Amid private credit’s gold rush, New York City’s Blue Owl is providing the “picks and shovels” for deal-hungry private equity firms. It also injects liquidity into the partnerships, minting billionaires in the process.
By Hank Tucker, Forbes Staff
Inearly April 2020, when Covid fears were at their peak and private market deal flow was almost entirely on hold, Marc Lipschultz, cofounder of what was then direct lending firm Owl Rock Capital Partners, got a call on a Sunday night from Philip Hammarskjold, a longtime friend and the chairman of private equity firm Hellman & Friedman. Hammarskjold’s firm was finalizing a $1.15 billion acquisition of cybersecurity business Checkmarx and wanted to make sure Owl Rock, the predecessor to today’s Blue Owl, was still game to provide some of the financing for the deal.
“Of course the answer was yes,” says Lipschultz. “That was our reason to be, which was to be this longer-term durable solution that wasn’t open and closed with the vagaries of the trading marketplace.”
The deal closed on April 16, 2020, with Owl Rock underwriting a $250 million first-lien loan priced at a floating rate of 7.75% above the London Interbank Offered Rate, a benchmark interest rate. It was the type of big-ticket buyout the firm had become known for in its four short years of existence, and as the Federal Reserve raised interest rates in the ensuing years, yields only got better.
Blue Owl’s core private credit business has closed no fewer than 600 loans amounting to $100 billion in gross originations since Owl Rock’s founding in 2016. Some $15 billion of those loans are held by Blue Owl Capital Corp., one of the company’s NYSE-listed business development companies, which has logged an internal rate of return of 9.8% since inception in 2016.
New York City’s Blue Owl Inc. is a relatively new name in the world of private capital, but it is run by veterans of the business. It was formed in May 2021, after a $12.5 billion SPAC merger between Owl Rock and Michael Rees’ Dyal Capital Partners, known for buying minority stakes in other private equity firms. Since then the firm has roughly quadrupled in size. It managed $174 billion in assets at the end of the first quarter this year, with $91 billion in its credit business. Following acquisitions of Kuvare Asset Management and real estate lender Prima Capital in April, Blue Owl has effectively ballooned to more than $200 billion. Its stock is up 86% in the last year, becoming a rare success story among companies borne from SPACs. Co-CEOs Doug Ostrover, 61, and Lipschultz, 55, as well as Rees, a co-president still overseeing its $56 billion general partnership stakes segment, are all billionaires.
Blue Owl specializes in financing software buyouts and private equity-backed businesses in other growing industries with recurring cash flows, and Ostrover boasts that his firm has never lost money on an enterprise software deal. Its track record of avoiding defaults is superb, with firm-wide annualized losses of just 0.06% in its credit portfolio.
“We want to make sure we get back 80 cents on the dollar [worst-case]. Most deals don’t go distressed right out of the gate, so if I could get a couple years of coupon and get back 80, that means I’ve gotten our investors back par,” says Ostrover, explaining the firm’s philosophy towards minimizing risk and backing industries like software whose models support annuity-like cash flows. “Our goal is not to have the highest yield of anyone in the market.”
Doug Ostrover’s introduction to the world of high-yield credit came at brokerage firm E.F. Hutton soon after he graduated from the University of Pennsylvania with an economics degree in 1984. Ostrover originally landed in Hutton’s municipal finance department in the area of industrial revenue bonds. These sometimes questionable credits helped corporations get lower rates on loans for buildings and other operations by structuring them as tax-exempt bonds. One morning on the subway to work, Ostrover opened the Wall Street Journal to an article about the IRS changing the tax code to clamp down on these bonds. He arrived at the office to find his colleagues packing boxes and thought he was out of a job.
“They came into our room and said to pack up,” Ostrover remembers, “but because you worked with small companies, we’re going to now make you the junk bond group of E.F. Hutton. And that’s how I got my start.”
Ostrover eventually wound up at investment bank Donaldson, Lufkin & Jenrette in 1992 and helped it become one of Wall Street’s top junk bond underwriters in the decade following the collapse of Drexel Burnham Lambert. He stayed at DLJ, which was bought by Credit Suisse in 2000, for 13 years before he and colleagues Bennett Goodman and Tripp Smith figured it was time to branch out on their own.
“We started thinking, well, we’re the number one originator. The deals we can originate that we know have alpha attached to them, rather than go syndicate those and sell those to PIMCO and Fidelity and Blackrock, why don’t we create a business where we keep those really good loans?” says Ostrover. “Today, that’s called direct lending. Back then, virtually no one was doing it.”
The trio called their new business GSO Capital Partners, representing each of their last initials, and within three years, they were managing $10 billion. In January 2008, they received their payday—a $945 million sale to Blackstone. Ostrover kept building GSO (since renamed Blackstone Credit) and by 2015 the division had amassed $75 billion in assets under management. Ostrover’s entrepreneurial itch then began to flare up again.
By that point, Ostrover says, there were plenty of firms that could make small loans of $10 million here or $30 million there, but very few other than his operation at Blackstone were loaning hundreds of millions at a time. He felt there was enough demand for these big deals that a new independent firm could muscle its way into the top of that pyramid, and started to recruit new partners.
Meanwhile, Lipschultz was head of energy and infrastructure investments at KKR, having started at the famed buyout firm in 1994 fresh out of Harvard Business School. Lipschultz had billion-dollar wins to his credit for deals like Hilcorp and East Resources, but he also got caught with losers like TXU when commodity prices fell. When Ostrover called him with the opportunity to come to the lower volatility world of private credit, he jumped at it.
“If we could now create a set of products that give alternative portfolios something more predictable, durable, and principal-protected, we could build something really special for investors,” says Lipschultz. “We could serve as a picks and shovels provider to this great gold mining industry of private equity.”
Lipschultz wasn’t the only heavy hitter Ostrover recruited. He also coaxed Goldman Sachs high-yield boss Craig Packer, a former DLJ colleague, to start Owl Rock with them—Packer is now a co-president and head of Blue Owl’s credit platform. Together, bolstered by Ostrover’s track record with GSO, they raised $6 billion in their first fund, and with a turn of leverage had $12 billion in firepower to deploy. Ostrover says around 35% of the funding came from private wealth managers, getting early support from wirehouse Merrill Lynch, which was unusual for major private equity funds in 2016. Owl Rock put its securities in BDCs, which effectively securitized the loans, giving the wealth clients of brokerage firms the same access as large pension funds and endowments. Most of Blue Owl’s assets are in long-dated permanent capital vehicles that don’t have to return capital to investors within a defined time frame, making its cash flows stable and predictable. Close to 90% of its $1.7 billion in 2023 revenue came from management fees.
The cofounders also committed some of their own accumulated wealth to Owl Rock’s early funds, and in 2019, they tapped New York’s Dyal Capital to buy a minority stake in the firm to give them more liquidity to invest in new funds. Backed by 85-year old asset management heavyweight Neuberger Berman, Dyal was formed in 2011 to buy pieces of hedge funds and alternative investors.
Ostrover soon realized that if Owl Rock really wanted to be an “indispensable partner to the private markets ecosystem,” Dyal was a natural fit to combine with. Owl Rock provided credit for private equity firms’ deals, and with Dyal, they could offer cash directly to the owners of these firms, the general partners, as well.
Since inception Dyal has invested in more than 60 alternatives firms at valuations that have turned more than a dozen PE founders, including Silver Lake’s Egon Durban, Platinum Equity’s Tom Gores and Starwood’s Barry Sternlicht, into billionaires. Now called Blue Owl GP Strategic Capital, its strong performance reflects the growth in private equity over the last decade. Net IRRs for its third, fourth and fifth flagship funds, which collectively manage $39 billion, are 23%, 42% and 15%, respectively. It also has $700 million in assets in its Blue Owl HomeCourt Fund that buys minority stakes in NBA teams, including the Phoenix Suns, Atlanta Hawks and Sacramento Kings.
The marriage hasn’t been entirely seamless. After Ostrover promoted Lipschultz to co-CEO of Blue Owl last May, reports emerged that Rees, a co-president, was frustrated with the shakeup and felt sidelined. Ostrover now downplays the rumored discord as “much ado about nothing,” though Blue Owl’s quarterly filing last August shows the firm awarded Rees a generous new compensation package in an apparent effort to mend fences. The agreement promises Rees bonus payments each quarter pegged to a proportion of the profit generated by his segment of the business. The bonus for each of the last two quarters of 2023 was $8.5 million, and Rees agreed to take the quarterly payments in Blue Owl stock through the end of 2025. Rees, who is worth $1.8 billion by Forbes’ reckoning, is now raising a sixth fund, which is expected to close at around $13 billion.
Since Blue Owl’s formation in 2021, the firm also branched into real estate with the acquisition of Oak Street Real Estate Capital for $950 million at the end of that year. Oak Street was the market leader in the fast growing niche area of triple net leases, a practice in commercial real estate where owners require tenants to pay for insurance, taxes and property maintenance, lowering their risk. Today, Blue Owl’s nascent real estate segment has $27.2 billion in assets under management. Oak Street’s founder Marc Zahr is now Blue Owl’s head of real estate and another co-president of the firm.
The acquisition spree continued this year with its $170 million purchase of Prima, which manages $10 billion in real estate assets, and its $750 million deal for Kuvare Asset Management (KAM), an asset manager for insurance companies, which is expected to increase Blue Owl’s AUM by another $20 billion. It also bought $250 million in preferred equity in Kuvare UK Holdings, a life and annuity provider that’s a separate company but has assets managed by KAM. Insurance assets, which have long favored publicly traded corporate bonds, represent a giant untapped honey pot for private credit merchants like Blue Owl. The agreement with Kuvare will give Blue Owl access to the insurance market without competing against its private equity clients by owning an insurer directly.
“The two big areas that I think are going to be a driving factor of alternatives over the next few years are private wealth management and then insurance,” says Piper Sandler analyst Crispin Love, who has a buy rating on Blue Owl’s stock. “Blue Owl already has a nice foothold in private wealth management and retail, and I think insurance was somewhat of the missing piece. This Kuvare Asset Management deal will help them plug that hole.”
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