2023-04-16 02:17:07 ET
Summary
- I've covered several alternative asset managers before and have been clear about my preference for the sector.
- Today, I cover Blue Owl Capital, which, given its size of $138 Billion in AUM, provides an ideal mix of safety and growth potential.
- The fund has grown its AUM by 46% in 2022, and I expect that growth will continue going forward, though it will likely slow.
- Even assuming they gain zero market share and no growth for real estate, they should still continue to increase their AUM by at least 18% annually.
- Not only that, but they trade at a cheaper valuation than peers!
Dear readers/followers,
Expanding on my bullish thesis for financials I want to start coverage on a smaller, but fast growing asset manager - Blue Owl Capital ( OWL ). OWL has an AUM of $138 Billion which puts it somewhere between the (almost) trillion dollar mega funds such as Blackstone ( BX ) and Brookfield ( BAM ) and the small emerging funds such as the recently covered Patria Investments ( PAX ). In theory this could be the ideal size, where the fund has already proven itself and provides reasonable safety while still maintaining very interesting growth prospects, that will frankly be limited for the mega funds (it's hard to double a trillion dollars in AUM vs $100 Billion). So let's have a look.
Blue Owl Capital
The fund was created by a merger of two existing funds (Dyal Capital and Owl Rock) and had its IPO in 2021, which means it hasn't really had time to prove itself. Anytime I see a stock that only has a very short history, I try to be very thorough in my analysis and use assumptions that are even more conservative than usual to provide the necessary margin of safety. And that's exactly what I'll do here.
2022 was a banger year for Blue Owl as they increased their most important metric, the AUM by 46% YoY to $138 Billion. The AUM is split between three segments that OWL operates in. Their largest and fastest growing segment - Direct Lending accounts for nearly 50% of all assets and focuses on providing private loans to middle-market businesses. This is followed by Capital Solutions which focuses on financing alternative asset business through debt and equity investments and accounts for 35% of AUM. The remaining 15% is invested into net lease Real Estate.
Before we go further, it's important to mention that the proportion of real estate is going to increase as a result of a recently finalized acquisition of STORE Capital ( STOR ). This $15 Billion acquisition was completed in cooperation with CIG and will add $9 Billion to the Real Estate division, increasing the net lease portfolio by about 50%.
Their impressive AUM growth in 2022 has translated into equally strong growth in Fee-bearing AUM which increased by 45% YoY and reached $89 Billion. Notably, 80% of this capital is classified as permanent capital which means that it's invested in long term strategies and is unlikely to get recalled soon. This, in addition to strong fundraising should ensure stable and growing AUM which will be the single most important of OWL's success.
While it's unlikely that they will be able to maintain the growth rates seen in 2022 I see growth of 15-20% a year for the rest of the decade as achievable. This is supported by the fact that the direct lending sector as a whole has grown at a CAGR of 23% over the past 12 years and similar level of growth is expected going forward. The capital solutions market is expected to grow slower, at 12% per year. Even if we assume that OWL will not be able to increase its market share in the segments it operates in and simply grows their AUM in proportion to the growth of the market as a whole, and assuming no growth in the Real Estate market, we get growth of 18% per year (say for the next 5 years) as our worst case scenario.
That sounds promising and the positives don't stop there. With fee revenues of $1.32 Billion, their average fee stands at an impressive 1.48%, which is almost 50% higher than Brookfield's. Their margin is also above the industry standard at 60%. Their Fee-related earnings have increased in proportion to AUM by 46% YoY to $0.57 per share while distributable earnings reached $0.53 per share. For Q1 2023 they have announced a $0.14 dividend, up 22% from 2022, which translates into a yield of 5.2%. Based on analysts expectations, that means a healthy forward payout ratio of 80%. Going forward I expect the dividend growth to be significant, easily in double digits.
Finally, I want to touch on debt. They have a very strong BBB rated balance sheet with about a billion dollars in available liquidity. Unlike Brookfield, they do hold some debt - $1.66 Billion to be exact. But since their leverage and the cost of debt is very low, this debt could actually be helpful in an inflationary environment. And since all of it is very long term with maturities from 2031 to 2051, I'm not worried about it at all.
That brings us to valuation, which is where a comparison to Brookfield will be useful. With Brookfield for every dollar you invest, you get $7.60 in Fee-bearing capital. With OWL this number is only $5.75. At first glance that would suggest that OWL is more expensive, but when we factor in the fact that OWL is able to charge a fee that's on average 50% higher, the tables turn.
From an earnings perspective, OWL trades at just 19.4x their fee-related earnings, compared to 26.2x for Brookfield and 23.8x for Blackstone. And while some discount is understandable, given that its IPO was only in 2021, the company is in no way overpriced, especially when we factor in that their AUM are likely going to increase at a faster pace than those of the bigger peers. Still, because they are an unproven company, I will continue to value them at the current multiple for now.
With that said and based on a very conservative forecast I expect:
- dividend yield of 5.2% growing at double digits
- earnings growing at 18%
- no return from multiple expansion
- total expected annual return of 20-25%
That's really solid alpha and quite achievable in my opinion so I rate OWL stock as a "BUY" here at $10.80 per share. This is a long term holding for me and one that I expect to at least double over time so for now I won't set a concrete price target.
For further details see:
Blue Owl Capital: Promising Asset Manager, With Growth Potential And Undervalued