TIVP009: Blue Owl Capital (OWL): The Next Blackstone? w/ Shawn O’Malley

26:02So I went on these asides about Dial, Oak Street, and Alrock to highlight the core parts of the business that have all been merged together with Blue Owl, and also to spotlight that the founders of these firms have stayed on to lead subsidiaries from within Blue Owl, and I mostly see that as a strong indication of the high-quality types of leaders at the company, as well as the amount of talent that they've correspondingly attracted at lower level positions. Let's pull it all together a bit now and look at Blue Owl's business as it stands in March 2025. The direct lending business, formerly known as Alrock, has almost$130 billion in assets under management, while the GP strategic capital business, formerly known as Dial, has roughly$62 billion in assets under management, and the Oak Street real estate subsidiary has about$44 billion in assets under management.

26:54That adds up to over$230 billion in total assets under management, but Blue Owl doesn't earn management fees from all of that. It varies for each unit, but altogether, Blue Owl has more than$150 billion in fee earning assets currently under management. And as of September 30th, the company had another$21.7 billion in cash that was yet to be deployed that will generate over$260 million a year in fee revenue once allocated. And then there's still$50 to$60 billion that Blue Owl doesn't earn any fees on. Some of this is actually investments from the company's own employees and executives into their own funds.

27:34So they aren't charged fees on those amounts. But mostly this is borrowed money used as leverage in some of their investment funds, which isn't held at the parent company level. So fees are only charged on capital committed by investors into the investment funds that Blue Owl manages. And if they borrow some additional money to use in their strategies, they're not going to charge their investors fees for that. But since Blue Owl became a public company, its management fee revenues have increased by more than 200%. And management fees are up 25 % in the last year alone, thanks to raising new funds from investors, acquiring other asset managers, and deploying capital that was previously held in cash.

28:13What stands out to me the most is that out of the$154 billion of assets it manages earning fees, 91 % of those funds are considered permanent capital, where investors in these vehicles cannot make redemptions and try to withdraw their money. Meaning if we multiply$154 billion by 91%, this implies that the company has$140 billion worth of permanent capital that it will earn fees on indefinitely. And that strikes me, obviously, as being very valuable. When I say permanent capital, though, it's important to understand what I mean. There is sort of a spectrum of capital permanency in investment products.

28:53ETFs, for example, are the opposite of permanent capital. They trade all day on stock exchanges and money can freely flow in and out of them for the most part. Then there are alternative asset funds for accredited investors like private equity, private credit, private real estate, and hedge funds. These can all be structured differently, but they tend to have some sort of defined lifespan or timeline for being able to withdraw your money after a lockup. So a private equity fund might raise capital commitments, go out and look for private companies to invest in, and then call capital from their investors to go make the investments with a goal of later selling those businesses again in five to 10 years and returning the money back to the investors in their fund, who are also known as limited partners.

29:36Limited partners in a private equity fund like this are expecting to tie up their money for at least five years or more. So from an asset management perspective, this is much longer than an ETF, but also not quite permanent capital because the capital will eventually be taken out of the fund and returned to investors in full. Truly permanent capital in public markets would be something like a closed-in mutual fund, which unlike normal mutual funds and ETFs, don't accept new inflows of cash, nor do they allow outflows. Meaning the managers of a closed-in fund raise capital upfront and can allocate it toward investments indefinitely without fear of their investors abandoning them.

30:14This is not as ideal for the investors in these funds, but it is pretty attractive from the perspective of the asset management companies managing them since they can charge the same management fee every year on the same base of assets without worrying about that capital fleeing. That obviously makes their business much steadier. Investors essentially handed them money in return for shares in the fund with no expectation of ever explicitly being paid back. I'd say that this is basically the same thing that happens with public companies. Investors commit capital to a business during its IPO, receive shares of equity in exchange, and hope that the shares will eventually be worth more when they resell them, or hope that they can at least collect enough dividends to more than repay their initial investment, but they don't expect to have the company be liquidated and all their capital returned at some point, like with the typical private equity fund.

31:06They're accepting that their capital has been permanently tied up in the business and are hoping management will be good stewards of that capital. Warren Buffett appreciated this as much as anyone, and that's why he closed down his investment partnership, where his limited partners could flee in a downturn and request to withdraw all their money at inopportune moments. Trying to manage a long-term portfolio where your investors could demand their money back at any moment is a really tough way to do business. And you could say that's what drew Buffett to ultimately acquire Berkshire and use it as a holding company to allocate capital through.

31:39As the controlling shareholder, no one could force him to sell any of Berkshire's assets or distribute its cash unless he wanted to do so. The company's capital was truly permanent for him, giving him complete discretion to allocate it with a long-term perspective. I could talk about Buffett all day, but my point is to illustrate how some forms of capital are more permanent than others. And that can be very consequential for the managers of that capital. There's a balance between what's most ideal for investors in terms of maximum liquidity as with ETFs, and what's best for the folks trying to invest that capital on longer time horizons as with alternative asset funds, closed-in funds, or like Buffett did with Berkshire as a permanent capital holding company.

32:23So back to Blue Owl and their claim of having 91 % of their assets under management as permanent capital. Using the company's own language, they define permanent capital as the quote, AUM and products that have an indefinite term and do not have a requirement to exit investments and return the proceeds to investors after a prescribed period of time. For example, I'm sure there's a bunch of nuance in how each of their private credit funds are individually structured, but generally these have multi-year capital commitments. It might even be evergreen in the sense that Blue Owl may offer quarterly redemptions, but most investors will prefer to keep their capital in the fund indefinitely, assuming it's performing well.

33:05So the capital is definitely longer term and not as liquid as an ETF, but it's also not completely permanent either because there would still be a chance to eventually withdraw funds quarterly. In some of its real estate funds, there's a similar gray area where funds that won't be liquidated for five years or longer are considered long dated and thus functionally permanent, even though that's, again, not exactly the case. But Blue Owl also oversees a number of business development companies, which to make things even more confusing, are sort of like publicly traded versions of private equity and private credit firms.

33:40They are a type of closed-in investment fund that primarily invests in small to medium-sized businesses and must distribute 90 % of their income to shareholders. While they must distribute their income, their asset base is still permanent. I say all of this, not to confuse you, but because if I were to try and value the different piles of assets that Blue Owl manages, I'd want to use a higher discount rate for AUM that is less permanent, like with some of its real estate funds, to reflect that this comes with a bit less certainty than the business development companies, where we know the capital is fully locked up and will continue to generate steady management fees indefinitely.

34:21So the degree of permanency varies across Blue Owl's different investment vehicles. As far as it goes in the world of asset management, Blue Owl has a very high quality base of mostly permanent or at least long-term capital to generate fees on. And that's what has attracted me to learning more about the company. I should say that specifically one of my good friends, Chris, put the company on my radar and he runs a financial advisory business and invests chunks of his client assets in Blue Owl funds. He understands Blue Owl pretty well, so he was a huge help in researching this episode. And this ties into something we've talked about before, but that is the importance of using the scuttlebutt approach to investing.

35:02Or instead of just reading analysis online or trusting the company at their word, you go out and talk to real people who have worked for the company or for competitors, use its products, or for some other reason, have hands-on insights into the value they add and how they're perceived. Chris was one of those scuttlebutt contacts for me, and just hearing how and why he might consider putting client assets into different Blue Owl funds was immensely useful in contextualizing the company's role in the asset management ecosystem. To pivot back toward looking at the quality of Blue Owl's assets and earnings power, the company has said in financial filings that they have$21.7 billion of undeployed cash that will eventually generate$260 million worth of fees for the company, suggesting that Blue Owl's average management fee is roughly 1.2%.

35:50That soon-to-be-tapped stream of management fee revenues sounds great, but I could see how this can create some incentives that aren't necessarily the best for the investors in these funds. Clearly, they want the cash to be put toward the most optimal potential investments. And Blue Owl wants this too, but there's certainly a temptation to allocate that capital as soon as possible so they can start earning fees on it. Still, AUM only continues to grow as the underlying assets compound in value, and as Blue Owl launches new investment products and acquires other asset management firms too. Most recently, Blue Owl acquired Kuvar Asset Management, an insurance investing specialist that offers annuity products, and Adelaide Capital, a lending firm, which combined added more than$30 billion to Blue Owl's assets under management.

36:37As the Financial Times puts it, Blue Owl sees the future as now and wants to win the land rush. The good news for them is that they have shown enough promise to Wall Street to make their stock currency very deployable, which refers to the fact that Blue Owl trades at a relatively high valuation and can use that elevated stock price to its advantage when funding acquisitions of new AUM with issuances of its shares. What stands out to me is the number of different approaches Blue Owl has taken to grow its assets under management to establish itself as a major player in this industry. In October, the FT reported that Blue Owl, alongside other private credit players, had purchased billions of dollars of loans for consumers, automobiles, and home equity from fintech businesses like Upstart that had tried to use AI and algorithms to improve the loan underwriting process, but were now basically retreating from certain lending niches.

37:29So, you know, Blue Owl is making acquisitions of traditional asset managers at the parent company level, while also buying up loans from struggling fintech businesses and its lending funds. I don't think anyone could accuse them of not being active. In October, Blue Owl acquired IPI Partners for$1 billion, with 80 % of that financed by new issuances of its own stock and 20 % with cash. IPI, for context, is essentially a real estate investment trust with$10.5 billion in asset center management with a portfolio of 82 US-based data centers. Each of these acquisitions is turning Blue Owl into an increasingly diversified financial institution, spanning everything from financing infrastructure products and private equity buyouts to leasing data centers.

38:12At this point, though, I'm worried that they're trying to grow too fast. It makes me think they're overpaying for these acquisitions because if all of these smaller asset management firms were otherwise selling themselves at sweetheart prices, you'd think that the Blackstones or Blackrocks of the world would have already acquired them. Clearly, Blue Owl is trying to transform itself into a gigantic asset manager like that, and it makes good sense to do so because there are some very attractive economies of scale to the asset management business. It doesn't necessarily take any additional employees or research to run a$10 billion fund relative to a$1 billion fund, yet the management fees are an order of magnitude bigger because they're usually a fixed percentage, like 1 % or 2%, multiplied by the amount of assets being managed.

38:56As you expand the number of investment products offered and build a name for yourself in the industry, it becomes easier to attract more investors and it builds on itself in a flywheel that should grow profit margins over time as AUM grows faster than costs. But that assumes you are not overpaying for that AUM and excessively diluting shareholders along the way. If you increase your share count by 10 % to acquire a firm that will expand your AUM enough to boost earnings by 5%, then in the short term at least, you've worsened results for shareholders because earnings per share would actually decline in that case.

39:29To be clear, I'm speaking hypothetically, but you get the idea. And the question is, in the longer term, when you discount all of the future management fees from that acquired AUM, whether the picture is much better for Blue Owl. To invest in Blue Owl today with a long-term view would be to implicitly bet to some extent that the bonanza in private investments can continue. And on that point, I'm skeptical. We have private investment firms rushing in to take over loans that banks are less keen to make after the great financial crisis. Yet companies like Blue Owl are far less closely regulated than banks.

40:08So it's not completely evident to me that this is a good thing for society. Bloomberg's Matt Levine explains how this has unfolded. He writes, traditional banking involves banks, which are funded with short-term liabilities, also known as deposits, making long-term illiquid loans like mortgages and corporate loans. This has obvious risks. The depositors can all ask for their money back at any time, and if they do, the bank won't have it since it can't rapidly turn the long-term loans into cash. Much of the modern banking regulatory system then is about mitigating this risk of bank runs, but it still comes up in various forms.

40:49Meanwhile, there are other firms that have very long liabilities, like pension funds. Pension funds tend to have a good sense of how much they will have to pay out each year in a long time horizon. Once upon a time, he writes, it was sort of hard to turn bonds into cash. They didn't trade that often because most bondholders were these long-term investors with long-term liabilities, so they would just buy bonds and hold them to maturity. But now, bonds are actively traded. Still, those long-term investors with their long-term liabilities exist. An endowment or pension or sovereign wealth fund or 40-year-old saving for retirement really does have some predictable need for cash far into the future.

41:32As Levine explains, it turns out that you can often get paid more interest by making private loans that don't trade than you can by just buying regular traded bonds. So private credit, as it's known, developed. Big alternative asset managers take big pots of long-term money from pensions and insurers and use it to make long-term illiquid loans directly to companies. And to some extent, private credit firms have been able to out-compete banks to make loans, in part because they have a more sensible business model for making loans. Banks have short-term funding and so sometimes can't make loans because they or their regulators get nervous, but private credit funds have a long-term funding so are free to make loans that banks can't.

42:15That is the idea, at least. One important exception, says Levine, is that a lot of private credit firms get leverage from banks. Instead of just using their long-term investors locked up money to make loans, they also borrow some money from banks to fund those loans, and thus the risk of bank runs sneaks back into private credit. And I'll add that in the meantime, there's been a larger trend generally to private assets underpinning all this, which are often pitched as having higher returns with less volatility than public markets. Endowments, pension funds, and many other institutions often grade their performance in an academic way based on the amount of return they receive per unit of risk taken, where risk is defined as the amount of portfolio variance.

43:03So they're trying to get as much return as possible with their investments fluctuating as little as possible, or having positions that offset each other's ups and downs that provide some diversification benefits. This is by no means, in my opinion, the best way to think about investing though. And the reason why ties back to the concept of Mr. Market that Buffett always talks about. If someone came and offered you a different price for your house every day, would it really matter how much those quotes fluctuate? If you're happy living there, the day-to-day price fluctuations shouldn't really matter.

43:38And it's the same with stocks. Price quotes for stocks can fluctuate wildly throughout a year, but to disciplined long-term investors, that shouldn't matter that much and is actually something to take advantage of. Let's take a quick break and hear from today's sponsors. Hey, it's Sean O'Malley, just popping in with a quick message. If you like this podcast, well, I've got great news for you. We've got a handful of other shows for you to explore. From learning about Bitcoin to embracing a richer, wiser, happier lifestyle. Just go into your podcast app and type in We Study Billionaires to find our collection of shows.

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47:15All right, back to the show. Not to keep going on yet another tangent, but the reason these institutional investors love private investments is in part because they aren't marked to market every day, which from a behavioral finance perspective can make the investments more tolerable to their clients. If a private equity fund buys some dental practice in Des Moines, there's no active market for pricing that dental practice daily. The paper value basically stays the same until it's sold again and revalued, and the private equity fund will make quarterly estimates for how much they think that business they acquired is now worth.

47:51Experts, rather than markets, determine the prices of private equity owned companies in some cases. Even better is that these experts are the PE firm's own employees. And as such, they can report considerably less volatility than you'd see with any listed stock. But, you know, I mean, come on, let's use some common sense here. Do we really believe that some portfolio of small town dental practices is more stable from an operating perspective and in terms of changes in business value than a handful of public stocks like Apple, just because Apple is traded daily and thus has more visible volatility in its pricing?

48:33To me, the whole thing is a bit silly. And honestly, if I hadn't seen these practices for myself in past jobs in the real world and in school, I would not believe it. But for the most part, what I describe above is actually not that far from what really happens. Yes, there are some truly exceptional venture capital funds, for example, that are private investments where there are enough relationships and expertise to legitimately generate extremely attractive returns. But this is more the exception than the rule. If you can invest with the Sequoias of the world, more power to you, but that is not representative of the entire asset class.

49:10I'd wager far more private equity, private credit, and private real estate funds are benefiting from creating investment products that institutional managers desire, where they can artificially remove volatility and amplify returns with modest leverage, and then pitch that to investors as a better product than what they could get by simply investing in broad index funds. The whole thing is a bit distasteful to me, where, as I said, there are legitimate financial solutions being fulfilled here and actual outperformance being earned. And then in other cases, the whole thing seems like an irrational bonanza, where we're asked to believe that just because something isn't publicly traded, it can generate not only consistently better returns, but returns that almost never decline in value.

49:53And maybe 20 years ago with savvy general partners guiding a private asset strategy that would be true. Before trillions of dollars raced into private assets, you could probably find a number of compelling private businesses that, because they weren't listed publicly, could be purchased on the cheap with a considerable relative discount. But now there's an incredible amount of competition to bid on acquisitions of or loans to private companies, and I find it hard to believe that there can be so many attractive opportunities in these niches still at attractive prices. I'd imagine there's been a convergence between business valuations in public and private markets, so much of it now looks more like savvy marketing to me and an excuse for charging dramatically higher fees.

50:37I'm sure plenty of people will have no trouble telling me why it's not as simple as I make it out to be, but a good rule of thumb is that if financial history is any guide, we should be wary of the quote-unquote next big things in finance. And the migration to private assets has been one of the biggest trends in finance of the last 15 years. So that gives me some pause about how sustainable this all is and what's really brewing beneath the surface. For goodness sake, the boundary between private and public has become so blurred that there are now private credit ETFs, as if that makes any sense.

51:12The financial masters of the universe believe that for some reason, we need to try and cram something that is, by definition, illiquid into one of the most liquid investment vehicles there is. That is sort of the canary in the coal mine. And to me, this has all become a bit exhausted. In financial theory, there is such thing as the illiquidity premium, where harder to access and sell investments should offer higher returns. But if there are quite literally private credit ETFs now, how can we have it both ways? Either there's an illiquidity premium or there's not, and broadly speaking, that illiquidity premium has undoubtedly shrunk in recent years, raising questions about the extent to which these alternative investments can still be marketed to advisors and institutions going forward.

51:58To see what's been happening, you need not look further than the stock charts for some of the largest asset managers. The private equity giant KKR has seen its stock jump by over 400 % in the past five years, while Blackstone's has risen by 25 % a year since 2020, and Apollo stock has tripled over that same period. My brain immediately wonders where all this money is coming from. Some university endowments already have more than 50 % of their portfolios in liquid private assets, so it doesn't surprise me that private asset funds are increasingly targeting everyday retail investors with ETFs and other contrived investment products because the largest and highest quality sources of capital have already been mostly tapped.

52:40Again, I'm sure people who work in investment management or alternative assets will be very unhappy with what I'm saying. But the basic idea here is hard to refute, and that is, as more money flows into private assets, the assets become less private and therefore less special. And in five or 10 years from now or sooner, I wouldn't be surprised if these strategies lose their luster and we see a large rebalancing away from alternative assets. Looking at private credit in particular, the financial journalist Robert Armstrong writes, the promise of private credit is that for a loan to a borrower of a given creditworthiness, it can get returns that are either a bit better than, a little less volatile than, or at the very least, uncorrelated to other forms of lending such as high-yield corporate bonds.

53:27This possibility might derive from, variously, the fact that some borrowers will pay up to avoid public bond in loan markets, tighter contract terms, tighter bilateral relationships between borrower and lender, or lack of mark-to-market valuation. The question, though, is whether risk-adjusted performance is greater or less than the fees that clever, hardworking people who run private credit funds charge their investors. And according to a recent study on that point from researchers at Ohio State University, which I'll link to in the show notes, any extra returns generated by private credit, which is the largest tranche of Blue Owls AUM, I'll remind you, are completely offset by the higher fees charged by private credit managers.

54:12So to put that differently, if private credit firms and aggregate are generating compelling returns, a lot, if not all of that, is being lost to the higher fees that these strategies charge for investing in them. That doesn't mean Blue Owls funds aren't performing well. And to be fair, the primary pitch for many private assets is that they're uncorrelated and therefore offer diversification benefits. Not that they always deliver better returns, but still the results of the study and some common sense suggest to me that it isn't all that sustainable for money to keep flowing into these strategies like they have if there aren't even excess returns and if the lack of correlation is a manufactured byproduct of simply not being marked to market as frequently.

54:54If there's a substantial degree of truth to that, and I'm sure not everybody agrees with that, but even just a little bit of truth there would be a troubling development for alternative asset managers who would maybe eventually find themselves needing to compete for new capital inflows by cutting fees if they can't deliver the same kind of high returns as in the past. And that would mirror what we've seen in public markets since the 1980s, where Vanguard has completely disrupted the world of actively managed mutual funds with ultra low cost passive funds. For Blue Owl, this is where the question of capital permanency becomes increasingly important.

55:30The longer their AUM is locked up, the better it is for their existing business to endure swings in the alternative asset management industry. And while Blue Owl doesn't specifically run private equity funds, you might see that as much as 80 % of its business is dependent on private equity, either through their private credit AUM that fund buyouts, or their GP Capital Solutions business that buys stakes in private equity management firms. Its fortunes are very closely tied with the bigger picture trends surrounding private asset classes and private equity in particular. So I've railed against the rise of alternative assets enough, and you might be surprised here that I'm not quite ready to disqualify Blue Owl yet, I want to look closer at its business prospects in particular and look at its valuation.

56:18When evaluating asset management businesses, the term distributable earnings gets thrown around frequently is calculated by taking a company's net income and adjusting it for factors like unrealized gains, deferred taxes, and other non-cash items that may not be readily available for distribution. Blue Owl's aim is to pay most of its distributable earnings as dividends, and as such, they targeted$0.72 of dividend payments per share last year, which would be a dividend yield of almost 3 % at current prices and higher when you consider that management has said they intend to grow the dividend each year in line with their growth in distributable earnings.

56:54Since 2021, Blue Owl's dividend has grown at an impressive rate of 65 % per year, and based on the company's Q3 earnings call, it should rise another 25 % in 2025. That would bring its expected dividend yield for 2025 to roughly 3.6%. That's very solid, especially for people who are looking for income generating stocks. Maybe though it's a good time to mention that Blue Owl has a few different share classes of its stock. And I will warn you to brace yourself because it is going to get a little complicated. Would not blame you if you want to skip ahead by two or three minutes. But for those who want to get into the nitty gritty, here we go.

57:33The Class A shares are traded publicly, whereas the Class B, Class C, and Class D shares do not trade publicly. The Class D shares hold 80 % of the company's voting power for a period of time until eventually converting into shares of Class A stock. And for now, while Class B shares would also have more voting power, there are none of them outstanding. The Class C shares are a remnant of the company's IPO, where the investment firm Neuberger Berman received a stake in Blue Owl for selling its interest in Michael Reese's Dial Capital. So far, so good. Nothing too crazy. This split structure where certain share classes have more voting power is common in companies where the founders want to retain significant control over the company's strategic direction while still accessing public capital markets through sales of shares that still have an economic interest in the company, but have reduced shareholder voting power, which in Blue House case is the class A shares that trade publicly.

58:28Alphabet has a similar share class structure. And it's not a deal breaker for me, but it is not something I always love to see either. It gives founders and insiders more power over the company than they would have simply based on their economic interests in it. This just makes it all the more important to nail down your perceptions of management, because if the management team isn't as high quality or honest as you'd hope, the stakes are even higher because they can do even more damage with more unfettered control over the company. Unfortunately, this is not where the capital structure conversation ends.

59:01There's more complexity to be had. Blue Owl conducts business through a combination of operating partnerships, of which its publicly traded A shares have a 39 % interest in an entity known as the Blue Owl Operating Partnership. And that stake is defined in terms of quote unquote units. The class A shares directly correspond to this 39 % interest and are exchangeable one-to-one with the units in the partnership. So if you hold one A share in Blue Owl, that's equal to one unit in the Blue Owl operating partnership. The other 61 % of the Blue Owl operating partnership is split between so-called common units and incentive units.

59:43With the common units, depending on who owns them, they can either convert to class A or class B shares, which cancels out a corresponding number of class C or class D shares. And the incentive units are what they sound like. They can be awarded to employees and management if certain performance targets are met and eventually convert to more shares of stock. It is a really confusing thing to look at initially. And honestly, my head was spinning the first time I tried to understand it. I legitimately had regrets about trying to cover this company, but I am glad that it powered through and that you've stuck with me because it's important to be able to understand a wide range of businesses if we're going to look for the best returns available in markets.

1:00:24The different units and share classes should all or mostly convert to Class A shares over time. But for the time being and for the foreseeable future, the structure is wonky. In short, if you go out and purchase Blue Owl stock, you will be receiving shares of their Class A stock, which translate to currently a 39 % stake in the operating partnership entity. And that stake in the operating partnership will increase as the number of Class A shares grows over time. As for example, Neuberger Berman continues to convert their special class C shares into class A shares so they can sell them. If you look up Blue Owl on different financial data sites, look at differing accounting for its market value.

1:01:04Some places report the equity value of just the A shares and that gives a market cap of around$14 billion for those shares. But if you include the other share classes to get the fully diluted value of the entire enterprise, the share count nearly triples, and thus the market cap is estimated at over$38 billion at the time of recording. Even though the A shares have grown quickly, when you look at the operating partnership level and compare that with the number of units today versus in 2021, the dilution is much less dramatic than I initially thought at less than 3 % per year. I would say just be mindful of which method you're looking at because if you attribute all of the business's free cash flow to its class A shares, then it looks like the stock is trading at a very attractive price to free cash flow of 16, when in reality, you'd have to adjust that to either account for the other share classes or the smaller claim on those free cash flows held by the A shares.

1:01:55But either way, the correct number for the price of free cash flow is closer to 40, which doesn't make the company look screamingly cheap to me. Okay, so we made it through the discussion of corporate structure and share classes. Moving on, I'll say that to Doug Oshiver's credit, he has architected a business model that would be any alternative asset manager's dream. The model is centered around fee-related earnings, where fee revenues consist almost exclusively of recurring management fees that are particularly valuable due to their stability and predictability. Regardless of performance, the company gets paid.

1:02:31Even though OWL is much smaller than the biggest companies in its industry, its fee-related earnings margin of 60 % plus is second to none. And as I've mentioned, and close to 90 % of OWL's AUM that it charges fees on is categorized as permanent. OWL is asset light to the extreme, too. It's not like they have to pay for new factories to expand their business. And I find that all to be very compelling. When valuing Blue OWL, it is more informative to look at free cash flows than net income, because its net income reporting is heavily distorted by depreciation, amortization, and stock-based compensation, which are all mostly byproducts of its acquisitions and growth.

1:03:10Not to say those non-cash charges are completely inconsequential. They don't paint a good picture of economic reality as much as cash-based measures of profitability like free cash flow or distributable earnings for an asset management business like Blue Owl. I'll say that financial services firms are notoriously difficult to value with much certainty. As the valuation expert Aswath de Motoren puts it, quote, With financial services firms, we enter into a Foustian bargain. They tell us very little about the quality of their assets, but we accept that in return for assets being marked to market by accountants who presumably have access to the information that we don't have.

1:03:46Therefore, estimating cash flows for a financial service firm is difficult to do. So we trust financial service firms to pay out their cash flows as dividends. Thus, DeMotorin recommends focusing on the dividends per share a business like this has produced and is likely to produce going forward as the basis for the valuation rather than focusing on gap net income. To be clear, he's primarily referencing banks, but my interpretation of this is that without being forensic accountants, buying a financial services stock is something of a leap of faith where you're putting a considerable amount of trust in management since it's very challenging to independently verify the quality of their assets.

1:04:25But this can go quite poorly for even the most sophisticated investors in the world. Warren Buffett was famously burned by Wells Fargo after it was one of his highest conviction bets for years after first investing in 1989 and pouring over$12 billion into purchasing his shares until mostly bailing on the company in 2021. If you just look at the stock chart for Wells, it's not like Buffett lost on the bet over 30 years, but it was a significant laggard that otherwise weighed down returns over the last 15 years. On June 19, 2009, the stock traded at$24.19 and was trading just below$30 per share by the end of 2020.

1:05:02Wells Fargo has been hit by a host of scandals, lawsuits, and fines that derailed the bank, fundamentally stemming from poor incentive programs for employees, and that wasn't the first time a bank investment had gone sideways for Buffett either. In 1991, he made his now famous proclamation before Congress as a shareholder in the troubled Solomon Brothers Investment Bank saying, lose money for the firm and I will be understanding. Lose a shred of reputation for the firm and I will be ruthless. I'm obviously cherry picking examples here. And Buffett has, of course, made losing bets in other sectors and also made plenty of winning picks with financial services companies.

1:05:38His investment in Goldman during the financial crisis is considered one of the best trades of all time. And I use that word trade intentionally because it was more of an opportunistic trade than his normal style of owning wonderful businesses for the long term, but still financial services businesses are simply more opaque and often more convoluted than your average business, which we've seen in action today while trying to understand Blue Owl. And that makes it all the more easy to be blindsided by unforeseen risks. And that is true for Blue Owl. Hence the focus on, after all is said and done, how much cash the company is paying out to shareholders.

1:06:14The dividend is a very big part of the story and management knows that, which is why they continue to set aggressive targets for growing it. In 2022, management committed to$1 of dividends per share by 2025, and now it looks like they're not going to quite reach that. Plus, it appears that they've had to actually take on some debt to finance their dividend distributions in 2024, which is an orange flag for me that would become a red flag if it continues to happen. We are running out of time to do a deep dive into the valuation, and I'll go into a little more detail in the newsletter on Blue Owl, which you can sign up for in the show notes below.

1:06:48And it's also where I share my full intrinsic value portfolio every week. So again, make sure you're subscribed to that newsletter and the show notes so you can see my full breakdown of Blue Owl today, along with my ongoing holdings in the intrinsic value portfolio. But it's probably not a huge surprise to say to you that I'm passing on Blue Owl. I'd guess that there's a decent chance it proves to be an excellent investment based on Doug Ostrover's track record, its permanent capital fee structure, and the ongoing expansion of alternative investing. But boy, do I not feel like I have my head fully wrapped around this company.

1:07:25From the SPAC to the operating partnership structure and units and different share classes, to the nuances of its various funds and trying to determine their permanency to bigger questions about whether the trend toward private assets has been a good thing and whether it's at a risk of reversing all give me pause. Maybe if I was a financial advisor who had experience working directly with Blue Owl and allocating client assets to their strategies, I'd feel more confident about the outlook for the company. I pass in a similar way when looking at John Deere, and I'd say I have even bigger question marks lingering here.

1:07:57As far as I'm concerned, I'm happy with concluding that Blue Owl is about fairly valued given the quality of its fee structure and prospects for growth at a price-to-free cash flow of 40 and 3 % dividend yield. Blue Owl is not even a company I'll keep on my watch list just because I don't have a firm enough price target in mind to know when there's a true margin of safety in it. I'm glad I studied it to push outside my comfort zone, but doing so doesn't obligate me to invest accordingly. With that, as always, I'd like to leave you with a timely quote. This line is often attributed to Benjamin Franklin.

1:08:32It goes, and investment in knowledge pays the best interest. Today, you made an investment in knowledge and learned about not only Blue Owl, but also the fast-growing alternative asset industry, and perhaps it will pay dividends for you in some way at some point in the future. I'll see you again next week with another business breakdown and potential addition to the Intrinsic Value portfolio. Thank you for listening to TIP. Make sure to follow the Intrinsic Value podcast on your favorite podcast app and never miss out on our episodes. To access our show notes and courses, go to theinvestorspodcast.com.

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