Blue Owl Capital Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Blue Owl is an alternative asset manager operating across Credit, GP Strategic Capital and Real Estate. The filing reports one operating segment.
Business context
At quarter-end, assets under management (AUM) were $149.6 billion, including $93.6 billion of fee-paying AUM (FPAUM). Approximately 93% of first-half management fees came from Permanent Capital. Blue Owl reported $12.0 billion of AUM not yet paying fees, which it estimates could generate about $170 million of annualized fees once deployed or applicable fee holidays expire.
Financial results and key metrics
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Revenue, net | $416.9 million | $327.2 million | $807.9 million | $603.2 million |
| Net income (loss) attributable to Blue Owl | $12.9 million | $(1.1) million | $21.2 million | $(12.9) million |
| Fee-Related Earnings (non-GAAP) | $244.6 million | $197.1 million | $470.5 million | $368.4 million |
| Distributable Earnings (non-GAAP) | $227.0 million | $180.4 million | $436.0 million | $336.1 million |
| Adjusted EBITDA (non-GAAP) | $247.2 million | $197.3 million | $475.3 million | $368.9 million |
- Q2 revenue increased 27% year over year; first-half revenue increased 34%. Management fees drove growth, including higher Credit fees and Part I Fees as interest rates rose.
- Q2 Fee-Related Earnings increased 24% year over year. FRE was about 61% of FRE revenue, compared with about 62% in the prior-year quarter; FRE is a non-GAAP measure and should not be treated as a GAAP margin.
- Q2 GAAP expenses were $375.7 million, including $115.9 million of intangible amortization. The first-quarter 2023 change in estimated trademark lives resulted in the remaining trademark balances being expensed by June 30; this elevated amortization and affected GAAP earnings.
- For the six months, operating cash flow was $359.1 million, investing cash flow was $(56.9) million, and financing cash flow was $(329.0) million. Cash declined $26.8 million to $41.3 million.
- Quarter-end debt principal was $1.790 billion, including $280 million drawn on the revolving facility; the balance sheet reported debt obligations, net, of $1.755 billion. The facility had approximately $1.263 billion available. Blue Owl said $225 million of the revolver was repaid after quarter-end, leaving $55 million outstanding as of the filing date.
- Quarter-end total assets were $8.752 billion and total liabilities were $3.380 billion. Cash and cash equivalents were $41.3 million. No separate current-ratio or comparable liquidity measure is clearly provided in the filing text.
Material changes versus the prior comparable period
- GAAP net income attributable to Blue Owl improved from a loss to income in both Q2 and the first half. First-half consolidated net income was $76.1 million, with $54.9 million allocated to noncontrolling interests.
- Fee-Related Earnings and Distributable Earnings grew in both periods, supported by higher fees across all three platforms. Credit management fees benefited in part from higher interest rates and increased Part I Fees.
- AUM rose to $149.6 billion from $119.1 billion a year earlier; FPAUM rose to $93.6 billion from $77.5 billion. First-half new capital raised was $6.7 billion, versus $11.0 billion in the prior-year period, which included a $6.5 billion acquisition contribution to AUM.
- Amortization of intangible assets increased to $115.9 million in Q2 from $64.9 million, and to $186.8 million for the first half from $126.4 million, primarily due to the trademark useful-life change.
- The revolver’s capacity was increased and its maturity extended to June 2028 in June 2023. The company also issued $59.8 million of 7.397% senior notes due 2028.
Outlook, commentary and risks
- Management described elevated inflation, high interest rates and slower growth as weighing on deal activity, while noting increased announced M&A and capital-markets issuance versus Q1. It cited direct lenders’ opportunities to deploy at wider spreads and lower loan-to-value ratios, and ongoing fundraising and deployment across the platforms.
- Blue Owl set a 2023 target annual dividend of $0.56 per Class A share, or $0.14 quarterly. The Q2 dividend was payable August 31, 2023. Future dividends remain subject to quarterly board approval and may be changed or discontinued.
- Management said current liquidity and fee cash flows should cover anticipated working-capital needs for at least 12 months. Funding needs may also include acquisitions, debt service, dividends, taxes and Tax Receivable Agreement (TRA) payments.
- The company estimated approximately $959.4 million of potential TRA payments, assuming sufficient taxable income to realize the relevant tax benefits; actual timing and amounts are uncertain. It also had $36.5 million of unfunded commitments to its products.
- Risks include slower fundraising or deployment delaying fees; lower investment valuations affecting fees on products priced by asset value; market and interest-rate volatility; reliance on financing availability; and concentration of most corporate cash at one financial institution in balances above FDIC-insured limits. Valuations of illiquid investments and certain liabilities rely on significant judgment and unobservable inputs.
- No material changes to previously disclosed risk factors were reported, and Blue Owl said it was not subject to pending legal proceedings expected to materially affect its financial statements. Disclosure controls were deemed effective; no material change in internal control over financial reporting was reported.
- Subsequent to quarter-end, August 7 agreements amended investor rights and certain executive and principal arrangements. Michael Rees’s agreement provides for quarterly additional compensation of $8.5 million for Q3 and Q4 2023, elected in equity for the current year; review the full agreements for terms and governance implications.
Important facts for investors to verify
- Reconcile non-GAAP Fee-Related Earnings, Distributable Earnings and Adjusted EBITDA to GAAP results; these measures are not substitutes for GAAP earnings or liquidity.
- Assess the sustainability of fee growth, including the pace of deployment of the $12.0 billion not yet paying fees and the first-half fundraising slowdown versus 2022.
- Review the $959.4 million estimated TRA payments, related assumptions, and potential effects on cash available for dividends and investment.
- Monitor debt, revolver utilization and borrowing costs, including the post-quarter repayment, and compare dividend plans with cash generation and other funding needs.
- Consider how trademark amortization, noncontrolling interests, earnout settlements and share/unit dilution affect reported GAAP earnings per Class A share.
- Review valuation assumptions for illiquid product investments and the concentration of corporate cash deposits above insured limits.