We don't do a lot of this kind of event. We haven't done one of these together in a very long time. Liz, we're here to talk to you and Rohan.
We have real keyman risk on the pod right now.
Welcome back to another episode of Compound Interest from Semafor Business. I'm Liz Hoffman, Semafor's business and finance editor. If you've been paying any attention at all to Wall Street over the past few years, you've heard of Blue Owl. They embodied the rise of private credit, the explosion of lending that's moved outside of banks since the 2008 crisis. And for the past year, they've been the face of a big reality check for that industry. Investors got spooked. They're demanding their money back from Blue Owl and peers like Blackstone, Apollo, and Aries. And because these things can't be bought and sold quickly, like a share of stock, the firms have had to limit those redemptions. So, what we've got is a slow-moving run on a very big bank. Well, you haven't heard as much from Blue Owl themselves. They've kept a pretty low profile over the past few months. And today we're talking to the CEOs, Doug Ostrover and Marc Lipschultz. They are Wall Street veterans of KKR and Blackstone. And they did as much as anyone to invent this particular financial industry and have seen the weather change very quickly around them.
I've written a lot that I think the panic in private credit is overblown. But there are real questions about how these loans will hold up, especially as interest rates stay high and borrowers get squeezed. But even if it's fine, it's unlikely to be the growth engine that made Blue Owl into what I've sometimes envyingly called a Wall Street super band that combines lending, real estate, sports, and increasingly big bets on AI data centers. So, where does Blue Owl go from here? What do Marc and Doug see in the AI buildout that makes them nervous? And why not just take the company private? We'll get into all of that with Doug and Marc in just a minute.
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Doug and Marc, welcome to the show.
So let's start here. Blue Owl was the poster child, I think, for private credit on the way up and has been, fairly or not, the face — I won't call it the way down — but of the stress over the past year. Investors have soured on private credit in general and to some degree on some Blue Owl funds in particular. What, as you sit right here, Doug, we'll start with you. What are you seeing?
Well, I think there's a really big disconnect between what's actually happening in private credit versus what the market thinks. So, perception versus reality. And you know, before we jumped on, Marc and I were talking about this because the asset class is doing really well and by the way, we're looking out the next 18 months and we think we're going to put up fantastic results. So we kind of were asking ourselves, what did we miss? And we both decided like, First Brands here was this random auto parts company. I had never heard of it. They didn't finance in the direct market. It went bankrupt. I believe there was fraud. We really don't know much about it. And yet it became really important, like this watershed moment. And so as we look back on that, not just us, but I think our industry, we should have been more proactive about helping people understand this market. We're not doing anything new. I've been in the loan business for almost 40 years. It's all I've ever done. What we've done is we've just taken what was a syndicated loan, made it a better product, made it safer, higher returns. But we haven't done — we probably could do a better job explaining that. And so, we're at this weird point right now where performance is good, yet in the market there's this perception that things are really bad.
You know, I think also what Blue Owl really is, you know, is sort of a misunderstood component of this. You know, as you noted, the sort of almost interchangeability between direct lending and — well, and yet actually, direct lending is about a third of our business. A very good part, by the way, to be clear, we love that part of our business, but our fastest growing business is our real assets business. Sitting here right now, this is exactly the environment where — back to direct lending — where direct lending thrives: a rising rate environment, a strong economy but uncertainty on the horizon. Institutions see that, institutions are actually moving into the asset class. But you know, with a little bit of the irony that today is exactly when direct lending thrives.
But one more here is there, you know, I went back and looked at the investor presentations from your early days and it was a very growth-heavy message. Which made sense. There's a lot of money coming in. You were well positioned to get it. Is there anything you'd have done differently in how you marketed the fund, the kind of growth you were targeting, the message that you were selling to the public?
I don't think so. You know, when we started the business, we had this simple premise. Let's be one of the premier solutions providers to this private markets ecosystem. Let's be narrowly focused. Let's not have as many funds as our peers, but if we get in a business, let's be a market leader. Let's also make sure that we can generate high current income in everything we do and protect the downside. So that was how we built the business. We started, if you remember, we had our credit business which was big and we thought, oh, we can help PE firms finance all their companies. But the one thing we as a business were really focused on is it's a competitive market. We're never going to become complacent. So, how do we get better? So the first thing we did was we said, oh, let's merge with the GP stakes business, the leading GP stakes business, let's make one firm and go to all these PE firms and now have the most unique offering we can.
This is the old Dyal business that owns stakes in the general managers of the private equity funds themselves, as an investor in the PE businesses.
Exactly. So the idea was let's merge these two because you were mentioning would we have done anything different, the answer is no because we came to market with this very unique offering. To your point, we could up at the GP level through the old Dyal business now provide world-class solutions. Just so you know, that business we're probably bigger than our five biggest competitors combined. We were voted the number one PE firm globally this year. So, it's a business that works. It has very steady cash flows. The credit business has very steady cash flows. I'm sure you're going to want to talk about data centers, the asset-based business. What we've created for our investors, and I think it's important because you talked about growth, what we've created for our investors, I believe, is a very steady stream of income. You can look at our funds. Our funds pay management fees for a very long period of time. We created a model that was different than everybody else. Basically just under 100%, let's call it 98% of our revenue at Blue Owl comes from management fees. So as an investor, you're not worried about, oh, are we monetizing assets, generating carry, what are our transaction fees? This is the most predictable, highly stable stream of income there is. And so the key for us is what is our margin? And we've had very consistent growing margins, 58, 58, 51.5%. And the question is growth. We had very high growth through until this year. And then a combination of credit and the media, it slowed our growth down. And I would tell you as a management team, as we look at the business, we like how we're positioned and if we can accelerate growth again with a high dividend, I think the stock has a lot of upside.
For our listeners, that growth was fueled in part by retail investors, non-institutional investors, and part of how you and your peer firms have pitched these products, these funds, is as semi-liquid. And that's a distinction that I think has confused, has stressed a lot of folks. Is it just that we need to come up with a new term for what we call liquidity here?
I don't think so. Look, we are taking illiquid assets and creating a semi-liquid product around it. And here's the bottom line. It's working. Let's just take credit. If you are invested in our credit product, our semi-liquid product, you've earned in excess of 9%. Now, you could have gone and done a public high yield fund. You would have missed out on 600 basis points of incremental return. You could have gone to a loan fund and you would have missed out on 300 basis points of incremental return. You should know there will be periods where you can move in and out of these funds. There'll be periods where redemptions are low. You can move in and out, but you should assume there will be periods where you have to wait to get your money. I think the key is what we're focused on is making sure that what we bring to wealth are things that we would put our own money into that we think are appropriate for the wealth investor. Triple net lease, very safe. Credit, despite the narrative, we believe it's very safe. And so these are things that we think are appropriate and we're showing the market if you're willing to give up a little liquidity, you can make a lot of incremental return. And so I think it makes sense.
They're being sold these products though generally through their financial advisers who are incented in different ways to sell different products. And I wonder if part of the issue is, is there an incentive to put your funds, these funds, in portfolios that maybe just shouldn't be exposed to them?
I don't think there is an incentive, at least the way we come to market. Look, we work with the best platforms and partners in the world. These are incredible organizations, great financial advisers, and they succeed by delivering, exceeding, or meeting people's expectations. Remember, this is a really key point to keep in mind. The products, despite all the noise this year, the products are delivering. And as I just sat sitting here today, one would be very thankful to be in a floating rate product where, in point of fact, problematic loans have not changed in any material fashion through the course of this year. So I don't want to speak for all FAs. I don't want to speak for all products. I certainly think like any market that is changing and growing, it's partly about manager selection. And that could sound self-serving, but it is true. It matters. Are you equipped to meet that channel and to educate and deliver the right product and communicate and answer questions and deliver, of course, the promised results? There's no magic in all this.
So this is, you asked the question about these semi-liquid products. I think part of this whole evolution of alternatives, of privates going into the wealth market, is also about making sure we understand it's not all — you can't take an illiquid asset and magically convert it to something liquid. But what you can do is take a pool of assets with a lot of different investors and create exactly what it's called, a semi-liquid, a partial point of access. Doug, you know, quantified this, and in particular a product like direct lending, remember it has a natural liquidity to it. That is to say there's hundreds of line items in that product that Doug referred to, that kind of our large main product that has that entry and exit option. It has hundreds of different loans, all of which have different maturities, all of which are paying interest, all of which are being refinanced or sold on different schedules. So when you think about this idea of 5%, it's actually not a stressful undertaking. That's not a stressful number because we have loans being repaid every quarter.
But to just put a fine point on it, there were points over the last year that depending on the fund, half of your investors asked for their money back. That doesn't seem to me like a product that is working or that has found its market fit.
I mean, it depends how you measure market fit. Again, I don't think we're suggesting this market by any measure. I think if half of Nike's customers said, 'I'm returning these sneakers,' Nike would say, 'There's something wrong with the sneakers.'
You know, at the end of the day, and it is certainly true that this is an evolving and growing market, and I don't want to suggest otherwise. And safe to say, none of us want to have products where investors are saying, 'Oh, I think I've read enough stories that I feel like I should ask for my capital back.' And so again, we need to do our best to both educate and provide information and answer questions and evolve products over time and markets.
I'd like to talk a little bit about one particular criticism that I think is often aired, which is that these things are marked at 100 until they aren't. And that you see the markdowns in private credit tend to, I think there's some research on this, be steeper than the markdowns in the bank loan market. You had one recently, classic mid-market PE-owned company makes specialty paper. I think that loan went from 100 to like 22 cents on the dollar in just a couple of weeks. And I think some people might look at that and say, how honest was that 100 cents? So, can you talk a little bit about how you think about marks, how often you pressure test them, what your assumptions are going in?
Yeah. Again, this is another one, and I'm not being defensive at all, where the narrative is just completely unrelated to reality. And I've done this, I don't want to say longer than anyone, but I've been doing direct lending since 2005. So, I've seen all the models for pricing. So, I just want to describe a couple. One is where a firm prices the loans themselves. We don't do that. There are some firms that price their own loans. There are others who use a pricing service and they get a range and they have to price within that range. There are others who use a pricing service and they're allowed to override a certain percentage of those marks. We do something completely different. We outsource it 100%. We have a pricing service that comes in and every quarter analyzes the loans. We get huge reports and they give us a mark and we accept it. The price is decided by two things, and I think you'll find this interesting. One, of course, is the underlying performance of that company, and they have access to everything we get. And so if it's outperforming, maybe it gets marked up a little; underperforming, it should get marked down. The second thing they do is they look at comparables in the public markets, and if those spreads have widened out, then our spreads widen out. So I don't want to say it's perfect, but I think when you go and you focus on a single name, I think the market has a lack of understanding sometimes of how things trade. And I used to be a distressed trader in fixed income. You can have a security that maybe is going through a difficult time, but it's going through a strategic transaction. If that deal happens, you get back par. If it doesn't happen, you could be severely impaired. The pricing service has to figure out how to mark that. Now, I'm not referring to your loan in particular, but there are these situations where you're going to have volatility because the uncertainty of the company is just higher. And again, we have no say in how it's marked. But I think it's unfair to focus on just one or two names and you see it gets marked down, that that's a barometer for the broader market. So, our loan losses over the last 10 years have been 12 basis points. Almost all those loans have been repaid, cycled through, but 12 basis points. It's a fraction of the syndicated market. In fact, depending on the index, the syndicated market is 60 to 100 basis points. When we underwrite the loan, we get to spend weeks, if not months, working on it. A syndicated loan, you get maybe three or four days to do your work. We can talk about why this is, but I bring this up because if you and I, if we had more time, I'm pretty certain I could convince you that a direct lending portfolio is actually safer than a syndicated loan portfolio.
By the way, I'm not sure I need convincing. I mean, my sense is like this is a big credit market. We're probably in a credit cycle and there's probably going to be some blame to go around, but it's not obvious to me that there's going to be a particular corner of this market that will have been seen to be a particularly bad actor. But just that this —
Can I just comment on — you made one point about the market and the asset class has been around a long time. I have a quick question for you and Rohan.
1990 to 2026, syndicated loan market, which Marc and I are saying, let's just say worst case is comparable to what we do. Probably worse, but let's just say it's comparable. 1990 to 2026. How many negative years do you think there were in credit?
I'll tell you this right now though, Doug. I wasn't alive for 10 years ago. Just so you know.
I want you to take a guess.
I would say three. I would say '94, '08, and maybe 2020, though I don't know where things netted out there.
Liz, you are 100% right. It was three years.
I was at least alive for most of those, if not —
The years you'll be surprised. Obviously 2008, which we'll come back to. 2015, the market was down 4/10 of 1%. 2022 with COVID, it was down like 1.1%. The reason I bring this up is unless we've gotten really dumb very quickly, history would tell you that this has been a very good place to be. Even 2008, which people point to, if you just stayed in the trade until like June or September of '09, you were back in the money because it was just marked to market.
But the problem with 2008 wasn't that investors in Lehman Brothers lost money. It was that it took down the entire global economy. Is there a chance that the private credit industry is plugged into the broader financial system in a way that we don't totally appreciate? Whether that's leverage you guys are getting from the banks, whether it's the panic in retail that makes them sell other stuff. Is this plugged into the broader system in a way that we haven't seen that could unravel?
You want to move risks into places where liabilities and assets are matched. And not trying to be jargony about it, but if you take a look at the fundamental problem, when you get to any crisis in the market almost without exception, it has been an issue more of liquidity than anything else, right? It's people have made commitments of capital that don't match the duration of capital. And what private credit has actually solved, when it's done — again, I'm not saying every manager every time — what it has solved as an asset class is that matching. Loans, multi-year loans belong in multi-year products, that's why they go into funds, that's why they go into, remember we talked before about those wealth vehicles. And that feature, which some people have called the bug, the feature of the 5% tender is to ensure you cannot have that mismatch problem. And even more to the point, the bulk of our capital, as we've talked about, sits in these vehicles like the vehicles that are permanent, literally permanent. And so there is no point at which that capital — so you have actually the inverse of the problem that has actually created those contagions and problems before. It's the inverse. We actually have the capital tied up so that you have it matched. So now you're just about performance. That goes back to Doug's point actually, then these long arc questions are what matter as long as you can't catalyze a problem based on misinformation or a panic of the moment or an unwind of the moment, actually you stabilize the system. And again, ample evidence, look at what happened during COVID, look at what happened when rates went from zero to four or five. So I mean, look at these moments over the past five years, private credit has motored on. Private credit has delivered its results, continued to make loans, continued to get repayments, continued to return capital.
That feels like a good place for a pause. We'll be back with more from Marc and Doug.
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We are sort of headed for it. It seems like higher rates for at least a while. Most of your loans are floating, which is great for you guys, but also requires that your borrowers are going to have to come up with more cash. And is this like a double-edged sword for you guys? Does this hurt as much as it helps?
No. I mean, listen, if rates went to 15%, 12%, it could be a problem. But, you know, remember Marc mentioned this — I can't remember the exact time frame, but over like a couple year period, SOFR went from basically zero to 5%.
This is the overnight funding rate. That's the baseline for your loans. You take a spread on top of that.
So, there was the expectation that, you know, we'd see a lot of defaults.
And, you know, the truth is we just didn't know. A 500 basis point move, we had to prepare for what could happen. We didn't see an uptick. And, you know, listen, Marc and I, we're not macroeconomists. We can't give you a better view on interest rates than anybody else. We can give you a view on what's happening in the economy because of all the companies we invest in. But my instinct is, and I don't know when this crisis, you know, this war will get resolved, some point it will, and that will dampen inflation to a degree. But no, we're set up that if rates did go a lot higher and we had problems, I mentioned this earlier, we come into these companies at very low loan-to-values. And so, you know, the reason we've only had 12 basis points of loss per year for the last 10 years is because one, that low LTV, two, great covenants, and three, we have a really strong workout department. And so if a couple companies ran into trouble, it's something we're prepared for, we're equipped for, and we're there to try to maximize value. But Rohan, you're touching a really interesting point about this. There's a generation, but just a long period of time. It doesn't even really matter because people's memories can sometimes get a little fuzzy. You know, the environment where we had zero rates, that's the abnormal environment, not the environment where we have rates like we're experiencing now. That's actually the normal environment over the grand arc of time.
Back to the bricks on which our foundation is built. It's built out of times when rates absolutely looked like this. And so I think it raises actually really interesting questions about investment strategy because strategies that have been high performers but kind of fundamentally predicated on really low rates, you know, a little bit of past as indicator of the future, I think everyone has to be a little bit careful and thoughtful about that. I actually was walking into a meeting, literally walking into a meeting the other day as the Chyron ran across that talked about how we're now at a 19-year high on the 10-year rate.
You guys were happy about that, right?
I'm the only one that walked into the meeting and I said, 'Hey, I just saw some good news.' Now, I say that half tongue-in-cheek. We all appreciate why very high rate environments have implications for lots of assets, but actually, very directed for direct lending is quite literally true. We don't have a portfolio full of things that were bought predicated on some low interest rate environment, low interest rate financing. We're creating assets today in this digital infrastructure based on today's rates, today's higher cap rates, today's capital structures. That's a tremendously appealing opportunity set.
Just the amount of money that is coming into these data centers with hyperscalers as offtakers. These are really long-term projects. You're making assumptions about what the world is going to look like a really long time from now. Are we all right to be a little nervous?
Setting aside whether the robots are going to kill us.
Yeah, let's put that to the side for a moment.
Not a first rodeo. This one's, you know, magnitude that perhaps, well, in fact, it is measurably a magnitude none of us have seen. Whenever this much capital moves this quickly and valuations move this abruptly, I think it's awfully safe to conclude there'll be some mistakes. That's a truism. There's never been an example, I don't think, where that hasn't ultimately proven true. So then it becomes like, well, what's the mistake? Is the mistake the direction of travel or is the mistake the valuation? You know, kind of who's the winner and what's it worth? And I would say in this case those two are very discernible. Overall it's safe to say you can agree the direction of travel and I would suspect we all agree that AI is one of the most transformative, maybe it's the single most transformative experience in the industrial world. We shall all see but I think we can all agree it is extremely transformative, disruptive, impactful and it will matter a lot to the economy now, 5 years from now, 10 years from now and beyond. So I want to be a part of that, right? I want to invest behind that. In fact, if you don't, you know, you're going to get rolled over by it. That's very different from concluding that valuations are right. And I'm not trying to express we purposely kept ourselves out of the business. We're trying to judge, you know, is this company worth a trillion dollars, a half a trillion, two trillion. You know, you all know this. You talk to people in Silicon Valley. The venture capitalists will tell you, you know, obviously an era where Series A, right, first round are being done at billion dollar free money valuations in companies that have no revenue, may not even have defined a business model. We can all agree there's going to be things that didn't work there. So, how do you participate? That to us is the key. We're not trying to figure out. I mean, we care. We're interested. We're deeply curious people. You know, we live in a society that's impacted by all this. So but I mean if there's two different questions 10 years from now, you know, what will be the interaction and role of AI and humanity, monumentally important question, but just so you know Blue Owl's question is in 10 years will Microsoft pay the rent bill. I mean that but that's...
Isn't that part of the problem here? And I appreciate that, Mark and Doug, you guys have both talked about how diversified your business is, but AI it seems inevitably is we are talking about one firm and that's Nvidia that is underwriting almost everything. And yes there's a Microsoft and yes there's a Meta, but generally it all goes back to Jensen. How do you actually manage risk there? It doesn't seem like you can.
