2024 has been a year of stunning performance among asset managers, especially those managing private investments. With a resilient economy, contracting long-term yields, and market optimism, leading asset managers' stock prices have capitalized on the backdrop after challenging years.
When analyzing the year-to-date performances, it can be seen how well top-capitalized US alternative asset managers have performed.
- Blue Owl Capital (OWL, Financial) 65.23%
- KKR (KKR) 91.24%
- Apollo Global Management (APO) 81.07%
- Ares Management (ARES) 47.22%
- Blackstone (BX) 50.59%
Source: Guru Focus
Now, when scrutinizing each of these firms' fee-related earnings components, it is clear that private credit is the asset type that is growing the fastest. Within those five names, Blue Owl Capital is the asset manager that stands out in terms of private debt exposure, and therefore, I would like to explain why this is my favorite pick.
OWL - Company Description
Blue Owl Capital was founded in May 2021 through a merger of Owl Rock Capital and Dyal Capital via a SPAC established five months prior. Considering the period since the SPAC Altimar Acquisition Corporation started trading, Blue Owl has accumulated a price return of approximately 129% and currently sits at all-time highs, like many of its local peers.
The firm appoints two co-CEOs: Marc Lipschultz, a former employee at KKR with more than two decades of experience, and Doug Ostrover, who founded GSO Capital Partners, which was later acquired by Blackstone, where he stayed for several years before founding Owl Rock Capital.
Blue Owl: Segments and Fee Structure
As commented, Blue Owl is an asset manager predominantly focused on private debt. It does not have exposure to infrastructure or private equity funds. Therefore, its operating segments are Direct Lending, Real Estate Lending, and GP Capital Solutions. The latter segment constitutes minority investments in other general partners of alternative funds, and although the revenue is not directly linked to alternative credit, the former segments constituted 72% of the Q3 adjusted revenue.
Unlike traditional private funds, which charge clients management fees and carried interest, Blue Owl's funds remove the carried interest component and only focus on management fees. This allows them to charge higher management fees and reduce the volatility of their top line as they do not depend on profitable realizations to boost their revenue, as happens with competitors such as Blackstone or KKR. In summary, their fee structure makes them less sensitive to the economic cycle compared to peers.
Blue Owl's Growth
With approximately $36 billion in equity value, Blue Owl is perhaps the firm that has exhibited the fastest growth in assets under management and fee-related earnings. For example, a couple of months after the merger, the firm combined over $62 billion in AUM, and later, the company more than quadrupled its total AUM figure to $253 billion.
Similar scenarios have occurred regarding fee-related management fees, with Blue Owl passing from less than $180 million in quarterly FRE management fees to over $500 million in three years. If this wasn't convincing enough, just two-thirds of the total AUM pays a fee, allowing Blue Owl to expand its FRE management fees internally even further.
Alternative Credit Industry Tailwinds
All this impressive growth wouldn't have been possible if there hadn't been a boom in alternative credit. Certainly, top-asset managers are seeing large inflows to this asset type, and from the side of corporations, many are increasing the demand for alternative loans instead of turning to a bank.
Alternative credit asset managers have two primary benefits over traditional banks. First, they are not subject to capital adequacy regulations restricting their lending, such as Basel III. Therefore, all the money gathered through their funds could be invested as long as it follows a given mandate. Second, private lending tends to be faster than traditional bank lending as not many bureaucratic processes are involved, and businesses can get their loans faster.
Of course, there are negative characteristics that corporations have when requesting a loan from an alternative asset manager instead of a bank. The major one is that the negotiated spreads on loans tend to be more expensive than requesting a loan from a traditional bank. This disadvantage could potentially be diminished over the years as alternative asset managers encounter more economies of scale and can fund larger deals.
Valuation of Blue Owl
A company could be growing fast, but if the valuation isn't adequate, it is best to skip it. In the case of Blue Owl, although a trailing PE ratio of 791.45x makes it a huge red flag, when illustrated with forward earnings and against its peers, the valuation of OWL looks attractive.
| Ticker Symbol | Company | Forward PE Ratio |
| OWL | Blue Owl Capital Inc | 26.28x |
| BX | Blackstone | 34.11x |
| ARES | Ares Capital | 31.36x |
| KKR | KKR | 26.05x |
| APO | Apollo Global Management | 26.05x |
| Median | 28.77x |
Source: GuruFocus
For example, Blue Owl is trading at around 26.27x forward PE ratio, which is in the lower percentiles compared to competitors, even when considering that Blue Owl has higher growth prospects.
Risks of an Investment in OWL
Although Blue Owl's growth and valuation provide enough justification for a bullish thesis on the stock, the extraordinary price return exhibited over the past two years makes a potential investment entry unattractive from a technical standpoint. This provides ample room for a possible correction after the stock has gained approximately $16.2 billion in market value just in 2024.
Simultaneously, Blue Owl can be riskier than other alternative asset managers due to its large exposure to a quasi-single asset type. During a recession, they would most likely outperform their peers due to potential lower effects from NAV decreases. Nonetheless, during boom economic periods, the lack of carried interest and debt appreciation potential would most likely make them underperform other peers with infrastructure and private equity assets.
Summary
To conclude, due to its exposure to the fastest-growing asset type within alternative investments, decent forward-looking valuation, and fee structure, Blue Owl is my favorite pick among the most capitalized alternative asset managers in the US. I do expect this pick to be more volatile than the rest of the competition due to its lower time in the market and higher growth prospects. Yet, the upside potential more than counters the expected volatility.
