Marc Lipschultz is co-founder and co-CEO of Blue Owl Capital, one of the fastest-growing firms in alternative investing. He's a key architect of the private credit boom, helping companies access capital beyond Wall Street's traditional gates, and a key player in financing America's data center buildout. Lipschultz captures a defining shift in modern finance: the rise of long-term, steady capital powering the real economy.
Marc, thanks for being here. We are coming up on the 10th anniversary, I believe, of Blue Owl, or kind of what you had a former name of the firm. What was the original thesis? You left KKR to do this. What was the thesis?
The thesis was do my job for 10 years and then I'll get invited to the Axios conference. So mission accomplished.
So work. Does that mean I get a cut of the market cap? It's not bad. Okay, we'll talk about it.
You know, the thesis actually then and the thesis now remain very consistent. That's to say the principles we set up the firm. So I've been in the alternative investment business for 30 years, starting in the world of private equity when it wasn't called private equity. But 10 years ago when we started the firm we had three basic ideas. One was that we wanted to be a capital solutions provider. That is to say provide private capital, bespoke solutions to a wide range of users, corporate users, and be the picks and shovels, if you will, to the sort of finance industry. Second, the reason we wanted to do that was so that we could create a set of products, investment experiences that were about downside protection, stability, predictability, yield generation. Those are the attributes of all the products we do today, then and now. And then the third point was to basically make sure we could present those opportunities as true to individual investors and institutions as true peers. Not oh, an institutional firm that could do something for individuals or an individual firm trying to do something for institutions, but purpose-built to serve both. Those three were the principles then, those three are the principles now. 10 years ago it was a thesis and you know today we manage about $300 billion across a set of adjacent strategies.
And one of the big strategies within that is private credit, obviously, which is, which I think probably when you launched the firm most people didn't know what it was, even on Wall Street didn't necessarily know what it was. Everyone knows what it is now. The beginnings of, maybe not the beginnings of private credit, but say the maturation of private credit, I mean from your perspective, how much of it was regulatory arbitrage?
Yeah, I think this is such an interesting topic. So everything you said is, I think, the correct hypothesis. Private credit wasn't invented 10 years ago, but actually this modern incarnation pretty much was. Like if you look back prior to that, we weren't talking about lending to the best companies being a lender of first choice. Rather, private credit had largely lived as a lender of last resort. And part of our thesis, and not ours alone, was to redirect the business toward being a preferred lender for the best companies, not the lender you went to if you couldn't get anybody traditional to lend to you. Now, as for the regulatory arbitrage, I'd put it in two categories. There certainly was a regulatory element at the time post-crisis that led to a lot of restrictions on the banks participating in the traditional marketplace. And so that was distinctly a catalyst for accelerating the transition from the traditional bank.
Would, I mean, would Blue Owl exist? Maybe is an overstatement, but would it be what it is today if the post-crisis, if those rules hadn't been there? If those Dodd-Frank rules, if those extra weren't there?
And you know, it's an interesting hypothetical. I'd say this: the fact that those Dodd-Frank rules were there and the shift that that accelerated in the market most certainly, you know, opened the aperture. But that said, this is maybe actually a perfect lead to the second point. This migration from a traditional, hey, banks lend money to these, by their measure, the midsize corporates, large by our measure, in the private world, but this, that was happening for 20 years prior. Like when I started in 1995 at KKR, when we had 20, you know, professionals, front, mid, and back office, and a gigantic $3 billion fund already, we were on the front edge of this migration from banks being lenders to banks being intermediaries. And that's not a critical comment. It's a business choice. And that already had been happening.
They like to still be lenders, by the way.
Well, they do and they don't. They want to be underwriters. It's a very profitable business. They actually don't want to be lenders. And that's not pre- and post-crisis. How they took risk on their balance sheet, who owned it for that interim period of time changed. But keep in mind in 1995 when we did a financing, we'd actually go to mostly banks that don't even exist anymore because they've all consolidated, and they'd literally say, 'Okay, I'm going to take 500. I'm going to take 250.' And we, you know, write up a spreadsheet of literally who's taking the debt. And over the next 24 years before the crisis, that was changing dramatically. The banks had long exited the primary business of being the lender and become the intermediary where they can make a higher return on capital. So in a way it's a very interesting intersection because both, I guess, could be true, which is it was this trend away from being a lender to being an intermediary started decades before the regulatory change accelerated the transition.
As you know, private credit has come under some scrutiny, more scrutiny than usual in the last couple months. There was a couple companies that went bankrupt, neither one of which were your companies, neither of which were really actually had private credit. But in the aftermath of that, Jamie Dimon of JPMorgan obviously comes out and somehow pointed a finger a little bit at private credit. He made the comment that you all have to start looking for other cockroaches. Is he right? Are there a bunch of cockroaches sitting inside the private credit portfolios?
Well, we take it in layers. Let me start with the thing I can speak the most directly to, which is Blue Owl. And our credit is, our credit's in outstanding condition. Our portfolios are in outstanding.
Well, I mean, it's part, when you say that, I mean part of the argument that I think Dimon would make, and I don't want to speak for him, he could have come and done that, would be, would be you don't necessarily know because there's looser standards on the debts. It's easier to defraud you. So it looks good, but in, you know, that's the whole point of a good fraud, right? The lender doesn't know.
So you know, ironically, you know, the thing is we do know. Now, let's again, let's accept that fraud could happen to anybody. Like, I'm not pointing fingers. Thankfully, we haven't experienced that problem. I think there's a lot of reasons to think there's a much lower likelihood of private credit markets being susceptible to it. But that's even a, that's a sideshow to this point. Let's put credit fraud in its own little box and kind of talk about credit more broadly. And there we know a tremendous amount, which is to say this is one of the advantages of private credit, which is we do extensive due diligence. We have much more restrictive documentation and we get to be interacting with the company on a continuous basis. Our documents, our covenants, our restrictions on what that company can do are far, far tighter than the public market equivalent. You know, sometimes my partner Craig, you know, says it this way, which is directionally correct: our weakest document is probably better than the best documents in the public market. And when I say the best document, what can you do once you're a borrower without the permission of your lender? Because we're not a diffuse lender. We are the lender, or we and a couple others like us are the lenders. So we are in a constant dialogue and we start with very much, very restricted on what you can do and certainly we're watching out for the ability to move collateral, to put debt ahead of us. It's a simple capital structure. There's equity and there's our debt. And either you're going to own it or we're going to own it. Preferably, you're going to own it. And the experience over the last decade for us has been an average annual loss rate of 13 basis points. But most importantly, to your point, because it's a forward-looking question, remember, when you're a private lender, we're getting information from companies with quarterly, monthly, weekly, if it's in some cases. So we know exactly what's happening with those companies. Nobody goes from 'I'm doing fine, I'm doing fine. Boom, I'm in trouble.' That happens in the public market because nobody knew they were already in trouble. In our world with sponsors, remember, we have sophisticated sponsors, also an important part of this equation, that own these companies, highly credible people, right? The KKR world, the, well, in our world, most of what we do is sponsor-backed. People used to debate, is that a good thing or bad thing? Our argument now, probably proving true, is it's a good thing because you want someone that has a big concentrated position that's sophisticated and actually is going to detect any problems and certainly isn't going to pass them on. You can be sure those reputable firms aren't the ones that are overseeing those kinds of problems. So what does it allow us to do? It means if you have a problem, we see someone underperforming projections, underperforming, then they call us and say, you know, hey, I might have a covenant problem in two quarters, let's talk about it. We know quarters in advance before there's any kind of broad problem in a portfolio. Could any one company show up? Sure, I suppose it could. But I think the total misunderstanding is this idea that there's something lurking that could kind of spring upon us. It can't.
It's one of the things, you know, you talked about and we've talked about this 10-year period with the, with the kind of the COVID blip. I'd say from an economic standpoint, the COVID blip, right? Because the markets came back very, very quickly. This generation or this evolution of private credit really hasn't had to operate in a bad economy, in a recessionary economy. Does that change things if we end up in a recession? Does that, does that change not just trajectory, obviously changes trajectory, but do cockroaches come out from under the cupboards if the recession hits?
Well, a couple thoughts. In extreme distress, I mean a negative, a recession of any sort. Clearly that is negative for any company and any part of any company. So it'd be silly to suggest like, you know, we're living in some, you know, some vacuum or bubble. Of course we're not. However, when we underwrite credits and we've looked at 10,000 of them to make the loans, we have over 10,000 now. We are modeling the cases of, hey, let's suppose it's another GFC. Let's suppose it's another deep recession. So it's not as if these haven't already been considered that way. And the loan to value with these sophisticated buyers, we lend on average 45% of the purchase price. So remember this is going to be very important. The other party has to lose 55% of the money, right? More than half the capital structure for us to have $1 of problem. So will there be incrementally more companies that have challenges in a recession than not? Absolutely. In which case you'll be extremely happy that you chose to be in a senior secured lending product as opposed to an equity product or a junk bond product. So it's a little bit of compare to what comparatively he'll probably do even better comparatively. I prefer no recession. I don't see one right now.
You talked about, you talked about earlier kind of how the firm has grown and you've purchased a bunch of things. Obviously, you guys had the big merger with Dial. You added things on both on the private credit side and the real estate side, even a life sciences kind of growth equity investment firm. What's the next capability for Blue Owl that you would like to add either organically or inorganically?
So our business has one thing that hasn't changed, or those three things that I described before, and then one that's always changing, which is look, what we want to do is get positioned where there's ultimately an imbalance of capital in favor of the provider or where there's a marketplace that hasn't yet adopted private solutions and you know sort of seen the value of that proposition, or as we put it, copying Wayne Gretzky, trying to skate to where the puck is going. So I think actually the two places the puck is going in our world where you have those attributes of more protected products is in alternative credit, meaning like asset-backed credit, and in digital infrastructure. And actually we're in a fabulous position in both of those. So there's no other market we look at today and say, gosh, we have to be in that market. There are logically adjacent markets. There's, we're leading in digital infrastructure. There's obviously broader infrastructure. We do US-focused private credit. There's European private credit. I mean, there's some logical adjacencies, what I'll call strategic imperatives. You want to be ahead of the game. I think we feel like now we actually have assembled those.
