BLUE OWL CAPITAL INC. annual report, FY2021

Business context and reporting period

Blue Owl Capital Inc.’s Form 10-K reports the fiscal year ended December 31, 2021. Blue Owl is an alternative asset manager focused on Direct Lending, GP Capital Solutions and, following its December 29 acquisition of Oak Street, Real Estate. It reported one operating segment. The May 19, 2021 business combination brought Owl Rock and Dyal Capital together; consequently, 2021 results include Dyal only from that date, while Oak Street contributed immaterial results in 2021. Comparisons with 2020 are therefore not like-for-like.

Financial and operating highlights

Revenue comprised $667.9 million of net management fees, $150.0 million of administrative, transaction and other fees, and $5.9 million of realized performance income. Management fees included $150.4 million of Part I Fees. The filing does not provide a single company-wide GAAP operating margin; Fee-Related Earnings and Distributable Earnings are non-GAAP measures and should not be treated as GAAP profit or liquidity measures.

The GAAP net loss reflected substantial noncash and transaction-related charges, notably $1.205 billion of equity-based compensation, an $834.3 million change in earnout liability, $113.9 million of acquired-intangible amortization, and $43.7 million of warrant-liability remeasurement loss. Fee-Related Earnings exclude several such items. Adjusted EBITDA was $456.2 million for the year and $169.4 million for the fourth quarter.

At year-end, AUM was $94.5 billion and fee-paying AUM (FPAUM) was $61.4 billion. AUM comprised $39.2 billion Direct Lending, $39.9 billion GP Capital Solutions and $15.4 billion Real Estate. Approximately 98% of fourth-quarter management fees came from permanent-capital vehicles. About $11.0 billion of AUM was not yet paying fees; management estimated it could generate approximately $140 million of annualized management fees when deployed or when fee holidays expired. Approximately $2.2 billion moved to FPAUM on January 1, 2022.

Net cash provided by operating activities was $281.7 million; investing activities used $1.599 billion, primarily reflecting acquisition cash consideration; and financing activities provided $1.348 billion. Year-end cash and cash equivalents were $42.6 million. Debt obligations had a $1.174 billion net carrying value, comprising $700 million of 2031 Notes, $350 million of 2051 Notes and $153 million drawn on a revolving facility; $487 million remained available on that facility at year-end. The $153 million revolver balance was repaid in January 2022. In February 2022, revolver capacity increased to $715 million and the company issued $400 million of 4.375% notes due 2032.

Material changes versus the prior period

• Net revenue rose by $574.1 million, primarily reflecting Dyal results after the business combination, growth in Direct Lending FPAUM, and expiration of fee waivers at ORCC. The comparison is affected by the different consolidation periods.
• Fee-Related Earnings and Distributable Earnings increased substantially, reflecting Dyal’s contribution and higher Direct Lending fees, partly offset by higher recurring compensation and other expenses.
• AUM grew from $53.3 billion at the end of 2020 to $94.5 billion at the end of 2021, including $15.4 billion added through Oak Street. FPAUM increased from $38.5 billion to $61.4 billion, including $8.2 billion from Oak Street.
• Blue Owl completed its public-company combination with Dyal in May and acquired Oak Street in December. The company also completed a $505.2 million strategic revenue-share purchase, paid with shares and cash, which is amortized as a reduction to management fees.
• The company ended 2021 with a larger, longer-dated debt structure, including newly issued 2031 and 2051 Notes; it had repaid its prior $250 million term loan.

Outlook, risks and unusual items

Management said it expected a net positive effect from rising rates: floating-rate Direct Lending portfolios could benefit over time, while market volatility could support demand for GP Capital Solutions and Real Estate strategies. It expected Oak Street to be accretive in 2022. The filing gives no quantified earnings or revenue guidance. Management stated that available liquidity and cash generated from management fees were expected to cover anticipated working-capital needs for at least 12 months.

The company intends to pay quarterly dividends representing approximately 85% of Distributable Earnings, subject to board discretion, operating needs, legal and debt restrictions, taxes and other obligations. A $0.10 per-share dividend was announced in February 2022. A $100 million share-repurchase authorization was in place, but no shares had been repurchased through the filing date.

Key risks include fundraising and deployment competition; market, credit, interest-rate and geopolitical volatility; COVID-19 effects; leverage at the company and its products; valuation uncertainty in illiquid investments; key-person and integration risks; cybersecurity and regulatory exposure; and conflicts of interest in allocations, co-investments and expense sharing. The holding company depends on distributions from operating partnerships. The Tax Receivable Agreement requires 85% of specified realized or deemed tax benefits to be paid to certain equity holders; the reported year-end liability was $670.7 million, while estimated potential payments before a fair-value adjustment totaled $791.6 million under stated assumptions. Payments may be accelerated in certain events.

There were no pending legal proceedings that management expected to materially affect the financial statements, although the filing cautions that outcomes can be unpredictable. KPMG issued an unqualified opinion on the financial statements. Management did not assess internal control over financial reporting for year-end 2021, citing the time and resources needed following the business combination; no auditor attestation on internal controls was provided, and the company expected one for its 2022 annual report.

Important facts for investors to verify

• Review the audited financial statements and non-GAAP reconciliations, particularly the scale and recurring impact of equity compensation, earnout and warrant remeasurement, and acquisition-related costs.
• Track conversion of non-fee-paying AUM into FPAUM and whether the estimated $140 million of potential annualized fees is realized; confirm the timing and fee impact of fee-holiday expirations.
• Assess acquisition integration and Oak Street’s contribution to 2022 results; monitor the announced Wellfleet acquisition, which was pending customary conditions at the filing date.
• Monitor debt, revolver availability, refinancing costs and covenant compliance, as well as the timing and cash requirements of TRA payments.
• Consider the company’s controlled-company and multi-class voting structure: the Principals held 90% of total voting power, limiting public shareholders’ influence.
• Follow progress on internal-control assessment and auditor attestation, which were not completed for 2021.