Blue Owl Capital Inc (OWL) 2022 Q3 法說會逐字稿

Good day. My name is Savannah, and I will be your conference operator for today. At this time, I would like to welcome everyone to the Blue Owl Third Quarter 2022 Conference Call. Today's call is being recorded. (Operator Instructions)

And I would now like to turn the conference over to Ann Dai. Please go ahead.

Thanks, operator, and good morning to everyone. Joining me today are Doug Ostrover, our Chief Executive Officer; Marc Lipschultz and Michael Rees, our Co-President; and Alan Kirshenbaum, our Chief Financial Officer.

I'd like to remind our listeners that remarks made during the call may contain forward-looking statements, which are not a guarantee of future performance or results and involve a number of risks and uncertainties that are outside the company's control. Actual results may differ materially from those in forward-looking statements as a result of a number of factors, including those described from time to time in Blue Owl Capital filings with the Securities and Exchange Commission. The company assumes no obligation to update any forward-looking statements. We'd also like to remind everyone that we'll refer to non-GAAP measures on the call, which are reconciled to GAAP figures in our earnings presentation, available on the Investor Resources section of our website at blueowl.com.

Please note that nothing on this call constitutes an offer to sell or a solicitation of an offer to purchase any interest in a Blue Owl fund. This morning, we issued our financial results for the third quarter of 2022 and reported fee-related earnings, or FRE of $0.15 per share and distributable earnings or DE of $0.14 per share. We also declared a dividend of $0.12 per share payable on November 30 to shareholders of record as of November 21.

During the call today, we'll be referring to the earnings presentation, which we posted to our website this morning. So please have that on hand to follow along.

With that, I'd like to turn the call over to Doug.

Thank you, Ann, and good morning, everyone. Today, we reported another strong quarter of growth for Blue Owl. And as I reflect on the growing earnings power of our firm and contrast that to how our stock has traded over the last few months, I'm really struck by the disparity between these 2 trends. So I thought it would be an interesting moment in time to pull the lens back in the midst of this market dislocation and volatility and really focus on what we have accomplished as a business. We entered the public markets in May of 2021 at $10 per share. At that time, we've mapped out and shared with our investors an ambitious growth plan. And over the past 6 quarters, we have been making substantial progress in outperforming that plan.

As you can see on Slide 6, since our entrance to the public markets, we have grown AUM by 112%, fee-paying AUM by 96% and permanent capital by 86%. We have also grown management fees by 93%, distributable earnings by 77% and our dividend by 50%. We acquired a $15 billion net lease real estate business and a $6.5 billion CLO business, and we have continued to expand our already robust retail distribution.

Our earnings are driven 100% by FRE with 93% of our management fees coming from permanent capital. And over the past few weeks, we have traded below our $10 per share initial trading price, despite an earnings stream that looks like a quickly growing and highly durable annuity stream. We can't control the market, all we can do at the end of the day is continue to put up strong results, like we did again this quarter. We have made good progress towards the key milestones we highlighted at our Investor Day, raising $50 billion of fee-paying AUM across 2022 and 2023, achieving after-tax DE of $1 billion in 2023, and paying $1 per share dividend in 2025. Across the firm, we have a unique perspective on market dynamics, considering the over 300 portfolio companies, we work within our direct lending business, our over 50 partner managers and GP Solutions and the over 100 companies we work with in real estate.

The operating trends we see remain positive and durable across this cohort, despite the elevated volatility in public markets. Portfolio company revenue continues to trend positively with an ability to pass along impacts of inflation for the most part, which supports the bottom line and therefore, each company's ability to service its (inaudible). Our partner managers who tend to be larger, more diversified and more specialized alternative asset managers continue to fund raise successfully meeting their stated capital raising targets. And in real estate, we continue to see 100% rent payment across our tenants. And ultimately, we believe that as we continue to prove out Blue Owl's resilient business model, that will resonate with public investors through what we expect to be a continued challenging and volatile market backdrop.

Moving on to our third quarter results. We demonstrated another quarter of steady and robust growth with management fees growing 19% quarter-over-quarter and 70% year-over-year. We had a record fundraising quarter, well diversified across institutional and private wealth channels with $8.8 billion of new capital raised across the platform.

Over the last 12 months, we have raised over $37 billion across new capital and debt, which is nearly 3x greater than the prior 12-month period, and we continue to broaden our distribution footprint as we integrate and cross-sell institutionally and expand our private wealth distribution efforts globally. We had a very robust quarter of institutional fundraising with significant capital raised across diversified and tech lending and GP minority equity stakes. Institutional accounts constituted roughly 60% of capital raised in the third quarter, including commitments from new and existing LPs across the U.S., Europe and Asia. And we have raised $12.7 billion from institutional accounts over the last 12 months.

In aggregate, over the past 1.5 years, we have raised nearly $8 billion from institutional LPs that were non-investors prior to our introduction to the public markets, illustrating the ongoing demand for our strategies and continued progress in expanding our LP base. And private wealth had another strong quarter of fundraising with $3.6 billion of inflows for the third quarter, bringing the last 12-month inflows to over $11 billion.

Tender request have remained de minimis with approximately $75 million across our entire platform. What we hear often from our fund investors is that the defensive nature of our strategies and their focus on income generation, principal preservation and inflation protection are highly desirable during good markets, but they stand out even more during challenging environments. Our fundraising during the third quarter reflects the ongoing demand for these qualities and for the track record we have generated in our strategies.

Looking ahead, the key messages that we've highlighted over the past year and most recently at Investor Day should continue to resonate in today's market. The market backdrop may have changed but we have not wavered in our long-term strategic focus in the slightest. And in fact, we think this market environment favors Blue Owl's business. We see meaningful runway to raise capital across institutional and wealth channels. And in our view, we have the right strategies, the right people and deep investment expertise in place to invest that capital well.

Permanent capital remains the cornerstone of our business, creating competitive advantages and supporting growth. And with each successive dollar of new assets raised, we will continue to add new layers to Blue Owl's earnings power.

With that, I'd like to turn the call over to Marc to give you an update on our direct lending and real estate businesses. Marc?

Great. Thanks so much, Doug. The favorable investing environment in direct lending we highlighted last quarter remained in place through the third quarter, as Blue Owl played an integral role as a liquidity provider to sponsors in a market where capital has been scarce with lenders unwilling or unable to commit to financings.

We continue to see very attractive opportunities at wider spreads and lower loan to values to even larger and higher-quality companies than we've seen for some time and remain very selective in our underwriting standards. And the healthy fundraising trends we have seen position our firm well to lead some of the biggest and most compelling deals happening in the market today, such as Anaplan, Zendesk and Avalara.

So just to expound on this a bit further about the attractiveness of the opportunities we're evaluating today, let me contrast what we're seeing right now to a typical deal from even a year ago. On the base rate, we're about 250 basis points higher as a result of Fed actions. And on an average deal, we might be seeing spreads about 100 to 150 basis points wider than a year ago. So combined with a stronger position to negotiate even better terms, we're looking at investments that could provide 11% to 12% unlevered yields relative to approximately 7% to 8% unlevered for a similar financing a year ago. And generally, we're also seeing sponsors put in more equity for deals today, creating even greater cushion for us as the creditor.

In addition, we continue to finance very large market-leading companies and year-to-date have looked at approximately 60 deals with facility sizes in excess of $1 billion, exceeding the over 40 investments of that size we evaluated in all of 2021 for the full year, and we continue to see a good pipeline, despite the decline in broader industry M&A volumes.

So you can see on Slide 13 of the earnings presentation, we had gross originations of $6 billion and net funded deployment of $3.9 billion for the third quarter, driving the ongoing growth of our high-quality portfolio and by extension management fees. For the last 12 months, gross originations and direct lending have been $26.1 billion or 33% greater than what we originated in the prior 12-month period.

Credit quality across our direct lending portfolio remains very strong, with our annualized realized losses remaining at approximately 5 basis points since inception. But even that overstates the losses as we also have realized gains. In fact, we have had annualized realized net gains of positive 5 basis points. That is to say, if we take our realized losses with our realized gains together, that is a net positive for investors. Our weighted average loan-to-value remains in the low 40s across our direct lending portfolio and in the low 30s across our tech portfolio. We've continued to see great resiliency in the ability of the portfolio of companies we finance to pass along cost increases to their end customers, limiting the impact to their margins.

So turning to performance. The direct lending portfolio achieved gross appreciation of 5.4% for the third quarter and 8.1% over the last 12 months.

Now turning to real estate. We continue to see very high levels of interest in our net lease strategy and myriad opportunities to put capital to work. As corporate borrowing costs continue to increase and markets become harder to access, the attractiveness of a net lease solution grows, and we continue to see a robust pipeline of opportunities with roughly $6.9 billion of transaction volume under letter of intent or contract to close and a near-term pipeline of more than $21 billion of potential volume.

Inclusive of announced acquisition activity, we've invested or committed over 80% of the equity in our fifth closed-end fund, keeping us on track to hold an initial close of our Real Estate Fund VI this quarter. We launched our latest open end product, Net Lease Trust in September through one of the large wire houses, and we are in the process of expanding the syndicate over the coming quarters.

In the current environment of persistently high inflation, a net lease strategy offers desirable inflation hedging characteristics, as the CapEx, maintenance, taxes and other expenses of owning real estate are borne solely by the tenant and investors' response to the structure as a result has been very positive. We're very excited about our net lease strategy generally and believe we've got a very differentiated approach. Investors in this strategy are able to access the advantages of the net lease structure, which targets an attractive 7% plus yield for primarily investment-grade counterparties with beneficial tax attributes. And we think this compares quite favorably to other strategies currently out there.

You've heard us say this multiple times, but I think it bears repeating. Income generation, inflation mitigation and downside protection are what fund investors are looking for in markets such as these, and our net lease strategy provides exactly that.

We achieved gross appreciation across our real estate portfolio of 2.8% for the third quarter and 22.9% for the last 12 months. These are strong risk-adjusted returns [with the] underlying credit profile of these portfolios, and they seem to be resonating well with the investors we speak to.

So with that, let me turn it to Michael to discuss the GP Capital Solutions business.

Thank you, Marc. We continue to see constructive trends in our GP Capital Solutions business. Given our scale, we are focused on the largest, most diversified managers within the alternatives universe. These managers remain the beneficiaries of a persistent trend of GP consolidation with the big getting bigger and the strong getting stronger. We held what we had expected to be our final close for Dyal V towards the end of the quarter. And at that time, agreed with our fund investors to allow a final $500 million of capacity to come in before year-end. With the existing enclosed $12.5 billion and the anticipated incremental $500 million, we expect the final fund size for Dyal V to reach approximately $13 billion, relative to our initial $9 billion goal. This was a very successful fundraise and was characterized by a growing and diversified LP base with over 250 investors, many of whom were new to Blue Owl products.

From the Fund V fund raise, $6.9 billion was from institutional LPs, of which over half are new firm relationships. $5.3 billion was from the wealth and intermediary channels, approximately 2/3 of which are from platforms and intermediary partners that are new firm relationships. The attractiveness of such a large number of new clients highlights the opportunity Blue Owl has to continue to cross-sell and collaboratively cover additional clients across each of our 3 leading investment strategies.

Clearly, we've been seeing strong and growing demand for our differentiated GP minority equity stake strategy, highlighting what we believe to be a market-leading position. Fund V is a record fundraise in the GP stakes industry at over twice the size of the next largest competitor.

We've raised approximately 2/3 of all the capital allocated to GP stakes funds over the last decade. This puts us in a position to continue deploying capital into large firms with the leading track records who we believe will continue to outperform other market players over the long run.

Total invested commitments for Dyal V, net of co-investments to our investors and including agreements in principle to close on 2 additional investments will bring Fund V to $8.4 billion of capital that has been committed to investments. And we continue to see a relatively smooth deployment pace with roughly $4 billion of equity committed annually for the last few years despite large changes in economic and market conditions.

The investments we made through our GP minority equity stake strategy are the culmination of many years of relationship building and strategic conversations, making the timing of capital deployment less dependent on short-term dynamics. We remain confident in this relatively smooth deployment pace as we look ahead.

Performance across Dyal funds remained strong with a net IRR of 23.4% for Fund III and 57.6% for our Fund IV. We're very optimistic about what the next 12 months holds for the GP Capital Solutions business. Not only is Dyal well positioned within a very small subset of firms that have the scale and capability to provide growth capital to these fund managers, but we continue to partner with managers who are the greatest beneficiaries of flows to alternatives and GP consolidation. Overall, we see ample opportunities to take advantage of the dislocation in the current market environment.

With that, I will turn things over to Alan to discuss our financial results.

Thank you, Michael. Good morning, everyone. I'm going to start off by walking through the numbers for this quarter, and then I'll touch on a few other items I want to cover today. I'll be making references to pages in our earnings presentation, so please feel free to have that available to follow along.

To start off, this earnings call is going to sound a lot like my remarks from last quarter and the quarter before. And I suspect next quarter will sound a lot like my remarks from this quarter. We built our business with a foundation of permanent capital and steady predictable management fee cash flows. We don't have lumpy vol of carrying interest revenues flowing through our P&L, so we look different than our peers. And we have expected that earnings releases last quarter, this quarter and next quarter will continue to differentiate us in the diversified alt industry.

Okay. Let's cover our quarterly results. Our third quarter was another quarter of strong growth for our business. Management fees are up $54.9 million or 19% from last quarter and up 70% from the third quarter a year ago. Broken down by strategy, direct lending management fees are up $24 million or 16% from last quarter and up 50% from the third quarter a year ago. GP Capital Solutions management fees are up $29.1 million or 23% from last quarter and up 72% from the third quarter a year ago. And real estate management fees are up $1.8 million or 10% from last quarter.

So as you can see, we had double-digit management fee growth quarter-over-quarter sequentially in all 3 of our strategies. FRE is up $12.8 million or 6% from last quarter and up 48% from the third quarter a year ago. Distribution costs are driving the lower increase in FRE quarter-over-quarter, which also brought FRE margins down a little from last quarter, all in line with the guidance we provided on our last earnings call in August. We continue to be right on track with our 60% FRE margin guidance for 2022, but I'll cover that more in a few moments.

Our ratio of compensation as a percentage of revenue is roughly flat to last quarter at 27%. And we announced a dividend of $0.12 per share for the third quarter, up from $0.11 per share last quarter and $0.09 per share in the third quarter a year ago, resulting in a 33% increase in our dividend year-over-year. All of this is in line with our expectations and what we noted on our earnings call last quarter.

Now I'd like to spend a moment on our fundraising efforts as we posted very large numbers again in the third quarter. As a reminder, in the second quarter, we raised $7.2 billion. And now in the third quarter, we have raised $8.8 billion. I'll break down these numbers across our strategies and products.

In direct lending, we raised $5.5 billion, over $2 billion from one of the 3 biggest state pensions in the U.S., a new relationship for us, $1.7 billion for our tech strategy, $0.8 billion for our retail distributed core income BDC, ORCIC, which is now over $5.25 billion of equity and approximately $1 billion for other direct lending products.

In GP Capital Solutions, we raised $2.9 billion, $2.7 billion was raised for Dyal Fund V and an additional $200 million of co-invest. That brings our total fundraise for Dyal Fund V to $12.5 billion through September 30. When you think about a run rate revenue number for the GP Capital Solutions strategy overall, I would think of that as around $525 million to $540 million annualized, which includes all commitments raised through September 30. Not included in these fundraising or run rate revenue numbers, we have the ability to raise an additional up to $500 million through the end of this year in Dyal Fund V.

In real estate, we raised $400 million, a good early outcome for the recently launched net lease trust product, our first non-traded REIT, which is leveraging our best-in-class retail distribution network. That momentum continues to build nicely into the fourth quarter, and we are also planning for an initial close of our Real Estate Fund VI product in the fourth quarter, which we are all very excited about.

As you just heard, we have had extraordinarily strong second and third quarter fundraising levels, and we have good momentum heading into the fourth quarter. We are not expecting the same record levels in the fourth quarter as we saw in the second and third quarters, but we are expecting another strong fundraising quarter.

As it relates to our AUM metrics, on Slide 11, we reported AUM of $132.1 billion, fee-paying AUM of $84.1 billion and total permanent capital of $106 billion. AUM not yet paying fees, was $10.7 billion as of September 30. AUM grew $13 billion to $132.1 billion, an 11% increase from last quarter and an 87% increase from the third quarter a year ago. Fee paying AUM grew $6.6 billion to $84.1 billion, a 9% increase from last quarter and a 79% increase from the third quarter a year ago. Both metrics driven primarily by capital raise and deployment in direct lending, capital raised in Dyal Fund V and when looking at the growth from a year ago, the addition of our real estate and CLO businesses.

Permanent Capital grew $10.5 billion to $106 billion, an 11% increase from last quarter and a 64% increase from the third quarter a year ago, driven primarily by capital raised and deployment in direct lending, capital raised in Dyal Fund V as well as the addition of our real estate business when compared to a year ago.

AUM not yet paying fees was $10.7 billion, including $9 billion in direct lending, $0.8 billion in GP Capital Solutions and $0.9 billion in real estate. This AUM corresponds to an expected increase in annual management fees totaling approximately $140 million once deployed.

As Marc highlighted earlier, we continue to have a strong deployment in direct lending, with gross originations of $6 billion for the quarter and net funded deployment of $3.9 billion. This brings our gross originations for the last 12 months to $26.1 billion with $16.9 billion of net funded deployment. So as it relates to the $9 billion of AUM not yet paying fees in direct lending, it would take us about 2 quarters to fully deploy this, based on our average net funded deployment pace over the last 12 months.

Turning to our balance sheet. We continue to be in a strong capital position. As you can see on Slide 22, we currently have over $1 billion of liquidity with an average 13-year maturity and low 2.9% cost of borrowing.

So to wrap up here before getting to Q&A, there are a few last items I want to cover. Our G&A and distribution costs on previous earnings calls, I've been talking about larger distribution costs coming in the back half of this year. In the third quarter, we incurred approximately $37 million of distribution costs. Most of this was anticipated and I had provided guidance on this last quarter during our Q&A session, but some of it, approximately $8 million was due to the much larger final closing of Dyal Fund V. The $37 million of distribution costs this quarter compares to approximately $12 million of distribution costs that were incurred in the second quarter.

As I have mentioned on previous calls, these are incredibly valuable dollars we're raising here. Permanent capital that will generate significant management fees and Part 1 fees every quarter, every year for our shareholders. As we look to the fourth quarter of this year, we think we could incur approximately $25 million of distribution costs. But as I've said on previous earnings calls, it's sometimes hard to predict the size and timing of these costs.

Also for the third quarter, our regular-way G&A, excluding distribution costs, is slightly down from the second quarter, although I do expect this line item to continue to grow in future quarters, simply as a result of the overall continued growth of our business. As it relates to the financial milestones we've put out guidance on, we are on track with all of them, but here's a more specific update. We are right on track to achieve $1.3 billion of revenues this year. We are right on track to achieve a 60% FRE margin this year. We are right on track to raise $50 billion of fee-paying AUM during 2022 and 2023. Of the $50 billion, we have raised approximately $20 billion through September 30. This amount represents year-to-date equity raise plus year-to-date debt raise for products where we earn fees on debt less year-to-date fee free capital.

We are on track to double our 2021 revenues of $900 million to $1.8 billion in 2023. We are on track to achieve $1 billion of distributable earnings in 2023. We are on track to achieve a $1 per share dividend in 2025. When I think about our dividends for 2022, we have posted a $0.10 dividend for the first quarter and $0.11 dividend for the second quarter, a $0.12 dividend for this quarter, and we feel comfortable we can post a $0.13 dividend for the fourth quarter. Since we had set a target at the beginning of this year of distributing approximately 85% of DE, this has given us the ability hold some cash back for buying back Owl stock, funding GP commits to our new products and investing in the growth of our business.

We continue to plan to fix our dividend for 2023, which I will talk more about in February on our fourth quarter earnings call. As I think about all of the items I just ran through, I see them as a very strong message about our business model. In these times of market dislocation, volatility and overall strong headwinds, we continue to demonstrate strong growth quarter-over-quarter, quarter after quarter and remain on track with all of the milestones we had set for ourselves.

Speaking of buying back shares, we have been active buying back our stock this year, in particular, over the past few months. Since the beginning of the third quarter, we have bought back 4.3 million shares at an average price of $9.26 per share for a total of approximately $40 million, incredible value for our shareholders. That brings our year-to-date buyback totals to 6.3 million shares at an average price of $10.17 per share or approximately $65 million.

I have commented on these past few earnings calls about the rising rate environment we're in and the potential impact that could have on our business. We have included here again on Slide 14 the impact of rising rates to our direct lending business. As expected and in line with our previous guidance, we saw a significant increase in our Part 1 fees from last quarter. In the third quarter, included in our management fee line, our Part 1 fees from our BDCs increased $16.1 million or 35% from the second quarter. A large portion of this was driven by higher interest rates and some of it was from AUM growth in our newer BDCs, like ORCIC and ORTF II. We are expecting to see an additional increase in our management fee line in the fourth quarter due to continued rising rates and could see possible increases into next year.

So summing it all up, we are very pleased with our results again this quarter, delivering strong growth quarter-over-quarter in all of our key metrics; AUM, fee paying AUM, permanent capital, management fees, FRE and DE. Heading into year-end, we are very excited about how our first full year as a public company will wrap up, and we can't wait to report those results to you in February. Thank you again to everyone who's joined us on the call today.

With that, operator, will you please open the line for questions?

(Operator Instructions) Our first question will come from Alex Blostein, Goldman Sachs.

I think that was me. Sorry. I thought it wasn't particularly clear. So thanks for the update. I think the question that I have for you guys is around the $50 billion fundraising target you reiterated through 2023. I mean, clearly, the retail environment has gotten a bit softer for the whole industry, given all the volatility we've seen sort of moderation in flows across the space. So if we continue to be in a fairly uncertain macro backdrop, can you help us sort of fill the gaps of where the incremental fundraising is going to come from if retail falls short of your original expectations to get you to the $50 billion.

Sure. And thanks for the question, Alex. So yes, we are reiterating the $50 billion. We came out with that at our Investor Day in May. I think Alan mentioned, we've raised $20 billion to date, and we'll go into this further on. We're expecting a good fourth quarter. You know we had a great third quarter. We raised almost $9 billion, and that breaks out 60% institutional, 40% retail. We don't spend a lot of time on institutional, but if you remember, when we put all these businesses together, we spent a lot of time talking about, we have no overlap in our LP basis. And that opportunity to cross-sell is just beginning. And I think what you're seeing is we are just starting to capitalize on that opportunity. I don't want to overstate it. It takes time, but it's something we're very positive on.

In terms of wealth, we raised $3.6 billion for the quarter. I think that is basically in line with what we did in the second quarter. And I think it's important to point out, we had virtually no redemptions or de minimis redemptions in the second and third quarter. I also want to comment, with regard to wealth, I know we all want the flows to be very consistent and every quarter up to the right. But you know better than anyone, that's just not how markets work. But I think if you peel the onion back and you think about the products we have, we think they are far superior than what a high net worth investor could find in a mutual fund or anywhere in the public markets.

We touched on this high current income that's downside protected. So I can't tell you exactly what the wealth flows will be quarter-over-quarter. But I can tell you that over the next 5 years, we believe strongly we're going to see a significant amount of wealth capital flow into the alternative markets. And we're confident, and I think we've proved over the last number of years, that we're in a position to capture a meaningful amount of those flows.

Our next question will come from Glenn Schorr with Evercore ISI.

I have a question on GP stakes. And in this environment, I would think the pipeline opportunity is big because there's no other ways to access except for someone like you. So a, if you could talk about the pipeline; and b, if you could talk about -- the inception to date on Dyal -- on Fund IV is great, but it is down low to mid-double digits quarter-on-quarter. Expected in this market, but I'm curious on how you go about it, meaning is it a company-specific market, is a higher discount rate using public comps? I'm just curious on how the marks work there.

Glenn, it's Michael. Thanks for the question. Saw your (inaudible) reference in other node. I was hoping we'd get a guns and roses reference this time, but maybe next time. The pipeline in GP Solutions is one that's built over many, many years. So most of the deals we're doing are the result of 5 to 7 to 10 years' worth of conversations, and they really aren't specific to a market environment quarter-over-quarter. So our pipeline is extremely consistent.

We target and have achieved about $4 billion of deployments per year. And that's a consistent number when you look back several years. So we're going to do several deals in the last 2 quarters of this year with really great GPs. And it's not market timing on their part or ours. So I would just expect a very consistent deployment pace out of GP Solutions 2022, 2023 and '24. So it's not -- like I said, it's not overly market environment specific.

Fund IV is doing great. If you do want to look at very specific things that drove the price and fund performance this quarter, there are several stocks, public companies that are held in Fund IV. Those include Blue Owl as a result of the original Owl Rock investment, as well as Bridgepoint. And so when you look at the actual quarter-on-quarter change, it's -- it was really driven predominantly by those 2 names that had mark-to-market losses over the quarter from a share price perspective. We sort of hesitate early in a fund's life to put out those IRRs because the lack of a J curve and the early cash flows mean that we're going to have really high IRRs at the outset. And they will probably -- as deployment of the fund continues, they'll probably moderate.

I wouldn't look at a super high IRR going to a high IRR being any reflection of that fund's performance. We expect it to be a great cash flow generator for our fund investors over time. We don't even report Fund V's IRR yet because it's so eye-popping, and it will most likely only modulate down as capital goes in the ground.

But once we get to years, 5, 6, 7 of a fund like we are with Fund III, you'll see a much more consistent IRR mid-20s for that fund that will be pretty hard to budge, just given how much time has progressed and how much cash flow is coming out of the Dyal GP stakes funds.

Our next question will come from Craig Siegenthaler with Bank of America.

Hope you're doing well and good to hear that the -- you're on track with your targets. So my question is on the credit quality migration within direct lending. And from the last disclosures, it looks like ORCIC still had 0 nonaccruals. But across all your direct lending portfolios, what are you seeing on the credit quality front? Has there been any pickup in nonaccruals? Have you needed to restructure a higher number of loans? Any early-stage delinquencies, [compensation] of pay in kind? Anything on that front would be helpful just given that it looks like we're under a recession.

Of course. Thank you. So a few thoughts. Let me headline with -- which I know we talked about each quarter, the credit performance is bedrock for us. It's really, really important. And we do thankfully a really good job with it. But for purposes of Owl shareholders, remember the credit performance doesn't actually matter.

This is a fee-based earning business. All of our revenues come from fees. So for the shareholders here, actually managing the capital is what matters. Obviously, performance matters over the long term for raising capital. With that said, because we are intensely focused on this issue of credit and returns, the straightforward answer, and I know where this question comes from, it's a very logical question in a tumultuous world, credit quality is strong. At the end of the day, we continue to see very good performance in our portfolio. That is to say, we continue to see -- I think Craig talked about this yesterday on the ORCC call, growth, revenue and EBITDA quarter-over-quarter in the portfolio.

We continue to see great strength in the sectors we've picked. We do tend toward sectors that are what many people would characterize as very defensive. And so look, we're definitely entering tumultuous times. And of course, it has to be a mathematical certainty that in the recession, some of that puts more strain on business on the margin than a booming environment, but we continue to see very consistent performance, very strong interest coverage. You asked a very good question about some of the early measures that we sometimes will see if there is even more challenge coming.

Right now, our ratings, as you know, we publicly rate all of our portfolio companies and the BDCs, have remained categorically quite stable, let's say in 1, 2 and 3 and below. But the early indicators sometimes will be things like accelerating requests for amendments or accelerating request for incremental capital or as you point out, pick in interest. And we're not seeing any of that. Actually pace on those types of requests has been very steady.

So we're not ignoring the clouds on the horizon by any measure. We always plan for them. We have planned for them in building the portfolio. So best I can deduce is by virtue of having planned this way and built our portfolio always for durability through a cycle like this, we're seeing the benefits. And as a result -- or since inception, as you know, we've done $60 billion in loans, and our loss rate has been -- realized loss rates was 5 basis points when you take into effect as we -- as I commented before, actual realized gains, losses, net of gains actually is a positive number in our portfolio across the platform since inception. So we're keeping close eye. We recognize how tumultuous the environment is, but we are seeing continued very strong performance.

Our next question will come from Bill Katz of Credit Suisse.

Maybe I'm going to try and sneak a 2-part question, so I apologize for violating the code. First part of question is, can you give us a sense of as you think about -- I know you just did Fund V, but do you think -- help us walk through the timing on Fund VI, just given what you talked about in terms of deployment, so thinking about $4 billion [glide] path. And was there anything in the third quarter in terms of catch-up fees?

And then the second question is, as you look out into 2023, how should we be thinking about operating leverage?

Thanks, Bill. Michael here. The -- on Fund VI, when you look at the $8.4 billion of Fund V that is committed and earmarked to deals and we look at our pipeline and as I alluded to, the steady $4 billion or so of annualized commitments and deployments, it puts us in a position to really get out on the road and start talking to clients at the very end of next year, and we expect 2024 to be the year where we turn on the fees in Fund VI.

So no real change to that overall plan. We were successful in raising a bigger fund this time around than we had thought, but puts us really squarely in place to start fees at some point in 2024, and we'll give more guidance as we get there.

Catch-up fees were $21 million. The way we think about it, most of our clients opt to pay a higher forward-looking management fee as opposed to catch-up fees. And so we're seeing improvements in overall management fee rates and relatively small catch-up fees at $21 million this quarter, given the amount of capital being raised. So we prefer ongoing steady, higher management fees, and that's what our clients have been selecting as well.

Bill, could you repeat your second part of the question, I believe it was operating leverage.

So just you think through moving past some of the noise in terms of the catch-up fee and the sort of upfront placement fees, which I appreciate the transitory nature of that, as we sort of think about the core operating leverage of the franchise, obviously running at a pretty high 60% to begin with. Does that all incrementally drop to the bottom line? Or would you look to potentially reinvest some of that to spur even faster growth even beyond '24?

Thanks, Bill. So generally -- it's Alan. Generally speaking, I think we should continue to target 60% as our FRE margin for our business. It's, as you noted, already industry high. And when you blend that across all of our different strategies and businesses, I think that's a pretty comfortable place to land.

Our next question comes from Ken Worthington with JPMorgan.

If I caught this correctly, I think that you called out that you were going to continue to fix the dividend in 2023. I guess what are the considerations that you're thinking about when you set this level. And the fact that you called this out, just sort of caught my attention, has something changed in terms of how you're thinking about the dividend in the future?

Thanks, Ken. I appreciate the question. So going back to our Investor Day in May, I talked about our expectation to fix the dividend in 2023, and on a go-forward basis, we think that has potential to open up our shareholder base to investors that aren't otherwise looking at a company who has a variable dividend philosophy. And so that is something that we've been focused on. Obviously, the things that we think about and consider when we consider setting a fixed dividend is really what is our DE going to look like for next year, what do we want to hold back this year. As I've mentioned on the call and on previous calls, we had been targeting 85% as a variable payout on DE.

We're right in line with that for this year. We have to think about how much we want to hold back for things like stock buybacks, GP commits and the like in order to set that fixed dividend. So there will be a lot more to come in February, when we come out and announce the level of where we're going to fix it.

But I think embedded in your question maybe is there any change in the directional payout approach that we pay out the bulk of our earnings, I think to be clear, it's not. This as Alan just said, we've talked before about the 85% payout target, that remains the underpinning math. We just got to do the math and convert that, so to speak, into a fixed dividend. So I don't want to overread the question, but if it's, are we changing the philosophy around building balance sheet versus paying out, we are a balance sheet light pay out our earnings rising dividend stock model, but fixed dividend step functions perhaps instead of variable every quarter, which is what Alan was referring to.

Agree. Agree. Well said.

Okay. Perfect. I want to make sure I wasn't over reading your comments.

Yes, yes.

Our next question comes from Adam Beatty with UBS.

I want to ask about a trend or potential trend in the wealth management channel. One of the things that we're hearing is that among some of the larger distributors and some of their FAs, there's an increasing appetite for exclusive products, i.e., products or strategies that are distinct and only available at certain firms. So I just wanted to get your thoughts. Is that something that Blue Owl is considering or would consider? And more broadly, what do you consider the pros and cons of that approach?

Well, thanks for the question. That -- we are not seeing that. There is definitely a preference to launch a product first on your platform and have a period of exclusivity. But remember, what most firms, big wirehouses want, they don't want to have their clients be 100% of the capital. It's important to them that there's other capital raised away from them. So I don't -- that's not a trend that we are seeing.

But I do agree with you, we are focused, and I think they're focused on working with firms that can bring differentiated product. If you think about what we have in the market right now, we have our diversified lending called core income, that looks a lot like other funds. And there's quite a few people competing in that space. We have our tech lending product, where we are the only firm in the market with a tech product. We have our triple net lease, it's real estate, but it's a much different wrinkle on real estate, and we're getting really good traction on that.

And I think it's fair to say over the next few quarters, you'll see us introduce other products where we have virtually no competition in the wealth channel. And look, what we're always striving for, and we've said this numerous times today is bring products where we can protect the downside and give investors a meaningful current income and potentially nice capital gains. And so we're working on a number of products in conjunction with those wire houses. And I think over the next couple of quarters, we'll have more to say on that.

(Operator Instructions) Our next question comes from Brian Bedell with Deutsche Bank.

Maybe to stay on that retail theme, can you remind us of the wirehouses, I know you were onboarding 1 or 2 in the third, and I think fourth quarter, just remind us of the penetration you have in the wirehouses now or at least (technical difficulty). And if you think about the penetration within those wirehouses in terms of financial advisers using your product, what sort of is the opportunity to build that? And if you don't mind commenting on how you're thinking about the RIA market as well on private banks? Basically trying to get an understanding of the runway of distribution penetration that could offset or more than offset any kind of sort of risk-off type of pullback by retail investors.

Yes. Thanks for the question. It's a good question. I kind of have to break it out by product as I think about our diversified lending strategy, our core income, we've built a pretty sizable syndicate there. I should start by saying we're working with all of the major wirehouses but we don't have all of our products in those wirehouses.

So in diversified lending with core income, we're pretty well penetrated, but we have a ways to go. In the technology fund, we're on a couple wirehouses today, but we still think there's a lot of growth there. And then we're really excited about our non-traded REIT, the Oak Street REIT, we're only in 1 wirehouse. And I think in the first quarter, you'll see us build out a pretty meaningful syndicate.

In terms of the RIAs, we have a team of about 12 people covering that marketplace, and we are actively pushing all 3 of those strategies right now and having a lot of success. One thing I do want to comment about the wirehouses is, if you take a step back, you just think about bringing these products, you get on, you don't generate massive sales right away, it takes time.

Remember, we're out, we're calling on all the big producers and then the next layer and the layer beneath that of financial advisers, so we have to educate them. We have to get them comfortable with the product. We've had great success. But as you think about where we are, I would tell you, we are in the very early innings of what we think we can achieve. Our penetration is nowhere near as high as a firm, let's say, like Blackstone. And I think we can get close to what they've achieved. It's just going to take us a little bit of time.

Maybe to add one element of color to that, if I could, which is because you talked about penetration within the wirehouses, which Doug just made reference to, this still is a very thin slice of the individual investor universe. There's a so-called power users, there's a set of kind of FAs and clients that are well understand and they are getting the significant benefits of access to these products. But the vast preponderance of individual investors within these platforms have yet to even use the product, and in many cases, probably don't even have familiarity with the product. So it's a very big white space. And sure, when people are more of a risk-off environment, more of a risk-off attitude, it will be -- it takes longer for people to adopt and per person orders might be a bit lower here and there. But also -- wealth is not a monolithic thing, right? At the end of the day, it all gets down to your particular products, your particular clients and your particular penetration.

And fortunately, for us, that's working in our favor. We're not seeing redemptions. We are seeing adoption of products that are truly distinctive like Doug talked about, like our triple net lease product and our tech product. So we are seeing that, and we're seeing a lot of new platforms that we're just not on with many of these products. So this continues to be an area of significant opportunity. Again, in this environment, we're not trying to pretend we know it will happen month-to-month, but I think we're feeling very good about the direction this takes us.

And our final question will come from Sumeet Mody with Piper Sandler.

On the inorganic front, just maybe I wanted to get an update on the conversations you're having with any M&A targets? And maybe what are the adjacent solutions you're finding the most compelling today, maybe across real estate, new geographies outside the U.S., things like that.

Sure. Well, look, our business and the plans you've all seen are predicated on what we know to be very strong, visible, predictable growth, which, again, I think is the most distinctive feature probably of our model and you're seeing it this quarter, and you're going to continue to see it. As Alan said in his comments, we have the regular rhythm. We can see that steady growth organically. And that's all we can count on, so to speak, and of course, what we can control.

However, certainly, we're going to continue to be active in the world of evaluating M&A opportunities. There was a good question earlier about what's happening in the marketplace. Look, there is no ideal market for [alts] firms. And access to capital, as you read people want it for either their own growth purposes or people want to be part of a platform with the scale benefits of being part of something like Blue Owl, this is a pretty interesting environment. So we're going to continue to be certainly actively engaged, selective. You've heard us say this many times, we're not trying to be all things to all people. We want to be extremely good at the things we do. We have all to be adjacent in this ecosystem of providing capital solutions to this broader private markets universe. So all of that will continue to guide us.

But listen, if we can find another Oak Street, I mean, it's a spectacular platform and a spectacular set of funds, which we think are going to thrive, particularly in this environment. But in any environment, we can find that or some interesting tactical opportunities like a Wellfleet, you'll certainly see us continue to do so.

And that will conclude today's question-and-answer session. I would now like to turn the call over to CEO, Doug Ostrover, for closing remarks.

Well, thanks, operator, and thank you, everyone, for the questions. We do appreciate it. I just want to say, look, we're really pleased with our third quarter results, and we're hopeful that all of you take away that we've built a pretty unique firm with a very steady stream of income from permanent capital and you tie that with meaningful growth. We think we have a stock that is poised to do quite well. I'll just add, we're grateful for everyone's support. We remain confident in where the firm is heading. And we look forward to hopefully continuing to exceed investors' expectations. So thanks again.

And this will conclude today's conference. Thank you for your participation, and you may now disconnect.