Why volatility is pushing investors to private lenders
Private markets have grown exponentially over the last decade. With so much volatility in the banking industry, investors have turned to private lending firms. Blue Owl Capital Co-CEO Marc Lipschultz (OWL) sits down with Yahoo Finance to explain the recent trend in investment management. When asked about motivation behind the change Lipschultz explained “the banks in the U.S., regional banks included,...made largely a decision not to really be lenders to these companies.... what might be considered sort of smaller companies."
When pressed with concerns over the private market, Lipschultz revealed numbers from Blue Owl Capital to alleviate those concerns. “We have lent $75 billion since inception, and you know what our loss rate has been? Annualized at six basis points. In our software business, which is our biggest area, our specialty, we've never had a loss in one of those loans" Lipschultz says.
Video Transcript
- Amid volatility and concerns surrounding the banking industry this year, investors and businesses are turning to private lending firms like Blue Owl Capital for alternative Investment Management. Joining us now to discuss the emerging trend and their latest quarterly earnings, Blue Owl Capital Co-CEO, Marc Lipschultz. Marc, you guys have seen impressive growth. Your assets under management went $149 billion.
They've about tripled since your IPO in 2020. What is going on? For people who are not familiar with this private credit market, like give us the overview. What is going on here that has caused this explosion?
MARC LIPSCHULTZ: Well, first thank you so much, Julie and Dan for having me. I really appreciate the chance to chat about it. You know what's causing the growth is private lending, direct lending. The Blue Owl Solutions deliver value. Like any product in the market, financial products are just that, right? They're innovative products. They compete in a broad marketplace.
And direct lending is really, if you take a step back, it's essentially offering what the banks, we all picture of old providing, which is making a loan, being a partner to the business, and being a long-term partner to that business and able to work through changes in the world together. So we're really a non-bank bank. We don't have any depositors. So there's no risk to the system.
There's no systematic risk. There's nobody on the hook besides us and our investors, and we're just trying to make a great risk reward for our investors. And the reality is the growth reflects the fact that we have a value proposition that works for the people that provide capital and outstanding risk reward for the people that provide us the capital, and we have a great value proposition for the people that use the capital. We're a long-term partner that gives them the privacy, predictability, and partnership they want in a lender.
- Speaking of the people who need the capital, one of the things that we saw with regard to the regional banks is they support a lot of small businesses. Is that-- do you find-- did you find an influx from small businesses seeking an alternative kind of investment platform?
MARC LIPSCHULTZ: So our whole business is designed, and our product suite is designed to lend company-- lend capital to private companies here in the US. So, absolutely, what many people would constitute as the maybe middle market place, overall. And with the change at SVB, no doubt it directionally moved more companies toward what we do.
The thing about the banks in the US, regional banks included, is a while ago, they made largely a decision not to really be lenders to these companies, these, what? Might be considered sort of-- they are smaller companies, and they made a decision a while ago not to be in that business. And even the biggest banks really are in the syndication business, right? They're in the business of intermediating loans.
And so that already had been happening, it certainly accelerated further with SVB. And yet, again, another reminder that at the end of the day, what you really want is long-term capital matched for long-term needs. That's what we do. We have capital that we have for the long-term so we can lend it for the long-term. And it's happened time immemorial. When you take short-term capital and you try to do long-term things with it, at some point, that ends up falling apart.
- Speaking of falling apart, this growth in the private credit industry has not come without concerns and questions about the scope of this lending that is happening outside of the traditional bank system, especially in a rising interest rate environment. How do you address those types of concerns?
MARC LIPSCHULTZ: So, look. Whenever there's an emerging marketplace, it's worth asking those questions. So to be clear, they're perfectly sound questions. At the same time, I think often, the critics, if you will, or the skeptics, say abstract kind of open-ended things like, well, you just don't know. I mean, we just don't know if we live in a simulation either, so we have to do is look at the facts. And the facts of the matter are pretty straightforward.
We take capital, again, as I said that we have tied up for the very long-term, we make fundamental credit decisions with that capital, and we lend that capital to what we think are really great companies for the long-term. And the evidence, however, is there that we know this model works. And that doesn't mean, every single loan works for every single company, that-- in fact, that would be a pretty poor result, right?
We're supposed to be in a marketplace where there's a modicum of risk and return engaged. But take Blue Owl, we have lent $75 billion since inception. And you know what our loss rate has been? Annualized at six basis points, and in our software business, which is our biggest area, our specialty, we've never had a loss in one of those loans. Now, those are extraordinary numbers, by the measure of direct lending. And, of course, it can't be lower than zero, so they can only increase.
But they only have to increase moderately because we have very diverse portfolios with very good companies. So I certainly understand the question, but also importantly, remember, because it's between us and our investors and the borrower, that's where it stops. So even if someone in this marketplace does not particularly good job, first off what you're talking about are having some challenges, then as a senior secured lender, you're the top of the stack. That is to say you're the first one getting recovery.
So then the question is, well, OK, do you get all of your money back or not? When you finish doing all that math and then realize it's not connected to the rest of the system, you don't have this cascade risk that others have that you'd have in banking.
- I guess it depends on who your investors are.
MARC LIPSCHULTZ: Well, it does. Our investors are extremely large, pension funds, sovereign wealth funds, foundations and endowments, and then a large range we've created access points for individual investors to participate. So this is a widely diversified pool of investors. And, again, key point being they're not-- they're not guaranteed by anybody. It's not a deposit where the government has to step in.
- So can I ask you, I want to ask you this question because banks are taking notice of what is happening in the private credit space, right? They want a piece of the action as well. Is a big bank friend or foe to you if they want a piece of that action?
MARC LIPSCHULTZ: So I would proffer that are friends. And I appreciate that often the storyline is more banks versus the private Lenders. But two observations, one, we certainly work closely with the banks. They've been critical, critical partners of ours from day one and will continue to be. I would also say that for a vibrant economy, for a vibrant capital marketplace, it's not an or, it's and.
Listen, this is a multi-trillion dollar industry, right? This credit marketplace. We're small by that measure, not just Blue Owl, but Blue Owl on all of us taken together are a minority portion of that marketplace. So to have a vibrant marketplace and a vibrant economy and good capital formation, we need a really healthy syndicated market, bank-based market, and we need a really healthy private market.
We've proven that too, because during the pandemic, during 2022 when the war broke out in Ukraine, during SVB, we were there providing capital. So we're providing capital at times that often the marketplace, the traditional marketplace, will not. So taken together, frankly, we've made the capital system the banks plus the private lenders that much more durable. That's a good thing.
- All right.
- Marc, thanks for coming in. Marc Lipschultz, Co-CEO of Blue Owl Capital. Appreciate your time this morning.
MARC LIPSCHULTZ: Thank you for having me. Deeply appreciate it.
