2023-05-08 13:38:38 ET
Summary
- Blue Owl is rapidly building a reputation for excellence in alternative investment management.
- A rapid growth in money under management, good performance, and increasing dividends, bodes well for the future.
- A strong senior management team that is shareholder friendly should ensure a successful long-term investment outcome.
Introduction
Blue Owl Capital ( OWL ) is my primary candidate for superior market performance over the next several years. The company is headquartered in New York with offices in Chicago, Hong Kong, London, Silicon Valley and Singapore.
Investors can expect to double their money every 10 years by simply having their funds invested in the S&P 500 ( SPY ) which over long time periods has rewarded investors with 10 year average returns of, at least, 7%. So the one and only reason to invest in individual securities is to generate returns greater than the averages, i.e. Seeking Alpha, which brings with it the real risk of underperforming the averages, i.e. negative Alpha, over both the short and long term. Thus, in order to be successful in this individual securities selection strategy, investors must seek those investments which will outperform the Index by wide margins in order to compensate for those investments which will underperform the Index, sometimes by wide margins as well. Those losers which, unfortunately, most of us may have experienced multiple times in our investment experience, will assure that our investment performance will often lag that of the Index. The outperformance of an Index is no easy task. This is documented by the fact that the performance of a large percentage of professional investment managers simply do not beat the Index, after fees.
Blue Owl Capital is a potential candidate that could reward investors with returns that exceed the Index by a multiple of 2 or more for many years.
My Case For Optimism Going Forward
Blue Owl is an alternative asset manager that operates on several different platforms. The majority of the company's assets are permanent capital thus allowing the company to seek long term value creating opportunities. According to the company's website, its Dyal Capital Platform invests in a variety of alternative asset management firms whose portfolios are diversified as to geographies as well as asset classes. Dyal has been engaged in this equity and debt strategy since 2010, and is currently providing $49.2 billion to this strategy.
The Oak Street platform has been a leading participant in direct and indirect real estate investing since 2009, focusing on sale-leaseback transactions across multiple asset classes and geographies. There are currently $23.6 billion under management. On February 3, 2023, Blue Owl closed on the acquisition of STORE Capital , an internally managed net-lease real estate investment trust in all cash transaction valued at about $15 billion, including assumed debt.
Its Owl Rock platform is the largest with $71.6 billion in assets under management. Here the focus is on lending to middle-and upper-middle-market companies which are backed by leading private equity sponsors. Its primary focus here is on credit quality. This is supported by the fact that the company closes on only about 5% of the deals that it evaluates. It seeks to work with companies that are an important participant in their respective markets.
On April 11, 2023, the company announced the launch of its Strategic Equity Strategy. It has engaged Chris Crampton as a Managing Director. Mr. Crampton's previous experience included serving as the Head of Merchant Banking and Asset Management at Goldman Sachs ( GS ). According to the company's announcement, Mr. Crampton will spearhead single-asset GP-led secondary transactions or continuation fund investments.
In its most recent earnings report for the quarter ending March 31, 2023 , we see that Blue Owl's Q1 Non-Gaap EPS came to $0.15, matching expectations, with revenues at $390.99 million which was a 41.7% increase year over year. Fee related earnings of $226 million equated to $0.16 per adjusted share. Its current AUM of $144.4 billion is an increase of 42% since the March 31 quarter one year earlier. Its dividend was raised 7.7% to $0.14 per share. Thus, at its current price of about $10.00 per share, the investment yields a most generous 5.5%. The company plans that it will significantly increase its dividend annually and that it will reach $1.00 per share as we approach calendar year 2025. Investors can expect this company to become a dividend aristocrat in the not too distant future. I also submit that the company's share buyback program is another strategy that will enhance shareholders value as well.
Blue Owl's Fund Raise for the first quarter totaled $3.8 billion of which $1.9 billion was generated by its Direct Lending strategy, $1.5 billion by Real Estate, and $0.3 billion by GP Capital Solutions. The company stated that it continues to see significant demand for all of its strategies despite the current difficult economic environment which includes a still elevated rate of inflation as well as the Market's reaction to concerns over the failure of several high profile U.S. banks. With this country's largest banks as well as its community banks currently not aggressively pursuing the growth of their loan portfolios, Blue Owl believes that it will be the beneficiary by providing capital to companies that may otherwise not be able to access needed funds to operate their businesses.
One factor that I believe is extremely important and differentiates Blue Owl from many of its mostly larger competitors is the fact that much of its capital is based on permanent capital which means that it does not have to monetize its assets with turn capital and raise a new fund. Therefore, additional assets raised by Blue Owl become part of their capital base. Additionally, once the capital of a fund is deployed, the fees generated will act as an indicator as to the company's future earnings power.
Blue Owl's competitors represent a Who Is Who in alternative investment management. Among them are BlackRock ( BLK ), Blackstone ( BX ), Carlyle Group ( CG ), and Brookfield Asset Management ( BAM ), with Blackstone's AUM well above $700 billion. With Blue Owl's smaller AUM and continuing positive investment performance, its growth trajectory from current levels could well be significantly above that of it competitors.
While the current $10.00 per share level appears to be much too low given its investment performance to date, the current and anticipated level of growth for its AUM, as well as its generous dividend, we need to be cognizant of the fact that no investment is without risk.
I see the major risk to be a set-back in our economic recovery, the possible failure of the Federal Reserve to avert a deeper than forecasted recession, the failure of Washington politicians to agree on a debt ceiling as well as another round of failures within the American Banking System. Of course, one should never rule out the possibility, however slight, of a company's misstep as it pursues its growth trajectory.
Final Thoughts
As I review my argument that Blue Owl is my number one choice in the quest for outsized investment returns over the coming 1-5 year period, I realize that it is somewhat unusual for an investment opportunity to offer the possibility of both outsized future returns while rewarding its shareholders with a 5% dividend yield. Yet this is the opportunity that, I believe is available to those of us who are focused on intermediate to long term investment strategies instead of shorter term trading opportunities. Needless to say, the progress of the company will need to be monitored on a regular basis, searching for any deviations from what today appears to be a well laid out plan for continued future growth and profitability. I expect my strong buy recommendation to be in place for an extended period of time.
For further details see:
May The Search For Outsized Returns Continue - Blue Owl Capital Is My Candidate