2023-08-05 08:00:00 ET
Summary
- Blackstone Inc. and Blue Owl Capital Inc. recently reported Q2 results.
- Blackstone has an extremely impressive track record whereas Blue Owl Capital is a relative newcomer to the publicly traded asset management space.
- We recap their earnings reports and share why we believe that Blue Owl Capital is a better buy than Blackstone moving forward.
Both Blackstone Inc. ( BX ) and Blue Owl Capital Inc. ( OWL ) recently reported Q2 results. BX has an extremely impressive track record, whereas OWL is a relative newcomer to the publicly traded asset management space. Since going public, BX has massively outperformed the SPDR® S&P 500 ETF Trust ( SPY ):
Meanwhile, since OWL has gone public, its performance has been only slightly superior - albeit much more volatile - than the S&P 500's performance:
However, the significant volatility in OWL stock implies that Mr. Market is still trying to discover what OWL is likely actually worth, so its performance track record is hard to draw too many conclusions from as far as management and business model quality.
In this article, we recap their latest earnings reports and share why we believe that OWL is a better buy than BX moving forward.
BX Stock Overview & Q2 Results
BX is the world's largest alternative asset manager, with over $1 trillion in assets under management. It is spread across numerous sectors including private equity, direct lending/private credit, real estate, and infrastructure. This provides it with formidable competitive advantages including economies of scale, a strong brand, access to exclusive deals, a vast repository of data, and lower cost of capital.
The company's asset-light business model allows it to generate above-average returns for its shareholders as it is able to return nearly all of its earnings to investors via dividends and buybacks while generating growth through fundraising by leveraging its numerous competitive advantages. As a result, it enjoys high returns on invested capital while simultaneously delivering a compelling dividend yield to shareholders.
BX's Q2 results were highlighted by the firm cross the $1 trillion AUM (assets under management) mark for the first time in its history, reflecting 6% year-over-year growth. Moreover, the company highlighted that it has ~$5.31 per share in net accrued performance revenues, giving it pretty decent embedded value in its shares. The company also mentioned that it repurchased 1 million common shares during the quarter to take advantage of the relatively discounted stock price during the period.
Management also highlighted that it believes its strongest growth segments of the moment are:
private credit and insurance, infrastructure globally, energy transition, life sciences, the development of the alternatives business in Asia, and the private wealth channel, where the democratization of alternatives in its early stages.
OWL Stock Overview & Q2 Results
While not nearly as large as BX, Blue Owl Capital Inc. is still quite large with ~$150 billion in assets under management, including $119 billion in permanent capital. It raises funds from both institutional and private wealth clients and deploys them across three major platforms: direct lending, GP strategic capital, and real estate. Its direct lending business is by far its largest segment with $73.8 billion in assets under management, followed by its GP strategic capital segment with $50.9 billion in AUM, and then its real estate segment has $24.8 billion in AUM.
OWL does not share the same comprehensive competitive advantages as BX, but it does enjoy strong competitive advantages in its areas of expertise. Its direct lending platform is one of the largest in the industry and has been enjoying strong growth and performance. Meanwhile, its GP strategic capital business is the dominant player in its segment and offers a truly differentiated product to clients. Finally, its real estate business is focused on the triple net lease space and has established itself in a position of strength in this niche with an impressive total return track record for clients. Management sees significant growth ahead for the business, particularly in its direct lending and real estate platforms, and also believes that it can grow into additional verticals such as infrastructure in the near future.
OWL recently reported Q2 2023 earnings, which were largely in-line with analyst's consensus expectations. The company has rebranded its subsidiaries under the unified name "Blue Owl" in an attempt to boost its brand image and long-term fundraising strength across its platforms.
Despite a tough fundraising environment, OWL still managed to raise $2.9 billion in Q2, though management did admit that they are about one quarter behind in their fundraising targets for this year. Despite the current challenges, management reiterated that they continue to expect very strong fundraising and fee-related earnings growth for the business in the coming two and a half years and still see a path to paying out a $1 per share dividend in 2025.
Why OWL Stock Is A Better Buy Than BX Stock
While both businesses clearly have their strengths and are continuing to post solid AUM growth despite operating in an environment where headwinds are rising, we believe that OWL stock is a better buy at the moment than BX stock is for the following three reasons:
#1. OWL Stock Has A Greater Focus On High-Growth Private Credit/Direct Lending
Perhaps the biggest reason to own OWL today is that it is an outsized play on the rapid growth going on in private credit/direct lending right now. This segment has enormous appeal since it offers the potential to achieve equity-like returns with the protections afforded by a highly diversified, professionally managed portfolio of senior secured and conservatively underwritten loans in quality middle market businesses that are often backed by private equity sponsors.
This rapid growth was reflected throughout BX's earnings call, with management stating:
The greatest demand today is for private credit solutions...Our global direct lending platform is over $100 billion today. and we see attractive expansion opportunities in the U.S., Europe and Asia.
However, BX's direct lending platform is only slightly over 10% of its total assets under management. In contrast, OWL has nearly 50% of its assets under management in its direct lending platform. Meanwhile, BX has ~33% of its assets under management tied up in relatively out of favor real estate in contrast to OWL having just half of that exposure (~16.5%) to real estate. As a result, we expect OWL to enjoy much stronger growth momentum moving forward as its overall business will likely benefit much more from direct lending growth than BX's will.
This fact is reflected in Wall Street analyst consensus estimates, who project OWL to grow distributable earnings at a 22.9% CAGR in 2023-2025 in contrast to BX, which is expected to grow distributable earnings at a 9.5% CAGR over that same timeframe.
#2. OWL Stock Has More Permanent Capital & More Stable Earnings
Another big reason to favor OWL over BX right now is because it has a significantly greater percentage of permanent capital than BX does and also has more stable earnings. OWL's permanent capital makes up ~80% of its total assets under management, whereas BX's "perpetual" capital (which is even less definitively permanent in nature than permanent capital at OWL) only makes up ~38% of BX's total assets under management.
This is important because it means that OWL faces much less redemption risk than BX does, which is a very real consideration given that BX has faced an onslaught of redemptions from its private market REIT this year amidst widespread concerns over rising interest rates and declining commercial real estate valuations.
Moreover, OWL's fee structure is set up to be higher in terms of fixed fee-related earnings while foregoing carried interest on its funds. In contrast, BX generates a considerable percentage of its earnings from carried interest/performance fees. What this means is that when times are good, BX's earnings stream soars higher as fee related earnings combine with realized performance fees to deliver very large returns to shareholders. However, when times are bad, BX's earnings stream tens to plummet, with its performance fees largely disappearing, leaving only the fee related earnings stream behind.
In contrast, OWL's earnings stream is much more stable as its higher fee-related earnings and lack of carried interest mean that - through good times and bad - OWL will be generating a remarkably consistent earnings stream for shareholders.
Putting the permanent capital and fee structures together make OWL:
- Easier to value as an investor since its cash flow stream is much more predictable and less macro-sensitive.
- Lower risk in nature.
- Enables it to pay out a fixed quarterly dividend instead of the variable payout model that BX and many other asset managers have adopted.
As an income-focused investor, the third point makes OWL much more attractive since its passive income payout is much more dependable.
#3. OWL Stock Is Significantly Cheaper
Last, but not least, OWL is significantly cheaper than BX stock. In addition to its more defensive earnings profile and more robust growth potential via its greater focus on direct lending, OWL's valuation multiples are also lower than BX's.
OWL's NTM dividend yield is currently 5.1%, well above BX's NTM dividend yield of 4.2%. Moreover, OWL's NTM P/DE ratio is 17.17x whereas BX's is 20.55x.
Investor Takeaway
While BX does enjoy the greater scale and longer track record than OWL which certainly makes it more appealing than OWL in some ways, OWL has a much stronger near to medium term forward outlook in terms of:
- Growth
- Defensive earnings profile
- Dividend Yield
- Total return profile.
As a result, we think OWL is a much more appealing opportunity at the moment and hold it alongside several other high yielding alternative asset managers in our portfolio .
For further details see:
Forget Blackstone Stock, Consider Buying Blue Owl Capital Stock Instead