Blue Owl Capital Inc.

Moat: 3/5

Understandability: 4/5

Balance Sheet Health: 3/5

Blue Owl Capital Inc. is a global alternative asset manager, providing capital solutions across credit, GP strategic capital, and real estate, catering to both institutional investors and individuals.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Blue Owl’s business is intricate, operating across different markets that requires knowledge of each, therefore it is not an easy business to completely understand. However, because of its complex nature, it is relatively difficult to compete against, thereby giving it somewhat of a moat. Moat Analysis:

  • Rating: 3 / 5

  • Justification:
  • Blue Owl operates in a niche market that involves originating, underwriting and managing complex loans. This complexity creates a barrier to entry, as it requires specialized knowledge, deal-sourcing capabilities, and a sophisticated infrastructure to manage various types of alternative assets. These are not necessarily easy to replicate, limiting the pool of potential competitors and giving the incumbents a good moat.
  • This can be compared to the old times when finance houses where difficult to get in to. Having many established processes and knowledge base and also a history in this niche gives them a solid footing.
  • A key component is a solid relationship to the borrowers. They should prefer going to firms with a long history of doing the lending to those that just popped up.
  • Their diversified product offerings across private credit, direct lending, infrastructure and real estate create a certain level of diversification, reducing their dependence on any one specific asset class and making their earnings less volatile. They also have a network of relationships which have given them access to attractive and large deals. All of that creates more stability and helps them scale.
  • The amount of diversification of their business can be compared to how a bank or a trading house operate, offering services that many others can’t.
  • Their permanent capital base, particularly in the credit side, creates some stickiness in terms of assets under management. They don’t need to do active fundraising, and this makes their AUM less dependent on market fluctuations.
  • This gives them an advantage over other investment firms, whose investors might pull money when there is instability.
*  Although they have a unique way of creating value, competition in this space, where many private equity and private credit firms have also popped up, is significant. They also are exposed to economic uncertainty. Therefore, their moat is not rock solid and requires a rating of 3/5

Risks to the Moat:

  • Economic Downturn: A severe economic downturn could cause distress in the credit markets, making borrowers unable to fulfill their obligations and thereby affect Blue Owl’s AUM and performance fees.
  • Competition: Increased competition from other alternative asset managers can erode Blue Owl’s pricing power and their ability to source attractive deals, shrinking their market share.
  • Regulatory Changes: Changes in regulations in financial markets, both on a national and international scale, can hurt Blue Owl’s operations, as they rely on some type of exemptions. Also, it might require them to change their business model or incur additional costs.
  • Interest Rate Risk: Rapid changes in interest rates, such as the hiking of the rate, may affect the valuations of their underlying loans. In cases such as when interest rates rise, companies need to renegotiate their debt, which might have lower valuations. Similarly, if interest rates are high, their leverage might also suffer.
  • Operational Risks: Operational risks are not well diversified and are present in all operations. These include risks related to systems or personnel and internal controls.
  • A software or personnel glitch could create major problems in operations and could give them financial losses and reputational damage.
  • Valuation Risk: As most valuation is forward looking, valuations might be incorrect, and the valuations also greatly depend on how management interpret and value intangible assets, goodwill etc. Because of such issues, companies can seem profitable on papers but they have no long-term viability
  • Debt The Company has recently been highly leveraging and this makes them vulnerable to potential market crashes

Business Overview:

  • Revenue Distribution:
  • Blue Owl operates through three primary segments: Direct Lending, GP Strategic Capital, and Real Estate. They provide capital to companies from private equity firms, public companies and real estate investors.
  • Direct Lending: This segment provides senior secured, unitranche, and junior debt to middle-market companies. It’s their largest segment. This type of lending is essential in the capital markets, and is a very needed service.
  • This generates income from recurring interest payments from loans
  • GP Strategic Capital: This segment provides capital solutions to private equity and other alternative asset managers.
  • This generates income from advisory, advisory fees, performance based fees and investment returns from the investments done in GP stakes.
  • Real Estate: This segment manages a diversified portfolio of real estate investments that often have long-term contractual cash flows.
  • This generates returns through interest rate on debt, fees and from direct investments.
  • Industry Trends:
    • The alternative asset management industry is currently seeing tremendous growth. There is more demand for alternative assets that are not in the traditional stock market. This provides opportunity for growth to OWL, but the intense competition makes it harder to maintain a high market share.
  • As investors look for alternate markets that have better returns than the stock market, that is driving growth in the industry. * A larger allocation of institutional investor portfolio towards private assets will result in more opportunities for OWL * Interest rates are a key driver to their business. * The ongoing consolidation in the industry may lead to fewer bigger companies that are better equipped for large scale transactions
  • Margins: Margins are attractive, and this is due to the fact that they operate in niche markets that can sustain relatively high margins compared to traditional financial operations.

  • Their margins can be compared to that of a pharmaceutical company, whose IP is protected by its patents. * However, margins can fluctuate, due to market volatility, changes in investor’s tastes, or other changes in the market.

  • Competitive Landscape: The alternative asset management space is increasingly competitive, with many established and new players. These players range from large established private equity firms, banks and newly formed boutique firms. This competitive landscape will affect their market share.

  • What Makes OWL Different:

    • Blue Owl focuses on the mid market segment, which typically is not chased by big private equity companies. This gives them an edge in getting good deals.

  • They employ a large group of employees with specialized expertise that can help them find and underwrite complex deals. * They have strong relationships with borrowers and with PE funds, thereby enabling access to quality deals.

  • Recent Concerns/Controversies:

    • The company has been increasing its leverage recently, and this might make it more vulnerable to any major changes in the market.
    • Some sources are claiming that the company’s loan book includes many risky loans.

  • The management has stated that the loans are all very safe, and that they constantly monitor their risk levels.

  • Financials In-Depth:

    • Profitability: They have seen decent growth in earnings in the last years, but some volatility is present. As they grow, they will start to see more economies of scale from their operations.
  • It is important to monitor whether this is correct, as it can be a good metric to test management’s competence.
  • Revenue: The company is growing at a solid rate. Most of this revenue comes from management fees, performance related fees and interest income from their loans.
  • The trend to see growth in the revenue of such firms is generally tied to the capital that they deploy and the performance they can achieve.
  • Balance Sheet: The balance sheet isn’t that strong, as the total debt-to-equity ratio has been rising steadily and is expected to reach approximately 0.6 in the next year. They also hold a great number of intangible assets and goodwill, which can pose problems if the valuations are incorrect.
  • Having high leverage makes the firm more profitable when there is economic prosperity, but in the time of downturn, it makes them vulnerable.
    • The company has a total debt to market capitalization ratio of 0.34. This means that for every $1 of market capitalization, they have 34 cents of debt. This can be considered high.

Understandability:

  • Rating: 4 / 5
  • Justification: While the basic premise of their business—asset management and credit provision—is relatively straightforward, the intricacies involved in the various types of capital solutions and complex deals make it difficult to fully grasp the underlying risks and factors. The complexity of financial engineering and derivatives also adds to the difficulty of truly understanding the business from an average person’s point of view.

Balance Sheet Health:

  • Rating: 3 / 5
  • Justification: The company carries a substantial amount of goodwill and intangibles which can decrease the value of the firm if they go bad. The leverage has risen substantially in recent times. They also have some debt that is not investment grade. However, the company has seen increasing revenues and cash flow which help support their balance sheet.
  • Their profitability makes them a robust business, but their balance sheet has some issues that need attention.