Episode 27: Michael Rees - Co-President of Blue Owl Capital

0:00Thank you, Michael, for coming on. I really appreciate it. It's our first in-person one ever. I appreciate you making the time and also helping me with the setup. Pleasure. It's great to be here and be the guinea pig for the on-air version of this, so thank you very much. Great. So I want to start off where I usually start off, your beginnings, your childhood. Tell me a little bit about your childhood, kind of your upbringing and education. What did it look like? Sure. So I was born and raised a proud son and brother from Pittsburgh, Pennsylvania. The Pittsburgh heritage has a big part of who I am and who this business is.

0:35And we'll talk a lot about what it means to be a good passive partner, which our business is built around. But, you know, having a high degree of humility and coming from what people tend to continue to call a blue-collar background. I don't think Pittsburgh is a blue-collar town as much anymore. But having that humility and upbringing was fantastic. grew up in the South Hills of Pittsburgh, went to the University of Pittsburgh, and just loved science, math, engineering, ultimately got a few degrees from Pitt and then went to MIT to study a little bit deeper into the engineering and business fields and really loved it.

1:17And, you know, was lucky enough to have a younger brother who I did everything with growing up and he joined me in the business 24 years ago and we've worked together ever since. So you know the sort of upbringing from Pittsburgh Pennsylvania has been a big part of what has shaped this business into what it is today. You talked a little bit about going to MIT and MIT you're trained as an engineer so I first want to ask you before diving a little bit deeper into your kind of early career do you think your training as an engineer anyhow shaped perspective differently going into the world of finance?

1:53Well, I always advise either interns or young students when I have the chance to talk to them that if you don't really know what your passion is, do something you're really good at. And so I think I took that adage all along. I wasn't really sure. I didn't fall in love with finance until my last year at MIT. But I really loved the engineering and physics background and I just wanted to be at MIT and study those kind of really sophisticated and intricate aspects of the physics world. Loved it there, but didn't have a passion for it and wasn't really sure what the future would look like. So when I got to take a bunch of classes at the business school and understand a little bit more about finance, sort of building in some of the fundamental rules that had engineering-like applicability.

2:45But in a much more social and dynamic setting, it really resonated with me. And so I fell in love with finance really from that point on. And sadly, I guess my 12 plus 4 plus two, my 18 years of studying engineering or leading up to studying engineering, I didn't actually practice engineering one day in my entire life. But ultimately, it served as a good foundation for ultimately what we built here. What I'd love to do before I kind of dive into the specific insights about your career and we dive into specific parts about it, which I'd love for you to do is kind of, from From the time you fell in love to finance all the way up to today, can you just give me a brief two or three minute overview of your career, what it's kind of looked like and what led you to where you are today?

3:34Yeah, I was fortunate enough to join the strategy team at Lehman Brothers early on in my career. And I was the young man, the junior person on the totem pole. And I got the business line that literally had nothing in it. You know, the most senior person got the fixed income business, which was the crown jewel of Lehman Brothers. And everybody else got their pick. and I got what was literally left over at the end, which was this asset management business that sort of had, you know, fits and starts and at that point had very little in it. But the first project that I worked on was to think about an M &A strategy for Lehman Brothers in asset management.

4:15What could we buy outright and what should we build and what should we buy a piece of to capture the economics of without controlling it? And that ultimately, that work that I did in 2000 and 2001 sticks with me today and really formed the foundation of what is the Blue Owl business and the GP Stakes business here. I went all the way through really doing M &A on behalf of Lehman Brothers until the bankruptcy. I stayed. I was there at midnight on September 15th. Yeah, right to the very end. And stayed there after the bankruptcy. see, we spun the asset management business out. All those pieces that I helped put together for those eight years, we spun that out into a management buyout and called it Neuberger Berman and stayed there for 2009 and threw our IPO into Blue Owl in 2021.

5:15So a nice run at Neuberger. And then ultimately as we peeled our business out of the Neuberger business and stood up Blue Owl, I came here and I'm a founder here at the firm and one of the co-presidents. I want to take a step back. You said a lot of these experiences in your early career, whether it be at Lehman or, if I'm correct, you were a consultant before on what you called kind of like a numbers-oriented McKinsey. So you were there. What specific experiences or lessons kind of stuck with you from then? If you were to pick out a couple that stick with you now. Yeah, the early years, you know, when you're the young analyst associate sort of riding up the curve, you're really focused on doing a task extremely well.

6:00That was my goal. You sort of, that ebbs and flows as you get more senior. But at a firm called Maricon Associates, which was, you know, high-end consulting firm, but really focused on quantitatively allocating capital among business units, how to think about the true financial performance of a business within a large firm. That really excited me. I could, to some extent, think quantitatively about business strategy projects. But, you know, I think the early part of anyone's career, you really have to focus on doing the basics well. And that was my focus. I look now, happily, not an analyst or an associate anymore.

6:48But really, having pride in the work product every day, knowing that I had only a few minutes with my MD or the executive committee of Lehman Brothers, I knew I had a shot and it had to be as close to perfect as I could make it. So I really focused my early career on doing the blocking and tackling and doing it really well. And then I assume eventually you became more high level and started thinking about the more high level things, more strategic visions. I want to talk a little bit about Dial a bit, which is now Blue L. So you said that after 2008, 2008 was a main shifting point in your business, as I think you mentioned.

7:31You said no one was promised an 8 % to 10 % return anymore. and a lot of these businesses, you know, everyone's a genius in a bull market, but once it's a bear market, you know, it's especially since you invested in, were invested in hedge funds heavily. So I'd love, what I'd love for you to do is take me through the evolution of Dial, which is now Blue Owl, but through the lens of crises, recessions. I know you haven't had many in your kind of the lifetime of Dial, but just take me through them with the lens of those recessions, but also how you adapt and evolve out of them. Well, I actually do think we've had a lot of crises.

8:04Over the period of time, I think everybody lives through minor crises, whether it's even as recently as, you know, the tariff tantrum. You go back a little bit before that, it was the election. Before that, it was the interest rate hike. So you're always living in a period where it feels like it's a crisis. If it doesn't feel like a crisis, something's wrong. That means everybody is too happy and you're likely at the end of a bull market and there's a crisis right around the corner. Yeah. So you're about ready for it at that point. So in general, I think you have to embrace the volatility of the financial markets.

8:44And part of that is knowing and feeling comfortable in a world that is uncertain, knowing that there will be, it's never as bad as it seems, and it's probably never as good as it seems either. And building the types of businesses that will endure through a crisis. Now, you know, I thought the fourth biggest investment bank in the world at the time, certainly in the United States, Lehman Brothers was big enough and stable enough that it would survive basically anything. But, you know, we were at this fulcrum moment. The government didn't let Bear Stearns fail and they weren't going to let everybody fail, but they had to make a example out of someone.

9:32And sadly for me and a lot of my colleagues, Lehman Brothers was that example. Now I do think for me and for a lot of others, that type of rapid decline and or, you know, elimination of a firm, it's catastrophic and it certainly had its negatives, but But out of it has come so many different businesses and great opportunities that were created out of a new start. And I certainly benefited and was one of them. And there are hundreds and thousands of others following the Lehman folk all around the financial services world watching what's happened since then. You have great people that work together that learned a lot from a great run at Lehman.

10:18It's natural that they're going to go on and do great things. and it's been fantastic to watch it. A lot of my colleagues here at the firm are ex-Lehman. And from a crisis that certainly was unfortunate, a lot of positives were also born out of it. I think there's a lot of people that sprung out of these banks that might have been failed. Actually, 30 minutes ago, I was speaking with Alan Schwartz, who was on the podcast, a very close friend of mine at Bayer. But you've, whether it's been minority investing or my majority investing, you've been kind of at the forefront of alternative asset management for two decades before, I guess it was even called alternative asset management.

10:57What's the biggest structural changes that are, you could say stuff, but what are some structural changes that might be out of the obvious that you've seen over the past two decades? And how is the company's receptiveness to advice evolved over time, whether you're a minority, majority, how they just responded to advice over time? Well, you know, I think very little in alternative asset management has happened quickly. We've been on a very slow adoption phase. The adoption of alternatives, growing this from basically a nascent industry 25 years ago to a$13 trillion industry today, That took 25 years to do, but it was all part of a sort of tectonic move away from the traditional equity fixed income portfolio to add a third leg of the stool, which everything was bucketed as alternatives, but it includes a host of different sub-asset classes.

11:59And it just gives investors, those that have the wherewithal, and I'll define that casually, whether it's the financial wherewithal or the informational wherewithal, those that have the wherewithal to invest in it, can get closer to that efficient frontier by adding an asset class in a lot of ways that either has higher return potential or downside risk mitigation. and hedge funds, private equity, private credit, infrastructure, all of those tools which were historically not available to all the different investment types, investor types, that has now sort of broken down and we're seeing that long continual structural growth into the alternative industry.

12:45And we think we're probably still only in the second or third inning. We still have lots Lots of client segments which have not adopted a host of the different alternative strategies. And it's only a matter of time until we'll see 401Ks investing in private markets, geographies around the world. We've seen the uprising recently of the wealth investor, the insurance investor moving into private markets. So we think that's going to continue for certainly a decade or two following the natural path of adoption that you've seen in in the traditional asset management space 30 years prior. And from the 2000s to today how is their receptiveness to advice evolved?

13:28Well in in alternatives these GPs these these owners and managers fantastic managers of these great firms they clearly know a lot they've built fantastic franchises you just look down the roster of firms but you know there It's a very opaque industry and there's not a lot of information sharing across the various firms. Maybe a founder has another founder friend that they go to dinner with or they golf with and they chat and share ideas, but there's no systematic or advisory way for any of these firms to learn about what's going on in the industry and how they can really make their business better until we came along.

14:14So one of the things that was different when we were buying stakes in GPs at Lehman Brothers, it was meant to be as far of an arm's length deal as it could be. It was pay me some money and leave me alone. In fact, don't show up. What we flipped that on its head and turned it into at Neuberger when it was called Dial and now at Blue Owl is a different kind of relationship. We want it to be as strategic as possible. We want the GP to benefit from the fact that not only do we have a partnership with them, but we have a partnership with about 70 other firms. And those 70 firms manage one-sixth of the total industry.

14:57So we have visibility into what works really well, what doesn't work. And we can help each firm sort of get to what is best in class. And on the other side of that wall behind us, you know, there are 60 people on our business services team. And what they do is they come in every day and just think about how to make our partners better. If any of our partners is interested in learning what's best in class in certain areas, we have that expertise in place. And ultimately, it's been a fantastic test case. Back in the day, 15 years ago, people said, you know what, they really only want your money.

15:36And we had a hunch if we could build something that was truly special and unique, they'd value the strategic side of the partnership as much as they would the financial side. And it's been great to see that evolve over time. During that time, 15 or maybe 20 years ago, and even before, you talked a little bit about, and I think everyone has seen a shift within the financial industry, of there were these hedge funds run by these star traders, even private equity firms, a lot of very star-driven institutions, whether that be, I think, when you did a podcast with Ted Seides and Capital Allocators, which I heavily recommend to anyone who's watching this.

16:15You mentioned Julian Robertson and George Soros, but also people like Michael Steinhardt even before that. As soon as they stop, as soon as they switch light off, they have no kind of institutional value. We've seen a shift in the past 20 years of these hedge funds, even from the get-go, looking to build more legacy, more institutional value. Glenn Dubin, who was a past guest of the podcast, mentioned how from the get-go about hybrids, he didn't name that after himself. He went for legacy, processed different strategies, and that's what eventually helped them merge into J.P. Morgan asset management.

16:46But my question to you is, as you've seen that shift from, I assume during the kind of start of your time of buying minority GP stakes or majority GP stakes, there were still a solid amount of star-driven kind of like hedge funds or private equity. It was very based on those specific employees. Have you seen it shift from kind of star driven to more institutional process driven? How has your investment process changed due to that shift? Yeah. And we see it shifting. We haven't seen it fully shift over and I don't think it ever will. I mean, these businesses in a lot of ways, they have key people and you don't ever want to try to make it a widget factory.

17:26This is not what this is. But we have flipped our investment process entirely on its head. When for the first 12 to 15 years, we only were focused on the then senior folks, and in most cases, senior individual, and trying to lock that person to the desk for as long as possible. The goal was tie them up. They can't leave this firm. They can't retire. What can we do to make sure that this one person or this small group is in charge of this firm that we're investing in for as long as possible. We've turned that over. What we look at now is does this firm who has great people, does it have the framework and the mechanisms that those great people can someday leave and the next generation of great people can take over?

18:18And that is an ethos in a lot of ways. The firm has to think about itself as an institution, not just as a star founder with a bunch of people orbiting around him or her. And they have to have the mechanisms in place, inclusive of the financial mechanisms and arrangements that, okay, someone can retire in a very smooth way and someone else can come in and take their spot. So a lot of it was changing our mindset from chaining someone to the desk or at least calculating how long we think that person will be there to looking at it as an institution or institutionalizing and trying to figure out is this the type of firm that will outlast this group and hopefully the next one and the one after that we're buying into what we think are long-term operating businesses so what we care about is something I don't know if it's a real word but we call it survivability.

19:19And so we want to find the firms that are going to survive the ups and downs of the market and importantly, the organizational dynamics that often are what causes a firm to go under. You'd be surprised, more firms go under because of internal reasons than because of external factors. They just can't seem to get that transition right. And to be able to invest in those businesses, you've described kind of a very long-term outlook, whether that be before you invest and still after you invest, keeping relationships with these top 250 kind of alternative asset managers. So on the topic of long-term focus, how do you think that long-term mindset, it's very hard to have a long-term mindset because there's always these short-term things that might make you a little bit of money and you want to kind of grab at it, but how does that long-term mindset shape the culture here at Blue Owl, but also how do you kind of reinforce it as the organization grows?

20:12Because some of them scale is an enemy of a really kind of specific culture. Well, the whole private markets are really predicated on duration. You buy into something, and quite frankly, in a lot of times, you can't get out of it. And that's a good thing. You know, investors are giving up liquidity, day-to-day liquidity, for something. There's a reason why there's alpha in private markets, and typically, and they have outperformed over 3, 5, 10, 15, 20 years, private markets outperform Publix because there is that just structural inefficiency of private markets that allows the best players in the space to buy a company, add value to it, and on their timeline, sell it.

20:58They're never going to be forced out of a trade in the private markets, particularly if you set up your assets and your liabilities to match. So by and large, the benefit of private markets is longevity. So what we've done at Blue Owl is created a set of products that allow investors to have a very long-term outcome, long-term return, but you don't have to wait till the last moment to get your money. So what we've tried to create here is a suite of products that ultimately gives you that long-term private markets return, but gives it to you consistently over time through yield. And so whether you look at our GP stakes business, our real assets business, or our direct lending private credit business, in all cases, we're thinking about protecting the downside and getting investors their money back over time so that there isn't a moment where the market might not be reacting well and you have to sell something.

21:59We don't want that ever to be the case. We want to consistently deliver returns quarter in, quarter out, so that investors get the best of what is private markets, which is duration. You spoke a lot about building these meaningful long-term relationships with kind of these capital allocators, these institutional investors, even if it doesn't seem like a deal will be had. And you speak a lot about that on the Capital Allocators podcast with Ted, which I listen to. How do you build these kind of meaningful long-term relationships? How do you provide value? What does it kind of look like, these long-term relationships?

22:37Well, I'm getting old because now I can honestly say the average deal takes seven or eight years from the time we meet one of these founders or managing partners to the time we actually do the deal. And the thing that I love most about this job is the chance to go on the journey with them. We have sat down with firms that were on Fund 2 that they weren't even sure what they were doing, but they wanted to understand what it would be like to take on a financial and strategic partner in the form of a minority stake investor early and get to know us over time. We often liken this to a marriage. And so, you know, you don't get married overnight.

23:22Most people don't. And you want to know who your partner is going to be. And so we get to travel the world, meet these entrepreneurs who are building firms. In most cases, they're sponges. They want to understand what are we seeing and how can we help them. And at the time of their firm's development where it makes the most sense, we are there to jump in with capital and advice. And sometimes that can be as quick as a year or two. It often isn't. Sometimes it can be as long as a decade. But on average, we get to develop these very long-term relationships with these great entrepreneurs and business builders.

24:03And when the phone finally rings and they say, you know what, we thought about it and now's the time, there's nothing more gratifying than building a relationship for many, many, many years and finally having it come home to be an actual deal that we can act on. You said a key driver for a lot of your partners is because you have access to so many of these top-tier asset managers, you can pull insights from their success and give them advice based on all the collective insights you glean from them. But I'm wondering about your own firm. What kind of insights did you learn from the firms you're partnered with that influenced how you built your own firm?

24:41Oh, I mean, all I've thought about for my entire career is what would make the kind of firm that you would want to own, not just for three or five years, but probably forever. And so in helping to create Blue Owl, we thought about what those levers are. And, you know, we wanted, you know, all of the things that we look for in our GP partners, we wanted them in our own firm. So we wanted to be a very scaled, high-quality player in everything that we do. We didn't want to have businesses that weren't high on the league table. So in direct lending, in triple net lease, in data center, digital infrastructure, and in GP stakes.

25:29If we're not the market leader, we're darn close. And that makes up the vast majority of what Blue Owl is. So we are true market leaders in what we're doing. and we've built a business for the downside. Our shareholders are recipients of our management fee profits for the most part. The more volatile and harder to measure carried interest or performance fees, that we leave with our employees as their compensation. And our employees are willing to wait for it longer. They're willing to have it be higher if things work out and lower if they don't because they're the ones living it every day. Public shareholders want something that they know they can measure and it can be consistent.

26:17And so what we've been able to do in creating Blue Owl is bifurcate that. And we give the employee base what they want, which is the alignment with their clients. When the clients win, we win. We get paid more. We get higher carried interest. And when the clients don't do as well and we hope that's never the case but if so our financial remuneration goes down. So we want to be aligned with the clients as employees and we want the shareholder to get the benefit of the stability of the business we've built and the fee stream that we earn. And with that you can create a culture that's kind of entrepreneurial because all these people want to get their carry and they're incentivized to work hard and because a lot of these big organizations a lot of people get to sign work and everything split pretty equally and they're just not incentivized to kind of, you know, build stuff or go out for things.

27:11Well, the whole, that's a great point. The whole alternative asset management business was created by people who left large financial institutions and moved to start their own firm for the most part or join early in a firm that was riding the wave. And you look at it, it's sad. And I give the investment banks and the large commercial banks credit. They have to keep reinventing themselves every year and hiring hundreds and hundreds of people because the better you do and the more you work your way up, the more likely you are to jump and want to do something on your own. And so Jamie Dimon always fights this, that he doesn't want people leaving J.P.

27:57Morgan. I actually think it's a badge of honor that all these great people have left Goldman and Lehman and JP and Morgan Stanley and started these fantastic firms that have become such an attractive industry. So, you know, that that creativity that we try to foster here at Blue Owl, which a lot of our partner firms certainly foster, that entrepreneurial spirit is what really created this 13 trillion dollar industry. People say, you know what, I had a great training here at this 30 ,000 person bank. Now it's my turn to go out and see if I can build something with my own hands that will be something special.

28:37And it's been awesome to watch that. 100%. And it's not even you have to do your own thing. You can work somewhere like here or somewhere where there's an entrepreneurial environment. And you can still have those resources to fall back on while still pursuing your own thing and being entrepreneurial. you mentioned as one of your kind of verticals that you'd say you're one of best-of-class in as data and a lot you said a lot of large firms rely on your data science team you've used that before even even the biggest of the firms you're partnered with as AI advances and kind of the role of AI on data advances how do you see the role of data evolving in these kind of firms operations and how are you guys leveraging AI to enhance your capabilities and your partners firms capabilities I think the pillar of our business services team that is the busiest consistently is our AI and data team.

29:23Every one of our partners, literally to the last one, wants to understand what is everybody else doing and what can I do to not get left behind in this amazing sea change that's happening in our industry. And I think we're probably going to see more change in the next three to five years than we've seen really across financial services historically. What we're trying to do is equip our partners with what is really today what is best in class and how do we think it will evolve over the coming I mean we're talking three month windows it's moving that quickly how will it evolve and and what can they do to position themselves so that team in some ways they're they're utilizing data and capabilities that each firm doesn't possess itself to help them understand investment decisions or business decisions and that's the sort of we we we call that that's our fishing for somebody we're giving them a fish but then the other part of the business we're teaching them to fish we're teaching them what is what is the latest and greatest what are others doing and what do we see around the corner that they can be doing today to build for the the moment in time when sourcing new deals can be done largely with AI models, when evaluating a new sim, a new opportunity, the total hours consumed can be taken from 100 to 10.