Blue Owl Capital Inc. (OWL) Q4 2022 Earnings Call Transcript

Blue Owl Capital Inc. (OTCPK:SBKJY) Q4 2022 Earnings Conference Call February 13, 2023 8:30 AM ET

Company Participants

Ann Dai – Head of Investor Relations

Doug Ostrover – Chief Executive Officer

Marc Lipschultz – Co-President

Michael Rees – Co-President

Alan Kirshenbaum – Chief Financial Officer

Conference Call Participants

Alex Blostein – Goldman Sachs

Glenn Schorr – Evercore ISI

Patrick Davitt – Autonomous Research

Brian McKenna – JMP Securities

Adam Beatty – UBS

Ken Worthington – JPMorgan

Brian Bedell – Deutsche Bank

Mike Brown – KBW

Chris Kotowski – Oppenheimer

Operator

Good morning. My name is Chris, and I will be your conference operator today. At this time, I would like to welcome you to the Blue Owl Q4 2022 Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will a question-and-answer session. [Operator Instructions]

Thank you. Ann Dai, Head of Investor Relations. You may begin.

Ann Dai

Thanks, operator, and good morning to everyone. Joining me today are Doug Ostrover, our Chief Executive Officer; Marc Lipschultz and Michael Rees, our Co-Presidents; 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-statements as a result of a number of factors, including those described from time-to-time in Blue Owl Capital’s 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 blueowl.com.

Please note that nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase any interest in any Blue Owl fund. This morning, we issued our financial results for the fourth quarter and full-year of 2022, for the fourth quarter we reported Fee-Related Earnings, or FRE, of $0.16 per share, and distributable earnings, or DE, of $0.15 per share, bringing total FRE to $0.57 per share and full-year DE of $0.53 per share. We declared a dividend of $0.13 per share for the first quarter payable on March 6 to shareholders of record as of February 24 and also announced a fixed dividend of $0.56 for 2023 or $0.14 per quarter starting with our first quarter 2023 earnings. During the call today, we’ll be referring to the earnings presentation, which we posted to our website this morning. So, please have that on hand to follow along.

With that, I’d like to turn the call over to Doug.

Doug Ostrover

Thank you, Ann, and good morning, everyone. Today, we reported another strong quarter of growth for Blue Owl. Capping off our first full-year as a public company. Since Blue Owl’s 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 metrics we use to evaluate our business, including management fees, FRE and DE, and have maintained an industry leading margin of 60%. This extraordinary growth has been driven by robust fundraising in 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 halfway 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 than we had the entire year of 2021, reflecting robust demand and the expanding power of our increasingly global and integrated fundraising platforms across 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 1.5%. By contrast, inflows into those same products were close to $1.6 billion during the quarter. Private wealth remains a successful market for Blue Owl 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.

In direct 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. leverage loan volumes and a 42% decline in announced U.S. M&A transactions. This speaks to the increasing breadth and scale of Blue Owl’s 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 GP Capital Solutions, we deployed about $4 billion of capital completing transactions with world class managers such as Dragonair, KPS, Veritas and PAI and bringing us to 70% committed for Fund V. During the fourth quarter, we held a final close for Fund V 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 fundraising environment.

And in real estate, we are now fundraising for our net lease strategy across multiple product offerings and we are off to a great start. 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, and tax advantaged yield characteristics of this strategy have 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 Blue Owl 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 analyst’s expectations for 2022 earnings growth across our peer group steadily declined as the street adjusted its view of carried interest and other difficult to predict earnings trends. In contrast, expectations for Blue Owl were unchanged. Speaking to our differentiated financial profile, and we delivered on what we said we would do. Achieving our goal of reaching $1.3 billion of revenue in 2022.

For the year, Blue Owl generated FRE growth of 46% and DE 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 with turn capital and raise a new fund and hopefully larger fund, we generally hold on to the assets we have. So each dollar of incremental assets raised is additive to our capital base. 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 Owl 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 and many corporate earnings, the core goals that we outlined for you at Investor Day back in May have not 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 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 ship. But we think Blue Owl’s business was purpose built for this type of market. And our value proposition increases during environments such as these. That’s not to say that these are easy environments to navigate. To fund raise 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 as it is for many companies, whether we’re going to grow, it’s how fast we’ll grow. That is the value of permanent capital and management fee driven earnings.

With that, I’d like to turn the call over to Marc to give you an update on our direct lending and real estate businesses. Marc?

Marc Lipschultz

Great. Thanks so much, Doug. Throughout the fourth quarter, Blue Owl 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 than a year ago, financing large and high-quality companies.

In 2022, gross originations and direct lending 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, a moderate slowdown from our year-to-date pace that reflected timing considerations and 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’s a broader recovery in M&A volumes.

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’ve largely stayed away from cyclical businesses in 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 realized losses of less than 5 basis points. And inclusive of realized gains, we’ve actually had annualized net realized gains of 3 basis points.

Our weighted average loan value remains in the low-40s across our direct lending portfolio and in the low-30s 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 inflation.

Now turning to performance, the direct lending portfolio achieved gross appreciation of 3.6% for the fourth quarter and 9.4% for 2022, outperforming the Leverage Loan Index by approximately 9 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 choppier, 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 a lot of intent or contract close and a 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 fifth closed end fund. Persistently high inflation remains a focus for many investors driving demand for a net lease strategy with desirable inflation hedging characteristics as the CapEx, maintenance, taxes and other expenses of owning real estate are borne solely by the tenant.

Our latest open-end product, Net Lease Trust, has reached $1 billion of capital raised primarily through just one large warehouse platform and we look forward to continuing to expand the syndicate over the coming quarters. And we on the first close on our sixth drawdown fund for our net lease strategy at approximately $2 billion and expect to wrap up fundraising sometime in the first half of 2023.

We achieved gross appreciation across our real estate portfolio of 4% for the fourth quarter and 20.6% 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 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 and we continue to find attractive opportunities to put capital work.

With that, let me turn to Michael to discuss GP Capital Solutions.

Michael Rees

Thank you, Mars. 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 the space.

During the year, we deployed about $4 billion of capital into attractive opportunities, closing nine transactions and Dyal V 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 in Fund V, constituting a diversified group of world class managers that we believe will grow substantially and benefit most from the growth and market share trends that shape 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 fundraising environment is more challenging.

Through the third quarter of 2022, funds greater than $1 billion received roughly three quarters of the total capital raise across the industry, up from two-thirds in prior years. Total invested commitments were Dyal V, including agreements and principles, will bring Fund V to $8.9 billion of capital committed or roughly 70% of the fund. The forward 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 Dyal funds remained strong with a net IRR of 24% for Fund III, 51% for Fund IV and 37% for Fund V, 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 stake remains high as demonstrated by our recent Dyal V fundraise and we look forward to expanding the breadth of our investor base even further with the next funds.

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 VI 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 as a strategy.

With that, I will turn things over to Alan to discuss our financial results.

Alan Kirshenbaum

Thank you, Michael. Good morning, everyone. I’m going to start off by walking through the numbers for the fourth quarter and the 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 in 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. We achieved our goal of $1.3 billion of revenue, we achieved our goal of a 60% FRE margin and we track nicely in 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 pathway towards our goal.

Some other key highlights include total revenues were up 47% year-over-year, FRE is up 46% year-over-year and GE is up 42% year-over-year. 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.

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 or 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. Compensation expense came 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 2022, total G&A costs came in at about $170 million, placement costs being approximately $70 million of that and regular wage 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 maybe slightly higher with placement costs slightly down and regular wage G&A higher driven by the overall growth of our business. FRE 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 $0.13 per share for the fourth quarter up from $0.12 per share last quarter and $0.10 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 markets 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.

In 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. In GP Capital Solutions, we raised approximately $600 million as we completed the fundraise for Fund V. In terms of guidance for a 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, $1.9 billion in our new real estate Fund VI. 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 fundraising here. And $800 million for our net lease trust product, our new 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.

Fee 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. Both metrics driven primarily by capital raise in deployment and direct lending, capital raise in GP stakes Fund V, capital raise in real estate Fund V1 in the REITs 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 in GP Capital Solutions and $2.4 billion in real estate. This AUM corresponds to an expected increase in annual management fees totaling over $140 million once deployed.

As Marc highlighted earlier, in 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 in 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 2.9% 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 was to raise $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 mix shift in our fundraising. With some pressure on retail channels, but we’re seeing continued institutional interest. We’ll 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 in 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 our fixed dividend for 2023, here’s how we thought through it. As I just noted, we expect to post $1 billion of DE in 2023. We currently have approximately $1.4 billion of outstanding shares. That math kicks out roughly $0.70 per share in distributable earnings for 2023. We feel it’s prudent from a capital allocation policy perspective to fix our dividend at $0.56 for 2023 or $0.14 per quarter to allow flexibility for capital allocation uses such as our share buyback program, funding GP commits and potential strategic acquisitions.

And that comes out to an 80% distribution rate, 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 $0.46 in dividends in 2022, this year’s $0.56 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 7.8 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 1 fees from the previous quarter.

In the fourth quarter, included in our management fee line, our Part 1 fees from our BDCs increased $15.4 million or 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 OR CIC and ORTF2. We are expecting to see some additional increases in our Part 1 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 the 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 Owl with a taxable transaction to certain shareholders, Blue Owl now has 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 as for 2023, you should assume an overall tax rate in the mid-single-digits. As for ‘24 and ‘25 for now, we would suggest using a low teens tax rate. Again, 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, we made a change to our voting structure which enabled us to be added to the Russell Indices and today we announced a 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 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?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] First question is from Alex Blostein with Goldman Sachs. Your line is open.

Alex Blostein

Hi, good morning, everybody. Thanks for the question. 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 the retail backdrop is a bit softer and capital markets trends are not that’s helpful. There might be questions just around ability to both, kind of, get to the retail numbers, but also to recoup some of the fee waivers and see some of the fee step ups that I think were originally incorporated in your, kind of, walk back from the investor day?

So maybe put some meat around the bones on 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?

Alan Kirshenbaum

Sure. Thanks, Alex. It’s Alan. Thanks for the question. So we continue to look at our forecast, we go through it every quarter. We refresh it every quarter. I did mention that to your 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 retail raise a little more than institutional and what we’re thinking out of that $25 billion that was raised. And what we’re seeing 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 billion. So we are seeing a mix shift in that, I commented on that.

We don’t know what the markets hold in terms of IPO markets or any of our products stepping up to full fees. But as you know, when we turn 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 $1.8 billion of revenue, the $1 billion of DE and the $50 billion of fee-paying AUM raise.

Doug Ostrover

Hey, Alex, just one comment. I just want to — I think you know this, but just 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 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 feel very good about hitting that $1 billion of DE in ‘23.

Alex Blostein

Great. Thank you, both.

Doug Ostrover

Thank you.

Alan Kirshenbaum

Thanks, Alex.

Operator

And the next question is from Glenn Schorr with Evercore ISI. Your line is open.

Glenn Schorr

Hello there?

Alan Kirshenbaum

Hey, Glenn.

Glenn Schorr

So — hello. So look, I wish you had even more dry powder. Because it sounds like the investing landscape particularly on the direct lending side is pretty good. So I wonder if you could talk to — I think that in digestion in PE land for LPs is well known. Could you talk about the state of the lending backdrop, I would think given the availability of like much better yields on unlevered base is out there. There’d be a lot of demand on the institutional side and direct lending. But can we talk — put that in a package for us? And how it feeds into obviously your confidence in 2023? Thanks.

Marc Lipschultz

Absolutely, Glenn. So it’s a great question. First of all, I share your wishes. We wish we had more dry powder also in direct lending. It really is an exceptional time. 2022, the intersection of credit quality, most importantly, in a global world, as well as spreads, terms, sort of all the intersecting components is as good as we’ve ever seen. And reflects itself ultimately in the roll 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 quite frankly of those half, we were a lead in almost every one of them.

And we really think the opportunity is tremendous. We think about just looking over a year, year and a half between base rates and then some incremental spread one gets today on an incremental loan. You go from a world of making an 8% unlevered to making a 12% unlevered to take senior secured risk where and in fact many of these were software, which we particularly specialize and lead in, you know, you are talking about loan to values in the low 30s. 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. But because they see the risk return, being able 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, 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 toward this asset class and you see people talking about it exactly as 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, again, asset class this year and beyond for that matter.

Glenn Schorr

Okay. Thanks. Sorry to hear you’re not a KB fan.

Doug Ostrover

Thanks, Glenn.

Operator

The next question is from Patrick Davitt with Autonomous Research. Your line is open.

Patrick Davitt

Good morning. Thank you. Just trying to think about what wealth flows could look like this year, and I understand it can be a volatile group of investors. Could you maybe update us on how the gross sales and redemption requests look so far in 1Q? 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?

Alan Kirshenbaum

Sure. Thank you, Patrick. I’ll cover the redemption side and then Doug will 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 the space. We have the similar 5% per quarter levels 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 or so quarters in a row.

And more importantly, on the net flow side, we are still seeing very positive strong net flows. So the net flows coming in, the gross flows are significantly above the redemption levels in each of our products. Doug, do you want?

Doug Ostrover

Sure. Thanks, Patrick. So look, we really weren’t that surprised to see wealth flows slow down during ’22. The markets were incredibly volatile. And I — 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, trillions 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 during his comments, across our platform in the fourth quarter, we had $2.2 billion of inflows from the wealth channel, and we only had $186 million of redemptions. Let me say that one more time, $2.2 billion of inflows, $186 million of redemptions. We think that’s pretty good. And as you think about the markets 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 just catch their breath. And so we have been out, we’ve met with all the wire houses, RIAs, other distributors, spending a lot of time on education, and I think that’s 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 two, and I can’t give you exact numbers and timing, you will 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.

Patrick Davitt

Thank you.

Operator

The next question is from Brian McKenna with JMP Securities. Your line is open.

Brian McKenna

Great, thanks. So I appreciate the color around 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 drivers that will ultimately get you to these figures?

Alan Kirshenbaum

Sure, Brian. Thank you. I appreciate the question. Look, we spent a lot of time going through. As I mentioned earlier, the forecast, in particular, for 2023, but we certainly refreshed on 2025, I wouldn’t lock in an 80% distribution rate. We — I expect that we will move around over time up and down from the 85% level that we were at in 2022. So this year, we’re going to do a little lower 80%. You could certainly see us going higher from 85% to 90%-plus 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 Marc and Michael have talked about on this call and on previous calls, something like GP Stakes Fund VI. We’re doing a lot in the Real Estate business right now, both for Real Estate Fund VI 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.

Brian McKenna

Helpful. Thanks, Alan.

Alan Kirshenbaum

Of course. Thank you, Brian.

Operator

The next question is from Adam Beatty with UBS. Your line is open.

Adam Beatty

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. But just in terms of the underlying portfolio, whether it’s maybe nonaccrual rates or EBITDA growth of the portfolio companies or anything else you could give just to give some color and support around the performance of the portfolio? Thanks.

Marc Lipschultz

More than happy to. Credit quality has always been and will be the central focus for the Blue Owl credit strategies, that’s really what we live and breathe. Look, that matters a tremendous amount to us. We focus on it intensely. And tank fluid vanilla to deliver world-class results in it. I do want to say before I jump into the answers to your question, for a Blue Owl shareholder, it doesn’t actually matter. Remember, you get paid fees, we have a feed-only business, and fee-only business from permanent capital.

Now again, it matters a lot to us because this is what we live and breathe and how we deliver for our LPs. But I just want to remind us, depending on exactly where you sit — and in this case as Blue Owl shareholder, it doesn’t actually impact you. With that said, our credit quality remains very strong. We continue to see very strong portfolio performance. That is 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 request. We have not seen a material increase in amendment request. We continue to monitor the portfolio, but it continues to perform on average very well.

Look, of course, it’s an uncertain environment. So I don’t say that as if we’re not sitting here spending every day thinking about what happens if what happens if, because that’s 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 continue 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 inception. And we continue, as we sit here, to run at an average annualized loss rate of less than 5 basis points.

And in fact, when you take into account gains in those portfolios as well, we actually have a net realized gain of 3 basis points. So really continues to be our strength, and we’ll continue to be vigilant, and we’ll continue to plan for darker days, but we’re in a good place as we head into that.

Adam Beatty

Excellent. Thank you, Marc for the detail and the context. Appreciate it.

Marc Lipschultz

Thank you.

Alan Kirshenbaum

Thanks, Adam.

Operator

The next question is from Ken Worthington with JPMorgan. Your line is open.

Ken Worthington

Hi, good morning. One of the stats you gave is that you closed on — or you’ve closed on 5% of deals that you’ve looked at since inception. I guess, how did that statistic look in, say, the second half of 2022? And how did it vary between more general lending versus tech lending? And then along the same lines, what are you seeing from the banks in terms of reengagement in Direct Lending as we start the year? And is the 5% close what you’d expect to see for 2023?

Marc Lipschultz

It’s generally been steady. I mean, look, there’s certainly variances quarter-to-quarter, year-to-year, but no pattern narrow of note that we’ve observed recently. I would say statistic, 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, but the number was higher. Look, we’re always going to do it, maybe days will be lower, maybe days will be higher. The key is to see a tremendous amount of investment opportunity and be extremely selective.

And so whatever that lands to mathematically is more, of course, output than an input. And we continue to really like what we’re seeing. There’s no doubt that M&A volume, of course, when I said this earlier in my earlier comments, obviously, M&A volume is down. PE activity is down, and we’re not going to defy that. And obviously, our originations therefore — in Q4, 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 selectivity we can still apply by having 100 people that spend every day out originating and looking at and underwriting and having built these relationships. We have credits that now we’ve known are in our system. They’re likely to stay in our system even when those companies get sold. There’s just — there’s a lot of forces at work that benefit us as an incumbent and someone that’s proven to be a really reliable partner to so many great firms and great companies. So that’s all kind of the context, I’d say, to selectivity. The — what was the second part of the question?

Ken Worthington

On the banks?

Marc Lipschultz

The banks. Yes, so listen, it’s a big world out there, right? It’s a multi-trillion-dollar credit market, and I know a lot of stories are about the banks versus the private lenders. It’s a world that needs both. Now today, the private lenders and frankly, during COVID, proved to be the stabilizing force for the market. And this is an interesting change if we think about the arc of 20-years, which is today, the private lenders, ourselves and a couple of others of real scale, are the ones that are consistently available to commercial users. And the public markets come and go.

So 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, they 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 taking up a lot of that slack and therefore, share, but there’ll be plenty of room for both in the world over time.

Ken Worthington

Okay, great. Thank you.

Alan Kirshenbaum

Thanks, Ken.

Operator

The next question is from Brian Bedell with Deutsche Bank. Your line is open.

Brian Bedell

Great, thanks. Good morning, folks. If we can zoom back in on retail, can you maybe characterize how you’re sensing that risk appetite? Obviously, the tougher environment, but we do have a couple of quarters of positive markets. Do you think that is improving the risk appetite near-term or people are remaining cautious?

And then kind of contrasting that with the conversations that you’re having with the gatekeepers of the platform, are they also cautious or more likely to embrace some of your differentiated products, including Real Estate? And I don’t know if you can 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 any of those, but any color would be great?

Doug Ostrover

All right. That’s 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 at the firms, they really want new, interesting, differentiated type of strategies. And the reason the firms, the gatekeepers want 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 bases. So they have been very receptive.

Now we haven’t rolled any of these out. But I think, hopefully, in the next quarter or two, we’ll announce at least one and maybe two that we’ll be working on. In terms of the risk appetite, the retail investor, it’s too early to say with the market up year-to-date. Our flows are still decent, but we haven’t seen a big uptick or downtick. But I — 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’s this focus on quarter-over-quarter, but we’re thinking year-over-year. And I will tell you as we go out and we talk to those gatekeepers in particular and some of the largest advisers, they are all very focused on all. So I think we’re in the right place. We’re well situated, and as I said earlier, I would anticipate we continue to get more than our fair share in the space.

Marc Lipschultz

And one thing I could add, it’s far 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. Our products, which have been the Blue Owl brand, the Blue Owl place within the system, is all built around products that are about stability, predictability and very strong yields. Remember, in our credit products, we talked about the strength of the credit performance before, we’ve also been raising the distribution rates. I mean, how many products, how many asset classes in 2022 where people call in investors and saying, I want to let you know the returns are going to be better than you thought. I mean that’s not a common threat.

And even when we talk about real estate, definitely not a model if you 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 you’re not talking about trying to buy a building and re-lease it or hope it stays leased and deal with operating expenses and 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 it lives under the word real estate. So even within these categories, there are real differences that I think play to our strength, and we’ll continue to develop new products, as Doug said, that hopefully continue that streak of delivering something different to our partner managers.

Brian Bedell

That’s great color. Thank you.

Alan Kirshenbaum

Thanks Brian.

Operator

The next question is from Mike Brown with KBW. Your line is open.

Mike Brown

Great. Hi, good morning, everyone.

Doug Ostrover

Good morning.

Mike Brown

So wanted to ask on the FRE margins. You achieved the 60% margin target for 2022. And Alan, you gave the G&A guidance for ‘23. So it sounds like the margin can continue to see expansion into 2023. But I just wanted to check if there any puts and takes we need to consider here? And then is there a target that you have for 2023?

Alan Kirshenbaum

Sure. Thanks, Mike. I 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 about the mix shift. Doug touched on the mix shift as well. In 2023, I’m reaffirming the 60% FRE margin, that’s what I think folks 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 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 2Q, but in the back half of the year, in particular, we could see a little more in 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 raise.

So there’s a little bit of a push and pull when you think about FRE margin and think about the mix of our fund raise and how much is from the wealth or retail channels and how much is from the institutional channel.

Mike Brown

Great. Thank you for the explanation. Thank you for taking my question.

Alan Kirshenbaum

Thank you, Mike.

Operator

The next question is from Chris Kotowski with Oppenheimer. Your line is open.

Chris Kotowski

Yes, good morning. 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 used to looking at the front tables from a normal private equity fund. We watch it get to like 60% invested and then they will start raising the next one. And then when it’s 80% or 90%, it swaps over.

But when I look at the fund tables in your most recent 10-Q, Funds IV and V — excuse me, III and IV were only about 60% invested. And presumably, the rest of that money is spoken for, but not drawn. And Fund V is only about 11% invested. But you’re already talking about — so how should we exactly expect that — how does the drawdowns and the dynamics of the handoff from one fund to the next work?

Michael Rees

Yes. Thanks for the question, Chris. The — what you really should focus on is the date that we quote turn on the fund. And 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 given fund. And that can span a reasonable amount of time, upwards of a year or even two, but the fees are all the payable once the commitments come in. So I wouldn’t focus as much on the amount of capital that’s gone into each fund. We commit to deals of 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 Owl P&L. What we all focus on at the management company level is how much we’ve raised in total commitments per fund. And we’ve got about $4 billion left in Fund V. 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 ’23 about Fund VI. And the key question is when will we flip the switch and turn on fees for Fund VI, it’s likely to be at some point in ’24, depending on pacing of deployment for the rest of this year.

Chris Kotowski

Okay. But — and by the time it flips over and turns over, I mean, let’s assume you were targeting 10% or 20% more for Fund VI than for Fund V, but presumably, the first close would be some fraction of that, right? But…

Michael Rees

Correct. That’s correct. We wouldn’t — it’s unlikely that we will have a one and done close for a big fund like that. It’s not how we typically do it.

Chris Kotowski

Okay. That’s it from me. Thank you.

Michael Rees

Thanks, Chris.

Operator

The next question is from Patrick Davitt with Autonomous Research. Your line is open.

Patrick Davitt

Just a follow-up on the guidance this year. I guess, firstly, you mentioned the lighter deployment rate this year. What are you kind of assuming year-over-year in terms of deployment in that guide? And are you anticipating any inorganic growth in that guide? Thank you.

Alan Kirshenbaum

Sure. Thanks, Patrick. Inorganics, I’ll leave that to one of my partners to talk about. 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.

Patrick Davitt

Sorry, deployment, yes, that’s obviously a part of the equation as well in credit.

Marc Lipschultz

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 with the variances, the deals we see, the investments we see, we really like. So our shortage, if anything, today, is really capital certainly not opportunity — well, put another way, it’s a shortage of capital against those opportunities. So the exact state of the M&A market in the second half, I don’t really know.

In terms of impact on P&L, frankly, 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, and that’s what our — we’re built on.

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, there’s 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 Blue Owl and across the platform? Is it a place where we can really deliver a market-leading role and performance?

Clearly, in the spaces we’re in, in GP Solutions, in triple net lease, we’re the clear market leader in Direct Lending, one of a couple. And that’s important to us that we’d be in products where we can really lead. We are not all things to all people. We want to be a handful of really good things to a wonderful side of investors. And then culture fit, critically important, take all that together, Oak Street is certainly a study in the kind of opportunity that we look for. We get a lot of inbounds, as you would expect, and 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.

Operator

That will conclude our question-and-answer session. I’ll turn it over to Doug Ostrover for any closing remarks.

Doug Ostrover

Well, thanks, everybody. We appreciate all the questions. We’re clearly proud of our results for ’22. You’ve heard us in the past talk describe our business using the words I think Marc touched on the stability, profitability and growth.

And just to highlight the growth again, revenue, FRE, DE, AUM, all up well over 40% year-over-year. And I think you’ve got a sense on this call, we’re equally as excited about 2023. And we’re reaffirming that $1 billion of DE. So appreciate all the support, and look forward to talking to everyone soon. Thank you.

Operator

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.