Q4 2022 Blue Owl Capital Inc Earnings Call
Good morning, My name is Chris and I'll be your conference operator today.
At this time I'd like to welcome everyone to the Blue Our Q4 2022 conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there'll be a question and answer session.
If you'd like to ask a question. During this time simply press Star then the number one on your telephone keypad.
Please limit yourself to one initial question and you may re queue for a follow up.
And I head of Investor Relations you may begin.
Thanks, operator, and good morning to everyone. Joining me today are Doug October our Chief Executive Officer, Mark with shelf and Michael <unk>, Our co President and Alan Kirshenbaum, Our Chief Financial Officer.
I'd like to remind our listeners that remarks made during the call may contain forward looking statements, which are not a guarantee of future performance or results and involve a number of risks and uncertainties that are outside the company's control actual results may differ materially from those in forward looking statements as a result of a number of factors, including those described from time to time and without capital.
<unk> filings with the Securities and Exchange Commission.
The company assumes no obligation to update any forward looking statements.
We'd also like to remind everyone that we'll refer to non-GAAP measures on the call, which are reconciled to GAAP figures in our earnings presentation available on the Investor resources section of our website at <unk> Dot com.
Please note that nothing on this call constitutes an offer to sell or solicitation of an offer to purchase an interest in any new outlets.
This morning, we issued our financial results for the fourth quarter and full year 2022 for.
For the fourth quarter, we recorded a related earnings or FRE of <unk> 16 per share and distributable earnings or <unk> 15 per share, bringing full year FRE to 57 per share and full year D. E. P 53 cents per share.
We declared a dividend of <unk> 13 per share for the fourth quarter payable on March six to holders of record as of February 24, and also announced a fixed dividend of <unk> 56 for 2023 or <unk> 14 per quarter, starting with our first quarter 2023.
During the call today will be referring to the earnings presentation, which we posted to our website. This morning. So please have that on hand to follow along with.
With that I'd like to turn the call over to Doug.
Thank you Anne and good morning, everyone.
Today, we reported another strong quarter of growth for Blue IL capping off our first full year as a public company.
Since blue entrance to the public markets, we have grown our AUM by 122% and fee paying AUM by 107% anchored largely by permanent capital and over the past year, we have achieved over 40% growth on the key.
Tricks, we use to evaluate our business, including management fees FRE MGE and have maintained an industry leading margin of 60%.
This extraordinary growth has been driven by robust fundraising and capital deployment. Despite a very challenging period in the markets. Let me provide some color on our achievements that drove this growth.
We raised 25 billion of fee paying AUM in 2022, bringing us half way to our $50 billion fundraising goal for 2022 and 2023.
Notably in the third quarter of 2022 alone we raised more equity in that quarter, and we had the entire year of 2021, reflecting robust demand and the expanding power of our increasingly global and integrated fundraising platforms Cross.
Institutional and private wealth channels.
Our strategies appeal to investors looking for positive leverage to rising interest rates income generation with downside protection inflation hedging and access to the positive secular trends across the alternative asset manager space and we continue to see strong demand.
For these investment characteristics.
Not only have we had strong fundraising trends, but our redemptions from products that offer quarterly tenders have remained de minimis with just 186 million of tenders received on the 13 $4 billion of fee paying AUM managed by those funds or.
Less than one 5%.
By contrast inflows into those same products were close to $1 $6 billion during the quarter.
Private wealth remains a successful market for <unk> with healthy flows despite a more challenging market environment, a testament to the attractiveness of our products and the relationships we've built in the space.
Indirect lending we had gross originations of $22 billion for the year, just slightly off our pace from the prior year. Despite a 20% decline in U S leveraged loan volumes and a 42% decline in announced U S. M&A.
<unk>.
This speaks to the increasing breadth and scale of <unk> platform as well as the importance of direct lenders in today's marketplace.
Volatility and uncertainty have created an environment, where other market participants are unable or unwilling to lend capital. Despite the very attractive opportunities present today, and we are benefiting greatly from that dynamic in.
In GP capital solutions, we deployed about $4 billion of capital completing transactions with world class managers, such as dragging ear, kps, Veritas, and PKI and bringing us to 70% committed for fund five <unk>.
During the fourth quarter, we held the final close for fund five at nearly $13 billion over 40% higher than our $9 billion target during a period that many across the industry have described as a difficult fund raising environment.
And then real estate, we are now fund raising for our net lease strategy across multiple product offerings and we are off to a great start with.
We closed approximately $2 billion for our drawdown product during the fourth quarter and are confident in reaching our fundraising target during the first half of 2023.
In this current market environment, what we're seeing is that the safety inflation hedging in tax advantaged yield characteristics of this strategy has resonated with investors and the cost of capital relative to the public markets has resonated with companies.
We're very proud of the substantial asset growth <unk> has achieved over the short period of time, but our goal is not to be asset gatherers not all AUM is created equal and our focus is on raising very long dated assets with attractive fee and margin characteristics.
Where we can provide a differentiated experience for our investors.
That is how we look to drive meaningful earnings and dividend growth for our shareholders and we believe that should translate into substantial value over time.
And we look to do so in a way that is predictable and resilient to a wide range of market conditions, which is why our permanent capital base and FRE centric model are so important.
Since our Investor day in May sell side analysts expectations for 2022 earnings growth.
Ross our peer groups steadily declined as the street adjusted its view of carried interest and other difficult to predict earnings streams and contrast.
Expectations for blew out were unchanged speaking to our differentiated financial profile.
And we delivered on what we said we would do achieving our goal of reaching one $3 billion of revenue in 2022.
For the year Blue all generated FRE growth of 46% and GE growth of 42%, while maintaining an industry, leading 60% FRE margin.
This is especially notable given the market headwinds present throughout the year, which impacted the larger financial sector.
We have nearly doubled our dividend over the last six quarters and as Alan will highlight in greater detail. Later, we are now moving to a fixed dividend that we expect to grow meaningfully over time.
Our asset base is very resilient.
It's based on permanent capital compared to our peers, who must monetize assets return capital and raise a new fund and hopefully larger funds. We generally hold onto the assets. We have so each dollar of incremental assets raised is additive to our capital.
This is what we call the layer cake model on top of that we have over 10 billion of AUM that will start paying fees. Once the capital is deployed providing incremental visibility into our earnings growth ahead.
This is what we call the embedded earnings power of our business.
All of this should sound familiar to those of you who already know the blue Al story.
Although the public equity and credit markets have been volatile although interest rates have moved significantly this year and although inflation rose swiftly and has remained persistently high weighing on GDP in many corporate earnings.
Core goals that we outlined for you at Investor day back in May.
<unk> changed.
And for those that are just getting to know us we think the past seven quarters as a public company have proven out the predictability the stability the resiliency and the growth potential of our business.
Looking to 2023, we're excited about the runway. We see ahead in spite of the challenging market environment, we continue to progress towards the financial goals, we laid out for our shareholders at Investor Day, we are committed to providing strong performance attractive income solutions.
And downside protected returns for our fund investors, we continue to deepen the relationships, we have with our current institutional and wealth partners and build many new ones and.
And we continue to innovate to stay ahead of the competition and drive growth for our shareholders.
The market backdrop has changed significantly since we've been public and continues to shift.
But we think Blu ILS business was purpose built for this type of market.
And our value proposition increases during environments such as these.
Thats not to say that these are easy environments to navigate to fund rates through or to deploy capital into.
It is truly a testament to the incredible efforts of our employees. The invaluable expertise we have across the firm and the benefits we're seeing from bringing these businesses together.
Ultimately the way I think about our business is this.
We operate a capital light model focused on substantial capital return to shareholders supported by a very stable and growing asset and fee base.
Essentially an annuity with growth.
And in thinking about our earnings profile over the next few years. The question for US is not <unk>.
As it is for many companies, whether we're going to grow it's how fast we will grow.
That is the value of permanent capital and management fee driven earnings.
With that I'd like to turn the call over to Mark to give you an update on our direct lending and real estate businesses Mark.
Great. Thanks, so much Doug.
Throughout the fourth quarter <unk> continued to play an integral role as a liquidity provider to sponsors in a market where capital has been scarce, we continue to see attractive opportunities at wider spreads and lower loan to values that a year ago finances, large and high quality companies in 2022 gross originations and directly.
<unk> were $22 billion, just 7% below our 2021 originations despite a meaningful drop off in industry volume.
We looked at nearly 70 deals with facility sizes in excess of 1 billion well exceeding the over 40 investments of that size, we evaluated in 2021.
In the fourth quarter gross originations were $3 5 billion and net funded deployment was $2 5 billion.
Moderate slowdown from our year to date pace that reflected timing considerations in slower repayments, we remain constructive about the deployment environment and continue to see a robust pipeline for investment, though we don't anticipate origination volume to look like the second half of 2021 and the early months of 2022 until there is a broader recovery in M&A.
<unk>.
Credit quality always remains a key focus for us and we have been very stringent in our underwriting standards from day, one closing on approximately 5% of the deals we've evaluated since inception.
We have been focused on the larger end of the direct lending market financing companies that are key strategic players in their respective markets.
In addition, we largely stayed away from cyclical businesses is sectors that we view as carrying greater risk. We believe this selectivity has benefited the investors in our funds and our loan portfolio remains in very good shape. Since inception, we have originated over $73 billion of loans with annualized real.
<unk> losses of less than five basis points and inclusive of realized gains we've actually had annualized net realized gains of three basis points.
Our weighted average loan to value remains in the low <unk> across our direct lending portfolio.
And in the low thirties across our tech portfolio.
We've continued to see resiliency in the portfolio with ongoing positive revenue and EBITDA growth at the underlying companies. Despite the headwinds of the place.
Now turning to performance the direct lending portfolio achieved gross appreciation of three 6% for the fourth quarter and nine 4% for 2022 outperforming the leveraged loan index by approximately nine points and the high yield index by over 20 points for the year.
Now moving to real estate, we continue to see high levels of interest in our net lease strategy from investors and companies alike, with corporate borrowing costs elevated and financing markets choppy or the attractiveness of a net lease solution has resonated and our pipeline of opportunities remains robust with roughly $5 1 billion of transaction volume under letter of intent.
Our contract to close in the near term pipeline of about $24 5 billion of potential volume.
Inclusive of announced acquisition activity, we've invested or committed nearly all of the equity in our closed end fund.
Persistently high inflation remains a focus for many investors driving demand for our net lease strategy with desirable inflation hedging characteristics as the capex maintenance taxes and other expenses of owning real estate are born solely by the tenants.
Our latest open end product net lease trust has reached $1 billion of capital raised primarily through just one large wire house platform and we look forward to continuing to expand the syndicate over the coming quarters.
And we held the first close on our sixth drawdown fund for our net lease strategy at approximately $2 billion.
And expect to wrap up fund raising sometime in the first half of 2023.
We achieved gross appreciation across our real estate portfolio of 4% for the fourth quarter and 26% for 2022. We think these are noteworthy risk adjusted returns for the very strong underlying credit profile of these portfolios, particularly given the downside protection presented by the contractual income streams and the law.
Long duration leases.
In summary, we continue to see very strong demand from investors for our income generating downside protected strategies across our direct lending and real estate businesses, we continue to find attractive opportunities to put capital to work.
With that let me turn to Michael to discuss GP capital solutions.
Thank you Mark 2022 was a very successful year for our GP capital solutions business as we closed our fifth fund at a record $12 $9 billion over 40% above our initial target, making it the largest fund ever raised in this space.
During the year, we deployed about $4 billion of capital into attractive opportunities closing nine transactions and dial five across new and existing partner managers. This is consistent with our long term deployment objectives and makes 2022, one of our most active years ever.
We now have 17 partner managers and fund five constituting a diversified group of World class managers that we believe will grow substantially and benefit most from the growth in market share trends, let's say private markets today.
Given our scale, we remain focused on the largest firms within the alternatives universe.
And those are the managers that continue to raise the lion's share of institutional and retail capital and we see this dynamic accelerate during years, where the fund raising environment is more challenging.
Through the third quarter of 2022 funds greater than $1 billion received roughly three quarters of the total capital raised across the industry up from two thirds in prior years.
Total invested commitments for dial five including agreements in principle will bring fund five to $8 9 billion of capital committed or roughly 70% of the fund.
<unk> pipeline remains strong and we continue to evaluate numerous opportunities that are quite attractive.
Our business services platform, which provides strategic value added services to our partner managers across key areas such as corporate strategy talent management ESG Advisory and data science remained very active during the year.
The team at BSP supported our partner managers with growth initiatives across their businesses assisting with recruitment efforts advising on new product launches and M&A and working with them on digital transformation projects among others.
Performance across style funds remained strong with a net IRR of 24% for fund, 351% for fund four and 37% for fund five all of which compare favorably to the median returns for private equity funds at the same vintages.
Moving to our professional sports minority investment strategy, we have sold our minority stake in the Phoenix SUNS at an attractive multiple in addition to date, we have closed on over $500 million of commitment to the strategy.
We're very optimistic about what the next 12 months hold for the GP capital solutions business LP demand for GP Stakes remains high as demonstrated by our recent dial five fundraise and we look forward to expanding the breadth of our investor base, even further with the next fund.
From a deployment perspective, we continue to see robust interest from well known and scaled alternative asset managers.
We look forward to launching conversations with investors on fund six later this year and are actively working to expand our LP base further exploring additional strategic relationships and partnerships in wealth and educating our combined institutional investor base on the benefits of GP solutions at the strategy.
With that I will turn things over to Alan to discuss our financial results.
Thank you Michael Good morning, everyone I'm going to start off by walking through the numbers for the fourth quarter and full year 2022, and then I'll touch on a few other items I want to cover today I'll be making references to pages and our earnings presentation. So please feel free to have that available to follow along.
To start off we are very pleased with our fourth quarter and full year 2022 results.
As you can see on slide five we are right, where we said we would be and have achieved the goals we set out for ourselves in 2022 <unk>.
We achieved our goal of $1 $3 billion of revenue, we achieved our goal of a 60% FRE margin and retract nicely and very tough and volatile markets against our goal of raising $50 billion of fee paying AUM by the end of 2023 by completing the year 2022 with 25 billion raised.
Halfway towards our goal.
Some other key highlights include total revenues are up 47% year over year FRE is up 46% year over year and GE is up 42% year over year all of this with because we built our business differently than our peers, we built our business with a foundation of permanent capital and steady predictable.
<unk> management fee cash flows.
Okay, let's cover our quarterly and full year results, our fourth quarter was another quarter of strong growth for our business management fees are up $24 1 million or 7% from last quarter and up 61% year over year. When you adjust for one time catch up fees in GP capital solutions.
Broken down by strategy direct lending management fees are up $21 $2 million were 12% from last quarter and up 48% year over year.
GP capital solutions management fees are up $1 3 million or 1% from last quarter and up 53% year over year, excluding catch up fees.
And real estate management fees are up $1 6 million or 8% from last quarter comp.
Compensation expense came in in line with our expectations at 27% comp to revenue.
G&A expense came in also in line with our expectations at $46 million for the quarter.
For the full year of 2022 total G&A costs came in at about $170 million placement costs being approximately $70 million of that and regular way G&A expense, excluding placement costs being approximately $100 million.
As we think about 2023, we're expecting a roughly similar level of overall G&A expense may be slightly higher with placement costs likely down and regular way G&A higher driven by the overall growth of our business.
<unk> is up $12 1 million or 6% from last quarter and up 46% year over year. Our FRE margin came in right on top of the 60% level that we've all spoken about on previous calls.
And we announced a dividend of <unk> 13 per share for the fourth quarter up from <unk> 12 per share last quarter and <unk> 10 per share in the fourth quarter, a year ago, resulting in a 30% increase in our dividend year over year.
All of this is in line with our expectations and what we noted at Investor Day in May of 2022, and on our earnings call last quarter.
Now I'd like to spend a moment on our fundraising efforts. We were pleased with our results for the quarter in particular, considering the strong headwinds and challenging market for the last six months as a reminder, as you can see on slide 13 in the fourth quarter of 2021, we raised $3 9 billion.
And now in the fourth quarter of 2022, we raised $4 9 billion I'll break this down across our strategies and products and direct lending we raised $1 7 billion almost 1 billion raised in our tech lending strategy and over $700 million raised in our diversified lending strategy, including almost $600 million raised in our retail.
Distributed core income BDC or CIC.
GP capital solutions, we raised approximately $600 million.
As we completed the fund raised for fund five in terms of guidance for our run rate revenue number for 2023 for the GP capital solution strategy overall, I would think of that as around $550 million.
In real estate, we raised $2 7 billion.
One 9 billion and our new real estate fund six we generally expect to wrap up fundraising for this product in the first half of this year and we remain on track with our Investor day goals for fund raising here.
800 million for our net lease trust product and renew non traded REIT.
As it relates to our AUM metrics on slide 12, we reported AUM of $138 2 billion fee paying AUM of $88 8 billion and total permanent capital of $110 7 billion.
AUM not yet paying fees was $10 8 billion as of December 31.
AUM grew $6 1 billion to $138 2 billion, a 5% increase from last quarter and a 46% increase from the fourth quarter a year ago.
Paying AUM grew $4 7 billion to $88 8 billion, a 6% increase from last quarter and a 45% increase from the fourth quarter a year ago.
Metrics, driven primarily by capital raise and deployment in direct lending capital raised and GP Stakes fund five capital raised and real estate fund six and the REIT and when looking at the growth from a year ago. The addition of our CLO business.
Permanent capital grew $4 7 billion to $110 7 billion, a 4% increase from last quarter and a 40% increase from the fourth quarter a year ago. As a reminder, 94% of our management fees are from these permanent capital vehicles.
AUM not yet paying fees was $10 8 billion, including $7 4 billion in direct lending $1 billion and GP capital solutions and $2 4 billion in real estate. This corresponds to an expected increase in annual management fees totaling over $140 million once deployed.
As Mark highlighted earlier and our direct lending strategy, we had gross originations of $3 5 billion for the quarter and net funded deployment of $2 5 billion.
This brings our gross originations for the last 12 months to 22 billion with $14 4 billion of net funded deployment.
So as it relates to the $7 4 billion of AUM, not yet paying fees and direct lending it would take us about two quarters to fully deploy this based on our average net funded deployment pace over the last 12 months, although our current deployment pace is a little slower than that.
Turning to our balance sheet, we continue to be in a strong capital position as you can see on slide 21, we currently have about $1 billion of liquidity with an average 14 year maturity and low two 9% cost of borrowing.
Now, let's spend a few minutes talking about 2023, both our P&L and our move to a fixed dividend.
When we think about our P&L. We have previously stated our goal for 2023 was to generate $1 $8 billion of revenue double our 2021 revenues and would represent a 35% growth from 2022.
We have previously stated our goal is to reach 50 billion of fee paying AUM over the course of 2022 and 2023.
As I mentioned earlier, we are halfway there through the end of 2022 the market backdrop is incredibly challenging, though and what we're seeing is a little of a mixed shift in our fundraising with some pressure on retail channels, but we're seeing continued institutional interest will continue to update you. It's clearly a bit fluid, but we are tracking towards the $50 billion goal.
And most importantly, we have previously stated our goal for 2023 was to generate $1 billion of distributable earnings which would be an increase of approximately 35% from 2022.
And these remain our expectations. Despite the very challenging market environment, we are living through right now.
Now turning our focus to a fixed dividend for 2023, here's how we thought through it.
Just noted we expect to post $1 billion a day in 2023, we currently have approximately one 4 billion of outstanding shares.
That math kicks out roughly <unk> 70 per share and distributable earnings for 2023.
We feel it's prudent from a capital allocation policy perspective to fix our dividend at <unk> 56 for 2023 were <unk> 14 per quarter to allow flexibility for capital allocation uses such as our share buyback program funding GP commenced and potential strategic acquisitions and that comes out to an 80% dish.
The abuse and right in line with our policy of maximizing our distributable earnings payout ratio and a dividend yield over 4% based on our current share price.
Based on our <unk> 46 in dividends in 2022. This year is 56 represents a healthy increase in our dividend of 22% year over year.
Looking forward, we expect to significantly increase our dividend on an annual basis progressing towards our 2025 goal of $1 per share.
So to wrap up here before getting to Q&A. There are a few other items I want to cover.
A final update on buying back shares for 2022 over the course of the year, we bought back approximately seven 8 million shares for a total of approximately $81 million.
On a separate note I have commented throughout the year about the rising rate environment, we're in and the potential impact it could have on our business as expected and in line with our previous guidance. We saw another increase in our part one fees from the previous quarter and.
In the fourth quarter included in our management fee line, our part one fees from our Bdcs increased $15 4 million were 25% from the third quarter. A large portion of this was driven by higher interest rates and some of it was from AUM growth in our newer bdcs like our CIC and <unk> II.
We're expecting to see some additional increases in our part one fees in 2023, albeit at a much more modest level as interest rates begin to stabilize in 2023 from the large increases in 2022.
Now to shift gears to taxes, so what taxes look like in 2023 to give you. Some guidance here, it's best to remind everyone about our structure largely because the formation of Blue al was a taxable transaction to certain shareholders Blue I'll now have certain tax benefits that we will be able to use for a number of years.
It's hard to predict what those benefits are year to year, but for 2023, you should assume an overall tax rate in the mid single digits as were $24 25 for now we would suggest using a low teens tax rate.
Taxes are hard to predict but as we go through the year, we'll continue to update you on what future tax rates may look like.
And finally driving shareholder value earlier in 2022, and we made a change to our voting structure, which enabled us to be added to the Russell indices and today, we announced the fixed dividend for 2023, we believe that these initiatives will help drive shareholder value over time, and this will remain an area of focus for us.
So summing it all up we are very pleased with how the year wrapped up we delivered strong growth year over year in all of our key metrics.
AUM fee paying AUM permanent capital management fees, FRE and de <unk> with each of these metrics up over 40%.
As I think about all of the items I just ran through in my prepared remarks, I see them as a very strong message about our business model in these times of market dislocation volatility and overall strong headwinds we continue to demonstrate strong predictable high margin growth.
Thank you again to everyone, who has joined US on the call today with that operator can you. Please open the line for questions.
Thank you professor.
Wonder if you'd like to ask a question. Please press Star then one on your telephone keypad. Please limit yourself to one initial question and you may re queue for a follow up.
First question is from Alex <unk> with Goldman Sachs. Your line is open.
Hey, good morning, everybody. Thanks for the question Joe.
So maybe we can start off a little bit higher level given the first question just around the confidence on 2023 targets for you guys. So obviously you have the retail backdrop is a bit softer and capital markets trends are not as helpful. There might be question is just around ability to both kind of get to the retail numbers, but also to recoup some of the fee waiver.
<unk> and see some of the fee step ups that I think we are originally.
Incorporated in your in your kind of walk back from the Investor day, So maybe put some meat around the bones and kind of what gives you confidence that you can hit the targets that you guys have outlined.
And sort of help bridge the gap from where we are now to what the goals are.
Sure. Thanks, Alex it's Alan Thanks for the question.
So we we continue to look at our forecast we go through it every quarter, we refresh it every quarter I.
I did mention that.
Question or comment about softness on the retail side, we are seeing a little bit of a mix shift where retail we think in 2022, we saw our retail raise a little more than institutional and what we're thinking out of the 25 billion that was raised and what we're seeing sitting here today is the inverse of that which is.
We raised the other 25 billion in 2023 and institutional raise a little more than retail of that final 25. So we are seeing a mix shift in that I commented on that.
We don't know what the market is hot in terms of IPO markets or any of our products stepping up to full fees, but as you know when we turned on the lights on every year because of the permanent capital base that we have 94% of our management fees are from permanent capital, we have a very steady predictable cash flowing business and so.
We are expecting based on all the inputs that go into our forecast for us to hit the $1 billion out of revenue the $1 billion of GE and the $50 billion of fee paying AUM raise.
Hey, Alex just one.
One comment I just wanted to I think you know this but just to remind everybody look we raised 25 billion last year.
And what I would describe as a really challenging and choppy market.
We're not saying, it's going to be easy but.
As we go through and take a look at what we have in the market and do a demand assessment both.
Both retail and institutionally, we feel pretty good about hitting that number but I think you know this assets are clearly really important to us, but our ultimate focus is on earnings and Alan mentioned. This we we feel very good about hitting that $1 billion.
<unk> and 'twenty three.
Great. Thank you both.
Thank you.
The next question is from Glenn Schorr with Evercore ISI. Your line is open.
Hello there.
So Glenn.
Hello, So so look I wish you had even more dry powder.
Because because it sounds like the investing landscape, particularly on.
On the direct lending side, it's pretty good so I wonder if you could talk to I think the indigestion in the.
P land for Lps as is well known could you talk about the state of the lending backdrop I would think.
Given the availability of like <unk>.
Much better yields on Unlevered basis out there there'll be a lot of demand on the institutional side and direct lending, but can we talk a put that in a package for us.
And how it feeds into obviously your confidence in 'twenty three.
Absolutely Glenn.
So it's a great question first of all.
I share your wishes, we wish we had more dry powder also.
Indirect London, it really is an exceptional time.
2022, the intersection of.
Credit quality, most importantly in our world as well as spreads.
Terms sort of all the intersecting components is as good as we've ever seen.
And it reflects itself ultimately in the role direct lending played in 2022 and continues to play you take a look at the largest take private transactions.
All of the year about half of them were done by direct lenders and frankly all of those have we were a leader in almost every one of them and we really think the opportunity is tremendous and we think about.
Just looking over a year or year and a half between base rates and then some incremental spread one gets today on an incremental alone. When you go from a world of making an 8% unlevered to make 12% on leverage take senior secured risk where and in fact, many of US were software, which we particularly specialize in lead in.
Youre talking about loan to values in the low 30, so all the way of reinforcing what I think your observation about the market. It's a very attractive time for us to deploy capital and I would say institutions get that we are seeing a lot of interest from institutions.
Because they see the risk return.
To generate double digit net returns to take extremely high in the cap stack risk in an uncertain world is pretty appealing. So we are seeing a lot of interest on the institutional side and we continue to see a lot of interest on the retail side.
As Alan said a bit of a mix shift but in many regards yes, there's some turbulence in the retail market, but more than anything that mix shift probably reflects the strength of institutional drive towards the SaaS at class and you see people talking about exactly is that as an asset class now for many people it wasn't even an asset class before so.
We're very very positive on the outlook for institutional involvement in this asset.
Asset class this year and beyond for that matter.
Okay. Thanks, sorry to hear you're not a K defence.
[laughter].
Thanks Glenn.
Okay.
The next question is from Patrick Davitt with Autonomous Research Your line is open.
Good morning, Thank you.
I'm just trying to.
Think about what wealth flows could look like this year and I understand it can be a volatile group of investors did.
Could you maybe update us on how the gross sales and redemption requests look so far in <unk> and then secondly, how is the.
What is the visible pipeline for adding new platforms and what's your best guess for the cadence of those coming online for each of the three big retail products.
Sure. Thank you Patrick I'll cover the redemption side of than desktop I'll talk to pulling the lens back what are we seeing and how are we building our syndicates.
So on the redemption side, we are seeing.
Much lighter redemptions than others in this space.
We have the similar 5% per quarter levels in.
In our docks and we're seeing about half of that come through by way of redemptions and that's actually been pretty consistent the last three years or so.
Rob.
And more importantly on the net flow side, we are still seeing very positive strong net flows so.
The net flows coming in to gross flows are significantly above their redemption levels in each of our products.
Sure. Thanks, Patrick So look we we really werent that surprise to see wealth flows slowed down during 'twenty two the markets were incredibly volatile.
And when we got into this seven eight years ago, we never thought it was going to be a straight line up to the right and I can tell you as an institution. We're still really excited about the opportunity. We still believe that over time I can't tell you the exact amount of time, but over time.
Williams of dollars are going to go from the wealth channel into the alternative space and I think we are uniquely positioned to capture more than our fair share of that money flowing in I think.
Alan commented on.
During his comments across our platform in the fourth quarter, we had 2.2 billion of inflows from the wealth channel and we only add $186 million of redemptions.
Let me say that one more time $2 2 billion of inflows hundred $86 million of redemptions, we think that's pretty good and as you think about the market's going forward. If they were to remain choppy or volatile, it's probably a good starting point for us no guarantees but.
I think what we've done is a couple of things one with the market pulling back it's given everybody a chance to catch their breath.
And so we have been out we've met with all the wire houses ria's other distributors spending a lot of time on education, and I think thats helped minimize redemptions, but we've also gotten a sense of.
What are the products they think they want to bring later this year early next year.
And I can tell you that two things I feel pretty good about one over the next 12 maximum 18 months, you will see us introduce into the wealth space.
A number of differentiated products and to and I can't give you exact numbers and timing.
We'll see us significantly increase the syndicate for our products that are currently in the market.
So net net we are still unbelievably bullish.
And we're pleased with how we're performing in this difficult market.
Okay.
Thank you.
The next question is from Brian Mckenna with JMP Securities. Your line is open.
Great. Thanks, So I appreciate the color on the dividend and payout ratio. So if I assume an 80% payout ratio on your 2025 dividend of $1 that implies $1 25 of EPS or about 35% EPS growth annually in 2024 and 2025. So could you maybe just talk about some of the underlying driver.
For us that will ultimately get to do these figures.
Sure Brian . Thank you I appreciate the question.
Look we've spent a lot of time going through as I mentioned earlier the forecast in particular for 2023, while we certainly refreshed on 2025 I wouldn't lock in an 80% distribution rate.
I expect that we will move around over time up and down from the 85% level that we were at in 2022.
This year, we're going to do a little lower 80% you could certainly see us going higher from 85 to 90 plus percent in future years, It really depends on capital allocation, how much we want to hold back depending on things, we're talking about at the management table.
So that's one and.
Look we have a lot of exciting products that Doug and Mark and Michael I've talked about on this call and on previous calls.
Something like GP Stakes fund six we're doing a lot in the real estate business right now both for real estate fund six and the new REIT that we just launched.
Later last year and then in the direct lending business, we have a number of new product rollouts as well. So we would continue to expect to grow our business year over year at pretty substantial growth rates.
And be able to put up that dollar share dividend that we've all talked about in 2025.
Helpful. Thanks, Alan.
Of course, thank you Brian .
Yes.
The next question is from Adam Beatty with UBS. Your line is open.
Alright, Thank you and good morning, just wanted to ask about some of the underlying performance in the direct lending book a lot of the questions and concerns we have from investors is around sort of credit quality and recognize that you guys have had really de minimis loss rates over the years offset by gains et cetera.
In terms of the underlying portfolio, whether it's maybe non accrual rates or or EBITDA growth of the portfolio of companies or anything else you could give just to give some color and support around the performance of the portfolio. Thanks.
More than happy to credit quality has always been.
We will be the central focus for the <unk> credit strategy is thats really what we live and breathe.
That matters, a tremendous amount to us we focus on intensely and.
Thanks, Louie vanilla deliver world class results I do want to say before I jump into the answers to your question for our Blue our shareholder.
And actually matter remember you get paid fees, we have a feed only business and fee only business from permanent capital now again matters a lot to us because this is what we live and breathe in how we deliver for our Lps.
Remind us depending on exactly where you sit.
In this case is a blow all shareholder it doesn't actually impact you with that said our credit quality remains very strong.
We continue to see very strong portfolio performance.
As to say, if we look at revenue and EBITDA growth year over year. It continues to be very strong across the portfolio on average.
We have not seen any material increase in.
Amendment requests we have not seen a material increase in requests.
We continue to monitor the portfolio, but it continues to perform on average very well look it's of course, it's an uncertain environment. So I don't say that.
We're not sitting here spending everyday thinking about what happens if what happens if because thats, indeed, where we spend our time and where we should spend our time, but we are not seeing it in the underlying performance of the companies or the portfolio. Today I think we only have three companies total on non accrual across our very large platform. So I think we all can.
To feel very good about the underwriting that got us here in the first place and the performance of the portfolio from there and just to pull back up and cap it off on the numbers.
Look if you look sitting here today, we've originated about $73 billion in loans.
Since since inception, and we continue as we sit here to run at an average annualized loss rate of less than five basis points and in fact, when you take into account gains in those portfolios as well, we actually have a net realized gain of three basis points.
So.
Really continues to be our strength and we will continue to be vigilant and we will continue to plan for darker days, but were in a good place as we head into that.
Excellent. Thank you mark for the detail and the context I appreciate it.
Thank you Adam.
The next question is from Ken Worthington with Jpmorgan. Your line is open.
Hi, good morning.
One of the stats you gave is that you're close on our you've closed on 5% of deals that you've looked at since inception.
I guess, how did that statistic look and say the second half of 2022, and how does it vary between more general lending versus type lending.
And then along the same lines what are you seeing from the banks in terms of re engagement and direct lending as we start the year and is the 5% close what you would expect to see for 2023.
It's generally been steady I mean look there certainly variances quarter to quarter year to year, but.
No no pattern narrow of note that we've observed.
<unk>.
I would say.
We obviously pay a lot of attention to I would say this listen.
We'd be perfectly happy if the mix of deals was so great that the number was higher like we're always going to do it.
Maybe days it'll be lower maybe days will be higher the key is to see a tremendous amount of investment opportunity and be extremely selective and so wherever that lands to mathematically as more course output than an input and we continue to really like what we're seeing there is no doubt that M&A volume of course Celeste said this earlier.
To my earlier comments, Bob obviously, M&A volume is down <unk> activity is down and we're not going to defy the odds and obviously our originations. Therefore in Q4 in originations as we enter this new year are lower than they were if you look at comparable times a year ago. So we don't live in a vacuum, but the quality of what.
We're seeing and the sort of productivity, we can still apply by having <unk>.
100 people that spent everyday out originating in looking at and underwriting and having built these relationships. We have credits that we've known or in our system, they're likely to stay in our system, even when those companies get sold Theres just a lot of forces at work that benefit us as an incumbent and have someone that's proven to be a really reliable partner to.
So many great firms in great companies.
That's all kind of the context, I would say to selectivity.
The second part of the question.
On the balances.
Yeah. So.
It's a big World out there right. It's a multi trillion dollar credit market and I know a lot of a lot of stories about the banks versus the private lenders.
It's a world that needs bolt now today, the private lenders and frankly during COVID-19 proved to be the stabilizing force for the market and this is an interesting change. If you think about the arc of 20 years, which is today the private lenders ourselves and couple of others have real scale are the ones that are consistently available to commercial users and.
Public markets come and go.
We actually stabilize the capital markets and the economy in a way that frankly, the public markets used to the banks play a role in syndication today. They obviously are sitting on many tens of billions of dollars of paper because I need to work through so we do not see a meaningfully active syndicated market.
It was really nearly nonexistent so to speak of in the fourth quarter.
So this has been a time, where we've certainly taken up a lot of that slack and therefore share, but there'll be plenty of room for both.
In the world over time.
Okay, great. Thank you.
Thanks, Ken.
The next question is from Ryan <unk> with Deutsche Bank. Your line is open.
Great. Thanks, good morning folks.
If we can zoom back on retail can you maybe characterize.
Are you sensing that risk appetite, obviously, the tougher environment, but we do have a couple of quarters of positive market. Do you think that is improving the risk appetite near term or people, who are remaining cautious and then.
Kind of contrasting that with the conversation that youre, having with the gatekeepers of the platform are they also cautious or more likely to embrace some of your differentiated product, including real estate and then I don't know if you could comment on you mentioned some new products that you might be rolling out over the next 12 to 18 months.
I don't know if you're able to comment on.
In any of those but.
But any color would be great.
Alright, Thats a lot for me to try to hit so in terms of.
New products. Unfortunately.
We'll announce them as we roll them out.
In terms of risk appetite of the firms.
Hi.
They really want new interesting differentiated type of strategies and the reason the firms the gatekeepers of on it because that's what the end customers want.
They want things that will allow them to allow the wire houses in particular to differentiate themselves with their client basis, but they have been very receptive.
We haven't rolled any of these out but I think.
Hopefully in the next quarter or two we'll announce at least one maybe two that we'll be working on in terms of the risk appetite of the retail investor.
It's too early to say with the market up year to date.
Our our flows are still decent, but we haven't seen a big uptick or downtick, but my guess would be if the market stays robust we will see risk appetite increase and you should expect flows to increase with the market going up but really hard to predict the mindset.
But I just want to go back to what I said earlier.
We're unbelievably bullish about the opportunity.
I know there is this focus on quarter over quarter, but were thinking year over year.
I will tell you as we go out and we talk to those gatekeepers in particular in some of the largest advisors. They are all very focused on all so I think we're in the right place we are well situated and as I said earlier.
I would anticipate we continue to get more than our fair share in this space and you know one of the thing I could add it.
From a monolith this idea of retail products or individual access points. There's a lot of difference in these products, even if by headline they have the same names are products, which have been.
The Blue our brand the Blue our place within the system is all built around products that are about stability predictability and very strong yields remember in our credit products, we've talked about the strength of the credit performance before we've also been raising the distribution rates, how many products how many asset classes in 2022 people.
Collyn investors, saying I want to let you know the returns are going to be better than you thought.
It's not a common thread and even when you talk about real estate definitely not a model. That's remember our real estate strategy is very very different from what else is in the market Triple net lease long dated commitments from extremely high credit quality Counterparties, where you take all of your expenses and costs and pass them through to.
The tenant.
And youre not talking about trying to buy a building and re lease it or hope it stays leased and deal with operating expenses of vacancies and therefore and hope for a better cap rate. None of that is part of our model. Our model is 15 20 year leases on critical assets to critical clients.
And our product for example, pays a 7% yield with tax advantaged attributes for many investors. So it's just totally different even though the lives under the word real estate. So even within these categories. There are real differences that I think play to our strengths and we will continue to develop new products as Doug said that hopefully continue that that.
Streak of delivering something different to our to our partner managers.
Okay.
Great color. Thank you.
Okay.
The next question is from Mike Brown with <unk>. Your line is open.
Great Hi, good morning, everyone.
So I wanted to ask on the.
I just wanted to ask on the FRE margins you achieved a 60% margin target for 2022, and Alan you gave the G&A guidance for 'twenty three so it sounds like the margin can continue to see expansion into 2023, but I just wanted to check are there any puts and takes we need to consider here and then.
Is there is there a target that you have for 2023.
Sure. Thanks, Mike appreciate the question.
In 2022, what we saw was our 60% FRE margin that margin is going to move around a little bit based on in particular placement costs.
Distribution costs and so.
I talked I talked about the mix shift Doug touched on the mix shift as well in 2023.
I am reaffirming the 60% FRE margin.
What I think folks should should look for and frankly expect of us in 2023 that can move up or down a little bit based on where we ultimately end up for placement costs. If we continue to see the mix shift we see a little more institutional than retail institutional it takes a little longer to close it's a little lower fee basis.
But also has less placement costs. So if we continue to see that we could see a little bit higher on the FRE margin.
And on the flip side, if retail really comes through maybe starting in <unk>, but in the back half of the year in particular, we could see a little more and placement costs, a little lower in FRE margin, but that also sets us up to certainly meet if not exceed the $50 billion of fee paying AUM raised so theres, a little bit of a push and pull when do you think.
[noise] about FRE margin and think about the mix of our fund raise and how much is from the wealth of retail channels and how much is from the institutional channel.
Great. Thank you for the explanation. Thank you for taking my question.
Thank you Mike.
The next question is from Chris Kotowski with Oppenheimer. Your line is open.
Yes, good morning, and thanks for taking my question.
A question for Michael and I guess, I, just would love some a bit more color on the dynamics of the handoff of one fund from another I mean those of US who are you still looking at the fund tables from our normal private equity fund.
We want to get to like 60% invested and then they will start raising the next one and then when its ADR at 90% that that flips over.
When I look at the fund tables in your most recent 10-Q.
Funds four and five.
Excuse me three and four were only about 60% invested.
And presumably the rest of that money is spoken for.
But not drawn in and fund five is only about 11% invested but you're already talking about.
So how should we exactly you expect that.
Yeah.
How does the drawdowns in the dynamics of the handover handoff from one fund to the next work.
Yes, thanks for the question Chris.
What you really should focus on is the date that we quote turn on the fund and Thats when that's when economics start to be paid to the management company.
And we will then be out in the market raising.
Capital for that that given fund.
And that that can span.
A reasonable amount of time.
Upwards of a year or even two but the fees are all then payable once the commitments come in so I wouldn't focus as much on the on.
The amount of capital Thats gone into each fund we commit to deals.
About 100% of each fund so it's not like that money isn't earmarked for investments it might not all go in the ground on a rapid fashion there might be delayed payments that are paid over time, so that metric doesn't really impact the blue <unk> P&L.
We all focus on at the management company level is how much we've raised in total commitments per fund then we've got about $4 billion left in fund five.
That's about a good annual pace for our deployment and our pipeline looks really good. So it's going to mean that we're going to start talking to investors towards the middle to end of 'twenty three about fund six and the key question is when will we flip the switch and turn on fees.
<unk> six <unk> likely to be at some point in 'twenty four depending on on pacing of deployment for the rest of this year.
Okay, but and by the time it flips over and it turns over I mean, let's assume you were targeting 10 or 20% more for fund six and poor fund five but presumably the first close would be some some fraction of that right.
Correct Thats correct, we wouldn't it's unlikely that we will have a one and done close for a big fund like that is how we we typically do it.
Okay.
Yeah.
[laughter].
Thank you.
The next question is from Patrick Davitt with Autonomous Research Your line is open.
Follow up on the guidance for this year I guess firstly.
You mentioned the lighter deployment rate. This year, what are you kind of assuming a year over year in terms of deployment in that guide.
And are you anticipating any.
Inorganic growth in that guide thank you.
Sure. Thanks, Patrick.
Inorganic I'll leave that.
One of my partners to talk about.
<unk>.
In terms of the fund raise I think what we're seeing is a little or what we're expecting I should say Patrick is a little lighter on the retail side and a little heavier on the institutional side that balances out to raise the other half of the $25 billion in 2023.
Alright.
And that deployment.
That's obviously, a part of the equation as well.
Credit Suisse.
Yes.
With regard to deployment and.
Credit in particular, it's slower right now as I said, we saw that in the fourth quarter, we see it now.
We're not suggesting we have a crystal ball.
But again remember with our permanent capital pools and variances the deals we see the investments we see we really like so.
Our shortage if anything today is really capital certainly not opportunity.
Put another way it is.
Georgia capital against those opportunities. So the exact state of the M&A market in second half don't really know in terms of impact on P&L, frankly that that really only shows up in the sort of fees in the arrangement fees. So.
Again, we don't predict that quarter to quarter.
We're assuming a more tepid pace this year than we've seen in prior more robust years.
What are we are built on.
Okay.
With regard to inorganic if you want a quick comment on that.
Look we continue to be interested but extremely selective in the idea of adding adjacent capabilities when we add capabilities.
Things that are very much front of mind for US, which is is it really a complementary product that suits, our DNA and allows us to sort of deliver on the strengths of blew out and across the platform.
Is it a place where we can really deliver a market leading.
Our role and performance clearly in the spaces, we're in and GP solutions in Triple net lease we're the clear market leader in direct lending one of a couple and.
And that's important to us that we'd be in products, where we can really lean we are not all things all people, we want to be a handful of really good things to work inside of investors and then culture fit critically important to take all of that together Oak Street, certainly a study and the kind of opportunity that we look forward, we get a lot of inbounds as you would expect.
We will continue to look but that one we can never predict when that will happen or won't happen, but we certainly continue to be active in the inorganic side as well.
That will conclude our question and answer session I'll turn it over to Doug Shaw for any closing remarks.
Well thanks, everybody.
Appreciate all the questions, where we are clearly proud of our results for 'twenty. Two you have heard us in the past talk describe our business using the words I think mark touched on this stability profitability and growth.
And just to highlight the growth again revenue FRE de <unk>.
All up well over 40% year over year, and I think you got a sense on this call were equally as excited about 2023, and we are reaffirming that $1 billion a day. So I appreciate all the support and look.
Forward to talking to everyone. Soon thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Please wait the conference will begin shortly.
Okay.
Sure.
Okay.
Yes.
Yes.
Okay.