Narrowing in on the private market with Marc Lipschultz
Susan Weber: Good afternoon. I'm Susan Weber and joining Walker & Dunlop CEO Willy Walker today for our 150th episode is Marc Lipschultz, Co-Chief Executive Officer of Blue Owl Capital.
You may have noticed our Walker Webcast brand look has evolved a bit – this refresh is part of our 150th episode milestone. You will notice that we talk about the chance to watch, listen, and read as we are not just a webcast. You can choose to watch or listen to our top-ranking podcasts and read the recap on www.walkerdunlop.com. Thank you for joining us today, and now over to Willy.
Willy Walker: Thanks Susan and welcome everyone. To what Susan just said it is our 150th Walker Webcast. It's a real joy to have as I get older, I'm not supposed to say an old friend, but long-standing friend Marc Lipschultz is joining me today. Before I dive into my conversation with Marc, just a couple quick things as it relates to the 150th Walker Webcast.
This whole concept came out of the pandemic where we felt we needed to talk to our clients and tell them what was going on as the world sort of shut down. There were a couple of things that were really important about what we did that has made it so that now three years later, we're still at this and just doing our 150th today. The first was that Friday when the world shut down, I turned to Susan and thought, what was the time that we needed to get our act together? And we just said, “Let's try it next Wednesday.” We picked Wednesday and we stuck with Wednesday. Many of you may recall that lots of companies put webcasts together to get information to their clients, but they moved those webcasts around. They'd say, we'll do one on Friday, we’ll do one on Monday. I think one of the things that made this have legs is we picked the day, we stuck to it, and we stuck to our time.
The second is that we were pretty straightforward, that while Walker & Dunlop and the people inside have opinions and insights that are very valuable – we sort of made the decision to bring in outsiders like my friend Marc today so that the viewers could see what's going on in the market. Not from W&D’s perspective, but from an outsider's perspective.
And so, we have been blessed and I personally have been blessed to have great, great, great friendships with people like Marc Lipschultz, who agreed to come on here, give us an hour of their time. I'm often asked how much it costs us to get guests, we've actually never paid a guest to be on the Walker Webcasts.
In all 150 (episodes), the only person we paid was the swimmer Katie Ledecky, where the U.S. Olympic Committee pays Katie $4,800, back then to give speeches, and we decided to pay that honorarium to the U.S. Olympic Committee so that they wouldn't have to come out of pocket to have Katie speak at the Walker Webcast. But we haven't paid people, it's out of the goodness of their hearts.
And also, quite honestly, the fact that this is watched so widely – we're now over 8 million views of the Walker Webcast, and the typical weekly views are somewhere between 70,000 and 100,000. My interview with Peter Linneman not this past quarter, which just went over 100,000 but the quarter before, is getting close to 300,000 views. At the end of the day, it's just a real joy and blessing to be able to do something like this and have people be able to look at it and get insight on the markets and be able to listen to someone like Marc today talk about what's going on in the markets, how he and his partner have built Blue Owl, etc.
Final thing I would say is that while this takes a tremendous amount of my time, it is a true pleasure and from a growth and leadership standpoint, I look at people like David Rubenstein, who both Marc and I know quite well, and David talks about how much he reads, Bill Gates talks about how much he reads. And I in no way I'm trying to compare myself to David Rubenstein or Bill Gates as it relates to their success and what they've accomplished in life. But they are both voracious readers, and I have had to do a lot of research and read a lot of things that I typically wouldn't do in the normal course of my job if I didn't have the webcast on a weekly basis. After having interviewed Condoleezza Rice last Tuesday, Kiril Sokoloff of 13D Research on Wednesday, Evan Osnos of The New Yorker on Saturday, Ezra Klein of The New York Times on Monday – I had to jam last night to get myself ready for this talk with my old friend Marc today. And at the same time, it was a joy at 11:30 last night pulling together some of my questions for Marc. Let me do a quick intro to you, Lippy, and then we'll dive into our conversation.
Marc Lipschultz is Co-Chief Executive Officer of Blue Owl Capital. Marc co-founded Owl Rock Capital Partners, the predecessor firm to Blue Owl's Credit Platform. Prior to co-founding Owl Rock, Marc spent more than two decades at KKR, serving on the firm's Management Committee and as Global Head of Energy and Infrastructure.
Prior to KKR, he was with Goldman, Sachs & Co. Marc serves on the board of the Hess Corporation, the American Enterprise Institute, the Michael J. Fox Foundation, Mount Sinai Health System, Riverdale Country School, Stanford University, and the 92nd Street Y.
Marc received an MBA with distinction from Harvard Business School and is a Phi Beta Kappa graduate of Stanford University.
So, Marc, first of all, welcome. It's super, super fun to have you here. Thanks for taking the time.
Marc Lipschultz: Thank you for having me. I'm very excited to be here. You have an incredible webcast. I learned a lot from you already. Frankly, long predated the webcast, but includes the webcast and pleasure to be here.
Willy Walker: Well, it's great to have you. Marc, you and your partner, Doug (Ostrover), both sit on the Michael J. Fox board. And as I looked at both of your bios, it's the only overlap you have. You didn't go to the same college, same business school, didn't work at the same firms. What is it about the Michael J. Fox Foundation that has both of you on it?
Marc Lipschultz: So, I think a couple of things to highlight. Look, the way Doug and I have had the good fortune of coming together to ultimately found Blue Owl and lead it today, you know starts I think, Willy, that’s built on three foundational legs. We have had a long personal friendship. We've known each other for a very long time, but not that we were dear friends, not that we were best friends prior to forming this. Thankfully, we've become best friends, but not prior to forming this.
So, it doesn't have that origin story, you know back to my mentors, Henry Kravis and George Roberts, they're cousins. They grew up together. So, you know, there's actually bases or partnerships that long predate ours. But we had the friendship certainly that had existed. We'd work together professionally, kind of more in parallel or in our roles. Doug was the founder of GSO Capital Partners and of course GSO, they sold Blackstone and therefore Doug was running the whole Blackstone credit business - today, the largest alternative credit business probably in the world. I had spent 21 years at KKR and had some senior roles there.
And so, in our respective roles we certainly overlapped professionally, probably more in terms of things that our groups were doing together than done one on one. But we always had a kind of dialogue, got together every six months, and just talked, and always had a wonderful professional relationship as well.
And then to your point, community service and, I don't think it's something magical, although I think that J. Fox Foundation is magical. I don't think it's something magical or mystical about that particular platform, but I think it is reflective for both of us, of something we really believe is important, which is engagement in the community and important causes. And that indeed was one that we both have been involved with for a long time. When we wind the clock back and actually try to kind of come up, what's the first thing we actually did together? I think in ‘07, we and our spouses and some others co-chaired Michael J. Fox gala. So, it might actually be the first tangible thing I can point to that we definitely did together.
Willy Walker: It's kind of neat. So, you mentioned, Marc, that both of you left really big jobs in really big private equity firms and you've built a 17 billion plus market cap company. So, the success you've had is phenomenal. But what was it that the two of you saw outside of KKR and Blackstone that you couldn't do inside of Blackstone or KKR? That said to the two of you, let's hop out and go do something new.
Marc Lipschultz: So, Blackstone, KKR do a lot of great things. And in fact, I'm sure there's nothing we have done or could do that they couldn't do if they wanted to.
Willy Walker: Except you own the majority of this one.
Marc Lipschultz: Taking a different approach, which is, listen, we had the great privilege of Doug having spent a lifetime in alternatives and credit markets building GSO and then Blackstone three years. I had spent my decades at KKR. Our CFO had come from TPG. Our other co-founder, Craig Packer, was running Leveraged Finance at Goldman Sachs. So, we came together having the benefit of having worked at these incredible institutions and therefore learned from them.
I made reference before to Henry Kravis and George Roberts, who are just dear friends, extraordinary people, and built an incredible institution that I was lucky enough to be a part of. In fact, lucky enough to be a part of since you and I were together at Harvard Business School since the day I graduated that was my job out of business school. And so taken all together, you know, what we are able to do is take the privileges we had from being in those places, the lessons we learned, and bring them into a focused firm where we said, look, we see also a market opportunity.
We see an evolution that if I could maybe simplify it in the bigger sense of the word, private equity had taken a kind of multi-decade arc from this boutique kind of backwater business into an absolutely mainstream asset class. By the mid-2015, when we decided we were going to do this. And we thought there was a parallel opportunity in the world of private credit, or really even more broadly as you think about the subsequent combination with our GP stakes business and our real estate business to be able to provide the picks and shovels to this now multi-trillion dollar gold mining industry known as alternatives.
Willy Walker: You have in the back of your Investor Deck, actually at the back of your website, a slide that I thought was fantastic that basically shows investors that evolution from publicly traded companies and how that number has decreased from almost 7,000 back in 2000 to just 4,600 today. So that's down by over 2,000 companies and that companies owned by private equity firms from 2000 to 2022 have grown from 1,800 to over 11,000. And so, you've seen this massive shift of ownership in the public markets to the private markets. And as you just said, Blue Owl is really focused on that.
As I saw that stat, and it sort of made my jaw drop, to be perfectly honest with you, particularly because you and I both run publicly traded companies, I sort of scratch my head and say, am I the idiot going the wrong way here? But do you think that's more an impact of just really smart people saying there's more flexibility in the private markets? Or do you think it is something of the mark to market? I mean, obviously, private portfolios are marked on a quarterly basis. So, it's not as if you avoid that, but your stocks are going to move up or down today. My stock moves up or down every day. And there are certain pressures to that, that are very distinct from being in a private format. What do you think has made that big sea change from the public markets to the private markets?
Marc Lipschultz: So, there's incredible power in the public markets. You experience it, I experience it. And we're fortunate that we have these incredibly deep public and private markets. You know, one of the great innovations, obviously, when we think about the U.S., We think about tech innovation, today AI front and center, medical innovation and look no further than the speed with which we came to a vaccine and now can produce new forms of medicines - cutting edge. But one of the greatest powers of the U.S. system are the capital markets. And I sort of think about this as that continued innovation and evolution of creating different pools of capital to meet different needs, different forms of the way you might finance a business to be able to continue to innovate. And so, it's not really that one is superior in all instances to the other. In fact, I think what's happened is we've developed a private market that is in many cases superior for long term plans. There are a lot of benefits to the private market, but it's really about the facts and circumstances. So, I look at it and say what we want and are fortunate to have in the U.S. today are really deep and vibrant public and private markets.
So, I do think people select the private markets because there is an ability to plan longer, think longer, operate over a longer horizon in terms of strategy and business. But it is not without its limits. There's wider access to capital in the public markets. So, there are advantages to the currency that you can create and the durability that you can build. So, I look at it as broadening the choice as opposed to only one or the other is the answer for all purposes.
Willy Walker: You mentioned the strength of the U.S. capital markets. While Blue Owl is global in its investor base, the majority of your investments are in the U.S.. Why both you and Doug ran platforms that were global in nature. You made investments in Europe and Asia and Latin America and all over the place. Why is Blue Owl's focus being predominantly on the U.S., if you will, so far? You've got over 144 billion of AUM right now that puts you into a lot of companies that I'm sure have global footprints themselves. But the real focus has been investing either at the GP level or in the debt level in companies in the U.S.. Why the U.S. focus?
Marc Lipschultz: In a way, it takes us into the DNA of Blue Owl. And this is what it is that we set out to build that was distinctive perhaps from the other offerings that were out there at the time. And the strands of that DNA, I think are kind of the foundation to answering that question, which is I think about the two strands of our DNA. One being what's the nature of the products we create, the investments that we offer to people that entrust their capital to us as LPs or a generalized term. And for us, our DNA is about risk management. Our DNA is about reduced volatility, protection of principle, preservation of principle and durability. And so that's kind of one thread. And with that thread, frankly, the U.S. market is a very, very strong place to be.
Every time a crisis hits, and I'm not suggesting there are wonderful strengths in other countries and other markets over time. Perhaps those will be things we'll want to capture. But think about where we stand today and think about most prior crises. The US ends up standing tall. We do have powerful, innovative markets. We have our challenges for sure. But in a world thinking about, "Hey, where can I deploy capital where I feel as if I'm going to have well-protected investor rights? I'm going to have a predictable framework. I'm going to have a resilient economy. I'm gonna have an innovative economy? That often brings us back to the U.S. So, I often will say this about many things, whether it was by good design or good fortune. Indeed, our investments are heavily centered in the U.S. That looks pretty good sitting here today.
Willy Walker: So, your direct lending business, which is just over 70 billion of your 144 billion, is essentially working with private equity firms that have invested in companies and putting debt on them. The vast majority of that is floating rate debt. We've got Jerome Powell in a couple hours probably saying to the world that we're going to raise by 25 basis points. One of the strengths of the Blue Owl portfolio is that most of the debt you have outstanding is floating rate debt. So, it has moved as interest rates have moved, which has been very beneficial to you all and to your investors.
As you can imagine, Marc, in our business, floating rate debt is a great thing until all of a sudden your debt service coverage ratio gets to a point where you're getting choked by that move in rates. And credit becomes a very significant issue. When does credit become an issue from the Blue Owl standpoint, given the companies you invested in typically senior secured investments, but also floating rate where, you know, two years ago those borrowers from you all were paying coupon rates in the 1 to 2% and today they're paying in the 6 to 8%.
Marc Lipschultz: So absolutely, we provide senior secured floating rate debt in our credit business. And this therefore has been candidly a good environment for our business. It is a good sort of what we're built for. You know, there's sort of a time and a place for everything, so to speak. And this idea of maybe economic uncertainty, rate uncertainty, but rising directionally in terms of what we've been the last 18 months is really what we're purpose built, because it is about being senior protected in the capital structure and getting paid. So, it is as close to inflation protection as one could come because as inflation is being fought, rates rise, rates rise. We directly flow that through to the borrowers and therefore to our investors. So, they record beneficial environments for what we do.
But Willy, to your point, like anything, you know, too much of a good thing, so to speak. At some point any company, any economy, this is the balance the Fed has been so far walking with kind of extraordinary aplomb. I mean, sitting here today to be extremely self-aware. A year ago, I would not have guessed, forecasted that we'd be sitting where we are today, which is this idea that somewhere up here was this hyperinflationary environment, somewhere over here was this recessionary environment. Those are kind of big blocks. Somewhere in between there was the spot we want to purpose our way into. Sitting here right now, the purpose our way in case looks more, most probable, of the existing cases.
And so, with that said, comes your exact question. Right now, I think we're certainly landing from the Blue Owl point of view, and I'll try as best I can to extrapolate it more broadly, because we do have several hundred companies that we lend in across all industries. So, I think it's not a bad sampling of what's happening and particularly the US economy or U.S. based businesses as they’re often global, as you point out. And what we're seeing is it's working, companies are still growing, revenue and EBITDA are still growing on average, coverages are still perfectly healthy. Companies, of course they aren't the coverage they were before, and it has to be a mathematical certainty that someone who could perfectly comfortably cover their interest when the LIBOR so for now was zero, has a greater challenge covering it 1 to 5, but the durability is strong. I sit here today and our portfolio, we have not seen any material changes in the credit posture of our portfolio over the last year.
Willy Walker: It's really, to your point, Marc, the threading of the needle has been, I mean, you look at the Dow over 35,000 and there are those people who would say it's heavily concentrated in the seven big tech companies, and that's a fair criticism. But at the same time, to hear someone like you who has hundreds of portfolio companies that you all are obviously monitoring on a day-to-day basis, it says that the health of the economy stays quite good.
The fact that the Fed funds rate has moved by this afternoon, probably 525 basis points in the last 16-17 months. But, you know, the ten year has only and by the way, look, our borrowers are feeling it on the ten year, but the ten year is only moved about 100 basis points over the last year. And so, while you've had this huge move in short term rates in at least in the commercial real estate space, most people are sitting there off of the long end of the curve. And while 100 basis points can make a big difference, I'm not trying to diminish that. It isn't quite the shock to the system that I think many people, if we were having this discussion a year ago today, would have projected for the economy.
Marc Lipschultz: That's, I think, well said and that's the experience we're having. And I'll just amplify, not to be repetitive. But our lends, look, we lend to the very largest private companies backed by the very largest sponsors, but those companies are very small compared to the mega caps. Of course, you're talking about their drive in the Dow. So, it is a distinctive lens that I think many people listening to this I suspect are more characterized as the upper middle market of the world as opposed to anything like those mega-cap companies, even though our language, in our own little world might be different.
And though it is a pretty broad sample, and my statements are intended to be pretty broad, which is to say that across industries, not without flaw, not without individual companies, is always going to be peculiar challenges different enterprises, peculiar wins they have. But across industries we are seeing that it looks like we're still in a solid economy with businesses that are generally able to absorb what you can characterize as a shock or change, in the short-term costs with, as you say, looking forward to not such a shock or change in their long-term profile.
Willy Walker: A bunch of your direct lending business, Marc, is to technology companies. And I had a kind of mind-bending discussion with Ezra Klein of the New York Times on Monday at the Sun Valley Writers Conference. Prior to sitting down with Ezra, as you can imagine, I had to do a lot of homework on AI. I asked Ezra, "Are you in the camp that AI is going to kill us all in a very short period of time, or whether AI can actually transform the world in a very beneficial way?" And we talked a bunch about DeepMind and the work that DeepMind did with AlphaGo, which was just to win a video game and then to AlphaZero, which was to win a video game, but with no real parameters behind it. And then to AlphaFold, which has done incredible work on protein discovery, if you will, in the folding of proteins.
Previously prior to Google and DeepMind focusing on this, there were only 150,000 completely sequenced proteins. And by using artificial intelligence, they've now successfully sequenced 200 million proteins. That treasure trove of data is going to allow for medical research and drug development at a rate that I think is unprecedented.
As you look at technology companies, I think I have two questions for you. One, how much is AI sort of changing the focus of the companies that you've invested in? Because you obviously have business plans with private equity firms that you invested in certain technology companies that all of a sudden right now might be saying, “Whoa, we need to shift. There's a real change in the market, change in the strategy.” How prevalent is that? And then the second, just on a personal basis, are you in that this stuff's going to kill us or are you in this is going to be really cool and change the world for positive purposes?
Marc Lipschultz: Well, maybe I'll start with the second.
Willy Walker: Yeah, that's probably the easier one.
Marc Lipschultz: Yeah, might be the easier one. So, look, I don't want to pretend to have a depth of understanding. We're all learning about this and frankly AI is evolving so rapidly they can be dangerous to sort of state much with great conviction about the exact path it takes. I just finished reading The Age of AI, which is Eric Schmidt and Henry Kissinger's book on this topic, which is more into the kind of policy implications, global relations implications. But obviously probes what does AI look like and mean. And I think it actually reflects something closer to at least the way I understand the world and think about it.
This is another incredible productivity tool. Like every productivity tool, comes with dangers and disruptions. And I don't minimize any of that. So, I'm not a Pollyanna about it. I'm not like it's, hey, no problem. I think most innovations, even whether they're giant in scale like this or smaller, they tend to be able to be used for better or worse. And maybe it comes at a time right now and I haven’t seen Oppenheimer yet, but, you know, think about nuclear power and nuclear weapons. Their discovery and our understanding of the nuclear level of the atomic level of the universe has been one of the most important things we've discovered. It also created weapons that can be used to destroy the world. So, it's hard not to picture AI as being able to be used in different ways by different people.
But overall, it's a tool of incredible power to bring knowledge and observe patterns that we can't see and inform our decisions, hopefully. And that's the part that I can only say hopefully we're going to develop the right kind of frameworks for how we use AI, and common understanding is how we use AI and don’t, so it doesn't sort of get ahead of us. Like my kids always say I'm too much on the side of the robots, which is sort of interesting because they live in a tech enabled world. So, I read a book like The Age of AI, and I feel pretty good that the odds are we can land. I also saw the new Mission Impossible, and that's a much scarier case. My kids said they told me so. So well, we are in a fast-evolving world. I'm on the more bullish side.
Willy Walker: Just a quick one and then I do want to ask you about the specific portfolio companies and sort of a change of strategy or not. When I was interviewing Evan Osnos of The New Yorker on Saturday at the Sun Valley Writers Conference, we were talking about AI. He made the point that he just interviewed Sam Altman, the founder of ChatGPT at the Allen & Company Conference. Sam Altman and Oppenheimer shared the same birthday. And it was just one of these really eerie kinds of things. Is that just coincidence or something about that. But everyone in the room sort of had this big kind of gulp of sort of like, o h, that's really wild. But anyway, for whatever that's worth.
But talk about Marc, there's X, Y, Z portfolio company, the private equity firm, invested in in 2020. And the strategy was X on social media, on ticket processing, whatever the case might be. How much has AI come into sort of say, whoa, this business is changing dramatically because of AI, and to some degree there's a job for Blue Owl to do to sort of re-underwrite the loan.
Marc Lipschultz: So, let me sort of set the stage. Indeed, we do a tremendous amount of lending to the software sector. Now it's tech. But if it boils down to what we really do at Blue Owl is software lending and we are, I think quite clearly the market leader. I think we're probably close to $20 billion in loans and investments with software tech companies. And we have a team of probably 30 people dedicated to this topic alone. So, I say that just to inform you of where my comments are going to come from.
So, AI for us has two dimensions. One is what does it mean for our business? And we have formed an AI task force and we're lucky because we do have an extremely deep technology batch and we do have a very wide portfolio. So, I think we're in a very distinctive position, even relative to our peers, to be able to develop a more informed view, to be able to act on AI both for ourselves.
What does it mean for Blue Owl and therefore our LPs and how we help them benefit from our application of our adoption of AI, and then to take it to your point, our portfolio companies, and what are the implications for our portfolio companies? Now, obviously both of those are still of course works in progress.
But with regard to the portfolio companies, the reason that we have been positive and remain very positive on lending to software enterprises – relates to the fact that they have these embedded customer solutions, automated, that's to say, tech enabled solutions for what used to be more manual processes or less efficient processes. And those companies are frankly in the best spot to adopt the beneficial aspects of AI and deliver it to that customer base. The power of software is that you have the customer, the customer relationship, the embedded connectivity, and AI in most applications, it's not as if you're just going to ditch everything you have. It's going to change the way you do what you do. And so, so far, again, back to this friend or foe AI writ large, I think, friend or foe AI for most software, SaaS software businesses, again, that's what we do. I think it's actually decidedly more friend because it's going to be they who are going to be the ones going to adopt the tool and figure out how to repurpose it into the specific application, medical records – who's better informed to do it than the tech company that already handles electronic medical records for hospitals? Who's in a better position to handle compliance with all electronic certifications and management and integration with delivery to governments and other stakeholders than the person who already manages that customer relationship and is a tech enabled company. These aren't lumbering old businesses. These are very front footed businesses.
So, I don't dismiss by any effect or any element the potential disruptive effects around, so to speak, the edges someone might be the victim of the change as opposed to the beneficiary. But so far, it looks like it's something that will be an adopted tool and be helpful to these software businesses over time.
Willy Walker: As I as I hear you talk about that in these types of innovative companies that you're underwriting from a debt standpoint and your direct lending business. Just kind of a maybe an odd question, maybe it never happened, maybe happens all the time, but you also have a GP solutions group that has over almost $50 billion of capital outstanding. Do you ever go to underwrite an opportunity? It's in a software business, for instance, and they've come to you for a debt solution, and you say, Well, this is so exciting. We want to be on the GP side. I mean, do you do you ever like, change the conversation or if whichever XYZ private equity firm comes to you and says, look, we're looking for debt for this investment, you're underwriting is debt and you stay in that lane or has your team turned around and said, whoa, and hold. We want to jump across and be on the GP side?
Marc Lipschultz: It's an outstanding question and it actually gets to the second thread of the DNA metaphor I used before, which was appropriate in the context of AlphaFold and other such biologics.
But I was talking before about the one thread being low volatility, low risk, delivering durable alternative solutions to investors LPs. The other thread is that the users of our capital, the commonality that ties them together is they are indeed alternative investment firms, often private equity firms, to your point, in many cases say, hey, I need a capital solution. And in fact, the design of Blue Owl is all about the one stop shop you're describing. It's not so much about: Whoa, whoa, whoa, hey, we'd rather go do this as much as it's saying listen, bring us your opportunities, your challenges that require capital, solutions that require capital, and we will help you find solutions. And then you can decide which solution suits you best.
Our job is to work for our LPs. Our fiduciary duty is to deliver a great risk return. For us, the more opportunities we can get in the system, the more times they partner with the company or a PE firm that says, I want to work with Blue Owl. Yeah, yeah, I understand. You know, with the price that that may entail, I want them as my partner. That's a benefit for LPs. So, the way I would take what you describe is not so much, Hey, I love this portfolio company, but I'd rather do this. It's more of I love this portfolio company. Isn't that interesting? This GP is doing some really fascinating things. We should make an introduction over to our GP stakes team to see how they're thinking about their GP and whether there's also an opportunity for us to support them there. That's really how we've built this ecosystem. And you happen to use a word I use a lot this kind of, hey, stay in your lane. And you asked me before about kind of how we are, what other firms to do or not do, Blue Owl wants to take that DNA and focus it together and now switch metaphors quite intentionally. There are strategies out there that look all things to all people. There are firms that it's about delivering all solutions of all types to all people in all parts of the world. That's not what we are. The single lane answers to, that's not what we are either.
We have compass direction. Our compass direction is north. Then what defines our compass direction is those DNA strands. I described it as sort of the kind of products we deliver for investors on the one hand, and who uses our capital on the other. That's the highway we occupy. And we have certain lanes we occupy well today with market leading positions in providing capital, GPs and being a direct lender to the biggest companies, to the best sponsors, into triple net lease solutions for the biggest corporations. That is where we live today.
There's other lanes in there, some of which we will occupy over time, but we're on a highway going in a particular direction. So that's really the way almost a picture of why does Blue Owl exist? Why are we prospering? Is because we have a defined path, but it's not as narrow as a lane, but it's not as broad as all directions on the compass.
Willy Walker: So, on your GP Solutions business, Marc, it was funny as I was, you individually you are a now member of the Washington Commanders. And by the way, I hope you take it back to the Washington football team. Just as an aside, that's my plug. And I'd also love to see you have my friend Taylor Heinicke come back to the Commanders. But that's just a personal plug on the webcast for two things as an owner of the Commanders, my team from D.C.
But as I was sitting there at one of the questions to ask you, have you at an individual, looked at other types of sports, and then all of a sudden, as I was doing research, I saw that Blue Owl has worked as a GP to buy GP interest in other professional sports teams, such as the NBA, where Blue Owl invested as an investor in the Phoenix Suns as well as the Sacramento Kings.
Talk for a moment about sports and GP interest because I guess the premise here is this: There are only so many billionaires who can stroke multi multibillion dollar checks to buy these franchises. Franchise costs are going up and up and up. And so, by being able to play on the GP side, you're providing liquidity to owners and then also providing an investment opportunity that your investors wouldn't be able to find on an individual basis. Am I right in sort of the way you all came to this?
Marc Lipschultz: So, look, I'm lucky enough to be a part of the investor group, the ownership group for Commanders. But listen, this is Josh Harris's team. I'll pass on your message.
Willy Walker: I have to say, though, Marc, I have to say, just by the way, when I talked to Condi Rice last week about being a part owner of the Denver Broncos, the first thing she said was I own about four helmets, which was great and self-deprecating. And at the same time, there is a reason that Condoleezza Rice is an owner of the Broncos, and there's a reason you're an owner of the Commanders. So, let's just leave it at that.
Marc Lipschultz: Yeah, well, we’ll all work to discover what that reason might be for me. I'm quite sure they benefit from her. But in any case, Josh, Magic Johnson, and Mitch Rales are doing a great thing, an incredible job with that team. I'm very excited to be a very modest part of it and look forward to, as they've said, see the team return to its extraordinary strength and it is fans like you that are going to make the difference. And you heard Josh say this, you know, change in the fan experience is top priority.
Willy Walker: One final thing is I have to put in here, the Commanders for years have tried to get me because Walker & Dunlop is based in DC, and they have tried for years and years to get me to get a suite. And I've said to them time and time again, “Look, I love the team, I love football, but as long as they're owned by X person, I will never consider it.” So, as you can imagine, their first phone call on the day that the team was sold was to me saying, “Hey, that was your one condition, that you wouldn't buy a suite.” So, we may have another conversation after this.
Marc Lipschultz: It’s been recorded, Willy, can I get your commitment for a suite right now? It’s adding value for the team.
Willy Walker: You got it. But anyway, so but on the NBA side and on buying GP interest in other outside of your personal investments, what you've used the GP fund to do in sports, because sports clearly not only does it have a lot of attention right now, I had Greg Maffei of Liberty Media on the webcast a couple of weeks ago. Greg obviously owns Formula One. They've looked at all sorts. But right after Maffei was on, you had Bob Iger, CEO of Disney, talk about basically potentially spinning off all of their cable channels other than ESPN. And you sit there, and you go, what's different about ESPN than all their other program television? Live sports. And so, there's so much interest in the value of these franchises has gone up so much that Blue Owl's product offering to be able to go and invest in GP interest on professional sports teams is a really interesting angle.
Marc Lipschultz: Yeah, and you're hitting on all the forces that inform the development strategy. There's a clear analog, a strong and good one between being a minority owner in a sports ownership group and being a minority owner in one of these alternative asset managers, being a minority owner in one of the GPs that we fund today. And that analog is what brought our GP stakes and solutions team to the topic of sports and continues to give us, I think, some real work ahead, an opportunity ahead in sports.
So, what does that mean? It means you have to be able to know how to identify the accretive opportunities on who's really built to win economically as an alternative firm or as a sports team. You need to have patient long-term capital because these are not assets that are being bought and sold with any frequency. And that's the case with GPs and sports teams. But they're also extraordinary franchises, right? Think about the Silver Lakes, the HIGs, the CVCs and the Veritas. The firms are lucky enough to be owners of the GP stake side. They are incredible, enduring franchises analogous to the sports point.
So, everything you're suggesting is exactly what brought our team there, which was, look, there's a huge marketplace evolving with capital needs to your very point that are rapidly exceeding what is available in the individual investor marketplace. And so, we've already been doing this in basketball. We are the approved partner of the NBA for these minority stakes. It's such a very strong place to be. It's a great opportunity. And building off of that, we're now looking at what can we do more broadly as institutional capital becomes maybe not just welcome, but necessary in most sporting arenas? Frankly, the only place where institutional capital, as you know today, isn't permitted is the NFL. And they decide over time.
Willy Walker: Yeah, they might have to. If the value of these franchises keeps going up much more, they may have to change some of those capital rules that they have on the NFL side. And a shout out to the Denver Nuggets for winning the NBA title this year. I was there the night that they won it and it was a really exciting thing.
So, let's switch to real estate for a moment, Marc. So Blue Owl's real estate platform was just named "Top Performing Core & Core Plus Fund Manager (Americas)" at the 2023 PREQIN Awards. Marc Zahr and his team, hats off to him for having built that platform.
There's a lot of concern about commercial real estate today, you're talking to somebody who gets questions on it every single day. What's Blue Owl's outlook and I know your investment strategy on triple net properties and big corporate users is somewhat distinct from other strategies, like I'll pick it Blackstone for a moment that basically has their hand in every single type of asset class globally – office retail, hospitality, multi, industrial although the BREIT’s great credit, they really did in the BREIT just focus on multi and industrial has held up quite well after kind of the run on the bank that they had in Q4 of 2022. But talk for a moment about Blue Owl's 20 billion plus in real estate and why it's distinct.
Marc Lipschultz: So, I'm going to have to be very cautious in talking about real estate with a world leading expert in real estate. So, I'm going to tread carefully. I'll try to stay close to mind, which is knowing what we do here and hopefully will integrate in people's minds. When I talked about what we do and how we define our highway, and I talked about lower risk, lower volatility principle protected investment strategies. That's what we do – and that's what we do in real estate.
So, in real estate, by measure of the breadth of the real estate industry, we're very small by measure of the particular niche that Marc Zahr so cleverly identified well over a decade ago and has architected this leading position for, we do triple net lease generally 15, 20-year leases with investment grade or strong credit counterparties. So, the expenses of course in a triple net lease solution are not so an inflationary environment. That's not a risk for us, our investors. That's something that the tenant manages and it's all about durability and predictability of those income streams, which during a bull market people are fine to have. But in a risk on market, it's like, well, that's nice.
In a risk aware market like we're in today, you get a lot of recognition and we do deeply appreciate the recognition from PREQIN, kind of exactly the point. Hey, you know what, it turns out there's a lot of different flavors inside these big words called real estate. Inside a big word like credit, inside a big word like equity. Our flavor is, again, sort of this is it's moment to shine because we're presiding over people is that predictability of certainty anchored by an attachment to a great tenet and a critical asset.
So, from where I sit, I think it's a spectacular strategy that Marc created to provide visibility and durability and a way to participate in real estate through this kind of disruptive time and have it, in fact, not be a drag. It's actually a lot for our strategy because cap rates in general are rising because of the malaise around the sector. And yet within our particular niche, the size of the risks of doing an Amazon warehouse have gone up. So, we're generally pleased with the environment that we face off against.
Willy Walker: I love that term “risk aware.” It's like, first of all, backing up to what we talked about previously, about where we are versus a year ago, a year ago was clearly a risk off. And a lot of commercial real estate, as you know right now, Marc is still in a risk off mode, but it is moving quickly, I think, to risk aware. And that's going to create more opportunities and capital flows coming back to commercial real estate. And I think it's credit to Mark and his team that on the Blue Owl platform given the investment strategy that you're able to be risk aware right now and not risk off like many, many other providers of either equity or debt capital in the commercial real estate space.
Marc Lipschultz: I'm glad that term resonates because I think it in a way captures exactly what we've been talking about around Blue Owl. Risk matters and how you manage risk matters. It matters in good and bad times. It's just not visible during good times, right? It's more visible during more challenging times. That's where we really have our kind of bread and butter, building products that are built in a very risk aware fashion.
And so, with these uncertain times, I think that's why we're taking it up a notch. It's kind of why it's generally speaking, favorable for what we do. I'm not trying to be a Pollyanna. You know, uncertainty is an enemy of capital formation. I don’t know the future, you know, for sure. And who knows where we'll land. But being in a business where you're very tuned into risk, this is an environment where that tends to shine.
Willy Walker: You talk about risk management, Marc, and let's talk for a moment more broadly about the management of Blue Owl. Only in that you have co-CEOs and you and Doug and you actually have three co-presidents. As the old adage goes, “If someone doesn't own it, nobody owns it.” Has been that sort of a management philosophy that at least Howard Smith, who is our President at Walker & Dunlop and I have pretty consistently tried to put into place that these divisions or businesses need to be owned by somebody. And if it's by group, you're never going to get to the right solution or the right ownership of it.
You all have clearly been extremely successful being in this sort of partnership, senior management structure. What's either unique about Blue Owl or just the relationships that you all have with one another that's made a co-CEO and three co-president structure work?
Marc Lipschultz: So, fully acknowledging that it's an atypical structure, so less common than not. And in many cases, I don't think there is not a one size fits all. It depends on the nature of the business and the nature of the people and what the risks in the business are. But I would actually say it's pretty consistent with actually our view of risk management, which is we're trying to build an institution and I think successfully built an institution that is way bigger than any individual.
So, I suppose the core argument would be if it's sort of if not one person's in charge, then no one's in charge, but then something happens to that person, then what happens? So, I think our idea actually probably is wired to our personalities and style and culture, which is we don't want failure points, we don't want anyone. And by the way, no one of us matters. And that applies across the board. We're trying to build institutions that always have redundancy. And I give Doug the credit for this, Doug, I'll say, Listen, you should join me as co-CEO. People don't do that, and he does it because I know what's best for Blue Owl.
Our co-presidents are incredible leaders for this business but very clear where box different bucks stop and yet we can kind of get the best of all our minds on a topic too. So, Marc Zahr is co-president and runs the real estate business extraordinarily well. And Craig Packer is co-president who runs our credit business extremely well, and Michael Rees is the co-president who runs the GP Stakes business and was the founder of that business - does extremely well.
So, we have very clear kinds of places where we wake up in focus each day, but that also gives us the ability to share knowledge, share information, share our vision and ideas, take those ideas, and cross them over to the benefit of our LPs. But it also gives us that back up. It builds the depth we need so people can know that it's not just Blue Owl and frankly, on alternatives, this has been a big issue. Is it a cult of personality, is it about any one person or two? It's not in our world. It's about the Blue Owl platform. We're thrilled to be a part of it. We think we add value in our roles. But if any one of us got hit by a bus, Blue Owl carries on.
Willy Walker: Marc, the one of the four ethos of Blue Owl is constructive dialog. And when I read that, I thought about Ray Dalio, and I thought about the quote unquote constructive dialog that Ray tries to put into his firm.
I'm just curious, given having a leadership team that is so wildly talented as you have at Blue Owl, there would be an assumption from an outsider that they're these super successful, super talented senior management team that sort of says, “We're going there and let's go do it.”
And so having constructive dialog is part of one of your ethos is, I thought, very interesting and important to understand. How do you, at a firm that is run by people who are wildly successful and have very strong opinions on things, make sure that that constructive dialog happens on a day-to-day basis?
Marc Lipschultz: Like anything - culture is about reinforcement and sort of walking the walk. And again, like everything we do, I am far from asserting we've got this sorted or perfected, and that would be my answer on any subject, sort of. Everything's a work in progress. But the thing I guess for us is at the end of the day, back to being a risk management-oriented organization, risk protective, that tends to actually also fit what the culture is saying: Listen, if you have a concern, express it. This isn't about one person's brilliant insight. It's actually about saying, how can we bring all the brainpower? We have an incredible team here. We are so fortunate. Since inception, I can't think of anyone that we have lost that went to a competitor. And I think that speaks to this culture of inclusion and dialog and really valuing individuals opinions.
So, listen, never we’ll be anything like us as successful or insightful as Ray Dalio. And you made reference to other incredible business leaders, many of them you've interviewed. And I'm none of those things. But you know what? What I guess I'd say anchors us is having been an alternative since 1995, long before it was called alternatives, having been in private equity before was called private equity, it was LBOs back then. When I started, there were two large LBO firms in the world. Two, you know, were KKR (Kohlberg Kravis Roberts & Co.) and Forstmann Little. TPG was a startup, right?
Willy Walker: Carlyle was a postage stamp back then.
Marc Lipschultz: So, it's just an incredible evolution in these markets. And you know what? Probably my most significant takeaway would be that would give you a lot of humility and that will give you a lot of sense of right place, right time counts for a lot, too. And I'm not taking away anything from the skills that crafted these enterprises have within my world.
And I think we've had some good ideas, but time and place counts and, you know, the kind of macro, the tailwinds, the ecosystem you operate in counts. And I think that humility of recognizing that a lot of our success comes from things that are outside our control and so some of our failures, I think helps us also to build a culture we say, none of us have all the answers, we just don't. So, the more we can encourage people to say, I just don't see it that way, we may not reach the conclusion they're advocating, but boy, we should hear it.
As soon as you get in that echo chamber where you're not hearing from people anymore. Again, this is a lesson I've learned over time, it's very easy to get into a culture. It's easier just to sort of say, yes, get along, You have a different view. You know what? But the most toxic thing, I think, in any culture, again, recognizing the limits of my knowledge, is we finish a meeting, and everyone nods their head and then they go off to get a coffee and they're like, oh, sad and dumb idea. That is the worst possible thing you can have in a culture. So, we're trying hard, hard to fight what happens as organizations grow to say everybody's opinion matters and may or may not believe it, but we want to hear it and we love it when you disagree with us. If you have a good reason to say, let's agree to disagree.
Willy Walker: I got it. I know, clearly your focus right now, being co-CEO of Blue Owl focuses on all industries, the various products that you all are putting out, etc. But I can't let you go without talking about energy for a moment because you truly are an expert on energy. You ran the energy practice at KKR and infrastructure. Two quick questions for you on that, Marc. First, I watched a number of your videos on alternatives. On wind and solar and things of that nature from a decade ago. Speaking out at Stanford University. What surprised you the most over the last decade as it relates to alternatives? Either they've exceeded expectations, they've undercut expectations, one of them has grown much faster than you would expected. What's been the biggest surprise in the alternative fuel energy space from your standpoint of where we were back in 2013?
Marc Lipschultz: So, there's good and bad news. The good news is, it's been working. That is to say that renewables as a part of the energy complex have decidedly been growing, in some cases, again, depending on region, as you know, electricity is a complicated animal in some cases much more than people would have expected. Wind in West Texas has grown more than people would have expected, some of the applications of residential solar. Now, a lot of these things are driven by incentives that have been created to lead to these results. I don't want to suggest they're just things that happened in the sort of open field of market play.
But nonetheless, you know, it arguably has seen great success in the implementation of renewables in many parts of the U.S. and around the world. At the same time, the bad news, but I think the recognition we have to have to get from here through a practical energy transition over the long term is the recognition that we have a very long ways to go and we don't today have the technology, the capability to move as rapidly as perhaps people would like. Perhaps people want, there will be a wide range of views on this. But energy transition, we're going to be with carbon fuels for a very long time. And so, the key here is going to be how do we get from today's world to that low carbon future and do that in a way that is healthy for the environment, but also allows for economic vitality.
And so, I think the good news is it's working. I think the bad news is there's a bit of impatience, and this is going to be a long process. And I think we're going to need to sort of take all of the above strategies to get from here to there realistically.
Willy Walker: And on oil, we've got carbon fuels around for a longer time frame than many would potentially like. A year ago, right now, oil was $110 a barrel. I actually was looking back, and I'd read out an analyst report by a Truist analyst a year ago that was saying that oil was going to go to 160 bucks a barrel. Good thing I didn't read that report and go long oil and, you know, it got down to 75 bucks a barrel last week. It's back up close to 80, today at 79. Just generally speaking, Marc, what's your sense as it relates to oil going forward? Are we looking at it's kind of in this band because of supply and demand characteristics of where the market is or is there something, given your deep expertise in this space, they would say to you, it's probably going down from here, or it probably goes up?
Marc Lipschultz: So, a couple of thoughts, again, recognizing…
Willy Walker: I got all the caveats you're going to say here. I want a sense of you know much more about this than I do. Should we think that oil is going to be 100 bucks a barrel? Should we think that oil's going to be 50 bucks a barrel?
Marc Lipschultz: I think you need oil prices that are closer to where we are now to rebuild the pipeline, (pun partly intended) of the energy that we need. Remember, we went through a period of time over the last several years. There's dramatic underinvestment in production and it does deplete. Yes, some people will view that as good news that it depletes. But the fact is, when you still need it, that is not good news because you have to replace it and it's very expensive.
And so, without being able to know, I would say you need prices that are closer to today’s to make a return on capital work in the energy complex. And that's just a reality. It's funny you said that about forecast. I remember the last energy supercycle ’06-’07 El down about $200 a barrel. And I've always marveled at the fact that you can be an energy price forecaster and be off by not only orders magnitude direction and you're still a forecaster. It's actually it’s quite a job. So that said, I just do it from the bottoms up, which kind of is the way I tend to work and think that if you just look at what you need to get to make a return on the capital it takes to just stay even on oil production, let alone, grow with economies around the world, you probably need prices closer to what we have now, but we're certainly not meaningfully debating whether higher or lower. That's at the whim of the market or maybe a pullback a given day.
Willy Walker: Last tough question for you. We're probably going to have a 5.25% Fed funds rate by the end of the day today. When would you project I mean, the forward curve has been wrong ever since we got into this tightening cycle. The forward curve set the 4.13% Fed funds rate by the end of the year back in May. And then it went up to 5.25% and now is rallied back down, it is sort of the high fours. Just from a rate standpoint Marc, do you think that we hang in this higher for a longer range or do you think that the economy steps backwards and we've got a cut coming up in the next 6 to 12 months?
Marc Lipschultz: So most importantly, I'm thankful to be in the floating rate business so I don't have to know the answer to that. And I say that's only half facetiously. That kind of is the point of our strategies. I'm fortunate that I don't have to depend on that answer one way or the other, because that's exactly what we adjust for.
With that said, I would make this observation: I don't know where rates go, and I have no greater insights on that than you and many others. However, on inflation and knowing how that looks through the lens of companies and with some meaningful reflection on this question – inflation is a tough, tough animal to tame. And so, I think if I could come out this door, inflation does not go away easily. And full credit to the Fed, we seem to be making progress. But that would lead me toward it's not so easy to take your foot off that brake because we're still in a place with very tight labor markets. Good. Lots of people have jobs. Costs are still very high. That's a lot of pressure on people's pocketbooks. Inflation has not gone away. It has abated from its peak. So, I would be in the inflation remains a risk category, more so than sitting here today at the company level. The recession doesn't look imminent doesn't mean we're not technically going to be in one. I don't know. But that doesn't look imminent. Inflation is still a beast to tame.
Willy Walker: Marc Lipschultz, it's a true pleasure to have, and I should say again, I'll go back to it – not an old friend, but a longstanding friend such as you on the 150th Walker webcast. Thanks very much for spending the time with me today. It's a real pleasure and congrats to all that you and Doug and all your colleagues have done at Blue Owl. It's really fun to watch.
Marc Lipschultz: Thanks. Willy, thanks so much for having me. It really is a true privilege, and our longtime friendship is very high on that list of real privileges. So, thanks.
Willy Walker: It's great. Have a great day. Thanks, everyone, for joining us.
Marc Lipschultz: Go Commanders!
Willy Walker: Exactly.