let me now provide a bit more depth on why I view OWL as a solid investment, which offers a combination of attractive yield at ~4% (underpinned by robust fundamentals) and great growth prospects.
Thesis
The portfolio structure of OWL could be segmented into three parts: credit, strategic capital and real estate.
The credit component, which accounts for roughly half of the total AUM is comprised of private credits to middle and upper-middle market companies. As stated earlier, this asset class in particular is subject to secular tailwinds that are stimulated by the tightening in banking markets and relatively unfavorable public markets, while interest rates remain above extremely accommodative levels.
The strategic capital component constitutes about a third of OWL's portfolio and is mostly associated with more exotic and less systematic (heterogenous) transactions in the private market space. This source works in close synergy with the private credit exposure, where joint benefits could be extracted from having tight cooperation with PE / VC houses, which in both cases provide volumes for OWL to assess (in practice obviously vice-versa situations also occur).
The final component - real estate - is the smallest puzzle piece in OWL's portfolio. Yet, it also entails decent growth opportunities considering the unfavorable conditions in conventional commercial real estate financing space, where more traditional lenders (e.g., banks) have become reluctant to refinance the previously issued low fixed-rate debt maturities.
All of these dynamics warrant higher demand for private market capital, where asset managers like OWL can step in, conduct sizeable fundraising and later manage the AUM base.
In the context of OWL's portfolio, it is also worth appreciating the fact that a significant chunk of the total exposure could be deemed as permanent capital, which effectively means that a significant part of OWL's portfolio is less volatile providing stickier revenues than most of other typical private market capital sources.
Now, if we look at the top-line and bottom-line trends below, it is very obvious how OWL has managed to register consistent growth over the trailing 5 quarters. An important aspect here is that it has managed to grow the revenues, while keeping the underlying margins in check, which has, in turn, allowed to expand the base of distributable earnings.
A major enabler of this trend (on top of the industry-level tailwinds) has been the well-structured debt profile of OWL. The current cost of debt is only 3% which is underpinned by several long-term notes (at fixed interest rates).
Looking at the prevailing borrowing structure, we can see that OWL will continue to be in a position to benefit from having way below market-level financing rates on its external leverage load. Theoretically, the first refinancing event for one of these notes will take place only in 2028, but I would not consider this material given the size of the outstanding principle (only ~$80 million). Adjusted for this, OWL is really protected from unfavorable repricing of its notes until 2031, which is a very long time for OWL to keep extracting the benefits from an inherently attractive spread. The leverage itself could be easily classified as a separate pocket of hidden value in OWL.
So, all of these elements feed nicely into OWL's dividend equation, which currently offers ~4% yield that is based on ~90% payout ratio. One might wonder whether this high payout ratio does not impede OWL's ability to accommodate further dividend growth. However, this is not an issue in OWL's case since the underlying business and its growth are based on fundraising volumes rather than reinvestments in the current asset base. The fact that OWL has carried this intensive payout and at the same time achieved 3-year dividend CAGR of 15.7% confirms that this is not an issue at all.
The critical elements to have for asset managers in terms of facilitating sustainable and attractive dividend growth are favorable market conditions, which stimulate flows into the specific asset classes in conjugation with cheap external financing that can further enhance the AUM base in a high margin fashion. All of this is present in OWL's situation.
Finally, the overall attractiveness of OWL's dividend story is enhanced by the Management's commitment to get the annual dividend to $1 per share by 2025. Compared to the current TTM dividend, this implies a growth of ~78% (or FWD implied yield of ~7%).
When Alan Kirshenbaum - Chief Financial Officer was asked by one of the analysts at the most recent earnings call to comment on this objective, the provided answers seem to clearly inject certainty in the assumption of OWL actually delivering on this target:
So we're going to continue to focus on dividend growth. We've got a 28% CAGR on our dividend growth since becoming a public company. It's the highest out there and we're all very aligned. We own 25% of the outstanding shares, so we sit right there with our shareholders and we'll continue to focus on strong FRE management fee growth, FRE growth and without a doubt of course, dividend growth.
The bottom line
The focus of OWL to source and manage capital in the private market space has not only benefited the historical growth but also rendered the growth prospects of its AUM base rather positive making the "1$ dividend per share by 2025" target realistic. The overall attractiveness is further boosted by extremely cheap external debt, which currently sits at 3% and where the first notable maturities kick in only in 2031. Moreover, the notion of having a significant exposure towards permanent capital (asset) sources in the portfolio introduces a fair degree of stability in OWL's business making the current earnings inherently more stable and less subject to unexpected AUM drawdowns.
In my view, OWL is a solid investment, where the combination of secular tailwinds and well-structured underlying business/portfolio will contribute to solid future performance and continued dividend growth.
For further details see:
Blue Owl Capital: Dividend Growth Focused Stock