(Bloomberg) — When deciding how to divvy up carried interest, Blue Owl Capital Inc.’s founders charted an unusual path.
For years, private-equity titans like Blackstone Inc.’s Steve Schwarzman groused that public shareholders put almost no value on carry, the performance-based income fund managers earn as a cut of investment gains. All investors seemed to care about were management fees.
So Blue Owl decided to use that money, along with its controversial tax advantages, exclusively to compensate its own employees. If shareholders wanted management fees, that’s all they’d get.
“We left the carried interest in the hands of the people that come into work each day,” Michael Rees, Blue Owl’s co-president, said in a Bloomberg “Front Row” interview. “It’s not part of our public company.”
That’s just one of the ways Blue Owl is shaking up alternative-asset management. Another is the fund it raised to invest in professional basketball. So was the contested and controversial deal that created the New York-based firm.
Rees, working at Dyal Capital Partners, had assembled a $30 billion portfolio of minority stakes in hedge funds and private-equity firms. At Owl Rock Capital Partners, Doug Ostrover, Marc Lipschultz and Craig Packer, built a $30 billion juggernaut in private credit. Then in December, they stunned Wall Street by joining forces in a three-way merger with a special-purpose acquisition company.
It took a judge’s ruling in April to resolve accusations that the combination was illegitimate. The new company started trading in August and since then has surged 30%. At $22.2 billion, Blue Owl’s valuation has eclipsed that of Carlyle Group Inc.
Most managers in private markets run funds with a limited lifespan and, as a result, eventually must liquidate their portfolios and return cash to clients. Because 91% of its capital is permanent, Blue Owl almost never has to sell and so the firm collects management fees indefinitely. That’s why it’s been able to rewrite the alternatives playbook.
Lipschultz, who co-founded Owl Rock in 2016 after two decades at KKR & Co., likens the approach to software-as-a-service: rapid growth, recurring revenue, high margins.
“We purposely built a business model that looked a whole lot more like a tech company than financial services,” Lipschultz, 52, also co-president, said in the interview. “We didn’t start and say, ‘Our base model is a bank, now how do we become a better bank?’”
More than anything, Blue Owl caters to private equity. The industry is constantly in need of debt financing for deals, and buyout firms increasingly are selling stakes in the general partnership, or GP, to fund growth. Blue Owl is one of only three companies supplying both types of capital, along with Blackstone and Goldman Sachs Group Inc.
Rees, 46, started Dyal Capital in 2010 as a unit of Neuberger Berman Group. Dyal funds acquired 50 so-called GP stakes, writing checks for as much as $1.85 billion in exchange for a typically 15% to 25% minority position in firms ranging from Starwood Capital Group to Vista Equity Partners.
The National Basketball Association invited Dyal to start a similar fund to hold minority interests in the league’s 30 teams, the first of its kind in pro sports. The $200 million Dyal HomeCourt Fund has since invested in the Sacramento Kings and the Phoenix Suns, and Rees said Blue Owl may extend the concept to football, baseball, hockey and possibly soccer.
“Some of these team values are getting so high that you’re going to deplete the number of mere mortals that can buy them,” he said. “You’re going to have to see institutional capital coming into this space.”
Owl Rock, founded in 2016, was a disruptor in non-bank lending. It discounted fees to raise capital fast, underwrote unusually big loans and extended credit to tech companies others considered too risky. Dyal bought a stake in Owl Rock’s GP in 2019.
But Dyal owned pieces of other lenders in private credit, and that’s what proved contentious in the Blue Owl merger. Two of those rivals, Sixth Street Partners and Golub Capital Partners, sued to block the combination on the grounds that Owl Rock, as a competitor, had a conflict of interest. Dyal fought and won.
The pitch to investors is simple: private equity-like returns with the predictability of fixed income. On Tuesday, Blue Owl reported fee-related profit of $141.9 million in the third quarter, up 9% from the previous three months. The firm’s expansion into property lending with the purchase of Oak Street Real Estate Capital will push assets under management, now $71 billion, past $82 billion.
Blue Owl is now raising $9 billion for a fifth GP stakes fund, as well as two new pools of capital — one to co-invest alongside GP partners in buyout deals and another to acquire fund interests from limited partners who want to sell. It’s also widening the distribution of its direct-lending products to large broker-dealers.
“We see that as a place where we can raise hundreds and hundreds of millions of dollars per month,” Lipschultz said.
There’s no guarantee Blue Owl shareholders will remain so enthusiastic. Goldman’s Petershill Partners Plc unit, a direct competitor in buying GP stakes, went public in London last month. It has since lost 16% of its market value.
But there is a limit to Blue Owl’s ambitions.
“Are we going to be a market leader in private equity? Being realistic, I don’t think so,” Lipschultz said. “It’s important for us to be self-aware.”
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