Blue Owl Capital Inc

NYSE:OWL

Earnings Call Transcript 2022-Q2

[Operator]

Good morning. My name is Joseph, and I will be your conference operator today. At this time, I would like to welcome you to the Blue Owl Second Quarter 2022 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will a question-and-answer session. [Operator Instructions]. Ann Dai, Head of Investor Relations, you may start your conference.

[Ann Dai, MD & Head of IR]

Thanks, operator and good morning to everyone. Joining me today are Doug Ostrover, our Chief Executive Officer; Marc Lipschultz and Michael Rees, our Co-Presidents; 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-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'd also like to remind everyone that we'll refer to non-GAAP measures on the call, which are reconciled to GAAP figures in our earnings presentation available on the Investor Resources section of our website at blueowl.com.

This morning, we issued our financial results for the second quarter of 2022 and reported fee-related earnings, or FRE of $0.14 per share and distributable earnings or DE of $0.13 per share. We also declared a dividend of $0.11 per share payable on August 29th to shareholders of record as of August 22nd. During the call today, we'll be referring to the earnings presentation, which we posted to our website this morning, so please have that on hand to follow along. With that, I'd like to turn the call over to Doug.

[Douglas I. Ostrover, Co-Founder & CEO]

Thank you, Ann and good morning, everyone. As you can see on Slide 7 of our earnings presentation, we reported yet another strong quarter of results for Blue Owl with AUM up 91%, management fees up 63%, and FRE up 52%, all from the second quarter of last year. We continue to experience growth across all verticals, underpinned by secular tailwinds, demand for our differentiated strategies, and expansion of Blue Owl's distribution platforms globally. And our significant permanent capital base accounting for 92% of our management fees in conjunction with our 100% FRE based earnings create resiliency and stability in our financial profile.

Many of you were either in the audience or listening via webcast, when we had our Investor Day a couple of months ago. And when I think back on the key messages from that day, the business that you heard us describe is one that really stands out during markets like the one we're seeing now. And for those of you that weren't able to tune in for Investor Day, we talked about three key milestones for our business; raising $50 billion of fee-paying AUM across 2022 and 2023, achieving after-tax DE of $1 billion in 2023, and paying $1 dividend per share in 2025. We have always said we're striving to build a different type of alternative asset manager. We want to give you growth that is better than our peers, but with downside protection and absent the volatility of carried interest running through our financials. I think you've seen that clearly shown in our results this quarter, and I expect that to play out even more next quarter. So we look forward to continuing to demonstrate the strength of our differentiated model. Our view has always been that investors should appreciate and ascribe higher value to stable, steady and growing management fee streams. And we are now getting the chance to display that stability against a volatile and challenging market backdrop for our peers.

With that in mind, let me first offer some commentary on the broader market environment and Blue Owl's positioning before I cover our second quarter results. In a continuation of the trends we saw during the first quarter, inflation, interest rates and global GDP growth have remained in the spotlight, driving ongoing public markets volatility. This is exactly the type of environment where we are able to differentiate our business model and the value of our strategies. At the Blue Owl level, we have patient and permanent capital and resilient management fees, providing underlying support to our existing earnings profile even as we continue to grow, the layer cake analogy, and we anticipate a net positive impact to earnings as rates rise, particularly for our direct lending business, where Part 1 fees benefit from higher rates.

At the strategy level, that same permanent capital allows us to provide flexible certain financing solutions to sponsors, corporations, and alternative asset managers during a time when liquidity is scarce and public markets are closed are much more expensive than they used to be. And for the investors in our strategies, our products offer attractive qualities in volatile uncertain markets, income generation, downside protection, and structural inflation hedges. All this to say, we feel very well positioned to navigate the current market environment. Pipelines remain robust across the business as we continue to see market share come our way in direct lending despite lower industry M&A volumes and across our businesses. We believe our scale and capital base create meaningful competitive advantages. This is one of the most favorable environments we've seen for direct lending since our inception seven years ago. and we fully intend to capture the attractive risk-adjusted opportunities we're seeing.

Moving on to our second quarter results, we continue to demonstrate steady and robust growth, with management fees growing 14% quarter-over-quarter and 63% year-over-year. Fundraising for the quarter was well diversified with over $7 billion of capital raised across strategies from both institutional and private wealth investors. Keep in mind, that's up from $1.2 billion in the second quarter of 2021. That brings our last 12-month equity capital raised to $17.3 billion for organic growth of 28%.

As we mentioned during our recent Investor Day, we launched our new wire house distributed tech lending product, ORTIC during the second quarter, closing on over $700 million through August 1st, primarily driven by one wirehouse in one geography and we are in the process of expanding the distribution for that product substantially over the coming quarters. This is in addition to the multiple closings we've had for our other tech lending BDC, ORTF2, which has now exceeded $3 billion of equity and which remains in the market and we continue to see good traction for a diversified lending strategy as well. Through August 1st, we have raised an additional $2 billion across direct lending of which private wealth constituted over half.

In GP Solutions, we raised $3 billion for Dow Fund V during the quarter and through August 1st, we've raised the subsequent $200 million to take the fund to approximately $10 billion. We anticipate wrapping up fundraising later this year which we expect will bring the fund to over $10.5 billion. And in real estate, we expect the second half of the year to be very active as we come to market with new products and next vintages of existing clients. What we hear often from our investors is that the defensive nature of our strategies and their focus on income generation and principal preservation are highly desirable during good markets, but they stand out even more during challenging environments. And we've been active in deployment across all of our strategies, moving us closer to the next big fund raise for each of those strategies.

Looking ahead, the key messages that we've highlighted over the past year and most recently at Investor Day, should continue to resound in today's market. We see meaningful runway to raise capital across institutional and wealth channels and in our view, we have the right strategies, the right people, and deep investment expertise in place to invest that capital well. Permanent capital remains the cornerstone of our business, creating competitive advantages and supporting growth, and with each successive dollar of new assets raised we will continue to add new layers to Blue Owl's earnings power. With that, I'd like to turn the call over to Marc to give you an update on our direct lending and real estate businesses. Marc?

[Marc S. Lipschultz]

Great. Thanks so much, Doug. I'd like to pick up where Doug left off in his earlier comments about the terrific opportunities we're seeing in our direct lending business. We've been able to generate strong growth in that business through very constructive market environments, but these choppy markets are even more advantageous for us to deploy capital and are especially where direct lending strategies shine. As a scaled player in direct lending with patient permanent capital, we are well positioned to provide much-needed capital solutions at a time when liquidity is scarce and our market-leading position in tech lending has served us well. We continue to lead a number of large finances for large software firms and attractive spreads and low loan to values. Our continued capital formation puts us in a position to lead the biggest deals happening in the market today such as Zendesk and Anaplan.

So to use a recent example, we were recently named the admin agent on the senior credit facilities for Helman Improvement and Premier's acquisition of Zendesk, a scaled and fast-growing market leader in the customer support service market for midsize and enterprise customers. Zendesk's revenue is highly recurring with attractive retention metrics driven by a strong value proposition and expansion within its existing customer base, precisely the type of characteristics we look for when we've enhanced a software company. So for the first half of the year, we looked at nearly 50 deals with facility sizes in excess of $1 billion, exceeding the over 40 investments of that size, we evaluated in all of 2021 for the full year. Our pipeline remains very robust as sponsors sit on meaningful dry powder and continue to find attractive opportunities. We're also having conversations with various non-sponsored private companies looking for financing solutions. This is an excellent market with favorable supply-demand characteristics for us.

For the second quarter, as you can see on Slide 13 of the earnings release, gross originations of $7.6 billion were up nearly 50% year-over-year and over 55% quarter-over-quarter. For the last 12 months, gross originations in direct lending have been $28.9 billion, more than double what we originated in the prior 12-month period. Although we expect capital markets activity will likely remain under pressure in the near term, we're cautiously optimistic that the back half of this year will remain quite active for our direct lending strategy. Credit quality across our direct lending portfolio remained very strong, and we are proud to say we have not had a single new nonaccrual for default in the quarter.

Our annualized net realized losses have remained at approximately 5 basis points since inception. And we continue to focus on downside protection, with a weighted average loan to value in the low 40s across our direct lending portfolio and in the low 30s across our tech portfolio. The interest coverage ratio across direct lending is roughly 3.3 times, we expect that even with a further 200 basis point rating, interest coverage will remain above 2.5 times. So our portfolio is very helpful. So far, we have seen great resiliency in the ability for our portfolio of companies we finance fast costs along to their other customers, protecting their businesses for margin compression.

Now turning to performance for the 12 months, the direct lending portfolio appreciated 8% and for the second quarter, while March were negative due to spread widening on how we value our existing loans as a result, our portfolio continued to fundamentally perform very well. Let me take a second and comment on how we think about mark-to-market. You've heard me say this before, but it does bear repeating. While we care very deeply about the performance of our products, and it very much matters to us and the investors and our funds for this particular audience, performance and in particular, unrealized mark-to-market is not really impactful to our shareholders. As you saw during the quarter, there was deminimis impact on our management fees as a result of marks, as evidenced by the management fee growth in direct lending during a period in which public credit markets traded off significantly. Said another way, what we ultimately care about is good credit call and that we get paid back on our investments, and everything in between is simply noise. Unrealized marks from changes in spreads do not impact the overall performance of our investments or our dividends to our investors.

Now moving on to fundraising, we raised $3 billion direct lending strategies during the second quarter, of which wealth constituted $1.9 billion. This incorporates $500 million close for our new tech income fund and ongoing clauses for our core income fund. Furthermore, we've experienced very limited tenders in our core income fund. During the second quarter, investors requested tenders for a deminimis $28 million which compares to $10 billion of AUM in this fund. Subsequent to the end of second quarter, we closed an additional $2 billion across direct lending and more broadly, we continued to expand the distribution for all of our direct lending products flow.

Now moving on to our real estate business. As we spoke about at Investor Day, we believe we are in an attractive investment environment and continue to see tailwinds for net lease as corporate borrowing costs continue to increase. As we stand here today, we have roughly $1.5 billion in transaction volume under letter of intent or contract close and a near-term pipeline of more than $25 billion of potential loss. As of today, we have invested over 55% of the equity in our fifth closed-end fund, putting us on track to launch our real estate Fund VI later this year. The pipeline for sale leasebacks is very robust, and the volatility of the markets continues to create opportunities. We've recently picked up approximately $900 million of broken deal flow at an average cap rate that is meaningfully better than that of the prior potential market [ph] but we expect to continue capitalizing on similar opportunities in a challenging financing market.

In addition, we launched our latest open-ended product, Net Lease Trust. We're currently in one large wirehouse with this product today, with an expectation to have the first close in the third quarter, and we will continue expanding. We are very excited about this net lease strategy generally and believe we have a very differentiated approach. Investors in this strategy will be able to access the advantages of the net lease structure, which targets an attractive 7% plus yield, primarily investment-grade counterparties with beneficial tax attributes, and we think this compares favorably to other strategies currently out there. You've heard us say this multiple times now, but I think it bears repeat; income generation, inflation litigation, and downside protection are what investors are looking for in markets such as these, and our net lease strategy provides just that.

Since our real estate strategies inception, we have never had a tenant miss a single rent payment, go bankrupt or default on a lease, and we've generated a net IRR of 26% on average across our fully realized closed-end funds and gross appreciation across our real estate portfolio of 6.7% for the second quarter alone, and 30.4% for the last 12 months. These are strong risk-adjusted returns for the underlying credit profile of these portfolios. As you can tell, we are quite excited about our track record and strategy given the large opportunities that we see. So with that, let me turn it to Michael to discuss GP Capital Solutions.

[Michael Rees]

Thank you, Marc. We continue to see a very constructive fundraising and investing environment for our GP Capital Solutions business, particularly given our positioning as an attractive and scaled source of capital for growing private managers. Continued growth across the alternative asset manager space not only drives our investable opportunity set as more firms seek growth equity, but it also drives cash flow from our partner managers as they continue to raise and deploy capital.

As Doug mentioned earlier, during the second quarter, we closed on roughly $3 billion of new commitments for Dial Fund V, bringing total commitments to $9.8 billion. So far in the third quarter, we've raised an additional $200 million taking the fund to $10 billion. We are excited about the strong momentum and anticipating wrapping up fundraising later this year, which we expect will bring the fund to over $10.5 billion, exceeding the $9 billion we had on the cover. At $10.5 billion, the size of Fund V will be a record in the GP stakes industry and nearly twice as large as the next competitor. This puts us in a position to continue deploying capital into large firms with leading track records. As we've highlighted at our Investor Day, our market share of deals above $600 million in check size has been approximately 88%.

We remained active on the capital deployment front as well, adding two positions in leading firms that are new partner managers as well as three commitments to firms we have funded previously. As you can see on Slide 16 of the earnings presentation, this brings total commitments for Dial V to $7.4 billion. Having already surpassed Fund V's target size by $1 billion as of August 1st and with additional capital expected to close this year, we anticipate the launch of Fund VI towards the end of 2023 with fees turning on in 2024.

Performance across the Dial funds remained strong with gross IRR of 31% for Fund III and 112% for Fund IV. Looking ahead, we're very optimistic about what the next 12 months holds for the GP Capital Solutions business. Not only is Dial well positioned within a very small set of firms that have scale and capability to provide growth capital to fund these managers, but we continue to partner with managers who are the greatest beneficiaries of flows to alternatives and GP consolidation. Overall, we see ample opportunities to take advantage of this dislocation in the current market environment. With that, I will turn things over to Alan to discuss our financial results.

[Alan J. Kirshenbaum, CFO]

Thank you, Michael. Good morning, everyone. I'm going to start off by walking through the numbers for this quarter, and then I'll touch on a few other items I want to cover today. I'll be making references to pages in our earnings presentation, as Ann mentioned, so please feel free to have that available to follow along. Okay, let's start off by covering our quarterly results. We closed our acquisition of Wellfleet on April 1st, so you will see those numbers included in our results today. Our second quarter was another quarter of strong growth for our business. FRE revenues are up $45.2 million or 17% from last quarter and up 51% from the second quarter a year ago. Management fees are up $36.7 million or 14% from last quarter and up 63% from the second quarter a year ago. Broken down by divisions direct lending management fees are up $12 million or 9% from last quarter and 39% from the second quarter a year ago. GP Capital Solutions management fees are up $22.6 million or 21% from last quarter and up 70% from the second quarter a year ago. When you adjust for catch-up fees in Dial Fund V, we are up $12.8 million and real estate management fees are up $2.1 million or 12% from last quarter.

FRE is up $25.7 million or 15% from last quarter and up 52% from the second quarter a year ago. FRE margins are roughly flat from last quarter at approximately 62%. We expect this will tick down for the second half of this year due largely to distribution costs we expect to book in the remainder of the year. Our ratio of compensation as a percentage of revenue is roughly flat to last quarter at 27%. And we announced a dividend of $0.11 per share for the second quarter, up from $0.10 per share last quarter. All of this is in line with our expectations and what I noted on our earnings call last quarter and in February, we continue to be on track with reaching our 2022 goals of $1.3 billion of revenues and an FRE margin of 60%.

I wanted to spend a moment on our fundraising efforts as we put up very large numbers over the past four months. In the second quarter, we raised $7.2 billion and since quarter end, we have raised an additional $2.2 billion. So in total, we have raised $9.4 billion of equity commitments from April 1st through today. I'm going to break down these fundraising numbers across our products, so everyone has more transparency here. In direct lending, we raised $5 billion. $1.8 billion was raised for our core income BDC, OR CIC, which is now over $4.5 billion of equity. $1.7 billion was raised for ORTF2, which is now over $3 billion of equity, surpassing the size of ORTF. As a reminder, we earn fees on total assets for these two products which, including ORTIC, we have now raised approximately $7 billion of equity. And with a turn of leverage, that's approaching $15 billion of total assets for our tech dedicated products, $700 million in ORTIC, our Technology Wealth platform products and $500 million in CLOs. In GP Capital Solutions, we raised $4.2 billion, $3.2 billion was raised for Dial Fund V and an additional almost $1 billion of co-invest, which is fee free. In real estate, we raised $200 million and are in the process of launching two new products as you heard in more detail from Marc, a few minutes ago.

As it relates to our AUM metrics on Slide 11, we reported AUM of $119.1 billion, fee-paying AUM of $77.5 billion, and total permanent capital of $95.5 billion. AUM not yet paying fees, was $8.8 billion as of June 30th. AUM grew $17.1 billion to $119.1 billion, an increase of 17% from last quarter and a 91% increase from the second quarter a year ago. Fee paying AUM grew $11.9 billion to $77.5 million, an 18% increase from last quarter and an 81% increase from the second quarter a year ago. Both metrics driven primarily by deployment of capital and direct lending, capital raised in Dial Fund V, and when looking at the growth from a year ago, the addition of our real estate and CLO businesses.

Permanent capital grew $9.9 billion to $95.5 billion, an 11% increase from last quarter and a 68% increase from the second quarter a year ago, driven primarily by deployment in direct lending, capital raised in Dial Fund V, as well as the addition of our real estate business when compared to a year ago. AUM not yet paying fees was $8.8 billion, including $6.4 billion in direct lending, $0.8 billion in GP Capital Solutions, and $1.6 billion in real estate. This AUM corresponds to an expected increase in annual management fees totaling over $105 million.

As Marc highlighted earlier, we had another strong quarter of deployment in direct lending, with gross originations of $7.6 billion and net funded deployment of $4.6 billion. This brings our gross originations for the last 12 months to $28.9 billion with $16 billion of net funded deployments. So as it relates to the $6.4 billion of AUM not yet paying fees in direct lending, it would take us less than two quarters to fully deploy this based on our average net funded deployment pace over the last 12 months.

Turning to our balance sheet, we continue to be in a strong capital position. As you can see on Slide 22, we currently have over $1 billion of liquidity with an average 14-year maturity and low 2.9% fixed cost. So to wrap up here before getting to Q&A, there's a few last items I want to cover. On distribution costs, last quarter, I talked about a large onetime upfront distribution or placement fee expense, on certain equity dollars raised. Some of that we closed during 2Q and the rest, the majority of what I was referring to last quarter will close in the second half of the year. During the second quarter, we had distribution costs elevated by upper single-digit millions versus the first quarter, and the majority of what we expected will now be booked in the second half of the year.

On our Investor Day we held in May, we put out some financial milestones we wanted to achieve. These milestones included achieving $1.3 billion of revenue this year and a 60% FRE margin, as well as milestones for 2023, which included doubling our 2021 revenues to $1.8 billion, hitting $1 billion of after-tax distributable earnings, and raising $50 billion of fee-paying AUM during 2022 and 2023 combined. As I noted earlier, although we're all facing a pretty choppy market environment with strong headwinds, we are on track with our 2022 goals, and I'll note here, we are also on track with our 2023 goals, including our $50 billion fundraising goal. Of the $50 billion, we have raised $10.5 billion through June 30th and an additional $2.2 billion through today.

At the end of June, we were added to the Russell 1000 and 3000. That was a process we have been very focused on being a part of, and we're glad to be included in these indices. Both on last quarter's earnings call as well as at Investor Day, I commented on the rising rate environment we're in and the potential impact that could have on our business. I've included here again on Slide 14 the impact of rising rates to our direct lending business. We are expecting to see a lift in our management fee line in the third quarter due to rising rates as well as another possible lift in the fourth quarter. If the Fed continues to raise rates, we would expect continued increases to our management fee line due to an increase in Part 1 fees across our BDC business.

So summing it all up, we are very pleased with our results again this quarter, delivering double-digit growth quarter-over-quarter in all of our key metrics, AUM, fee paying AUM, FRE revenues, FRE and DE. We are hitting in all of our key metrics, and we continue to have very exciting growth plans ahead of us as outlined during our Investor Day, which we feel we continue to be well positioned to execute on. Thank you again to everyone who has joined us on the call today. With that, operator, can we please open the line for questions.

[Operator]

[Operator Instructions]. Your first question comes from the line of Alex Blostein. Your line is open.

[Alexander Blostein, Goldman Sachs]

Hey, good morning everybody. Thank you for the question. So maybe we could start with just more details around the retail channel. Obviously, it's a huge growth opportunity and a focus for you guys and nice to see traction there. Environment has changed pretty materially, but it doesn't seem like there's been a lot of negative impact on you guys just based on some of the reduction comments that you had earlier in the prepared remarks. So I was hoping to get a better sense in terms of how much of the net flows are coming from sort of existing platforms versus maybe some of the newer ones that you've added, just to get a better sense of kind of same-store sale dynamics? And then you mentioned a lot of numbers, so I was hoping to unpack this a little bit. But the $2 billion that you raised so far in direct lending in the third quarter, I just want to double check that that's effectively through early August, and maybe you can give us a sense of sort of the open-ended products versus kind of continued fund rate towards the up to?

[Douglas I. Ostrover, Co-Founder & CEO]

Why don't I -- good morning Alex, why don’t I have Alan start on the $2 billion direct lending piece, and then I can address retail.

[Alan J. Kirshenbaum, CFO]

Thanks, Doug. Hey, good morning Alex. The answer is yes, it grew effectively today. So it includes the August 1st close as well as the July 1st close for our wealth distributed products.

[Douglas I. Ostrover, Co-Founder & CEO]

And then let me just start by saying in fund raising this quarter, we were really pleased. It was a great quarter. We raised $7.2 billion. I think, as Alan mentioned, $3.6 billion of that came from wealth, and that's versus $2.2 billion in the first quarter. And I think I have this number right, it's about $1.3 billion has been raised from wealth, quarter-to-date. So continue to do well, definitely seeing a little bit of weakness. We're reiterating our $50 billion of fundraising goal for the next 2022 and 2023. We mentioned that our tenders have been deminimis, just $28 million in the second quarter out of $10 billion. And so over the intermediate and longer term, our views haven't changed. We're confident in our ability to continue to raise capital from wealth. And I think the products we're offering in the channel have attributes that really resonate, lots of income generation, downside protection, positive leverage to rising rates, especially in direct lending.

I think at our last call, we talked about the wealth channel and how allocations thoughts remain very low. In Investor Day, you'll remember, we put up a number that we thought the wealth channel would control $220 trillion by 2025, and that an incremental 20% of that could move into the alternative market, that's $40 trillion to $50 trillion. So when we talk about wealth, our enthusiasm hasn't waned at all. In fact, we're more excited than ever. We have spent a lot of time building our brand. Our distribution now is truly global as good as anyone in the market. You know we've been at this since the day we launched approximately seven years. So I think we're in a really unique position to not only continue to maintain market share but to grow market share in that channel for the next number of years. Just to reiterate, super excited about it and hopefully, Marc mentioned this, you'll start to see that as we roll out our nontraded REIT.

[Alexander Blostein, Goldman Sachs]

Great, thanks for all that color. My second question is probably for Alan, around the G&A commentary on the distribution cost, understanding that, that could be pretty lumpy, obviously, based on this quarter results and sounds like that number is coming up next quarter. But I guess, a) maybe you could just kind of help us clean up what you actually expect G&A dollars to be for Q3, Q4, just to get some of the noise out of the way. But more importantly, as you guys are expanding into more distribution platforms, can you just kind of help us think about the framework of how holistically distribution costs work for you guys, whether it's a basis points on retail AUM or some framework around that would be helpful?

[Alan J. Kirshenbaum, CFO]

Yes, of course, Alex. Thanks for the question. So look, when I think about placement costs for the rest of this year, for 3Q, we could expect $20 million to $25 million incremental from our 1Q level. And for 4Q, we could potentially expect and look, this is subject to obviously to where we end up actually fundraising and where fundraising levels end up in 4Q, but an additional $15 million to $25 million incremental from 1Q. Please don't extrapolate the amount of fundraising that we did in 2Q relative to the placement cost and extrapolate fundraising to 3Q and 4Q. The costs vary and I'll talk -- I'll answer your second question in a second. The costs vary quite a bit across different wealth and wirehouse platforms. And just to pull the lens back for a minute, although these -- some of these numbers are big numbers for our G&A line, I would pay these costs every day of the week, right. I've talked about last quarter, if we raised, let's say, $1 billion as an example and we pay, let's assume $20 million to $25 million in placement costs for that, and that's blended across again, different wirehouse and wealth platform costs, that would over time, equate to roughly $30 million or $40 million of annual management. So it effectively, it does pay itself off in one year. And so to answer your second question, there are some platforms that charge everything upfront. There are some platforms that charge a small amount upfront and an annual trail over time. Generally speaking, we could pay 2% to 4% either upfront or over time, depending on that platform.

[Alexander Blostein, Goldman Sachs]

Got it. But just I guess to close this topic, the elevated distribution costs that you guys can see from placing these products in the back half of the year, is that largely a 2022 dynamic because you're getting the new platforms, and you obviously have RCF2 and a couple of other large kind of launches or do you think the distribution expense run rate could ultimately be higher in 2023 as well?

[Alan J. Kirshenbaum, CFO]

I think we're going to continue to ramp up what we're doing across the retail and wealth platform channels. And it certainly could be something that you'll see for the foreseeable short and intermediate term. And look, that -- with that said, keep in mind in my prepared remarks, I commented on where we think we're going to be in 2022. Our guidance continues to be spot on with where we expect to end the year, right. The $1.3 billion of revenue, 60% FRE margins, which equates to $780 million of FRE, and the 2023 goals that we put out there, the milestones that both Doug and I commented on, on the call, in our prepared remarks, we continue to feel very good about those milestones, and we continue to feel that we will achieve those milestones. Everything we just talked about for placement costs is already embedded in our expectations for 2022 and 2023. So there's nothing -- there's no new incremental distribution costs here that we see today or in the foreseeable future that would change the guidance we've already given.

[Alexander Blostein, Goldman Sachs]

Very helpful, thanks so much.

[Alan J. Kirshenbaum, CFO]

Of course. Thank you. Thank you very much, Alex.

[Operator]

Your next question comes from the line of Glenn Schorr. Your line is open.

[Glenn Schorr, Evercore ISI]

Hello, thanks very much. A question on the direct lending side. I think I got the numbers right. You mentioned 50 deals in the first half, over $1 billion versus 40 of all last year that you've looked at. So the question I have is if you could help peel back the onion of what is it that's driving this higher activity level because it's not just you, it seems like that marketplace is expanding, you happen to be great in it, but is it the deal structures that you can provide the relationships, anything to do with rates, maybe lower capital ratios at banks, just curious on how you're sourcing them and the big picture drivers there? Thanks.

[Marc S. Lipschultz]

Great. Thanks, Glenn. First of all, definitely I want to echo your comment. I think we're great at it. So here's what's happening, we're seeing a continued market share evolution. Look, at the end of the day, there's a very big marketplace out there for capital solutions. And the direct lending is a minority portion of it and will be a minority portion of it probably for a very long time. That said, there's $2 trillion of dry powder in the hands of private equity firms. And just assuming one turn of leverage, that's $2 trillion of incremental demand for financings, plus you got to refinance the trillions of dollars of financing that's already in place in the market.

So from the point of view of where Blue Owl sits, it's a nearly limitless sort of white space, so to speak. And what's happening for us in particular, and as you know, it's not for us alone, the market in total for direct lending, has been growing, and it's been growing for, I think, a few reasons. One, of course, has been the expansion of the depth of the pools of capital we have to offer. So our relevance to the ever larger financing opportunities has changed over the last five years. And that you can see in those same calculations, that 50 deals over $1 billion that we looked at, you go back to, say 2016, there were zero of that scale that were relevant to -- that have been done in direct lending. So it is an evolution of the depths of capital pools.

It's also very importantly, I think most importantly, that we've been able to prove that the model for direct lending, when we started Blue Owl, we really had a view that what we wanted to take was a direct lending business whose legacy had been a lender of last resort, for the companies that sort of couldn't get financed elsewhere and turn it into the lender of first choice for the best companies and the best sponsors. And that meant creating the value proposition. And today, what we call the 3P is, right, predictability, privacy and partnership. People, I think, call them, in many cases, the very best firms, the best companies to say, look, I understand we pay more spread. I understand it's a tougher document, but I really appreciate the value proposition that comes with it. And so today, this year, think about this, we at Blue Owl have led Anaplan, $10 billion plus take private, was announced that we're leading Zendesk, another $10 billion plus take private. Yesterday, you may have seen that Tomarabo announced Ping, we're the lead in financing the Ping take private. So I think you've just seen this model and its value proposition to these world-class companies, world-class sponsor to prove out.

[Glenn Schorr, Evercore ISI]

Okay. I appreciate all that. Whoever wants to take this one, I'm just curious on what factors we should be looking at or what you're looking at that might indicate closer towards listing of the BDCs? Thanks.

[Alan J. Kirshenbaum, CFO]

Sure. Of course, Glenn, we obviously can't comment on the timing of an IPO with an SEC registrant. I would comment that the ORTF portfolio is fully invested, fully deployed, fully levered. Our shareholders are enjoying a great cash-on-cash return, dividend, IRR, the ORCC 3 portfolio is fully invested, fully deployed, fully levered. And ORTF, we're just now continuing to ramp. We've now exceeded the size of ORTF, as I mentioned on the call. But we have a long way to go in terms of deploying that capital. So maybe I'll leave it there, if that's okay.

[Glenn Schorr, Evercore ISI]

Sure. If you're not able to comment on just the factors that lead to it not the timing, in other words, what market conditions might make it more reasonable?

[Alan J. Kirshenbaum, CFO]

Sure. So the factors I just mentioned, certainly is a large contributor towards the timing. So ORCC 3 is a more recently raised product. But ORTF, we raised in 2018. ORCC, we did about a little less than three and half years from the initial close to the IPO, ORTF we raised in 2018. So that's been about four years. The factors, like I said, fully invested, fully deployed, fully levered are certainly a contributing factor. And now we're just looking for a good market environment, which just isn't there right now.

[Douglas I. Ostrover, Co-Founder & CEO]

Yes. I'll just make one quick comment. At the end of the day, we want to give our investors liquidity. They want it. We want to give it to them. But we're all in agreement that we want to do it at a time where we feel really good that when we listed, it will trade well. And we're certainly not in that environment today. There's virtually no IPOs. So as you think about the right environment, think about an environment where it's a fairly robust environment to get IPOs done. And I think we will be one of the firms that list and get a good reception, because it is, as Alan mentioned, it's a mature portfolio doing well. And I think when the time is right, I think our marketplace will find it interesting.

[Alan J. Kirshenbaum, CFO]

Yes. And another factor, just to add maybe one more component is you want a really good portfolio to take to market, really pristine from a credit perspective. And you really couldn't ask for more with ORTF. We've had no defaults, no arrears [ph]. Our portfolio has been performing in an incredible way since inception. So that is certainly another factor when you think about taking something to the market, that's certainly a material component of how we think about it.

[Glenn Schorr, Evercore ISI]

Thank you for all that.

[Operator]

Your next question comes from the line of Patrick Davitt. Your line is open.

[Patrick Davitt, Autonomous Research]

Hi, good morning, everyone. First question is on kind of the tenor of transaction fees. It looks like your deployment and funding was more like 4Q 2021, but the transaction fee was meaning below the $39 million you reported then. So could you flesh out the dynamics around those kind of disconnects between deployment and the actual transaction fees again as we think about how it looks going forward?

[Alan J. Kirshenbaum, CFO]

Sure, happy to Patrick. So I've commented on prior calls. Sometimes you'll see originations up, transaction fees could be flat or slightly up. They're not going to move in total lockstep. It's really going to depend on which deals we lead, which deals we participate in. So there's a number of factors that go into that. You certainly can see transaction fees up strongly versus 1Q. 1Q tends to be a slower quarter seasonally from a transaction fee perspective. But we certainly -- transaction fees are where we would have generally expected them this quarter.

[Patrick Davitt, Autonomous Research]

Okay, thanks. And then I do want to go back to the distribution discussion again. I think you guided to $25 million, $30 million in mid-2Q placement fees which I would assume would be a timing you'd have good visibility on that number, so what were the dynamics that made it so much lower than you were expecting? And should we -- does that mean that the guidance you just gave for 3Q and 4Q is pretty fluid?

[Alan J. Kirshenbaum, CFO]

So the -- when I spoke last quarter, it really was driven by the timing of when we closed the capital and so the timing of when we closed the capital as opposed to part of that coming in 2Q, part of that slipped to 3Q. And so what you're seeing is the 3Q guidance I gave, I feel very good about. The 4Q guidance is anticipating a certain level of fundraising that we just -- we can't predict sitting here today. But the 3Q numbers, I feel very comfortable providing.

[Patrick Davitt, Autonomous Research]

Got it, thank you.

[Douglas I. Ostrover, Co-Founder & CEO]

Thank you Patrick.

[Operator]

Your next question comes from the line of Craig Siegenthaler. Your line is open.

[Craig Siegenthaler, Bank of America Securities]

Hey, good morning everyone. Hope you are all doing well.

[Douglas I. Ostrover, Co-Founder & CEO]

Thanks Craig, doing great.

[Craig Siegenthaler, Bank of America Securities]

So my question is on the Wellfleet acquisition, which closed on April 1st. Do you guys have handy what the management fee and FRE contribution was in the second quarter? And as we're forecasting into 3Q and 4Q, is this a good run rate to build off of for 3Q?

[Alan J. Kirshenbaum, CFO]

So we don't take divisions down to the FRE level, Craig. But I can certainly tell you that the revenue contribution to the direct lending business from Wellfleet was in the mid to upper single-digit millions. And yes, that you can anticipate that as a run rate going forward, we will grow that business. So certainly, we'll look to add to that over the coming quarters as we continue to launch CLOs, but that's a good base to start with.

[Craig Siegenthaler, Bank of America Securities]

Great, thank you Alan. And just as my follow-up, I know you hit on retail flows overall, earlier in the call, but how have ORCIC's flows trended since June 30th?

[Alan J. Kirshenbaum, CFO]

So we had a -- we've done a July 1 and August 1 close. Those numbers have trended down a little bit, not dramatically, but they have trended down a little bit, which would be in line with our expectations. And maybe I would argue better than what we've been seeing in the industry.

[Craig Siegenthaler, Bank of America Securities]

Great, thank you Alan. Take care everyone.

[Alan J. Kirshenbaum, CFO]

Very well, thank you.

[Operator]

Your next question comes from the line Brian McKenna [ph]. Your line is open.

[Unidentified Analyst]

Great, thanks. So just to follow up on direct lending. There's clearly a significant amount of deployment opportunities across the market, and this is just going to steadily increase over time for a number of reasons that you already touched on. But how do you think about the size of your investment team in place today to continue to successfully underwrite deals? And what's the expectation for related headcount growth in the business longer term?

[Marc S. Lipschultz]

Thanks for the question. And you hit on a really important point, which is to do this business well it is a very people-intensive business. That is to say it's a very intensive work exercise, right. We have to do a tremendous amount of investing in origination to find the thousands and thousands of opportunities that we look at to do the very small number we ultimately do. Deep due diligence, extensive work on credit agreements, which as we've said before, to sound arcane is really important part of what we do in terms of protecting capital. So this is a business that we've had to invest very heavily in building the team. Now we have done that. We have one of the largest dedicated teams in the world to do this, we have coming up on 100 people, professionals doing direct lending and that's really what we live and breathe. So I think we're very, very well staffed to support the level of activities we have. We'll always be continuing to look to build our team and make sure we have the best team on the field, and we're always being proactive and finding the best opportunities. But we look back to our activity levels in 4Q last year, look at this quarter, we're in very good shape to support the kind of level of activity that we're talking about and seeing.

[Unidentified Analyst]

Got it. Helpful. And then just broadly, you've done a couple of strategic transactions recently, but I'm curious, just given the backdrop more broadly today, are conversations picking up at all for additional M&A and what are the some of the more interesting areas you would potentially look to expand into inorganically?

[Marc S. Lipschultz]

So the pace of activity in those conversations has picked up, as you've said. Now pace of activity mean the pace of available opportunities and conversations available to have. We're going to continue to be extremely selective. Remember, in Oak Street, what we had and have is just a market leader, extraordinary risk-return results, great team, a great leader in Mark Zar. So it's a great culture fit as a result and we won't need all of that to make an acquisition. Well, similarly, not as large, of course and strategic but again, a fantastic team, a great culture fit and a great complement to our core business. So we're in the picks and shovels business. We're in the capital solutions business and so you should, I think, continue to think about us looking for places where we can adopt other solutions that are adjacent. We can be another go-to source of capital, particularly for this private markets ecosystem.

So we have a foothold in real estate today and a very strong one at that. It's obviously a very large space that we can continue to explore. We are a very U.S. centric business collectively today. Obviously, we're -- we could explore things outside the U.S. So I think you'll continue to see us be very engaged. In a world where the IPOs managers is no longer a particularly practical idea for most today, I think we will continue to see people who are saying, I see an opportunity to grow, I like the benefits of being part of a larger platform, and we're going to continue to engage with those folks and selectively hopefully add to the platform.

[Unidentified Analyst]

Thanks Marc.

[Marc S. Lipschultz]

Thank you Brian.

[Operator]

Your next question comes from the line of Adam Beatty. Your line is open.

[Adam Beatty, UBS]

Hello, thanks very much. I wanted to ask about the vastly kind of increased pipeline in direct lending that you're seeing. It's a multiyear theme, you call it out at the Investor Day, of banks kind of pulling back from some of that. I imagine, given the current environment, that stepped up a bit. And you also mentioned kind of non-sponsor activity being a little bit more prominent. So my question is, how sustainable is that, particularly on the non-sponsor side, would you expect a little bit of reversion, or is the pie just growing from here in the future? Thanks.

[Marc S. Lipschultz]

I think and obviously, time will tell, I think the pie will continue to grow because there's a great value proposition. Really, at the end of the day, again, we're clear. We -- our loans -- we charge more, and there's no doubt that our documents are more restrictive and rigorous, but we offer people absolute certainty on their capital. They're going to have the money at the time and place they want it on the terms that they want it, that predictability. Private equity, and you want to be able to take a long-term view to build these businesses. We're the match to that. We're the private credit. We bring the whole system together and take a view of where you want to be three years from now to have a bigger, better business, and partnership. When things like the pandemic hit or current uncertainties in the world arise today, knowing you can speak to your partner, the person who owns in our case, on average, lend through kind of the low 40% value of an enterprise we are going to call that person saying let's talk about the future and getting from here to there, that's worth it.

And so what I think we're seeing is two things happening in today's market, the continued overall secular trend, which is, hey, that's a great value proposition. And once people try it, many people, great sponsors, great companies, private businesses alike, return to it, saying that was a really good experience. I'm going to do that again. So that becomes like a step function increase in the marketplace that we work with. Then there's another thing happening today that we should keep an eye on, which is, look, there is basically no meaningful syndicated market. So today, if you want to make a large acquisition, really direct lending is the primary opportunity, the primary option.

So there's certainly also a bit of a cyclical element right now in terms of available opportunities to direct lending. So it's a combination of both that we're seeing, but the secular trend is the more powerful one. And I think as long as we continue to develop pools of capital and deliver the value proposition, that should continue. I will say that one of the -- the greater challenge from where we sit and I think where the market will sit is we just don't have enough capital to meet the need. We don't have enough capital to make the loans that, frankly, today, we deem very attractive. We're seeing some of the best risk return opportunities we've seen since inception. And we don't have the capital to meet it and nor does the industry for that matter. So the bigger challenge, I think, gets down to capital allocators deciding and recognizing the opportunity here to have a safe floating rate experience, which is what we offer and delivering the capital so that we can in turn deliver it through our platforms to these great companies.

[Adam Beatty, UBS]

That's interesting, yes, about the constraints around capital. Maybe kind of to that point, you talked a little bit about resources around direct lending in terms of underwriting and diligence and what have you. In terms of distribution, maybe ramping up the capital gathering even more. Where do you see -- how far along are you in kind of the build-out of that globally, how much more in terms of resources should we expect either to meet your fundraising targets or maybe go a little bit beyond that in the coming years? Thank you.

[Douglas I. Ostrover, Co-Founder & CEO]

Yes. This is Doug. Thanks for the question. Look, since the Dial merger, we've really ramped up our global distribution. One of the things we got really excited about when we merged with Dial then with Oak Street was there was very little overlap between our LP base. In fact, shockingly like 2% to 3%. And so we are in the very early stages of cross-selling one another's products to each of these LPs. And I don't want to get ahead of myself, but we are having really good success. To answer your question, I'd say we're probably 85% of the way there. There's one or two jurisdictions that will probably add a few people. But from a cost standpoint, I think it's a deminimis cost and I don't think it will have any impact on the financials.

[Adam Beatty, UBS]

Great, very helpful. Thank you Doug.

[Operator]

Your next line comes from the line of Ken Worthington. Your line is open.

[Kenneth Worthington, J.P. Morgan]

Hi, good morning. Thanks for squeezing me in here. First on direct lending credit quality, there seems to be a fair amount of anxiety about credit quality going into the second half or the latter half of the year. You seem sanguine about credit today, you highlighted the low LTVs and high coverage. But this anxiety persists. Is investor anxiety misguided, maybe what are your thoughts here?

[Marc S. Lipschultz]

I think people should be anxious about markets, but not just now. I mean that is to say our business in direct lending is built for exactly this environment. So we performed very well during strong times as we have for the past many years, but our -- we really shine in times like this, this is what we're built for, senior secured loans against very large companies, very high-quality, world-class businesses with world-class sponsors, floating rate exposure. So this is really the market we're built for. So I wouldn't say that anxiety is misplaced, it's a very uncertain world out there. I would say probably investors should be kind of anxious but because you're anxious is the reason you go to direct lending, you say, I want to be senior secured I want to be at the top of the capital structure. I want to be protected from interest rate changes. And I want to do that with people that do vigorous underwriting, deeply in origination, work with the best sponsors and work with the best company.

So I think our particular position in the market for specifically because that's really our strike zone, which are the best companies best sponsors, that's really our strike zone. That's a particularly strong place to be. Really important point to note for this audience is what we all care tremendously about the performance of our portfolio and presumably, I think shows our since assumption performance was 5 basis points annualized loss rates. Remember, for the shareholders, people on this call it doesn't matter really at all. That is to say we are an entirely fee-based business, right. 100% of our revenues are fee based. So unlike anybody else in the marketplace where there's carry heavily embedded in their alt structures, we don't have that carry component, we're fee-based. So we care a lot about credit quality, and we're -- fair to say one of the best at it. But for you all as shareholders, to be clear, it actually doesn't affect the results.

[Kenneth Worthington, J.P. Morgan]

Okay. Perfect. And I apologize if I missed this, what were the catch-up fees this quarter?

[Alan J. Kirshenbaum, CFO]

Catch-up fees were $12.8 million.

[Kenneth Worthington, J.P. Morgan]

Okay, awesome. Thank you very much.

[Douglas I. Ostrover, Co-Founder & CEO]

Thank you Ken.

[Operator]

[Operator Instructions]. Your next question comes from Chris Kotowski [ph]. Your line is open.

[Unidentified Analyst]

Yes, good morning and thanks. I wonder if you can just give us a bit more color on the handoff from Dial V to Dial VI. I think we're all kind of used to the typical private equity structure where you raise a X billion dollar fund and then it gets invested over three, four, five years, whereas the Dial funds seem to be more on a pays just-in-time kind of fundraising basis. Is that what you anticipate for Dial VI and any idea when you start fundraising for it and then how much a year comes in, is it coming in at a couple of billion a year over four years or how is it going to work?

[Michael Rees]

Yes, well thanks for the question. As we look at the business for GP Solutions, Q2 and into Q3 is really highlighting the strategic position of our business and the Dial funds. We are seeing increased demand from investors so our fund size, we were able to increase. We're also seeing a really strong and building pipeline of continued deals with the biggest and what we believe to be the best players in this space. So we are, at the same time, raising a larger fund but we're deploying it in real time. So it means that we'll be back out on the road in calendar 2023. We'll have plenty of dry powder to get us into the beginning of 2023, but we'll want to make sure that Fund VI, that handoff is ready at some point in that calendar year, and we expect the fees to turn on towards the end of the year or very beginning of the following.

But it's important for us to have ample capital but our investors like to see some of the portfolio names and the strength of it as we go, which is why having this market-leading position, we believe we have partners like CBC and Veritas and HIG and Dragonair and many, many others like it, is such a strong position to market from. So I hope that answered your question, but really proud of the quarter and the way we were able to put the Fund V finishing touches on and then start setting our sights on Fund VI.

[Douglas I. Ostrover, Co-Founder & CEO]

And Chris, I want you to know all of us in the room are really grateful that you asked a question about the GP Solutions business because as Michael said, I think there was some skepticism in the market of us hitting our target. We've exceeded it handily, and that fund is doing really well. The investors are thrilled and as you alluded to, I think it's setting us up for a really successful Fund VI sometime in the not-too-distant future.

[Unidentified Analyst]

Great, that’s it for me. Thanks.

[Michael Rees]

Thank you Chris.

[Operator]

There are no further questions at this time. CEO, Doug Ostrover, I turn the call back over to you.

[Douglas I. Ostrover, Co-Founder & CEO]

Well, I want to thank everyone for joining us today. Hopefully, you got a sense that our business continues to have really good momentum. Just to reiterate one thing we talked about at Investor Day, we put up a slide at the end with three words: stability, predictability and growth. And I think what this quarter demonstrated is that we have a unique model. We have more permanent capital than any of our peers with best-in-class growth. So we're excited for what lays ahead. We're grateful for everyone's support, and I hope everyone enjoys the rest of the summer. And hopefully, we'll have a chance to see all of you soon. Thanks again.

[Operator]

This concludes today's conference call. You may now disconnect.