Q2 2023 Blue Owl Capital Inc Earnings Call
Good morning, and welcome to the Blue capital second quarter 2023 earnings call. During the presentation. Your lines will remain on listen only.
After the Speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time. Please press star followed by the number one on your telephone keypad to withdraw your question again press Star one.
I'd like to advise all parties that this conference call is being recorded I will now turn the call over to Ann Dai <unk> head of Investor Relations for Blue our.
Thanks, operator, and good morning, everyone. Joining me today are Doug asked Robert and Marc Lipschultz Co Chief Executive Officer, Michael <unk>, Co President and Alan Kirshenbaum, 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 the forward looking statements as a result of a number of factors, including those described from time to time and dwell capital 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 a solicitation of an offer to purchase an interest in any fund.
This morning, we issued our financial results for the second quarter of 2023 reporting fee related earnings or FRE of <unk> 17 per share and distributable earnings or D. A <unk> 16 per share.
We have declared a dividend of <unk> 14 per share for the second quarter payable on August 31 to holders of record as of August 21.
During the call today, we will be referring to the earnings presentation, which we posted to our website. This morning. So please have that on hand to go along with that I'd like to turn the call over to Doug.
Thank you Ann and good morning, everyone. Today, we reported another strong quarter of results for Blue Al again, demonstrating the steady and resilient growth.
We believe sets us apart in the alternative asset management space.
When we became a public company.
Thesis that we've laid out for our investors with a simple one.
We would generate substantial growth through a variety of market environments anchored by our base of permanent capital.
And we would provide an earnings stream that look much less volatile than peers with earnings supported almost entirely by management fee streams.
Over the past two years markets have shifted rapidly from a zero interest rate environment and robust capital markets to over 500 basis point fed funds rates and meaningful declines in M&A and public issuance.
The world changed overnight multiple times and many companies face sizable challenges as a result, including supply chain difficulties inflationary pressure and capital funding issues.
Over this period Blue al was able to step up and increasingly demonstrate the value of our capital solutions to a broad swath of partners, we provided necessary capital to businesses across nearly every industry and our credit business.
And have seen minimal credit losses, as a result of our disciplined underwriting our GP strategic capital platform supported the continued growth of the private markets ecosystem and in real estate, we offered crucial and scaled alternative solutions to large companies.
<unk> is seeking liquidity and capital flexibility.
It has always been our perspective that robust private market support the health of both public markets and the broader economy.
And we feel these past two years have been a validation of that view.
Also over this period.
Blue all strategies provided much needed recurring income downside protection and inflation hedging to investors, our credit and real estate returns have been in the double digits on a last 12 month basis contrasted against very volatile public markets.
We believe the trust that we've built with investors is reflected in the $32 billion of fee paying AUM. We've raised so far in 2022, and 2023, which compares to our fee paying AUM of 61 billion at the end of 2020.
One are over 50% growth.
This is substantial growth in any market environment much less the one we faced over the past year and a half and we continue to see strong demand for our strategies.
In addition, the diversification of our business between institutional and wealth channels continues to serve us well with roughly half of our fund raising over this period coming from each of these areas on the institutional side last year, we completed or made significant.
Progress towards raises for some of our larger funds such as our GP Stakes five and our second vintage of tech lending BDC.
As a result, we expect that our institutional fund raising for 2023 will be more diversified between separate account mandates new product launches and next vintages of smaller funds.
And well.
We have returned to seeing steady increases in monthly flows for our wire house distributed products and we've continued to see very modest redemption request from the small percentage of our products, which offer a quarterly redemption feature with just over $160 million.
Requested in the second quarter or half a percent of AUM in those products. This compares to over one $3 billion raised in those same products another very solid quarter of net inflows.
If you take a step back to look at our flows across blew out from the first quarter of 'twenty two to the first quarter of 'twenty three.
We saw nearly six and a half times more inflows than we did outflows in other words for every dollar that left our system as a result of distributions or redemptions, we raised almost six and a half dollars by comparison.
Appears on average rates just $2 for every dollar that left their platforms.
During robust fundraising periods. This dynamic may not be as noticeable but in a more challenging environment such as the one we've been experiencing you can clearly see that the assets. We raised which are higher fee are also relatively stickier and that is the advance.
<unk> permanent capital.
So in summary, we continue to feel very well positioned for many different market and economic environments as investors seek trusted scaled managers to provide safe yield and differentiated returns.
We continue to see lp's growing their alternatives allocations and consolidating their asset manager relationships and we are confident blew out will be one of the beneficiaries of this long term secular trend.
All of this is captured in the steady yet extraordinary growth that we've achieved over the past two years.
Increasing AUM by 140% and distributable earnings by 110%.
Recently, we completed a full rebrand towards a unified blue I'll name going forward the legacy brands.
Al Rock dial capital and Oak Street will be known as Blue else credit GP strategic capital and real estate platforms. This evolution marks another milestone in blue ILS journey driving towards our long standing vision of synthesize.
So multiple complementary businesses into a market leading provider of capital solutions and we plan to continue adding to our capabilities further broadening the ways in which blew out can be valuable to our partners and the products that we offer to our investors.
With that I'd like to turn the call over to Mark to give you an update on our credit and real estate businesses Mark.
Great. Thank you Doug the second quarter was characterized by many of the same themes. We saw earlier in the year with uncertainty around the trajectory of interest rates and pace of economic growth constraining overall market activity.
Our credit business, we continued to deploy capital into high conviction attractive opportunities, providing the central capital for our portfolio companies.
Over the last 12 months, we originated nearly $15 billion of loans, providing crucial financing into the M&A market.
During the second quarter gross originations were $3 4 billion.
With $1 $4 billion of repayments, allowing us to redeploy capital into attractive high yielding opportunities.
Gross deployment has slowed a bit in keeping with lower market activity with U S. M&A down nearly 40% on a year on year basis. However, as we've highlighted in prior quarters direct lending has continued to occupy a larger share of the market.
We believe much of the market share of the direct lending has taken over the years reflects a permanent shift in borrower behavior driven by the value of our London proposition, namely the benefits of privacy predictability and partnership.
Credit quality remains very strong.
Despite a more challenging macro backdrop, we continue to see good revenue and EBITDA growth on average at the portfolio companies, we have not seen any meaningful change in our internal watch list nor have we seen any material step up and amendment request or non accruals weighted average loan to values remain in the low <unk> across our entire direct lending portfolio.
And the low thirties across our tech dedicated portfolio.
Across the $78 billion of loans, we've originated since inception.
<unk> realized losses have been approximately six basis points and those have been fully offset by realized gains over that same period.
With regards to performance the direct lending portfolio achieved gross returns of four 3% for the second quarter.
18, 9% for the last 12 months.
Moving on to real estate, we continue to see high levels of interest in our net lease strategy with corporate borrowing costs elevated and financing markets more challenge.
Our pipeline of opportunities remains robust with roughly $3 $8 billion of transaction volume under letter of intent or contract close and our near term pipeline of about $30 billion of potential volume.
Inclusive of announced acquisition activity, we've invested or committed all of the equity in our fifth closed end fund and have started deploying capital out of our six vintage, which we have already raised $3 $7 billion of capital.
We expect we will reach our hard cap of $5 billion in the second half of this year, which would make this fund twice the size of the prior well.
And during the second quarter, we added a large wire house distribution partner for our perpetually offered real estate product and anticipate adding to this syndicate meaningfully through the rest of this year and into 2024.
With regards to performance, we achieved gross returns across our real estate portfolio of two 3% for the second quarter and 14, 2% for the last 12 months.
Spite the substantial increase in interest rates, we continue to buy assets with a significant margin of safety to where they trade on a marketed basis and monetize a meaningful spreads to our entry points. Notable during a period when many in the industry are facing challenges in this regard.
<unk> during the second quarter, we sold or signed letters of intent on over $150 million of assets at an average cap rate of five 6% achieving net IRR of 30% and net <unk> of one seven times.
A step back while we've been able to achieve so far with our real estate business is indicative of our playbook for future strategic M&A and how we look to create value for our shareholders. When we acquired this business did add about $8 billion of fee paying AUM and a year and a half later, we've achieved 60% growth and as I mentioned earlier.
Expect to raise a next vintage fund double the size of the prior call.
In addition, we have launched a well distributed product in scale raising $1 7 billion.
Under a year, despite asset class headwinds and outflow dynamics for our peer products.
Over time, we expect this will be a tremendous growth vertical for blue Nile.
I think this has a lot to do with our decision to approach real estate.
Currently from our peers. This is the same mindset with which we approach future M&A for Blue Nile to find parts of the market that are less crowded where we can create unique value for our investors and accelerated growth in scale by bringing businesses into our ecosystem.
With that let me turn it to Michael to discuss GPU strategic capital.
Thank you Mark our GP strategic capital business continues to serve as an important resource for the private market's ecosystem, providing growth capital to some of the largest and most diversified alternative asset managers.
Recently, we announced a minority investment in stone peak, a leading alternative investment firm specializing in infrastructure and real assets with over 55 billion in AUM.
With a robust and expanding pipeline total invested commitments for our fifth GP Stakes plan, including agreements in principle have reached approximately $11 billion of capital or roughly 85% of the fund and we currently have a line of sight into approximately $2 billion of new opportunities, which if all sign would bring us through.
The remaining capital available in fund five.
Our focus on larger firms within the alternatives universe has positioned our platform well within the current fund raising environment.
Note one of our managers CVC recently closed its latest flagship fund with 26 billion euros of commitments, surpassing its fundraising target and as private equity is largest ever buyout fund.
Performance across our GP Stakes bonds remained strong with a net IRR of 24% for fund III, 49% for fund four and 28% for fund five all of which compare favorably to the median returns for private equity funds of the same vintages.
Looking ahead, we are looking forward to launching conversations on our six vintage funds and our GP stake strategy and continue to anticipate a first close in early 2024.
Finally, I would like to address the rumors and speculation that have been in the press I am 100% committed to blew out long term success and will continue leading the GP strategic capital business.
As a show of alignment for the long term I have elected to receive 100% of my compensation for 2023, 2024, and 2025 and blew our equity I look forward to continuing to drive value for our shareholders with that I will turn things over to Alan to discuss our financial results.
Thank you good morning, everyone I'm going to start off by walking through the numbers for this quarter and the last 12 months and then I'll touch on a few other items I want to cover today I'll be making references to pages in our earnings presentation. So please feel free to have that available to follow along.
To start off we are very pleased with our second quarter and LTM results another quarter of strong industry leading growth.
Some key highlights of our results through June 30th include total revenues up 37% FRE up 34%.
<unk> up 32% and our dividend is up 33% all on an LTM versus a year ago basis.
All of this was because we built our business differently than our peers, we built our business with a foundation of permanent capital and steady predictable management fee cash flows.
So to step through our results through June 30, and more detail management fees are up $459 million or <unk>, 46% for the LTM period versus a year ago.
Oaken down by strategy credit management fees are up $272 million or <unk>, 53%.
<unk> strategic capital management fees are up $123 million or 28%.
In real estate management fees are up $64 million or 175% keeping in mind, we acquired our real estate business at the end of 2021. So we don't have a full year and our prior year LTM results.
This is obviously very considerable growth that we've been able to accomplish.
Compensation expense came in at just under 28% comp to revenue for the LTM period.
Overall, we are trending in line with our guidance of our comp expense ratio sitting in the 25% to 30% comp to revenue range likely towards the higher end of that range due to further growth and investment in our business.
G&A expense came in at $192 million for the LTM period, and $39 million for the quarter. Overall, we are trending in line with our guidance of G&A expense trending up a little in 2023 from last year with placement costs down and regular way G&A higher driven by the <unk>.
<unk> growth of our business.
FRE is up $227 million or 34% for the LTM period versus a year ago.
So with our comp percentage up a little and our overall G&A percentage down a little we continue to be right on track with our 60% FRE margin target for 2023.
And we announced a dividend of <unk> 14 per share for the second quarter for the LTM period, we have paid 53 in dividends versus 44, a year ago.
That results in a 33% increase in our dividend.
Now I'd like to spend a moment on our fundraising efforts in which the environment continues to prove challenging but were seeing some positive indicators I'll talk about in a moment.
As you can see on slide 12, we raised $2 9 billion in the second quarter.
And over the last 12 months, we raised 24 billion, 19% above the prior year period.
I'll break down our second quarter numbers across our strategies and products.
In credit we raised over $1 5 billion $1 3 billion raised in our diversified and first lien lending strategies, including almost $800 million raised and our wealth distributed core income BDC OCI.
And over $200 million raised and our tech lending strategies, almost all raised in our wealth distributed tech lending BDC OTI state and.
And GP strategic capital, we raised approximately $200 million.
And in real estate, we raised approximately $1 1 billion.
Approximately $700 million in our real estate fund six and approximately $300 million in our net lease trust product or rent our non traded REIT.
Although we had a lower level of institutional closes in the second quarter, we continue to see strong institutional interest in our products and in the wealth channel. We have continued to see good interest in our strategies with steady increases in our fund raising levels quarter over quarter, and we believe that will continue to build on itself through.
The end of the year not.
Not only are the gross fund raising levels improving while we continue to be very encouraged by the net fund raising levels. We are seeing from our products that have quarterly redemption features as Doug pointed out we are still seeing strong net positive inflows with these products with gross inflows for the second quarter running at about eight times the level of outflow.
For the small set of products, we offer our quarterly redemption feature.
All in all we've raised approximately 32 billion our fee paying AUM since January one 2022.
And our overall fee rate is significantly higher than our peers at over 150 basis points versus our peer average of below 100 basis points as we discussed on last quarter's call overall as we progress through 2023, we continue to expect fundraising to tilt institutional although as I've said previously.
Timing is always challenging to predict.
As it relates to our AUM metrics on slide 11.
AUM grew $35 billion to $149 6 billion or 26% increase from the second quarter a year ago.
Fee paying AUM grew $16 1 billion to $93 6 billion or 21% increase from the second quarter a year ago.
Both metrics are driven primarily by capital raised and deployed in credit capital raised in GP Stakes fund five and capital raised and real estate fund six Oh, NLP and <unk>.
Permanent capital grew $23 1 billion to $118 6 billion, a 24% increase from the second quarter a year ago as.
As a reminder, 93% of our management fees are from these permanent capital vehicles.
AUM not yet paying fees was 12 billion, including $8 1 billion in credit $1 1 billion in GP strategic capital and $2 8 billion in real estate.
<unk> AUM corresponds to an expected increase in annual management fees totaling over $170 million once deployed which equates to a fee rate of one 4% in.
In credit we had gross originations of $3 4 billion for the quarter and net funded deployment of $1 6 billion.
This brings our gross originations for the last 12 months to $14 6 billion with $9 2 billion of net funded deployment.
So as it relates to the $8 1 billion of AUM, not yet paying fees and credit it would take us approximately one year to fully deploy this capital based on our average net funded deployment pace over the last 12 months.
<unk> has obviously been running at a much slower pace. So there could be some upside to this.
Turning to our balance sheet, we continue to be in a strong capital position as you can see on slide 17. We currently have a significant amount of liquidity with an average 13 year maturity and low 3% cost of borrowing.
So summing it all up another strong quarter of growth for our business.
As it relates to our 2023 goals that we spoke about at our Investor day in May of 2022, we continue to track well against our goals of $1 billion of distributable earnings and $50 billion of fee paying AUM.
We are currently about one quarter behind our original target timeline and achieving these 2023 goals, which we are very pleased with considering the market in fundraising environment, we've all been it.
And standing here today, we continue to see our path and achieving a one dollar per share dividend for 2025, driven by continued strong FRE growth anticipated for the next two and a half years.
We are very pleased with our results we delivered exceptional growth in all of our key metrics.
AUM fee paying AUM management fees, FRE, and GE and expect to see continued strong growth for the foreseeable future.
Thank you again to everyone, who has joined US on the call today with that operator can we please open the line for questions.
At this time I would like to remind everyone in order to ask a question. Please press Star then the number one on your telephone keypad.
Your first question comes from Glenn Schorr with Evercore ISI. Your line is now open.
Alright, thank you.
So I appreciate all the commentary I Wonder if you can help us aggregate in terms of your comments on first close for GP.
The next net lease fund being twice the size and maybe any estimates on private credit maybe just lumped that into I don't know next 12 months what kind of.
<unk> does that add up to.
And then when thinking about the.
Part of it is market related cyclicality part of it is rate related cyclicality, but when thinking about the cyclicality of your current mix of business. How do you think about broad or are you thinking about broadening the platform in an effort to reduce that cyclicality. Thanks. So much.
Thanks, Glenn appreciate I appreciate the question good morning.
When we think about our flagship real estate product.
Fund.
Six we are still fund raising there we do expect to hit our goal our goal of $4 billion, but we think we can bring that to a $5 billion close that would double the size of fund five so we're super excited about that especially in the market environment, we're in especially with the real estate sentiment.
Thats out there right now.
<unk> Stakes fund six.
We have surpassed the 75% invested.
We expect to be out with investors in the back half of this year.
And we expect that we can do a closing in early next year and maybe we can accelerate that but let's see how the next couple of months ago.
So we're excited to raise a big fund six there.
And we think we certainly have the fund performance to.
That we're excited about to go out to the market with.
Credit side.
We're seeing a lot of interest in the credit products as we've talked about previously and I'm happy to hand that over to Doug to elaborate.
Thanks for the question.
<unk>.
So look when you when you mentioned the word cyclical.
We don't really view it as cyclical and it's really just more fun.
Fundraising is as episodic and when we talk about being a quarter behind it is really.
I got to get the exact number but it's just a few billion dollars of fundraising has had a big impact on that delta, but maybe I.
I can just address it in a little more detail.
Look the pipeline looks really strong and as I said, it's hard to predict timing, but we are seeing a lot of enthusiasm for this strategies. So let me just start maybe with private wealth and then I'll roll into institutional as well.
Remember the funds.
They generate a lot of income they are downside protected is definitely resonate. If you look on the wealth side for our continuously offered credit products I think we were up 32% quarter over quarter now one quarter, certainly doesn't make a trend, but we're seeing a lot of positive momentum.
In our wealth credit strategies, and we're expanding the syndicates real estate across the industry I think because there've been redemptions and funds lots of chatter about office.
Real estate closed it's definitely been slower but we're.
Starting to see some real excitement about our triple Triple net lease strategy.
And we're going to have some meaningful growth to our syndicate this quarter.
So I'm really excited as you know about what we can do with this product we're seeing it on the institutional side and I think now on the wealth side, we're going to be able to grow. Most importantly, we've had minimal redemptions across all of our products.
In wealth.
We're very very excited about this channel again, it's just one quarter, but I'm cautiously optimistic.
On the institutional side, we're still seeing a tremendous amount of interest in our credit strategies.
But you have to remember this is a bit of a strange quarter for us we're not in the market with any flagship funds and as you know, we just finished raising $8 billion of fee paying assets at very high fees for our tech to product and so I the way I.
I would think about is we will be in the market with new credit products over the next few quarters, we have already gone out and talked to investors, we're seeing a lot of interest.
I think about this quarter and last quarter, the best way to think about what we've been doing is we're really dealing with more bespoke mandates really more SMA.
And it's really hard to predict the timing on those and by the way these SMA as our large.
But it's not like we have a fund and we can say the timing is we're closing August 31, two happen to be in these are much more negotiated and I think between now and the end of the year Youll start to see some of those hit and as Alan mentioned, we will finish up fund raising in real estate and six were in the market with our continuation fund and we.
We expect to be in the market with GP Stakes.
<unk> six as well.
Since I have the mic I can't help myself just one last thing I know everyone is very fixated on asset growth.
But we'd like to start changing the conversation a little bit to the type of assets, we're raising and why we're different.
Our average fee today is about one 6% our average management fee when I look across our peers.
Many are at 1%, but many are well below 1%. So not every dollar raised is the same.
And in addition, our capital doesn't leak as Allan touched on so.
So we're really excited we think the trajectory and the destination are still really strong.
I have more to say on fund raising in the upcoming quarters as we launch some of these new credit funds and I want to amplify one last thing, which Doug commented on earlier, but just touched on again, which is the nature of the capital again, just as we set out to build this business. We really did set out to build a very different kind of all managed.
But firm.
And I mean in this context as a shareholder in terms of the business model so quality of assets the fee rate on the assets the value add if you all of the assets really important as is that duration and remember we talked a little bit earlier.
Every dollar that leaves our system.
We are raising six and a half dollars.
That's literally multiples of our peer set and it relates to the fact that we have permanent capital. So you don't have the dollars flowing out, but we do have dollars flowing in so when you think about what those two things combined mean for the power and trajectory of this model and the predictability of that trajectory.
Set aside any given quarter quarter to quarter, but.
Deepness of that slope and the predictability of its destination. When you have the one 6% fee rate and $6 $5 being raised for every dollar of that exit the system.
It really is a different business model.
Okay.
Alright, Thank you for all that.
Okay.
Our next question comes from Alex <unk> with Goldman Sachs. Your line is open.
Hey, good morning, everybody.
I was hoping we could build a little bit more on the discussion around how you're thinking about building out institutional credit business for you guys. So you mentioned the SMA New fund launches and obviously theres. Some next vintages, albeit from smaller funds. So can you help maybe contextualize what that looks like in terms of the pipeline size L. P type kind of how thats evolve.
Just a little bit more meat around the bones could be helpful. There because it's sort of uptake in the context of the fall.
The whole firm and it sounds like it could be bigger business for you guys, but some some incremental color would be helpful. There.
Yes listen as.
As I think about.
The credit business in particular remember in the past, we've done which has been a good strategy a lot of bdcs.
And now we're transitioning into more longer duration, GP LP strategies and so the most obvious we will be in the market.
With a diversified strategy really geared towards the international markets.
Going into too much detail coming up with a structure that really works well.
And then I'm happy we're not ready to disclose it but just like intact I think today we are.
About $16 17 billion.
Dedicated software capital I think youre going to see us launch other industry verticals that we think could be quite large so combination of moving.
We're going to do other bdcs, but also introduced more GP LP funds, where we can be in the market on a more regular basis do you think about our peers. They do fund one the money leaves they comeback with fun too.
<unk> Bdcs the capital doesn't leave but.
There is not always the opportunity to come back with the subsequent funds. So we will we will start to build more of that GP LP sequence and more industry focused funds.
Yes.
Got you alright, thanks for that Mike.
Second question, maybe is around the real estate business.
Kind of a two part of there so I apologize, but I guess one and.
An update on where you guys are with adding to the syndicate. It sounds like you plan to add more this quarter and just generally in the back half, but overall flows into retail channel for the real estate products have been a little soft so maybe comment on your expectations. There and then when we look at the fund six where are you guys in terms of deployed capital.
That fund and how frequently do you ultimately think the LP GP style funds there could be coming back to the market seen how you guys. I think are one of the largest players in that market and you could deploy that capital pretty quickly.
So let me start with.
The syndicate.
I think we are planning to launch on two very large as.
As you know we've been primarily in one wire, where we've had really meaningful market share there and we are about to launch on two new wires I think we've raised about $2 billion just under $2 billion today.
Look you know I think this is a really exciting product its tax advantaged it generates high current income.
I think you heard in our comments we've.
Even in this rising rate environment, we've been able to sell assets and generate meaningful capital gains so I'm really optimistic about.
Where we can take this product on the wealth channel and.
Over the next couple weeks hopefully we'll announce.
Who are the two big wires are but we're basically done there and then on the institutional side I'll, let mark comment on where we are in terms of deployment and when we can be back in market.
Look it's a good environment Glenn to your point about.
Behind this question. It is a very good environment for what we do in Triple net lease and I would say that both from a fund raising point of view because of course, it's a very predictable stable safe product space, but also users of the capital World.
Corporate costs rising uncertainty about capital availability triple net lease looks like.
It looks like a fantastic.
Option for many corporate users so anyway with regard to to the fund six Alex we have three.
$3 $8 billion and the pipeline as we mentioned in our remarks. So if that comes to fruition now remember we do use leverage so if I just run the math a turn of leverage for a turn of equity then.
I mean, we hit our $5 billion target that's $10 billion.
Oh purchasing capacity, but $3 8 billion of signed agreements is not a small increment toward that goal and we have $30 billion.
Broader pipeline so.
Brian you actually get ahead of ourselves, but we're still raising funds <unk>. So we're not here to talk about <unk> seven, but we really do have a distinct proposition for the market.
The very very clear market leader in Triple net leased for strong credit worthy counterparties and demand interest in both the product and use of the capital is growing. So we're very excited about this we're very excited about this channel and much like direct lending over the last year I think we're now in the year there was a period of time.
Where there is recognition that not all real estate is created equal not all strategies are created equal and I again I think this speaks to the distinctive nature of the blue our business, we really take a view of whatever we're doing we're looking for ways to reduce risk reduce volatility increased predictability and basically deliver the same or better returns.
With lower risk lower volatility and triple net lease is shining through.
A look at our returns for the last 12 months and Triple net lease.
Our triple net lease business in a world of obvious real estate.
Maybe havoc would overstate the case, but it's a pretty chaotic market out there.
And we've delivered a 14% return.
Real estate business because of the safety and security and nature of what we do.
I would just add Alex that all three of our platforms have very strong growth that we've experienced since our IPO and for the foreseeable future. We expect that to continue the real estate platform. We continue to expect to have the strongest growth of the three platforms.
Alright, thanks, so much.
Okay.
Your next question comes from Craig Siegenthaler with Bank of America. Your line is now open.
Thank you good morning, Doug Allen Hope you guys are doing well.
My question is on the international markets.
Sovereign wealth funds European pension plans Asian private banks. It seems like you have a lot of upside potential with these very large pools of capital so.
Including and excluding the potential for GP LP drawdown funds, which you just commented on can you provide your perspective on current penetrations and the total growth potential for blew out with non U S investors.
Good morning, and thanks for the question.
Youre right.
It is a massive opportunity for us.
I actually spoke to the firm last night about this we are really starting to see some significant penetration throughout Asia, and the middle East and.
Yes.
I don't want to get ahead of ourselves, but as we for example, as we round out fund six and real estate.
I think the bulk of that will come from overseas investors and certainly.
It's a big area of focus for US we've spent a bunch of money building out the team throughout Asia, specifically in Korea, Japan, Hong Kong Singapore.
And so to answer your question.
I think we will as I've always said I think we will get more than our fair share from those markets.
Thanks, Doug.
My follow up a quick one.
How many large wealth management platforms should we expect or trust.
And or CIC to beyond by year end.
Okay.
I think the answer to that Craig is we continue to.
We're starting from one right on the real estate side. So we certainly see that increasing significantly over the next say six to 12 months.
By year end is a little harder to triangulate, we've got a couple of new ones that we're onboarding over the next several weeks and months. So we're going to see a significant growth on the real estate side.
Oh, I almost said all our CIC to get the right new acronym.
As a much more mature product that is on a lot more platforms. So its got quite a quite a running head start on our real estate REIT.
But we continue to add platforms, where we can opportunistically there as well so I certainly see a few being added over the next six to 12 months yes.
I think the best way to think about it and I'm, sorry, I can't give you a number because I'm trying to run through it in my head.
But I think we're going to be able and I don't want to put I don't want to say it will definitely happen within <unk>.
Six months.
But I think basically we.
He will be.
And.
Virtually every major platform in the market with one of our products.
Which is really significant and so there have been a few firms that have been somewhat elusive and we haven't been able to get on and now.
They have agreed to put one of our products on so.
Look we view ourselves as a clear number two player in this marketplace.
And.
As I said in my comments in early on.
<unk>.
We've always been excited about it and our penetration continues to grow and we remain.
Very optimistic about what we can do.
Thank you Doug.
Okay.
Thanks, Craig.
Your next question comes from Patrick Davitt with Autonomous Research Your line is open.
Hey, good morning, everyone.
First one I imagine the pace of credit deployment is at least a part of the reason youre running a quarter behind on the <unk> target so through that lens. It does seem like we're starting to see a pickup of some bigger announcements. So could you frame how the direct lending pipeline trended through <unk> and how you feel about second half deployment relative to one half deployment.
Now that it feels like things are unlocking a little bit. Thank you.
Yes deployment, certainly is part of it and we certainly can't defy the M&A cycle as I commented, but direct lending share in our share in particular.
It continues to be really strong, we like where it positions us as the M&A cycle takes the other turn and it does seem to be firming.
There's little doubt our activity and activity in large opportunities has been accelerated.
So hard to predict at any given month or quarter, but the movement is the correct direction.
I think you saw this morning, the buyout of new relic <unk>, leading that financing again, our leadership in the world of software I think continues to shine through.
These are great opportunities for us significant and again sort of significant signs of.
Life for gambling, probably overstate because frankly it wasn't that it was more but before in these markets, but it is picking up so yeah. I think another one of the reasons to sort of feel good as we turn into the back half, but again I'll restate that so as not to get trapped into an excessively quarterly cycle, but as we talk.
Turn into the sort of next six and 12 months, yes. It does seem like activity is picking up nicely and I think there's an awful lot of pent up demand for <unk> deployment.
<unk> deployment and we're in a great position to garner a very large share of that.
Thank you my follow ups, a little higher level, it looks like Europe could finally be picking up some share indirect lending.
Could you update us on your appetite to get much bigger there do you think you could do that organically or do you think you need to buy something thank you.
So let me start with look we love the markets were in the U S. Market has served us very well it is by far the most robust and largest of course.
And very importantly, I never ever want.
Not want to Miss starting a conversation about credit without credit quality.
The credit quality for both the opportunities and the way we are particularly built into this market.
Over $78 billion of originated credit are running loss rate is six basis points and in software we have never had a loss so.
Put that first and foremost and any decision we make.
That said do agree the Europe is much like other capital markets sort of starting to follow suit with the U S and that presents an opportunity I think we will look to attack. It both ways, we already do a tremendous amount of business with the firm I mean these are all global firms that in many cases, even European based firms so in our <unk>.
<unk> Stakes business for example, we own stakes in firms all over the world, including for example, CVC you just raised the world's largest buyout fund so our network our ecosystem certainly spans well into Europe .
So organically, we already do episodic opportunities there we readily can build organically by putting more origination resources to say credit work of course, we have well over 100 people doing credit work. So organically I think we can and will continue to sort of participate or look to accelerate our participation but world.
But to an acquisition in the world of London, and Europe that would be of course, a jumpstart and with the right team and the right platform. We can do as we just talked about with with the former Oak Street now real estate business I think we can do some pretty special things.
Integrate into the Blue our platform. So certainly open minded about it but otherwise or in addition, we'll pursue inorganically over time.
Helpful. Thanks.
Thanks, Patrick.
Your next question comes from Brian Mckenna with JMP Securities. Your line is open.
Thanks, Good morning, all it would be great just to get some more color on your new PE Secondaries business you made a senior hire earlier in the year to run this business. So could you talk about this higher why now is the right time to start building out this business and then what the opportunity is longer term in both the retail and institutional channels.
Okay.
So we've actually made multiple hires now so indeed, we started with great leadership with Chris Crampton, our multi decade veteran of private equity industry.
But we've actually since now three.
The more people that have joined that team we have more come in we've assigned additional internal resources, we have a fully built capability to address what we think is a very very large opportunity. So what are we doing specifically in the secondary are what were really supporting our partner firms status.
To say all the 600 firms that we financed today or the 60 firms we own stakes in and offer them. Another private capital solution in this blue all ecosystem.
People have wonderful assets they've bought I can tell you I personally have been in private equity since the nineties and since that time people have talked about look the thing about private equity as you buy a great business to find out it's a great business. Some number of years later, but then you have to sell it everyone wants to keep them. So GP led secondaries continuation is the solution.
To this challenge it allows the GP to maintain ownership of announced that they know well can manage well and no. One has a lot of value create liquidity as an option, but not an obligation for the <unk>. So thats flexibility crystallized returns for prior funds. So it really is a way of meeting the needs of a lot of different.
Stakeholders in private equity and there is trillions of dollars of assets. So just ask yourself. This any given firm if you could pick one asset to keep managing and owning compounding your carry an opportunity on what would it be we're here to facilitate people keeping those assets with this strategy and it's a very distinctive strategy because remember.
This is what we do every day for the private equity community, we financed the GPS we finance their portfolio companies, we're adding another solution in that trusted set of partnerships. We have we say bring us your trophy asset or will elicit from you Your trophy asset and you can continue to own it and we will provide some liquidity for those who choose not to go forward.
We think it's a very very substantial opportunity and meets the needs of a lot of people in the market today.
Think about how our business our entire model is really set up to be a solutions provider.
We have 650 <unk>.
E firms, we cover on the credit side, we have stakes in over 60 private markets firms.
And we're not in the <unk> business, we're not a competitor.
And so we've gone out and they've said to us our most pressing need as Mark was saying is how do we hold onto our best assets longer.
And we think we are we can come in and provide that capital and I have to tell you. We look at the market. When we look at the demand from these PE firms to hold on to these assets. The demand for capital is enormous the supply of capital is de Minimis and whenever you're in an environment where.
There the demand is so much greater than the supply of capital. We think we can generate outsized returns for our investors in terms of fund raising.
We are dual tracking it where in the institutional market. We're also in the wealth channel.
So, let's just focus on wealth for a minute and think about the average investor trying to access the <unk> market.
Maybe they can find one firm to firm, it's usually it'll be one of the big brands.
But we're going to give them a way to come in.
We'll go out we're going to say these are the top 150 firms and we're going to focus on the deal flow from those 150 firms, who would never be able to get that kind of access.
And so we think we're going to create a better way, especially for the wealthy investor to invest in P/e.
It's early days and it's not going to have a huge impact on 'twenty three numbers, but as mark alluded to the Tam here is very very large.
And I think if we come in and we execute and we think we can generate top quartile results hopefully better I think we can create something potentially that's going to be quite large.
Great. Thank you guys.
Thank you.
Your next question comes from Adam Beatty with UBS. Your line is open.
Alright, Thank you and good morning, I just wanted to follow up on credit deployment on the one hand, you've got strong kind of secular tailwind and then as Mark mentioned some choppy deal activity recently wanted to ask about two other aspects one is the.
The slower slash episodic fund raising.
E capacity constraint and how much that might play into the recent deployment trends and whether some of the near term fundraising that you've talked about might loosen that up and then also just in terms of.
Pricing in the cost of funds, whether youre seeing any hesitancy on the part of borrowers.
So elevated these days thanks very much.
So Adam Thank you in terms of activity I think the fundamental constraints activity has really been just absolute market levels of activity.
Our share is high our role as distinctive blue all really plays a pretty special role in that capital solutions.
Center.
At the end of the day there is only so much activity.
Activity has been uptick in as we just talked about well we have we have capacity, but I will say, we and the industry is not excess capacity that is to say and we've talked about this before the dry powder in private equity.
Very much out matches, the dry powder in private credit and so well.
Certainly not suggest that the slower deployment in Q2 was a lack of capacity to to deploy capital I would equally say, it's not as if we have excess capacity fundraising will continue to be very important to have an adequate firepower to support the private market's ecosystem.
And as we continue to go through these disruptions in the banking system and disruptions in syndicated markets I think what we probably all can take away is to have a healthy economy and to have a healthy capital market system, we need a healthy private lending system.
And frankly.
Frankly, it's very healthy today, but it can use more capital and Thats, what <unk> been talking about and are pursuing and by putting them together GP LP format bonds by accessing the foreign markets as Doug talked about places. We just have underpenetrated over time, we think that can help us get the capital that that not just that we need to pursue our business, but the <unk>.
Thankfully the market needs to have a healthy flow of capital in the healthy available leverage pool, Mark talked about the demand from p/e versus supply of capital and I think one thing that is not discussed a lot is the big players like ourselves who are sitting with these large capital basis when rates were lower in M&A.
With robust we could have 2025% of our loans get refinanced in a quarter.
So we had so much money to deploy because you take what's refinanced plus what's coming in today.
Very little being refinanced theres very little M&A and so what we have to put to work is really just new capital coming in.
It's a very good time and look.
The positive for us.
Our returns are basically on an unlevered basis have gone from six 7% to about 12%. So clearly P firms have to use less leverage.
Does the interest burden is that much greater.
But look as Mark said its deployment is really driven by M&A volumes right now.
It feels like it's picking up but.
It's too early to tell as your latter question about is the absolute cost of capital or the higher cost of capital impact in <unk>.
Appetite or activity.
I don't want to pretend I know all all decision makers decisions, but I would say Ed metal level at the end of the day. That's that's math right that gets into the clearing price of an asset. If you know what your cost of capital is and remember one of the great strengths of direct lending is predictability. We tell you is that terms you know what it will cost us pause.
<unk>.
Then you can price that into your investment decisions. So I think it speaks more to how you have to price equity transactions are not probably have led to the slowdown when you get these gaps between what buyers want to pay and sellers want to take but over time markets function and it'll just price in this cost of capital. It will probably mean less leverage to doug's point on that would probably be lower perm.
Prices for certain assets, but that all can be solved by.
Change in the numbers on the so to speak on the page. So no I don't I don't think cost to capital cost of that is likely to provide any meaningful drag you've got trillions of dollars of private equity dry powder private equity has shown its ability to thrive in high rate environments low rate environments strong economies weak economies, it's good asset class.
And it'll be a good asset class going forward.
Very much appreciate it thank you both.
Thank you.
Your next question comes from Ken Worthington with Jpmorgan. Your line is now open.
Hi, good morning, Thanks for taking the questions maybe.
Maybe to follow up on Patrick's earlier question in terms of activity to what extent was April one outlier invested drag on originations for the quarter and then to what extent is competition from the banks.
Re emerging in the sponsor direct lending market and would you expect.
Competition sort of re emerges that this will impact sort of pricing and what you can kind of get earn on your transactions.
The value proposition for us in direct lending is.
Is about predictability privacy and partnership.
I mean of course, the syndicated market matters of course around the edges people are making decisions that include the fact that in the syndicated market you might very well be able to achieve better terms so to speak as a borrower, but what does better mean, if you're a private equity firm, making a long term decision I would proffer that the incremental cost.
Capital for private debt and incremental involvement depth of diligence.
Stricter agreements all of those things are well worth it to have the partnership with the predictability of capital. So yes. So I hope the syndicated markets will return its still pretty nascent we don't see it as a meaningful factor in the marketplace today is not meaningful to our business today, but I hope the syndicated market returns.
It's not a win lose proposition I'm not sure sometimes why weather.
Turn of asset managers on one hand or banks on the other.
Kind of turned toward each other and say oh, well, if I'm, winning or losing I think there are about having multiple solutions in a marketplace, we need capital depth capital depth unlock M&A.
And we'd be glad to have the syndicated markets return and facilitate a more robust M&A environment and frankly, there's a lot of things a syndicated market will finance, we won't we don't finance deep Cyclicals, we don't finance businesses that have extreme customer concentration we don't.
As a reason that we've been able to deliver six basis points of annualized loss, because we do very specific kinds of credit selection. So we're not here to solve every capital structure, but for great firms buying great businesses. They want a great capital partner, we're here to solve that so I think.
It Hasnt met much of yes, yes banks are probably open a little bit for business now, but we hope we hope they will come back sooner and Fuller force, we're quite happy to compete.
Compete in that arena, we deliver a solution that is worth it for the people that use our capital.
Okay Fair enough and then just on April was April .
That has impacted the overall quarter or was it really not that big an outlier.
Sorry, what specifically about April do you mean.
In terms of Youre sort of in the hangover period from the sort of mid cap banking crisis.
<unk> seems to be on pause like did that.
From your perspective was.
Is that enough of an outlier to I guess, maybe it was an outlier in the first place and if so is it enough not liar to sort of impact the overall sort of origination numbers for the quarter and if we exclude that things look better than they would have if we if April was normal.
Where I was going.
I understand where you're coming from I can't answer that with any precision our business Unlike traded market.
The rhythm is not measurable in weeks, maybe not even months, depending on the particular timeline of a transaction.
So I think it would be right for me to say Oh, Okay, well March directly impacted April however, there is little doubt that the hangover the malaise that disruption.
The Mei.
Bank crisis many crisis.
Certainly impacted markets ours included so just kind of froze up rides on our system froze up people froze up in anything that people are deciding on by and large probably got deferred so I don't measure it could be a scientific or prescriptive as Ed I. Appreciate the nature of the question safe to say Q2 suffered.
From a lot of economic uncertainty a lot of interest rate uncertainty and that of course. This this shock to the system from banking. So yes, it was kind of a tough quarter for market participants.
Nothing particular to blow of course, but to market participants.
Okay, great. Thank you very much.
Thanks, Ken.
Your next question comes from Brian Bedell with Deutsche Bank. Your line is now open.
Great. Thanks. Good morning, Thanks for taking my question, maybe one on the wealth channel and the unified branding I guess to what extent do you think.
The implementation of that unified branding is.
May help over the next year or so.
In interaction with advisors that Youre working with currently on those platforms.
And then also does it make it easier for you to extend in new platforms.
The overall question is to what extent do you think unified brand Beacon can enhance fund raising over the next one to two years.
Yeah. Thanks for the question.
<unk>.
Look you raised.
Our good and an important point and Thats why we went to a unified brand.
Especially in the wealth channel when we were out with different brands I'm not sure people even knew it sat under one roof, but where we really saw it.
<unk>.
In the international markets.
And look our goal is to create a brand that's the equivalent of.
The blackstone's the Aries the KKR Carlisle TPG around the world.
Having three or four different brands, we just thought was cumbersome.
And I think that ability as you think about well or the institutional market the ability to cross sell.
And to understand and say that's a trusted partner, we've done well with them when we walk in with that new strategy and we have instant credibility.
And so.
To answer your question, specifically when we had hired a consultant about I don't know 18.
18 months ago to study this for US and we did go out to the wealth channel and all of them.
All of the major wire houses came back and said it would make their lives so much easier to have it all under one brand. So we've implemented it we've gotten great feedback and as I said.
It will help us over time to really cross sell all of our products.
That's great color. Thank you and maybe just one one last one on the direct lending a lot of my questions have been asked and answered there but.
Any view on that.
Three and game.
Rules that were proposed for the banking system is it pretty much in line with what you expected.
No.
The strong secular trend there of course longer term for <unk>.
For direct lending to become a larger source of.
Bank lending or.
Do you see things in the proposed rules that make you even more excited longer term about about your role in the bank lending.
The look the continued.
The stabilization and focus on regulation of the banking sector and look we just went through March and we saw again.
What does happen, sometimes when you take very long term commitments with very short term capital and again I've said this before it's not private lenders versus the banks. It's really not these are ecosystems that taken together solve problems.
Some people assume.
Don't take it that way, but it's the case.
At the end of the day look we have long dated capital from long dated and investors to provide long dated solutions.
That just makes sense. We don't look we don't have depositors. We don't present systematic risks, we don't have government explicit or implicit guarantees and so we can provide a different kind of risk based different kind of duration capital and so look it does appear that when you look towards Basel III.
Kind of other recent conversations about increased capitalization of banking look we don't we don't have an opinion on that that is to say that that's a world that's adjacent to ours wonderful banks in this country are doing a wonderful job.
Third we welcome a healthy banking market alongside the healthy private credit market. So we're not deep and I don't want to opine on the specifics of the regulations, but I think what we are seeing develop our adjacent systems with different kinds of capital different kinds of risks different kinds of providers of capital.
And it works and Thats healthy private capital as continuous it's step function climb upward to providing solutions that are durable and therefore healthy for our economy in total so I feel good about where we're headed and.
I won't call I'll leave it to the banks to sort out the right answer for the banking sector.
But I think that we can coexist quite healthily in a way that will be good for that market in total.
Great Great perspective, thank you.
There are no further questions at this time I will now turn the call back over to Doug.
Well thanks, everyone. We appreciate everybody spending so much time and for.
<unk> for the excellent questions hopefully we gave you a good overview.
Hopefully it comes through just how excited we are about the business and where we can take it.
So we look forward to.
Talking to some of you after the call and staying in touch thanks.
This concludes today's conference call you may now disconnect.
Please wait the conference will begin shortly.
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