Billionaire Marc Lipschultz Talks Access To Private Markets, And The Real Opportunity To Win In AI

Most problems in financial markets ultimately come out of using short-dated capital to do long-dated things.

Well, it's a privilege to be here, Manita, and I never thought I'd be in anything where I was labeled as an iconoclast. So, I'm thrilled to be here.

So democratization of alternatives, you know, either could be taken as too highbrow a term or, you know, exactly right, which is to say it's about broadening access to these products. And let's, you know, be a little more colloquial about it. It's sort of private investment strategies that can be a great part of an investment portfolio, as that has been the case for institutions for decades now. You know, I started my career in alternatives, it wasn't called alternatives in 1995 at KKR, and you know, we had one fund, and of that one $3 billion fund, half of it came from basically two institutional investors. So you know, there's been this long run where institutions have benefited from being able to add to their portfolio better risk-return products, and democratization, to our way of thinking, and it was actually one of the founding principles of our firm, was saying, hey, that same experience, that is to say the same investment experience, needs to be delivered to the individual. And there's a lot that goes into making that happen, but I think democratization is that broadening, sort of putting down the drawbridge and letting individuals be able to get those same privileges.

So, broadening access, democratizing access, I think, has a few core attributes. Well, first and foremost, obviously, what any one of us has to deliver is a superior investment experience, right? Bedrock is it's got to be a great risk-return result for the investors. That's job one. But then to make that all happen, there's a lot that goes in in terms of what I would say is, let's call it structure, and to a degree it's culture. So let me unpack that a little bit. So investors investing in a Blue Owl product, an alternative investment product, there's nothing, you know, exciting about, oh, that's great, I have a Blue Owl product, unless it delivers that institutional-quality experience and result for the individual. So the first thing is to make sure you design, actually it's your whole firm as far as I'm concerned, around this idea that individuals are true peers to the institutions. It's not, hey, I'm going to add individuals to this institutional world. It's not a, oh, that's convenient for the moment, and we're seeing that today. There's a lot of people are going to dabble around the edges of this, find out they're not set up for it. The investor experience isn't going to be great, and they'll all retreat again. But those who are committed to staying, it's a commitment to actually saying, I'm going to make sure that they actually get not just access to Blue Owl, access to the very best of Blue Owl. So when we built our firm, we from day one said any investment, for example, any loan we make in direct lending, that same loan goes to the institutional investor and the individual investor access point. So I talk about them as access points. So I think part of it is that's a very big commitment actually structurally, and very few firms can or will make that commitment.

So I consider us very fortunate, and I think, you know, maybe ascribing to that notion that, you know, good luck or good fortune is something about, you know, preparation meeting opportunity. You know, 10 years ago when we created Blue Owl, we saw an opportunity, and it really was, you know, at its core this democratization as one principle, but the idea had two elements to it. One was in alternatives, if we look at the 20 years prior to that 10-year-ago moment, let's say, what we found was alternatives were mostly about high octane, right? They were about really high returns, pretty high risk. You saw private equity strategies, which are wonderful strategies, but they're one side of the curve. And really that had been the evolution of the industry. And what we saw was an opportunity to complement that with strategies that are much more, and all of the Blue Owl strategies are about downside protection, about stability, predictability, current income, and inflation protection through some of the strategies, including private credit is a big key emphasis for the fund, right?

Yeah, private credit. So, we have three core businesses at Blue Owl, all of which share that set of attributes I just described. So, private credit is our largest and probably the easiest to see those attributes in. Right. What we do is senior secured loans to big companies that have a lot of earnings, have a big backer, a big equity check. So, it's all about making sure that when we make that loan, we're going to get paid back. And it works. We've done well over a hundred billion dollars of those types of loans. And our running loss rate, right, has been 13 basis points per year. So, it's working. Now, I'm not suggesting, you know, of course, we all appreciate there's risks in the world, but the whole point here is to build a strategy that's durable to those risks. So, private credit, easy to probably see. Then within the world of real assets, which is another one of our large businesses, what we do in real assets, which again is a big word, is something very particular. We do real estate that is leased to extremely strong tenants, investment-grade tenants, either generalists like an Amazon distribution center or highly specialized tenants, and this is probably the highest growth area within our business and perhaps in all of alternatives, which is the digital infrastructure, where we're actually building and leasing for 15 or 20 years at a time, right? These pieces of infrastructure to the Microsofts of the world. You can't get a better credit quite literally today. It's rated better than the US government. So again, durability, you've seen the theme emerge here. It's not, there's a lot of ways to participate in real estate, and there have been high-octane ways. We came in and said, what is the predictable, stable way? And then we have our GP strategic capital, where we buy equity interest stakes in other alternative asset managers, right? So we just become, we share in the fees they collect, and as you know, the GP business has been a good business. It's a very predictable earnings business. And so we acquire and take our share of cash and return that to investors. So in every case, it's much more about that durability, predictability, not about adding to sort of the volatility. Quite the opposite. It's about making your portfolio less volatile, more predictable, and generating that steady income.

So the huge shift, let's start maybe with unpacking why is there a huge shift. So why are private markets growing and the number of companies, for example, in public markets shrinking? Well, first of all, let's start with the diagnosis. The diagnosis is there's something about the durability, predictability, the partnership. We like to call it the three Ps, for example, of direct lending. And quite literally it is that predictability, privacy, and partnership that people value. This idea that to run a business successfully, to create a lot of value, you need to be able to think not day-to-day, week to week, quarter to quarter, but rather plan for the long term. And public markets, frankly, have gone the other way, right? Public markets trade in, you know, nanoseconds now in the world of programmatic trading, and so, and this quarterly rhythm, as you know even today, is being discussed by the administration. Is that even healthy? Well, in any case, what we clearly have observed, and we know our business thrives on the idea that we can present someone with a long-term solution. So they can say, where do I want to be in five years with this business? So it's not about, you know, where am I today? What happened this quarter? But rather, where am I going? And again, the digital infrastructure is a perfect example. It is pretty clear that when we look over the next 10 years, the transformation of the economy, the digital transformation, and in particular the artificial intelligence transformation, is going to be dramatic. But it's not about tomorrow, it's about being in front of that wave for the next five and 10 years. And that's where private solutions are just so well suited. So what we have seen as a result is the burdens of being a public company. The burdens of that tempo of minute-to-minute, quarter-to-quarter are a real disadvantage for many companies. So today, as you just observed, 80% of companies with more than $100 million of EBITDA are private. So if you're not participating in private markets, you are missing out on a huge part of the economy. And that is the part that brings us back to this democratization comment we were having before.

Yeah, you know, look, obviously it's from a business interest for managers to say, oh, well, we, you know, we'd like to provide access to other investors. Of course, we're trying to make sure we have access to capital to deliver to the users of our capital. So, not suggesting it's selfless, right? That said, you know, when people think, well, you know, what's the motivation here or what's the benefit to the individual investor? In addition to the superior risk-return, absent participating in private markets, you are missing out on diversification. You are missing out on big swaths of the economy.

Yeah. If you stay in the only public market environment, and listen, public markets are a really critical part of the economy, and the very biggest companies in the world, they're public companies. And so by no measure am I suggesting anything negative about the public market, but rather the combination of public and private is what gives you a whole look at the economy. And it is also true that more and more of that lens requires that you participate on the private side. And we can see it in the public company count as well, right? You go back 20 years, there were probably just about twice as many public companies as there are today. There's something like 4,000 public companies. There were close to double that 20 years ago. So by every metric, the public market is becoming a less significant part and the private market is becoming a more significant part. But it's not one or the other. It's about having a healthy ecosystem. Both are what make, for example, the US capital markets second to none. Not even close. The US capital markets thrive because we have depth and vitality in both those marketplaces.

So investors are asking, how do I use privates to get a better result at the end of the day, right? How do I complement my current strategy? Again, this is not about wholesale replacement. It's not that public markets don't play a big role in any portfolio. Public equities have been a really successful strategy. They will continue to be a successful strategy over the long term for people. So it's about adding and complementing that with things. For example, take our strategies, and again, I'll just use private credit to keep it simple. At the end of the day, we do senior secured loans, as mentioned, and we've been able to deliver returns, results that are hundreds of basis points better, hundreds of basis points better than the public liquid credit market or that, you know, syndicated credit market. You know, we generate returns that are, you know, generally have been in excess of high yield, of junk bonds, and yet we're the senior secured lender, which is safer, much safer, and our losses are lower than the comparable public market. We're not saying here, why don't you make this trade? We're saying, how would you like to have a safer portfolio and a better return? Now, again, we appreciate everything has its trade-offs. Some of those trade-offs are about liquidity, and we should be very clear about that. You know, one does not have access to their money every day when you commit to a, you know, illiquid or partly liquid strategy, but that trade-off is very...

So our products, we have a range. So no, a typical loan, for example, we might have a stated maturity of five to seven years. Typical loans probably out for three years. But actually we architect products that depend on the user. Listen, for big institutions, many of the biggest pensions and sovereign wealth funds in the world are investors with us, right? They have no use for access to liquidity. They're managing hundreds of billions of dollars and they're saying, listen, what I want to do is have a way of investing that for the next five to 10 years, you're going to generate these great returns over and over again. For individuals, we've created access points that are much more about having partial liquidity. So we have products in like our core income product. We have this now in an interval fund, which is actually one where we have kind of greater access. So I'll come on to that as an example, interval.

So look, we listen to the customer like any business, right? What we have to do is meet our customer where they're at, understand what they're trying to accomplish. And as I said, for some big institutions, liquidity is not meaningful. You know, they're kind of perpetual entities. For individuals in many cases, some access to capital is very important to them. And so what we've done is create an access point. And the beauty of a product like credit is it actually does have a natural liquidity rhythm to it, right? Because what happens in credit is, take our core income product, has $30 billion of assets, hundreds of loans in it. Well, every loan has a different maturity. Every loan will get paid at a different time. So there is an actual natural rhythm to be able to give people capital back at times they ask. We've given capital back from that product every time someone's asked. We've never had to hit the limits on that. They're built to be durable so you don't get forced into having to get out of loans when you shouldn't. But the key is to have a product where people should never want or need that. And if they want or need it, you meet their needs. And by the way, if you don't meet them in one quarter, then hopefully you meet them the next. The key is to have realistic conversations with investors and make sure, listen, there is a little bit of something here about illiquidity that you ought to acknowledge, but the return you get, the incremental risk-adjusted return, it's really compelling. So mix it in prudently, have a great financial advisor, do your own work and your own research. You know, all of our jobs are education.

So I love that question, and there's two, you know, two things can be true at the same time, as they say, right? Which is absolutely there's a lot of investors who figured out that using the right private products, something like, you know, our credit product or our real estate triple net lease real estate products, using those products is actually a flight to safety, whereas again, back to this earlier point, when alternatives were high octane, that might be considered the risk. Now there's actually the flight to safety, and I'd say maybe the people that are most sophisticated on the topic, most educated on the topic, probably do see that it's actually a flight to safety. That said, there's a large share of the world, and I entirely understand it, who are saying, I know that sounds complicated. It sounds exotic to me. And so they, by definition, would just define it as, oh, that must be something riskier. And our job is, I think, to make sure to both put the proof in the pudding and then do as good a job as we can educating people about the opportunity.

I think the onus is on us as an industry to provide the information, the education, the facts. I'm lucky to be able to talk with you today because you bring to your audience this kind of education. So this is an incredible opportunity as far as I'm concerned. You obviously understand this industry. You have an incredible following, an incredible audience, and a chance to come and just talk about what we do, hopefully in relatively plain language, is part of the job. I understand why people don't understand what we do. People are busy. It's not their job to go figure out what is the difference between, you know, you mentioned the interval fund. Our interval fund does, for example, one kind of credit, which is so-called asset-backed credit, right? Alternative credit. So it's doing something where we're working in actually much shorter duration, and there's lots of cash being generated, and that's what makes it really good for this interval fund structure. We can come back to that, not to use a lot of technical terms. But in any case, you know, the idea is for us, it's not their job to go figure that out. It's our job to make that information available. So we've tried to do a lot on the Owl's Nest. We have an online set of resources just to explain our products. We just launched a new thing called the Talon, which is about tax efficiency and tax impacts of products. So we're trying to do our best, but nothing's better than a conversation with a thought leader like you.

Yeah. So investor education, which by the way would be the job in any investment business, but especially in this world of alternatives. I don't even like the term because by definition it suggests that it's something different from the mainstream, and that's not what it is.

Let me tell you a story that relates to this. So when I started, as I said, in 1995, I started in private equity that was not called private equity. Our business was called leveraged buyouts. And along the way, you know, people of course said they didn't like the name, in fact, because it implied too much about the financial engineering and less about what we were really, the value proposition, this idea of durability and private capital. And, you know, I still remember conversations where we talked about, well, we need a different name. And that led ultimately to private equity as the rebrand for LBOs. So, you know, we've been to this movie a little bit before.

That is, I can remember being, so to speak, in the room where it happened. I recall Henry Kravis very specifically being, you know, one of the key thinkers behind this topic of how do we, you know, help people understand what we do. And so there's an example of the same topic. So then alternatives wasn't a term either because there were only a few firms and it was these kind of, quote, obscure corners of the world. And then of course that changed, and then it became an alternative to publics, and that probably had its day in the sun and was logical. Today it's not an alternative, it is a direct, you know, complement. It's part of a peer to the public markets. So I don't know, maybe it's privates versus publics. I know we'll have to work together on a new brand.