2023-08-03 11:03:51 ET
Summary
- Blue Owl Capital is a smaller alternative asset manager with a longer growth runway and a large exposure to private credit.
- The company trades at a reasonable multiple of fee-related earnings and has the potential to deliver an 8% yield on cost by 2025.
- Despite a culture clash between co-founders, I continue to see OWL as a good BUY.
Dear readers/followers,
I've covered a number of alternative asset managers here on Seeking Alpha, including Blue Owl Capital ( OWL ) in my recent article here . My STRONG BUY thesis for the company has paid off so far, as the position is about 20% in profit. I'm not trimming, however, as I expect much more from OWL. The point of the article today is to go over OWL's recent earnings and determine if my original price target still holds.
I have been quite clear about my bullish stance towards the overlooked alternative asset management sector, which to this day is not part of the S&P 500. This is a sector where brand recognition and size is very important to attract new capital, which is why I heavily invest in Brookfield Asset Management ( BAM ) and Blackstone ( BX ).
But the trouble with these established players is that they trade at high multiples to fee-related earnings (FRE) of 25x and 28x, respectively. That leaves little space for multiple expansion. Don't get me wrong, I still expect both of these companies and especially BAM, to deliver market beating 15% returns over the next three to five years, but if your risk tolerance is a little higher, there may be a better option.
This is where Blue Owl Capital comes in. While a little riskier than the more established giants, the company enjoys a number of key advantages.
- It's smaller, with a longer growth runway (AUM of $150 Billion vs a Trillion)
- It has a large exposure to private credit, which is expected to be one of the fastest growing components of alternative asset management
- It has an all-star management team
- It trades at a very reasonable FRE multiple of 17x which leaves plenty of upside on top of strong growth
- It has the potential to deliver an 8% yield on cost by 2025
Recent Results
Recently OWL reported their Q2 2023 earnings which basically hit expectations as I see it. The company has also renamed its subsidiaries to unify everything under the Blue Owl name. What was originally Owl Rock, Dyal Capital and Oak Street, has become Blue Owl Credit, GP Strategic Capital, and Real Estate under the OWL umbrella.
We all know that the fundraising environment has been tough over the past couple of quarters and has manifested in relatively low and dropping inflows for most managers. OWL is no different. Fundraising during the second quarter totaled just $2.9 Billion (vs $3.8 Billion in Q1 2023 and $4.9 Billion in Q4 2022). Following the quarter, management admits that they are now one quarter behind in achieving their targets for this year.
But there were some positives. In particular, redemptions have been extremely low thanks to a very high proportion (>80% of permanent capital). Over the past five quarters, the company saw 6.5x more inflows than outflow and during the second quarter alone the spread was even higher at 8x. Such high portion of permanent capital gives OWL a major advantage compared to peers that, on average, raised just $2 for every dollar of outflows.
Not only that but fee-related earnings have increased by 26% YoY to over $400 Million in Q2. What's important is that OWL continues to get away with some of the highest fees in the industry. Thanks to the unique nature of their products, they're able to charge a 1.5% average fee on fee-bearing assets under management, which is about 50% higher than BAM's or BX's. A 60% margin, which they have maintained for many quarters, is also nothing to laugh at.
In summary, what I think really distinguishes OWL is the fact that it charges higher fees that are considerably stickier and therefore more visible.
Their BBB rated balance sheet is really strong, with abundant liquidity, an average 13-year maturity and low 3% cost of debt.
And what matters the most, in my opinion, is that management has confirmed that they continue to see a clear path to a $1 per share dividend by 2025.
That's almost a double from $0.56 currently over just two and a half years. Of course, this growth will have to be underpinned by equally strong growth in assets under management and fee-related earnings. If management delivers on their targets, today's investors will earn a yield on cost of about 8%.
In addition, the stock will almost certainly re-rate higher. OWL aims to maintain a 90% payout ratio, which would mean a $1.11 in fee-related earnings by 2025. Traditionally, alternative asset managers trade at 20-25x FRE. Even using the lower end of the range, we get a price target of $22 for OWL, which I see as completely realistic.
So if you buy OWL today, I think you can reasonably expect:
- a 4.6% dividend, which could grow to yield on cost of 8% by 2025
- an 80% upside in price from todays price of roughly $12 per share
Those are very high numbers, I know, but I do think it's entirely possible that Blue Owl will achieve this level of growth unless the macroeconomic and fundraising environment gets much worse.
Frankly, if the whole market falls, OWL will fall with it, but I feel really good about my position with a break-even around $10 per share and are not trimming here one bit. I rate OWL a BUY here at $12.30 per share.
Risks
One risk to consider is the recent dispute between the company's co-founders. From what I could find it seems that there's a culture crash between the two entities (Owl Rock and Dyal) that merged to form OWL and the founder of Dyal is refusing to step down. It's unclear what effect this will have on fundraising, but it might continue to prevent OWL from re-rating to a higher multiple, until resolved.
For further details see:
Blue Owl Capital: Fundraising Slowed In Q2, But OWL Remains A BUY