James Clarke – Building Enduring Partnerships at Blue Owl (EP.445)

26:57But that said, sometimes when you get in an area like direct lending, recently the performance dispersion has been very tight. What you have to do is differentiate in other areas. The performance of those seed investors has obviously been amazing because not only have we given them strong returns in the product, we've also given this incremental upside. And that incremental upside can be meaningful, particularly in direct lending. on senior secured risk and you can get into those mid -teens or high teens, that's incredibly valuable. But if you just sort of phone it in from there, good luck. There are times where I hope that we're not an annoyance.

27:35I've yet to hear it. One of the things that I love as well is that the team that we have, it's no one owns something. There's like four or five of us on them for many reasons. I just feel like I can call anybody and I don't feel like you're all competing for my attention. I think a lot of organizations have been built around the fact that the biggest competitor shouldn't be here. So if you're unified and you're collectively sharing that vision, and some of these can be five clients wrapped into one, you've got to go that way. A lot of people do sell on performance. And then when things are dour or the market's against them, they're kind of in no man's land because that was the thing that they advertised.

28:17The beginning and now in your career, you've worked with very large organizations of Blue Owls becoming. Yeah. And in the middle, maybe not so much. How have you thought about scale beyond what you mentioned, the ability to have the resources, to have breadth and depth of client relationships? Can I talk about scale on an investment standpoint? I very much bought into David Swenson's book, Pioneering Portfolio Management. One of the premises there was find differentiated uncorrelated returns. The premise around that was that you had to be in the alternative space. And a lot of that, he talked about the hedge fund universe.

28:55What I identified in that is to really generate significant alpha. You had to go into these small asymmetric deals. And he talks about the dispersion between being a public manager's returns first and third quartile is very tight where the dispersion in alternatives managers is large. So the selection, this one's asset allocation. This one here is manager selection. You have to get that right because I think he talks about VC where the median return for VC actually lagged public market returns. So I used to think that scale was a bad thing. I used to think that you had to be small in the alternative space to generate alpha.

29:40But I've found that there's alpha in scale. There's relevancy in scale. When you're large, you command a tremendous amount of attention from people. You can't do that if you're small. If it's income generation and capital preservation, then the scale and the quality of these businesses, whether it's a GP in a world where people are doing more with less and bigger managers are getting the majority of the attention, You can only do that if you're big. And on the direct lending side, when people are building portfolios, there's absolutely a home for lower middle market, mid market, upper middle market.

30:18It's portfolio fit what they're trying to achieve. But to be relevant to private equity sponsors, and we cover 750 of them, to regularly see that deal flow, to be very judicious about the loans you do, you have to be big. I think there's alpha in scale. The other place where scale is clearly shown is in the wealth channel. And from early on, you've talked about the institutional side. Blue Owl has had significant inroads in wealth. Love to hear about the similarities and differences you've seen in building out the business on the wealth side. I remember starting at Auroc and I turned around and I saw there'd been a tremendous infrastructure and wealth built.

31:02It was like waiting patiently for when this trend was going to take shape. The apparatus and the planning and the way that has been done has been absolutely flawless. It is a very different industry. The other thing we've done really well at Blue Owl is we don't compete against each other. I think a lot of organizations, it's like, well, they did this and you did this. I mean, the fact of the matter is they're almost like a balanced portfolio. Institutions will typically get into the void when there's a kind of dislocation. The Wealth Channel, what I've seen that's really impressed me with our business is the coverage model is very similar to the institutions.

31:43The way in which it's been built has been that they will cover them just like we cover them in institutions. But the narrative has to change as well in terms of how are institutions using this. We deal on the institutional side with about 4 ,000 or 5 ,000 idiosyncratic situations. globally, strategic allocation versus total portfolio approach. You have organizations where the boards are very influential. You have organizations where the government's very influential. You have organizations where the asset consultant's very influential. You only know that if you study it and you get to know it.

32:22There is a lot of information out there. It blows my mind when I've worked with people and they're like, oh, we got a meeting with this $300 billion pension. Do you read the annual report? The board minutes? You can start to see where the balance of power is in there, who's shaping this, the involvement of the asset consultant. No, I'm bringing Charlie along and see what happens. I mean, if you think about that, if that client is with you for 30 years, you are essentially selling something of significant value. Your preparation and planning and knowledge of that and listening before you go in, I think the only purpose of the first meeting is to get the second meeting.

33:04The only purpose of the second meeting is to get the third meeting, and then you're qualifying it, and then you're involving more facets of the business, getting them familiarity and understanding them. But to go in there and approach it, if it's just like, throw it at the wall and see what happens, man, I just think is not the right way. What I see the wealth people do that's really impressive is that they are constantly in communication with these people. Their coverage model is geographic across everything. There's nuances similar to us. How we operate in Australia is very different to Europe, is very different to the Middle East, is very different to North America and Canada.

33:43What we've done well is we've shared ideas where there are similarities and we've partnered really well on taking both businesses to the next level. And we do it across the firm. People try to catch up with you. And the question is, how do you outmaneuver? How do you go to where the opportunity is? What are examples of seeing something changing and trying to outmaneuver the competitors? It's a really good question. And I'm constantly thinking about it every day. From a client service perspective, it's the velocity of conversations. It's how the engagement takes place. The constant maniacal focus on what are people trying to do and how are they trying to do it?

34:26The other thing is sometimes step back if there's nothing there to do. Hey, you know what? We're not a fit, but let's keep talking. We are constantly looking at areas where the supply of capital is greater than the demand. And there are only a few people that are capable of doing it. The best examples of that early on were our triple net lease business. In fact, as more people have tried to enter that space, the percentage of the deals that we've gone up is higher. going to these areas where the competition is less, data centers, going where people are less frequent, less visible, and essentially where there's an inefficiency.

35:06We've done really well, but mergers are tricky. One of the things that we have been very focused on is culture. Culture is imperative to us. We've tried to create a softer, gentler culture. You bring in new groups, and particularly in my space, they're coming at it from the mindset of, this is how we did it. But now they're part of a $260 billion organization. It's a very different situation. When you work at a bigger organization, you actually have to flex more into what does the client want and it may not be your thing. But if you have competing verticals, not a good start. You're just fighting against each other.

35:46On the cultural side, both internally and with a global client base, how do you think about different international cultures, both inside the firm and outside? It's so important. To me in this business, there are acquaintances and there are relationships. And they're two completely different things. You go to the big conference out in California or the one in Berlin in a few weeks, everybody's running into each other. Oh, I know this person. I know that person. I know that person. We know them. But are you regularly in their ecosystem? I can tell you in Australia, there is a building where there are about three or four super funds in it.

36:28I used to go down there in the early 2000s, never have a meeting and sit in the lobby. And people would come in and you would just have these casual conversations with no agenda. Australia is very concentrated in Queensland, Sydney, and Melbourne. And how they interact and how they talk to each other and the nuances to Australian culture are completely different from the Nordics. So one of the things that we've done recently is have people that have a really good understanding of those markets. They've been doing it for a long time. They speak the language. Where I was going out to the Middle East a lot, and I absolutely loved it.

37:07But it was apparent to me that doing it from New York, even if it was six times a year, was not enough. I needed a local. I needed someone that had familiarity there, was in their time zone. Also, it was a demonstration of our commitment to the region. Australia is the same thing. I had a master plan for it, went out there. I'll be honest with you, Ted, two and a half years ago, we're a $150 billion firm with Blue Owl. And I have good friends there and they'll be like, I have no idea who that is. One of them called me Blue Duck or something like that. We were a nascent competitor. A lot of firms have been there since 08.

37:44The Australian superannuation industry is going to be the second largest in the world. You have to have an on -the -ground presence. You also have to understand things. And we work very closely with our legal department and tax department. There's heaps of considerations that go into this. Australia is a really interesting one because people go there a couple of times. They have meetings, they give up. I mean, it's a long way to go. I've probably done it a hundred times back and forth. I get it. I speak to a lot of Americans. They said to me, I really want to go to Australia. I just don't want to do the flight.

38:13Unfortunately, we haven't truncated that distance yet. Australians want to get to know people. They're interested in partnership. It's all about trust. It's very similar to other areas, but you have to be willing to make the commitment to go there and you have to have those resources there. When I think about us growing, sure, I'd love to go to continue to go to the Middle East, but I need someone there 24 -7. We build a good business there. But the moment we stagnate and think we got it is when we don't have it. So we keep building. And what's really been tremendous success over the last eight years since you've been around, there are always bumps in the road.

38:53There are always mistakes. As you brought people onto the team. What are some of the common things you've seen that you've had to course correct with people that are implementing the strategy on the distribution side? Having a big firm mindset is the biggest one and getting people to quickly tap into that. The past is irrelevant. We all come here with our experiences, including me, constantly putting all those ideas in the crucible. We've changed a lot, but the most important thing is the client always. Where do they get that comfort? There are so many ways to distribute. I could put 400 people in a cannon and shoot them out and say, right, you cover whomever it is and let's see what happens.

39:37They can all compete against each other. Or you can build the model that we have, which is everybody's coordinating and working together. And if you speak to the clients, there's a funny story. There's a guy in Missouri who I absolutely love. and he was telling me about a firm once where he was sort of being covered by three people and he organized a conference call. He said, okay, here's what's going to happen. I'm going to drop off the call and at the end of it, one of you is going to decide who covers me. We want to make sure that we're doing it the way that our market and our clients want to be approached.

40:11And getting people to buy into that and realizing that's best for Blue Owl is something that I continually focus with. It's not easy. We're not perfect. We have to keep thinking of how to get better. How many businesses have been built to last? Truly built to last. We've talked about my old firm, and there's a number of other ones out there, but are they fads or are they organizations that will transcend our employment? Where I want to be is sitting on a beach 20 years from now going, that thing is chugging along. It's even better than when I was there, and I was there at the start. I don't want it to be something that just sort of troughs.

40:52And it troughs if you don't remain focused on the clients and it troughs if you don't build that internal DNA of everybody pulling together. The other thing that I made a mistake on was I probably didn't add resources as quickly as I should have. An organization should never become bloated, but I probably over -index that. I had to play catch up for a little bit. Not perfect, but I think we got there now. It should have been in those non -US markets quicker. We were covering them and we were having success. A big mistake and a big learning curve is that assigning a strategy to limited success data points is not a winning one.

41:36Again, you deal with 4 ,000 idiosyncratic events globally. If you say, well, this is the way it works because these 10 people did it, well, you're missing out on the other 3 ,900 odd. How does being a public company fit into the ability to have permanence and all the pluses and minuses that come with that? There is always an apprehension in the institutional market of when businesses merge, acquire. It's totally a natural state to get to because remember, they're buying into something with certainty that things aren't going to meddle with the process, that what they invested in is going to continue to be the same.

42:17I get it. And it's something that we have to give comfort that comes to transparency, trust, and communication. The thing that we've done on the investment side is those businesses continue to operate the way they are. That's number one, table stakes. Number two is there's the constant pressure of being public, having a share price that trades daily. And a lot of the time, the conversation is around capital formation, totally natural. We're in an envious position that 90 % of our capital is permanent. There's this base there. The way I've thought about it is that this is a business where you have to continue to stay ahead.

42:57And if you've had that lens of the stock price on you all the time, you are constantly thinking of how to get better. And I think that in turn helps the clients. Where the mistake happens is if you put your own interests ahead of the clients. It's about the process. The moment they're unhappy, it's going to affect the share price. So you can't really think about that. What you need to be thinking about every day, and we've got just under 100 of the largest institutional investors in the world now as clients, is that they can grow alongside us, we can grow alongside them. But if we start focusing on the wrong things, that's going to be a problem.

43:38Now, things may not happen quick as we want them to. That's just the general cadence of the business. But they are the most important thing, and this will take care of itself. It's the same with fundraising. If you stay in the process, this will take care of itself. People focus very much on the money coming in. There is a massive dispersion in what a successful first meeting looks like for the client and what it looks like for you. I think a lot of managers, they go on the first date at the bar, they have the second date at the bar, they date for six months, they propose and they get married.

44:13That is not a normal state. That is a rock star marrying in Vegas. Last time I checked, they don't work out that long. You have to have this process. It has to continue to follow. Being a public company will take care of itself if you do all these things right. And that's where I focus. From all the conversations you have with institutional investors, what pieces of advice do you give someone on the allocator seat? I'm not necessarily in the advice business. I'm in the listing business. I try and illuminate for them what everybody else is doing around the world and how people are taking on the market in different ways.

44:52There are growth markets around the world. Australia is a growth market. The Middle East is a growth market. Canada is a growth market. These are defined contribution plans in Australia. They have a compulsory savings rate, but they have to think about things differently, but they have perspective. I've tried to sync up these different groups. You should speak to this person. There was a group in the Middle East that I had speak to someone in Australia. Very similar. I'm not on the call, but I'm able to sort of be that facilitator because I'm here and I'm here and I'm here. They're not. Look, I heard this.

45:26This may be interesting. And half the time they're like, thanks for the idea. No mask. There are times where they say, put me in touch. That's interesting what they're doing. I want to learn that. And then there are times where they may even be interested personally in going there, maybe trying to help them out. A lot of the US pensions now, some of them are considering this total portfolio approach. They've been very public about it, moving strategic allocation to total portfolio approach. There are organizations that have done that globally for years. What are you most excited to continue learning over the next couple of years?

46:02One of the things that just drives me about this industry is that some people think it's very stagnant. I think it's constantly evolving. You and I have been in this for a long time. I would love to get a conference agenda from 2005, 2015, and now. One 2020 strategies. There was obviously a lot of the hedge fund stuff back in the day. There was portable alpha. I'm sure some of those things still exist, and I'm sure people are doing very well in those, but the industry does evolve. I'm very excited. I think the next three or four years probably shapes the next 10. I personally believe that in an industry like institutional asset management, which is so competitive, the demands on people time, we don't have a right on their time.

46:51It is not a God -given right that they should take our meeting ever. But if we can stay in the thicket of that discussion and that relevance in that competitive environment, that's what excites me. There is so much more that we can do with these organizations that transcends product. The quicker that asset managers can get closer to their clients and have these big strategic partnerships, it's a win -win for everybody. How we do that, I don't have the answers to all of that. I've given you some of them, but I think it's worth diving into that even further. And that comes through conversations and partnership.

47:30That's what I'm excited about. All right, James, I can't let you go without asking a couple of fun closing questions. So what's your favorite hobby or activity outside of work and family? That 68 California special Mustang. I became a casual observer of those and got really into those. I love the providence. Lee Iacocca is actually one of my most interesting folks that I've gotten to read about, learn about. He was the grandfather of the Mustang. And what he identified was that there was this baby boomer group coming through in the mid -60s that wanted a good -looking car that was affordable. In fact, I think back then they went for $2 ,368 and the poundage of those cars was $2 ,368.

48:14It was a dollar for a pound. He was able to tap into the market demand and create something that was affordable and stylish. It's on its seventh generation. It's like the longest running line of cars. I was fortunate enough a number of years ago to buy one. And it just so happened that I was the second owner of it. A gentleman had passed. He was 93 years old. He bought this car in Los Angeles. I put the original receipt. He drove it everywhere. And there's a picture of him, the weekend of Woodstock, on the Hudson River with it. It has never been painted. It's got chips all over it. It's the original car.

48:55and I barely even drive it, Ted. It's four -speed stick shift. And those ones, if you're just a little off on the clutch, man, you are bunny hopping that thing down the road. It's the fascination of Iacocca. It's the fascination of that car. It's the fascination of that period. On the weekends, we'll sometimes just slightly detail it. If you detail it too much, you rip the pain off. What I'm tapping into is nostalgia. What was your first paid job and what'd you learn from it? I worked in a department store in Sydney and they kept me away from all the sort of fashionable stuff and they put me in the suitcase department.

49:34We didn't have cell phones in the mid -90s. So I'm sitting there behind the counter, just staring around, doing my four hours and leaving. There was no flow on these suitcases. I learned within a week or two, what do people use a suitcase for? They're going somewhere. By asking those questions, I was able to start to qualify what type of suitcase they needed. If it was a businessman, you need durability. If it's a family going on their first trip, get them a big one. And then I would start to read the brochures, where they were made, what they were made of, and was able to talk about the product.

50:07When you travel, you get a very fond attachment to your suitcase. It is everywhere with you. I had this Toomey that I bought, and this thing lasted me 20 years. And I dragged this thing It probably went around the world 50 times and it was battered and bruised. And I remember being on a trip with Mark Lipschultz in the Middle East. He's like, can I just buy you a new suitcase? That was my first paid job. What I learned from him was ask questions. Don't just stand there. Don't just be a cashier. And I think in this industry, you're either at McDonald's window. There's high demand and you're standing there and you're just taking fun docs or you're proactively going out there and learning about people.

50:47So I got out from behind the counter, got out to the customers, found out what they were doing, qualified what they needed. Which two people have had the biggest impact on your professional life? My first boss, John Wilson, he's very old school. Back in the 90s, you could be kind of rough on people. He trained me the right way and I learned quickly. He was maniacally focused on detail. Detail was everything to him. He used to have this philosophy, and this carried with me to this day. If you make a typo in an email or a client's name, how do you expect them to want them to give you money to manage?

51:25This is when you could actually go through the airport and into the lounge. He was going from Melbourne to Sydney to Brisbane. The only reason he was going to Sydney was to pick up presentation materials for a finals presentation. It was the Queensland industry electrical employees retirement system. And I'd put the apostrophe in employees in the wrong spot. And I had gone over this thing so many times and I gave it to him. The first thing he saw was the apostrophe. He was wrong. And I learned that from this day. And then Bill Thompson, I admired him from afar. I was a senior associate VP, senior vice president.

52:05He was the CEO. He did things the right way. There was a delineation of responsibilities in the organization. He kept people focused on things. I remember him saying, we had a conference. He said to the entire, if I see a flotilla of Mercedes out there, I will be deeply annoyed. You are presenting yourself to the clients in the way that you have to be familiar with them. You have to be relatable to them. I do not want to see that. And he just taught these little lessons that have carried me forever. How's your life turned out differently from how you expected it to? Oh my goodness. I'm here. I'm in America.

52:46If you'd showed me a map of America in 1998 and told me to point to the cities, I would have got Detroit mixed up with Idaho or something. I've been to 47 of the States out of 50. I didn't grow up in snow. I've tried to drive a car in Michigan in snow and skidded it off the road. I just never thought I would be here. And I didn't think I'd be here this long. I came here for a year or two just to test it out. And then I just absolutely fell in love with it. It's a marvelous place. I miss Australia dearly. But I would say being here and also being in finance. So basically everything has turned out differently.

53:24There was a period there where I just thought I was going to write scripts for comedians. I did that for a week and it weren't very good. And then I got into this and I've loved it ever since. And I just love people. That's really what it boils down to. It's a relationship business. I got to ask you one that probably isn't as happy. Mets, Jets, and Rejects. Please discuss. Well, the Mets are 21 and nine as we speak right now. So I came here in 02. There were a handful of Australians that were here as well. And all of a sudden they were like Yankees fans as if they'd been around since 1923. And I just thought it was so basic.

54:02The Yankees had won in 96, 98, 99 against the Mets in 2000. Just missed out in 01 with the Diamondbacks. But that was such an easy decision. And I've always liked the underdog. They got into the NLCS last year. They've been in a couple of World Series. They've actually been a little bit more successful. The Jets is probably one that I will never get over. I'm a season ticket holder in the end zone, four rows back with a couple of high school teachers, go to every game. And I think it just becomes a joke fest at this point, laughing at situations. I love the underdog. I like following them. I like the trauma.

54:39And I remember there was a game last year where they lost to the Rams. And I turned to my friend, Tim, who teaches out in the Bronx. I said to him, one day we will look back on this game when they win the Superbowl. And he said, no, we won't. All right, James, last one. What life lesson have you learned that you wish you knew a lot earlier in life? Not take things so seriously. I turned 50 a couple of weeks ago. I did play sports. I did make some pretty good teams along the way just through perseverance, but I would get myself so wound up. One thing I've noticed in America is that you kind of stop playing team sports around high school unless you get into college.

55:19You can kind of stop or You play socially in the park. We played competitive sports. I played 26, 27 before I came here. But I would just get so wrapped around the results. And I really beat myself up about it. I took up golf when I got here. And I'm at a point now where there's just this piece. Sometimes it's going to hit the hosel and go 45 degrees right. Sometimes it's going to go straight and land on the green. I just can't care about the result. I just got to stay in the process. And I'll look back on that. And I was like, there was so much fun that could have been had, had I not been wrapped around the axle.

55:53Having said that, whenever I played, whether we won or lost, but I remember the people I played with and I still keep in touch with them. I can't tell you any of the games. I can't tell you what happened, but I can tell you who I played with. And one of the things I want that I think is different in asset management is for us as a group in 20 years to think very fondly of the people that I've worked with. That to me would be a nice experience because I don't think everybody has that. Anywhere they work, they have a real tension about people around them. Their egos clash. This culture that Doug has really been focused on and persevered with, I think we could have that experience.

56:33And that I would like to enjoy it and remember the people that I worked with. That's great. James, thanks so much for coming by. Thanks so much for having me. It was a lot of fun. Thanks for listening to this sponsored insight. Sponsored episodes are paid opportunities for another 12 managers a year to appear on the podcast. If you're interested in telling your story in front of the largest audience of investors in the industry, please email us at team at capital allocators .com to apply for one of the slots.

57:12Thank you.