Home Alternative Investments Don’t Buy Blackstone, Buy Blue Owl Capital Instead (NYSE:OWL)

Don’t Buy Blackstone, Buy Blue Owl Capital Instead (NYSE:OWL)

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Blackstone (NYSE:BX) is the world’s largest alternative asset manager, with an astonishing $915.5 billion in assets under management. It employs a balance sheet light strategy that means that virtually all of its cash flows come from asset management fees and net carried interest in alternative investments such as commercial real estate, private equity, and infrastructure.

The company first went public in 2007 and has generated tremendous total returns for shareholders since then, crushing the market (SPY) in the process:

Blackstone stock return
Data by YCharts

Blue Owl Capital (NYSE:OWL) is also a large alternative asset manager, with $102 billion in assets under management. Similar to BX, it also employs a balance sheet light strategy and generates all of its cash flows from asset management fees. However, while it does manage substantial real estate and private equity portfolios, OWL does not invest in infrastructure at this point and instead focuses primarily on direct lending, in part through managing the Owl Rock Capital Corporation (ORCC) BDC.

While the company has not traded on the public markets for long enough to assess that performance (though it has substantially outperformed the SPY since going public) in any meaningful way, the company’s internal metrics have been quite impressive and give us confidence that it will be able to deliver on its ambitious guidance and generate strong returns for shareholders moving forward.

In this article, we will discuss why we are more bullish on OWL than BX in the current environment and are long the stock instead of BX.

BX Stock Bull Case

There is obviously a lot to like about BX stock. First and foremost, the company’s world-leading scale and fantastic track record give it significant competitive advantages, including name brand power, familiarity, and trust with institutional investors, access to many deals that smaller competitors cannot afford to bid on, stronger brain power via its larger employee workforce and the resources to attract the best and brightest in the sectors in which it invests, a strong information edge which it can leverage to generate outperformance, and an asset-light business model that tends to generate stronger leverage for its results.

On top of that, the stock price is fairly attractive looking here when you combine the very strong growth momentum for the company (55% year-over-year growth in fee related earnings in Q1, 63% year-over-year growth in distributable earnings in Q1, and 84% year-over-year growth in net accrued performance revenues in Q1 thanks to 41% year-over-year growth in assets under management in Q1) with the 4.44% forward dividend yield.

Last, but not least, news just broke that one of BX’s directors (James Breyer) bought $1 million worth of the company’s shares at a $106.66 – $107.75 price range, which is certainly a strong vote of confidence in the company’s forward prospects.

On top of that, the growth momentum for alternative asset managers like BX is expected to remain very strong for the remainder of this decade as institutional investors are expected to continue allocating trillions of dollars in additional capital to the space as persistently low interest rates and elevated inflation rates make alternative assets an increasingly attractive place to invest in the current environment.

While it is true that interest rates are rising right now, inflation rates remain far above them and likely will for the foreseeable future. As long as real interest rates remain negative, BX’s vast real estate and private equity asset management businesses should continue to generate strong returns and attract large capital inflows.

OWL Stock Bull Case: Not All Assets Under Management Is Equal

While BX certainly has the track record and competitive advantages that make it look like an attractive investment right now, the main reason why we like OWL more is that the company has far more of its earnings coming from permanent capital than BX does. ~50% of BX’s assets under management as of the end of Q1 were permanent (or perpetual as BX likes to say).

In contrast, as of the end of Q1, 95% of OWL’s fee related earnings were from permanent capital and 100% of its distributable earnings are from fee related earnings. With no net carried interest and nearly all of its fee related earnings coming from permanent capital, OWL’s earnings stability vastly exceeds that of BX’s.

This advantage is particularly compelling given that we appear to be heading for recession. While BX’s earnings will likely take a hit during a recession due to declines in net carried interest and headwinds to fundraising, OWL’s permanent capital heavy and fee related earnings focused asset management portfolio will go largely undisturbed. As a result, its earnings stability should be considerably more stable.

On top of that, OWL’s largest asset management business is direct lending. These loans are almost all senior secured floating interest rate loans. This means that in a rising rate environment, the company should benefit. According to the company’s recent Investor Day presentation, management expects Fee Related Earnings to rise with interest rates. If interest rates rise by 100 basis points, FRE revenue will increase slightly. If interest rates rise by 200 basis points, FRE revenue should rise by 2% and if interest rates rise by 300 basis points, FRE revenue should rise by 4%.

As a result, we think the business is well-positioned for a rising rate and rising inflation environment. In contrast, rising interest rates will hurt BX.

On top of that, OWL’s real estate exposure is via triple net leases, which are arguably the most conservative and recession-resistant real estate investment there is. This also positions OWL well to weather an economic downturn, whereas BX’s more diverse and in some cases aggressive real estate investments may suffer more during an economic downturn.

A final reason we favor OWL over BX right now is simply the valuation equation. While we expect BX to continue generating strong growth for the foreseeable future, it is growing off a base that is almost 10 times greater than OWL’s is. As a result, OWL will likely enjoy stronger growth rates in the coming years. Analysts certainly seem to agree with this analysis, forecasting a 15.5% earnings per share CAGR for BX over the next three years whereas they forecast a 34.6% earnings per share CAGR for OWL over the same time frame.

Meanwhile, OWL is expected to grow its dividend per share to $1 by 2025 from its current $0.40 annualized level, good for a 25.7% CAGR. In contrast, BX is only expected to grow its dividend per share at a 10.6% CAGR over that span. Another way to look at this is that BX’s expected 2025 yield on cost is 5.46% whereas OWL’s expected 2025 yield on cost is 8.07%.

Finally, both stocks are trading at price to earnings multiples of ~20.7x. When you take into account OWL’s more conservative disposition towards the current rising interest rate and recessionary outlook relative to BX’s, which is more likely to struggle in a rising rate and recessionary environment, OWL’s significantly greater growth outlook, and nearly identical valuation with BX’s, OWL appears to be the hands-down winner in the head-to-head competition.

Investor Takeaway

Asset management has generally proven to be a lucrative business model as it is capital light and very easy to scale. The main key to long-term success is name brand (i.e., trust), which is something that Blackstone has in spades. While Blue Owl Capital is younger, it still possesses enough of a track record of success across each of its strategies and has a large enough assets under management to be a competitive player in the space.

On top of that, it is growing rapidly right now and is expected to do so for the foreseeable future, with clear tailwinds for its direct lending business in the current rising rate environment.

Last, but not least, its heavy concentration in permanent capital has set it up generate much more stable earnings through economic downturns than BX will likely be able to do.

Given that Mr. Market is offering us a higher quality earnings stream and stronger growth prospects with OWL at the same multiple at which it is offering BX, we are going with OWL for our portfolio instead. That said, we are also bullish on BX, rating it a BUY while we rate OWL a STRONG BUY.

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