Blue Owl Capital Inc

NYSE:OWL

Earnings Call Transcript 2021-Q2

[Operator]

Good morning and welcome to Blue Owl Capital Second Quarter 2021 Earnings Call. During the presentation, your lines will remain on listen-only. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] I'd like to advise all parties that this conference is being recorded.

I will now turn the call over to Ann Dai, Head of Investor Relations for Blue Owl.

[Ann Dai, Head of Investor Relations]

Thanks, operator, and good morning, to everyone on the call today. Joining me this morning are Doug Ostrover, our Chief Executive Officer; Marc Lipschultz and Michael Rees, our Co-President and Alan Kirshenbaum, our Chief Financial Officer.

I'd like to remind our listeners that remarks made during the call may contain forward looking statements, which are not a guarantee of future performance or results and involve a number of risks and uncertainties that are outside the company's control. Actual results may differ materially from those in forward-looking statements as a result of a number of factors including those described from time to time in Blue Owl Capital's filings with the Securities and Exchange Commission. The company assumes no obligation to update any forward looking statements.

We would also like to remind everyone that we will refer to non-GAAP measures on the call, which are reconciled to GAAP figures in our press release available on the Investor Resource section of our website at blueowl.com.

This morning, we issued our financial results for the second quarter of 2021 and reported adjusted fee-related earnings or FRE of $0.10 per share and adjusted distributable earnings or DE of $0.09 per share. We also declared a dividend of $0.04 per share payable on September 8th for shareholders of record as of August 24th. We'll be referring to the earnings presentation throughout the call today, so please have that on hand.

With that, I'd like to turn the call over to Doug.

[Doug Ostrover, Chief Executive Officer]

Thank you, Lian. Good morning, everyone. And thank you for joining us today for our first Blue Owl earnings call. We are very appreciative of the time that you are taking to join us on our call today and we look forward to seeing you all in person, hopefully sometime soon.

Given that this is our first earnings call, I thought I would start with a brief introduction to the Blue Owl story and highlight our vision for the combined platform and the tremendous growth we see ahead. Marc and Michael will then provide their perspectives on what we're seeing across the industry before providing color on business performance for Direct Lending and GP solutions. From there, Alan will cover our financial results and then we will be happy to take any questions.

So, let me start with a very high-level view of Blue Owl’s position in the marketplace. We are a leading solutions provider for the private markets with $62 billion of assets under management, of which $8.5 billion does not yet earned fees, but will once that capital is deployed. And notably, 97% of our management fees come from permanent capital. So, we have very high visibility into our earnings growth over the next six, twelve and even eighteen months.

We support the entire ecosystem of alternative asset managers through two businesses. Direct Lending, where we provide capital to sponsors to finance their portfolio companies and GP solutions. Where we provide capital to the alternative asset managers themselves, essentially, we are selling the picks and shovels to the industry. Or said another way, we are the equivalent of SaaS providers to the alternative asset management space.

Our long-term goal is to continue to expand meaningfully in these businesses and add additional capabilities that also fit this mandate of serving the private market’s ecosystem.

As I think about the market landscape for Blue Owl today, I see two businesses, which are trying to benefit greatly from the continued growth in the alternative asset management industry. We remain in a historically low rate environment with investors searching for incremental yield and increasingly expanding their allocations to alternative assets.

As the alternatives world expands further, we expect Blue Owl to continue to take market share, as we provide capital solutions to these more mature larger segments of the industry. What we've also seen is that during challenging markets, such as the financial crisis of 2008, the managers with experienced investment teams and strong track records attract the most capital as investors worked to protect their portfolios. We firmly believe Blue Owl will fall into that category, as well.

In addition to the strong growth we see ahead for each of Direct Lending and GP Solutions on a standalone basis, us, we see significant opportunities for synergies between the two businesses.

Today, we have just 2% overlap in our LP base, which tells us two things; one, that our combined reach across the investor universe has grown dramatically through this transaction; and two, that there are many opportunities for us to introduce our LPs to unique yield and return opportunities that they may not have had on their radars.

We also see the potential for synergies on the investment side, as there will be times when Direct Lending can bring unique investment opportunities to GP Solutions and vice versa translating into additional value for limited partners and shareholders.

Given that some of the audience maybe newer to the Blue Owl story, let me back up and provide a brief history of our businesses. I am going to start with Owl Rock. We started Owl Rock with the goal of building one of the premier firms in Direct Lending. We saw a meaningful opportunity in the upper middle market lending space and knew that we could raise a significant amount of capital to address that opportunity.

We were confident that we could leverage our combined market experience and relationships to build a wide funnel of deals, select those with the best risk reward opportunities, create downside protection through disciplined risk management and ultimately generate strong returns for our investors. And we thought by doing all of that, we could create an institutional quality best-in-class lending platform.

Over the past 5.5 years, I think we've certainly achieved that goal. Our ability to deliver timely and flexible solutions in scale has resonated with the market, as we have originated $35 billion of loans since we started our business.

We've established ourselves as a leading competitor in the upper middle market lending space with over $31 billion of AUM and our strict underwriting, strong covenant and focus on portfolio diversification have resulted in industry-leading returns for our investors. COVID was an unexpected test for our platform, much as it was for the broader U.S. and global economies and we as a firm made it through this very difficult period exceptionally well.

The $35 billion we have originated has been across 300 investments. And we have had only two realized losses of original principals through June 30th with notion along those investments of just $255 million or less than 1% of what we've originated and we still own both of those investments. This speaks to the quality and resiliency of the portfolio.

We have built one of the largest dedicated Direct Lending investment teams in the industry with nearly 70 investment professionals, including 23 managing directors with average experience of twenty years. And despite the impressive growth that we've experienced in our Direct Lending business since we launched 5.5 short years ago, I truly believe the balance is still ahead.

Now turning to GP Capital Solutions. Dyal is the clear leader in its market having founded the industry and taken stakes in over 50 alternative asset management firms since inception and that number continues to grow. In addition to providing growth capital for new and existing businesses, Dyal offers great strategic value to its partner managers through its business services platform team and also offers debt financing solutions.

The partner managers in Dyal’s Funds selectively manage roughly $1 trillion of AUM, giving Dyal a unique and very broad perspective on trends in the alternative asset management industry. We will endeavor to share the insights we partner from this special perch with you.

I think Michael and the team have built a terrific business and it really fits well with what we focus on at Owl Rock. We want to be market leaders in the space. We look for unique value propositions that allow us to generate strong performance for our investors and we like businesses where we can create scale. The Dyal business falls into all of those categories.

Shifting out to Blue Owl’s financial profile and Alan is going to cover this in greater detail later in the call. We've had the benefit of watching with other companies in our space have done and we've seen what works and what doesn't. We believe the market has told us that it values a steady and predictable earnings stream with high growth potential and that's exactly what we offer at Blue Owl.

FRE currently constitutes a 100% of our earnings, meaning our revenues come from management fees, which are highly predictable each year. When it comes to AUM, we are not on the hamster wheel raising capital, because when we raise increment AUM we keep it since almost all of our AUM is permanent.

We are not required to return capital to investors. We like to think of it as a layer cake. As we raise capital, we just add a new layer of capital to our existing permanent capital base. Unlike most alternative asset managers, we don't have to raise $20 billion to grow our AUM by $10 billion since capital doesn't leave the system, and that's a big differentiator for our platform.

Because of this, we have industry-leading growth generated from highly visible drivers and best-in-class profitability in FRE margins. We have a track record of investment outperformance and diversified and growing distribution capabilities across the institutional investor and retail distribution channels. We offer a healthy 2.5% dividend yield based on our June 30 closing stock price and we are hopeful that our quarterly dividend could double by the fourth quarter of next year.

Our balance sheet is strong with almost $600 million of liquidity and we are committed to maintaining our investment grade ratings over time. And importantly, we have an industry-leading, fully aligned management team. We did not sell any shares in the transaction and we own about 25% of Blue Owl outstanding shares. So we are well aligned with our shareholders.

In addition, we, as a management team, have personally invested a substantial amount into our funds, meaning, we are also very aligned with Our LPs.

Internally, we have an undertaking that we call Project Bright Blue, which has three primary objectives; one, we want to outperform the FRE expectations set forth for us; two, we'd like to pursue strategic acquisitions that complement our current best-in-class businesses; and three, we would like to trade at parity with or better than our closest peers in the public markets.

If we can achieve these objectives, we believe we can drive significant shareholder value over the course of the next few years.

Finally, before I turn the call over to Marc, I’d be remised if I didn't spend a moment on something that carries a lot of weight for us as a management team, which is culture. We’ve built our firm on a culture of being launched entrepreneurial and nimble in treating everyone with respect.

As we've grown, we’ve spent a lot of time and effort focused on maintaining these core tenets and we believe it has been and will continue to be a key differentiator for Blue Owl in our investment performance and our financial results.

With that, I will turn it over to Marc and Michael who will provide their perspectives on the state of the alternatives industry today and then will cover business performance for the quarter.

Thank you very much. Marc, I'll turn it over to you.

[Marc Lipschultz, Co-Founder and Co-President]

Great. Thanks, Doug. I'd also like to extend a warm welcome to our new and prospective public shareholders. One of the questions, we get most often when we meet with shareholders now is this, how do we expect the alternatives industry to continue to evolve? And how does Blue Owl’s business fit within that evolution?

So, before I provide some background on our Direct Lending business and talk about where we're going, I thought I’d take a step back and share some thoughts on the broader alternatives industry. I think you all know well the tailwinds that support the continued growth for alternative asset managers, investors are looking for attractive risk-adjusted returns in a market where that can be very hard to find.

Allocations to alternatives have continued to rise as investors realize they can trade some amount of liquidity for excess returns and for what we believe is a much better overall risk-adjusted return. As more traditional “alternative products” such as private equity and real assets have grown, new alternatives, market segments such as Direct Lending, GP minority stakes and secondaries and co-investments have really emerged and flourished.

At a high level, Blue Owl’s role in the market is to provide capital to the alternatives ecosystem, which continues to expand in size, scale and complexity. And while the larger alternatives industry continues to grow at a robust 12% average annual growth rate, areas such as Direct Lending and GP minority stakes are expected to grow even more quickly.

So, let's break that down for Direct Lending. By some estimates, there is $1.5 trillion of dry powder just in private equity alone and $3.3 trillion across private markets more broadly with more been raised every day. Now compare that to the size of the entire Direct Lending market with just over $300 billion total across drawdown funds and public and private BDCs.

When you consider that Direct Lending continues to take market share within the credit space, that suggests some very strong growth ahead for the Direct Lending industry with great visibility, which really brings me to the background on Owl Rock. So when we came up with the idea of building a market leader in growing Direct Lending and formed Owl Rock, we set some very big goals for ourselves.

Sitting here today, I think we have both met and surpassed those goals. We've grown our Direct Lending AUM to $31 billion in under six years and the strong pace of growth reflects the demand we've seen from LPs for the products that we offer and the need for capital in the companies in which we invest. It also shows investors’ great need for yield in this market environment.

Today, we offer four investment strategies, our largest being diversified lending with $20 billion of AUM. We also have dedicated technology, first lien and opportunistic lending strategies, each of which is growing very nicely. We believe our technology lending strategy, which we launched back in 2018 and has now grown over $6 billion in AUM is already the market leader in providing structured solutions to the upper middle market technology industry.

There continues to be a tremendous opportunity for tech, particularly given the outstanding 13.5% net IRR for our tech BDC with zero losses since inception and not a single non-accrual.

Now, it's one thing to raise large pools of capital and another to put it to work in a disciplined thoughtful way. While we've originated $35 billion of loans since inception with gross originations over $5 billion this quarter alone, I think it's notable that our broad ecosystem allows us to be extremely selective in the deals that we do.

To provide some context, we've looked at over 5,800 deals since inception and just over 300 of those have made it to the finish line. We have a very wide funnel for deals that continues to grow, but we invest in only the highest conviction investment opportunities that we see, which is about 5% of the deals reviewed.

Our discipline and diligence doesn't end there, we perform a rigorous portfolio monitoring with a focus on capital preservation and we will remain in continuous close contact with the sponsors and the management teams. This meticulous focus on downside protection and portfolio management really worked to our advantage as the U.S. and global economies shutdown down during the COVID-19 pandemic.

The fact that we were often the only lender for a borrower or one of a few made it easier to provide dedicated support and to have timely comprehensive discussions about liquidity, covenants and potential credit events that could arise from this unprecedented situation. We made it through the pandemic thus far with very strong performance.

We have had only two realized losses associated with a total of $255 million of notional value in loans relative to the $35 billion of origination in our firm's history. Ultimately, the pandemic was a very important test for our platform that we fortunately passed with flying colors thus far.

Across the Direct Lending platform, annualized realized losses have been just five basis points since the inception of our firm, outperforming what investors can get in the public markets and putting us amongst the very top of our peer group.

Looking ahead, and I don't mean to sound Pollyannaish about our growth prospects, but we really do see tremendous runway to continue expanding our Direct Lending business. We've grown to $31 billion of AUM, but we are still very small relative to total market opportunity and our pipeline looks very strong.

Sponsors like our business model, because we can provide flexible and bespoke lending solutions at scale. We can act quickly and we have permanent capital. So borrowers and sponsors don't have to worry about our funds coming to the end of their investment periods. We're singularly focused on lending, which means we are not competing with their private equity businesses.

And if the portfolio companies need to borrow more to do a transaction or fund incremental growth, that's easy for us to do, because we've been in constant dialogue and we can underwrite something in a very timely fashion. So, there are a number of avenues that will drive our future growth. One is expansion of our sponsor relationships.

We have over 500 relationships today and we expect that number and depth to increase meaningfully in part due to the synergies we see with the GP Capital Solutions business. As for existing relationships, we expect to grow with them as the sponsor raise larger funds and expand their product offering.

Meaningfully, as borrowers see the benefits of having that one-on-one relationship, which was very clearly on display during the pandemic and we will certainly continue to pursue adjacent opportunities in terms of future growth, new product launches, and new investment strategies.

With that, please let me turn it to my partner, Michael to discuss the GP Solutions business in more detail.

[Michael Rees, Co-President]

Thank you, Marc. Let me start by framing the market opportunity in the GP Solutions space and provide some additional color about the history of the Dyal business and then I'll spend a minute on how the business is doing and where we are going from here.

Since our founding in 2010, the Dyal team recognized the tremendous growth in the alternative segment and saw a need for growth capital to assist founders and management teams in achieving their business objectives. We launched the Dyal business to be the premier provider of such capital. The strong growth in the alternatives industry and the overall private markets was driven by institutional investors, increasing their adoption rate for the products that these firms offer.

With the industry's maturation, that need for our type of growth capital has only increased. We believe that these great businesses, investors in private equity, private credit, infrastructure, real estate and other similar strategies will continue to play a major role in the investment portfolios of institutions and individuals for decades to come. And we want to be the leading provider of capital at the GP level for this industry.

Our business model is quite simple. We raise permanent capital funds. We're raising our fifth as we speak, and we invest this money into passive minority stakes in the leading companies in the alternative investment space. We typically take passive minority stakes between 10% and 25%, which allows the investors in our funds to participate in what we believe to be the attractive economics of these businesses.

To Blue Owl shareholders, the ability to continue to raise funds to address this market opportunity, drives our fee income and we see a very attractive runway ahead. Across our five funds, we have over 50 minority states, and we believe we are the market leader in this category.

The overall private market industry totals about $7.5 trillion in AUM and is expected to approximately double in five years as leading players in this market seek to grow and expand their business, they will require capital to invest in their funds to seed new strategies and to grow their organizations. We've purpose built our organization to meet these capital needs from our funds, but also to provide strategic assistance to the firms we invest in.

The initial catalysts for an investment might be a firm's need for capital. But once on board, our partner managers also benefit greatly from our business services platform, which is a team of 40 employees dedicated to helping and supporting the growth of our partner managers.

Through this business services platform, we have created the ecosystem to support Dyal’s partner managers in building their institutional networks and seeking to deliver best-in-class capabilities across all aspects of their business. The feedback on this platform has been extremely positive and we believe it has contributed greatly to our market-leading position.

Our investment pipeline has been very strong and we've been putting capital to work quickly. Notably, we've already committed approximately 30% of the capital that we expect to raise for Dyal Fund V through four investments and we only held our first closing for that fund last November.

We have a number of other attractive investments that we hope to complete throughout the balance of 2021. Our outperformance and the strategy for our fund investors has been extremely strong with a net IRR 24% for Dyal Fund III, which had its final close in 2016 and a net IRR of 62% for Dyal Fund IV, which had its final close in 2019 .

For our current fund, Fund V, we've already seen quite significant early results with the portfolio already marked 20% above where our capital was put to work.

Looking ahead, we continue to see significant runway for this business as private markets continue to grow at a robust pace, as institutional investors continue to allocate to the space and as retail and high net worth investors increased their allocations to alternatives.

In addition to this strategy, we are in the process of largely growing funds focused on GP Lending, co-investments and secondary investments. All of this will complement our existing minority equity investment strategy and benefit greatly from the deep relationships we have with the private market firms across all of Blue Owl.

Finally, we kicked off our business unit focused on investing in sports and media industries. Dyal HomeCourt, our fund focused on taking minority stakes and teams within the National Basketball Association, launched and has two existing minority investments. One with the Phoenix Suns and one with the Sacramento Kings.

With that, I will turn things over to Alan to discuss our financial results.

[Alan Kirshenbaum, Chief Financial Officer.]

Thank you, Michael, and good morning, everyone. I am going to start off by first, pulling the lens back and framing our business for everyone. Then I’ll take us through the relevant numbers and metrics for this quarter. When I get to the numbers, I'll make references to pages in our earnings presentation, which we posted to our website this morning. So please feel free to have that available to follow along.

At a high level, we have a very simple business model. One, we earn management fees to manage our BDCs and funds, which are [Technical Difficulty] to Blue Owl shareholders.

Of course, we care very deeply about how our funds perform. But unlike other wealth managers, the returns of our funds do not really matter to our Blue Owl’s shareholders. That said, our strong performance has continued to support our fundraising goals. And three, virtually all of the capital we manage with permits. This also helps provide significant visibility into future earnings.

Now to break off this down a little more, we are a 100% FRE business. Our revenues come from steady, consistent, predictable management fee cash flow streams. We have built a strong high cash flowing business. 97% of our management fees are from permanent capital.

When we raise capital, it's like a layer cake, adding to our existing AUM. We are not on a hamster wheel having AUM fall away every quarter. We demonstrate best-in-class growth and best-in-class EBITDA and FRE margins. We expect to pay a strong competitive quarterly dividend with the potential to double our dividend by the fourth quarter of next year. We have a very strong balance sheet with a significant amount of liquidity. We are well aligned with our Blue Owl shareholders.

We as the management team hold about 25% of the outstanding shares at Blue Owl and we are well aligned with our BDC shareholders and LPs across our platform as we have personally invested a substantial amount in valor products.

To also touch on the key drivers of our short and intermediate term growth, these include, one, deploying the capital that we've raised as we generally earn management fees on the total assets of our funds for Direct Lending. Two, some of the products move into full fees after their initial fee discount period like our technology BDC products, and three, raising new equity capital in products like Dyal Fund V.

Okay. So let's get into some of the numbers and financial metrics of our business. Overall, we continue to be on track with the guidance we have previously provided for 2021 and 2022. As a reminder, our reported results include numbers for only half the quarter for GP Solutions. Since the transaction closed approximately halfway through the second quarter, while for Direct Lending, we are reflecting numbers for the full quarter.

Starting off on slide 10, in the adjusted Q2 2021 column, if we were to reflect the GP Solutions numbers on a full quarter basis, as if the transaction closed on April 1, 2021, our total revenues would have been $210 million, total expense is $78 million, fee- related earnings $130 million or $0.10 per share and distributable earnings $108 million or $0.09 per share.

We believe this is a better indication of the full earnings power of our business for this quarter. And I will reiterate our expectation to grow our distributable earnings by over 25% next year as we continue to raise and deploy capital across the platform.

Our adjusted EBITDA margins and our FRE margins were both 62% this quarter, assuming a full quarter for the Dyal business, making good control towards our target range of 65% to 70%. And our adjusted compensation expense as a percentage of total adjusted revenue were 29% this quarter, assuming a full quarter for the Dyal business already inside of our target range of 25% to 30%.

Moving on to our AUM numbers, you can see on Slide 12, we reported AUM of $62.4 billion, fee-paying AUM of $42.8 billion and AUM not yet paying fees of $8.5 billion. AUM grew 8% to $62.4 billion quarter-over-quarter, driven primarily by capital raising, deployment of capital in Direct Lending and portfolio appreciation across the platform.

Fee-paying AUM grew 7% to $42.8 billion quarter-over-quarter, driven primarily by capital raising and deployment in Direct Lending. As a reminder, for GP Solutions, we earn management fees when a capital is raised not deployed. And for Direct Lending, as I mentioned earlier, we generally earn management fees once the capital is deployed typically based on total assets.

AUMs not yet paying fees reached $8.5 billion This AUM once deployed corresponds to an increase in expected annual management fees totaling $120 million. For Direct Lending, the second quarters saw record gross deployments of $5.1 billion and net funded deployments of $3.2 billion. The difference being pay downs of existing loans during the quarter.

And our last 12 month deployment was $12.9 billion on a gross basis, and $7.5 billion on a net funded basis. So up to $8.5 billion of AUM not yet paying fees, I just mentioned, $6.1 billion is for Direct Lending. So, based on our average net funded deployment over the last twelve months as the deployment pace that would take us less than three quarters to fully deploy this capital.

Finally, I'll close out my remarks today with an overview of the firm’s strong financial condition and some other closing comments. We have a balance sheet light model and as you can see on Slide 19, we have almost $600 million of liquidity as of June 30 with our long dated capital structure that is comprised of $700 million of 10 year debt and an undrawn on $150 million senior secured revolver with almost three years of maturity remaining.

Our net debt is approximately $250 million or approximately 0.5 times net debt-to-annualized adjusted EBITDA. Our Board declared a dividend of $0.04 per share for the second quarter of 2021, which is calculated by looking at the full quarter results I just mentioned, distributable earnings of $108 million and using half that number for our dividend payable since we closed the transaction roughly halfway through the second quarter.

Although our dividend policy is to pay approximately 85% of our distributable earnings on a quarterly basis, this represents a 100% for the quarter. Going forward, you should generally expect us to maximize the amount of our dividend each quarter with a target of 85% of DE.

Finally, our Board approved a $100 million discretionary stock buyback plan during in quarter.

To wrap up, when I look down the road, we believe our investment performance, how are focused on delivering institutional quality products across all distribution channels and the overall brand we've built will drive our growth for the future. We are still in our early days of entering new markets, growing our business.

And once again, I want to thank all of our stakeholders for joining us today. We believe our business to be a very differentiated story in the Alt space with a compelling financial model and we look forward to spending more time with all of you in person in the coming months and quarters.

With that, operator, can we please open the line for questions?

[Operator]

[Operator Instructions] Our first question comes from the line of Alex Blostein with Goldman Sachs.

[Alex Blostein, Goldman Sachs]

Great. Thanks for the question. Good morning, everybody and congrats in the first quarter. So, first, I was hoping to start with a question around Direct Lending. Obviously, the pace of origination has been running well above historical levels and from the RCC call, it sounds like that base to sort of continued so far into the third quarter.

So, I was hoping you could expand on your sort of expectations for origination pace for the rest of the year. How Owl has been differentiating itself in the marketplace to make sure you gain sort of incremental share deal flow without taking excessive risk?

And I guess, secondly, Alan, to your point about the fact that it will take only three quarters to deploy sort of the shadow AUM here. How are you thinking about the sources of additional fundraising here to make sure that you have enough sort of dry powder to meet the need of the channel?

A- Alan Kirshenbaum

Great. Well, listen, thank you, Alex, for the questions. So, first off, the Direct Lending pace as you just observed really continues very robust. We continue to see activity this quarter that's at least consistent with the levels of last quarter and while the timing in any given quarter what’s happening, what will close in terms of a new level and what'll will happen in terms of repayments it's hard to know with precision.

We're continuing to see elevated activity to the kind of durability question, again, understand that there is a notable rhythm to the pace of a certain number of investments. The backdrop is extremely strong. If you look at fundraising in private equity, we're now looking at probably about a 1.5 trillion from the dry powder and $400 million of year-to-date private equity fundraising, which is just tremendous. That is the demand equation for our product.

And our product in fact is really taking share within the overall financing environment. So, if you think about just be simple for a moment with that $1.5 trillion using the $1 of leverage $30 equity that's a $1.5 trillion of demand just for new financings coming into the marketplace predictably in some fashion over the coming years.

And we are well positioned to take I think substantial advantage of that. As you’ve almost seen the size of financing that we are doing or growing, we're now taking there is now multi-billion dollar unit tranche financings. That's a pretty new phenomenon, but I think a durable one in all likelihood.

Add to that, the trillions of existing leverage financing in the non-investment grade market which have to be refinanced and really the TAM, so to speak, I mean, really not the constraint. It really has to do with, as you point out, maintaining our very, very careful discipline, which has been our hallmark as you obviously saw in our comments, our performance since inception on that is running platform-wise at about five basis points.

Really, I think that's to breed right and there. So maintain that discipline is key. We have every intention to maintaining that discipline, but we continue to see very elevated activity levels currently and certainly think there is probably underpinnings for that to continue for years to come.

[Doug Ostrover, Chief Executive Officer]

And, hey, this is Doug Ostrover. Maybe I can comment just on growth in general in answering your question specifically about raising additional capital. Certainly, our biggest growth initiatives - our business is relatively simple and I like to think about it as we have five things we're trying to accomplish in the near term.

So one is, you mentioned this, get the $8.5 billion of assets that we've raised, we're not currently earning management fees on yet get that deployed. Marc talked about the elevated deployment levels. We think that will continue for the rest of the year hopefully for some time. And Alan touched on this that's one $120 million of incremental revenue per year.

Obviously, Fund V, which Mike will touch on at some point, I'm sure in Q&A, but our deployment there has been excellent. The existing funds, both the funds III and IV, the performance has really been exceptional. So, highly confident in that fund raise.

In terms of replenishing our capital, I think you know and we can spend some time on this if you'd like, we're getting ready to launch a retail product into the wire houses. And again, I'd like to maybe further in Q&A spend a little more time on this. It's called our core income fund.

And I think Blackstone has been raising $4 billion a month. We've been raising about $100 million a month and we think it's - we're early in the process. But we were hopeful we can exceed people's expectations with what we can do in retail. Then, I think you we have a number of BDCs that we're earning discounted fees on until they list.

Alan touched on our tech fund at some point that will go public and we think we have the ability to go out and raise additional BDCs. So, we're cautiously optimistic on what we can do in the next number of quarters. But, I think on those five initiatives, we are highly confident that you'll see us execute over the next three or four quarters on each of those.

[Alex Blostein, Goldman Sachs]

Great. Thank you, both. And maybe, just touching on the other side of the ledger and talk about the GP Solutions business and Dyal. So, Mike, I think this is probably for you, but one of the questions we get the most from investors is really about the addressable market for Dyal here.

Given the fact that the markets obviously very large, you mentioned $7.5 trillion in AUM. But as you think about what's really addressable for Dyal, and more importantly, how much in fee-paying AUM relative to your sort of $19-ish billion today in the second quarter. Do you think you will require to support the growth, I'll call it - call it, over the next three to five years to support the growth in this GP Solutions space?

[Michael Rees, Co-President]

Yes. Good morning, Alex. Thanks for the questions. We look at the GP Solutions space as one of the most underpenetrated spaces in all of alternatives. When you - when we estimate the TAM, the addressable market, we think it's about $500 billion of total capacity now growing to $750 billion over the next five years.

When you look at our fund, which we can come back to our current fund – we are raising Fund V, targeting a $9 billion cover and our competitors, which are substantially smaller and they are really only two major competitors. You are looking at a tiny, tiny percentage of the addressable market being met by the existing fund.

So, we see a really long runway, not just Fund V, but on into VI, VII, and VIII. And a lot of conversations that have been developing and percolating for years. It's quite often that a relationship of ours will take anywhere from three, four, five years to ultimately result in a GP stake. So, we have a really long runway and our eyes on the horizon and we think there is plenty of capital to raise and deploy over time.

[Alex Blostein, Goldman Sachs]

Great. Thanks again. And then, maybe be the last question for me. Doug, you mentioned this, but clearly there is a lot of interest and appetite in the retail channel for private markets funds. It feels like in the last two to three quarters, that's been a theme that folks have talked about for one time, but it feels like it's sort of finally here.

So, maybe spend a minute sort of what differentiates Blue Owl and your credit products in the retail channel? And sort of how you expect that to evolve over the next few quarters and years?

[Doug Ostrover, Chief Executive Officer]

Okay. Well, if it's okay with you, and I just want to spend a moment on retail in general, because, I know you are familiar with what we've built. But I am not sure everybody else on the phone is. We've been in the retail space since we've launched and we've had really good success in the channel. As I mentioned, we're currently in the market with our core income fund.

Our sales have exceeded over $100 million month. But most of those sales have been in the independent broker/dealer channel. As I mentioned now we are expanding into wire house distribution. And then, we're expecting that to go well. But at this point, we are reluctant to get ahead of ourselves in terms of predictions. But I'm hopeful over the next few quarters we'll have some good news there.

But if you take a step back, there is no doubt. Retail is a huge opportunity. We believe it's as large as the institutional market, but with much lower adoption rates. I mentioned Blackstone earlier that had tremendous success. And I think I mentioned it was $4 billion a quarter.

It's actually they're raising $4 billion a month between their non-traded REITs and their credit product. So it gives you a sense of the numbers that can be achieved in these channels. So, we think our products are very competitive. Marc talked about our lending performance. We think it's a best-in-class. We actually think it's tough yet.

From day one, we built our platform to serve the institutional and the retail investors in the same way. This is different than many of our peers. If you look at what we’ve built, retail and institutional own the identical securities at the same price. And we think that makes a big difference in terms of what the retail experience will be.

Our goal is to bring a true institutional experience to that retail market. So, we are really optimistic as it relates to retail. But again, we are not ready yet to make any big predictions. To give you an idea of scale, today, we have over 40 professionals focused exclusively on retail and I think by the end of the year, that number will approach 50 professionals. We're also building out our Asian and European retail distribution and we expect to raise a significant amount of capital abroad.

And then finally, we're currently only working on distributing lending products through retail and Dyal has some strategies that we think could fit really well in the retail channels. They are certainly the market leader and so, that's something that we'll also be spending a lot of time on, as well.

[Alex Blostein, Goldman Sachs]

Perfect. Well, thank you very much for taking all my questions.

[Doug Ostrover, Chief Executive Officer]

Thank you, Alex.

[Operator]

Your next question comes from the line of Patrick Davitt.

[Patrick Davitt, Autonomous Research]

Hi good morning, guys. From Autonomous Research. So I guess, that you are stuck with the 2021and 2022 guidance, but if we take the $180 million of 2Q management fees, compared to the guidance like $956 million I think for the year, which is you are tracking well below that. So, could you help bridge the gap between the kind of 2Q management fee runrate and sticking with the 2021 guidance?

[Alan Kirshenbaum, Chief Financial Officer.]

Sure. Of course, Patrick. Thank you. It’s Alan Kirshenbaum. So, the annual guidance - we are right on track for the quarter of where we expect it to be for management fees. You can't take – you can't take our annual numbers and divide by four for a growing business.

We should expect each quarter putting aside one-time items. Each quarter revenues and FRE and DE will be higher than the previous quarter with the growth that we've projected out and we expect of our business for to the next year, for the next few years.

So, this quarter, we right on top of our management fee numbers that we expected. Expenses came in a little lower and transaction fees came in a little higher. And so, that's really the headline story for the quarter. And what you should expect is, when - and Marc touched on this earlier, when we have elevated originations on the Direct Lending side of our business, you should expect higher transaction fees and the same goes the other way as we have lower originations you should expect lower transaction fees.

And so, 2Q, as Craig and I were on our call last week for Owl Rock Capital Corporation, we talked about record numbers for 2Q and we noted that 3Q will be roughly the same or it could be higher than 2Q.

So, as we think about the 3Q numbers for Blue Owl, we could have the opportunity to have elevated transaction fees again in three 3Q.

[Patrick Davitt, Autonomous Research]

And is there still a fee holiday issue without Fund V, could you remind us of that?

[Alan Kirshenbaum, Chief Financial Officer.]

Of course. Yes, there is a fee holiday. So, Michael talked about $9 billion as our target fund raise for Dyal Fund V. We've closed that. That is subject to a fee holiday about $2 billion. And we expect there could be another $0.5 billion give or take. And so that fee holiday is for initial closures or those investors who were around the first close, but couldn't get closed for the first close. That runs through the end of this year.

[Patrick Davitt, Autonomous Research]

Got it.

[Alan Kirshenbaum, Chief Financial Officer.]

And so, those will - all investors in Dyal Fund V will pay the full 2% fee starting Jan 1.

[Patrick Davitt, Autonomous Research]

Got it. Very helpful. Great. Doug, you mentioned, I think the retail product running it about $100 million a month. Am I right that that's basically just one month at this point?

[Doug Ostrover, Chief Executive Officer]

No, we have been - that's what we've been running for a while. But that's in the independent broker/dealer channel. And we are just getting ready to go into the wires. It will be in a few big wire houses between now and the end of the year. And then, I think you'll see this syndicate grow in a very meaningful way starting January 1. So, hopefully, as I said, we'll a lot more to talk about in the upcoming quarters.

But, we're cautiously optimistic. And based on our track record and the feedback we're getting so far, we're expecting it to go relatively well.

[Patrick Davitt, Autonomous Research]

Got it. Thanks. And last one I have is a little bit broader. But - and I know it's early days and who knows what's going to happen and do you see? But do you guys have any thoughts on how a change in the carried interest tax rate could have on the cash flow of the Dyal portfolio? Is there any concern that could meaningfully impair the yields on those vehicles?

[Michael Rees, Co-President]

So, thanks Patrick. It's Michael. What really happens, when different tax legislation is proposed is that you have a tremendous amount of thinking and activity from the owners’ perspective in planning out they will own and continue to run their businesses and it generates incremental activity, not just a pull forward of some conversations that may have been longer in duration, but also a number of players that get off the fence and do want to think about GP stake deals that wouldn't have actually done so.

So, we see a very strong uptick in the actual volume of opportunities for us, both near-term and medium-term. But as it relates to our investment yield, our investors are predominantly passive across all of the Dyal Funds. And so for that reason, look, at least any of the carriers interest legislation is proposed, to-date, it wouldn't impact a passive investor in a Dyal Fund.

So, it actually continues to have very attractive cash flow profile. It wouldn't be impacted or impeded by anything that's currently been proposed in Washington or quite frankly any of the European districts or jurisdictions, as well.

[Marc Lipschultz, Co-Founder and Co-President]

And Patrick, this is, Marc.

[Patrick Davitt, Autonomous Research]

Go ahead.

[Marc Lipschultz, Co-Founder and Co-President]

I am sorry. To follow-up a thought and just a refresher which you know is to be true, but for Blue Owl shareholders, the underlying yields and performance in our products, whether on the Direct Lending side of the Dyal side within recent ranges really don't matter.

Remember, carried interest is zero percent of the revenues of Blue Owl. And so, while it is certainly relevant that we keep a close eye on it as it bears on delivering performance. And as you know Dyal Fund V, for example, is currently running over 60%. So I think we're feeling very good about that performance.

But that performance in earnest to the benefit of the LPs from a Blue Owl shareholder point of view, we are the picture shareholders for the SaaS offer we get paid a recurring fee to manage those products on a permanent basis.

[Patrick Davitt, Autonomous Research]

Right. Got it. Thank you.

[Operator]

And at this time, there are no further questions. I will turn the call back over to Doug Ostrover for closing comments.

[Doug Ostrover, Chief Executive Officer]

Well, thanks so much everyone. It was a treat having some time to speak with you today. We look forward to working closely with all of you and hopefully continuing to seed your expectations. Thanks again.

[Operator]

Thank you. That concludes today's conference call. You may now disconnect.