Blackstone (NYSE:BX) and Blue Owl (NYSE:OWL) are two investment-grade alternative asset managers with hundreds of billions of dollars in assets under management and attractive dividend yields.
BX has a lengthy and very impressive track record of delivering lucrative total returns to shareholders:
That said, over the past six months OWL has significantly outperformed BX as its business model is a bit more resistant to macroeconomic turmoil and its starting valuation was considerably more attractive than BX’s as well:
In this article, we will compare them side by side and offer our take on which one is a better buy moving forward.
Blackstone Vs. Blue Owl: Business Model
BX is the alternative asset management industry gold standard with its near trillion dollar assets under management global empire. Its immense economies of scale, vast business network, and unparalleled proprietary database on the industries and markets in which it operates give it a lower cost of capital, access to superior deal flow, and a competitive edge in underwriting deals. This in turn, enables it to fundraise quite easily, fueling its rapid growth in assets under management.
BX has many irons in the fire, with asset management platforms that include real estate (its primary platform), private equity, hedge fund solutions, credit and insurance. This makes it a popular one-stop shop for many large clients looking to gain exposure to a plethora of alternative asset investment opportunities.
That said, OWL is no slouch either, with well over $100 billion in assets under management. Furthermore, it is a leading player in its two main industries: Direct Lending (via its publicly trade and privately held Owl Rock (ORCC) platform) and General Partner Solutions (Dyal Capital). In fact, it is the dominant player in its General Partner Solutions business. As a result, we expect OWL to continue to fundraise and invest very effectively in its spheres of operation for many years to come. It is also growing its triple net lease real estate asset management business, recently combining with another partner to take STORE Capital (STOR) private and is holding its share of the real estate within its triple net lease real estate funds from which it is extracting asset management fees.
An important distinguishing factor between these two where OWL measures up favorably is that 80.2% of OWL’s AUM is in the form of permanent capital. In contrast, BX only has 37.8% of its AUM in what it deems “perpetual” capital (which is a fuzzier and less definite categorization than OWL’s use of the term “permanent” capital, which makes us believe that BX’s true “permanent” capital is an even smaller percentage of its total AUM). This means that OWL’s earnings stream is likely going to be much more stable over the long-term since it does not have to re-raise its permanent capital when the investment term expires and it will be much less sensitive to a decline in AUM if/when alternative assets fall out of style with institutional investors. It also means that OWL can focus purely on long-term performance with those funds rather than trying to force a short-term result in order to retain assets under management.
OWL also does not generate any carried interest on its balance sheet, whereas BX does. Instead, OWL generates purely fee-based earnings in a model that is designed to support a regular and progressive dividend policy and give more certainty to investors of a recurring revenue stream. In contrast, BX’s earnings – and therefore its dividend payments – tend to be a bit choppier, which can make it difficult to value at times.
Last, but not least, OWL’s outsized exposure to floating interest rate loans via its direct lending business has driven strong growth and promises to continue doing so moving forward. In contrast, BX’s private equity and real estate businesses generally suffer from rising interest rates.
OWL’s management highlighted this macroeconomic tailwind on their latest earnings call:
As expected, and in line with our previous guidance, we saw a significant increase in our Part I fees from last quarter. In the third quarter, included in our management fee line, our Part I fees from our BDCs, increased 1$6.1 million or 35% from the second quarter. A large portion of this was driven by higher interest rates, and some of it was from AUM growth in our newer BDCs, like ORCIC and ORTF II. We are expecting to see an additional increase in our management fee line in the fourth quarter due to continued rising rates, and could see possible increases into next year.
In effect, rising interest rates generally have a compound effect on OWL’s growth by driving increases in both management fees as well as AUM as more investors are drawn to its products which benefit from rising interest rates. In contrast, investors will generally be driven away from (and valuations will decline in) BX’s real estate and private equity products as interest rates rise. This could see fundraising momentum shift away from BX on the net (though it also offers floating interest rate exposed credit products) and move towards OWL on the net.
Unsurprisingly, the Wall Street analyst consensus expects OWL’s normalized earnings per share growth to significantly outpace BX’s with a 24.2% CAGR expected for OWL through 2024 and an 11.4% CAGR expected for BX through 2024.
Blackstone Vs. Blue Owl: Balance Sheet
Both businesses enjoy solid investment grade credit ratings, with BX boasting an A+ credit rating while OWL has a BBB credit rating. The main reason for the sizable difference in credit ratings is simply that BX has a much longer track record as a company and has such immense scale and access to capital through its institutional partners that it is considered a financial fortress.
Meanwhile, OWL’s balance sheet situation is also in excellent shape, but its relatively smaller scale and shorter history have precluded it from earning as much trust from ratings agencies as BX has accrued over the years. That said, moving forward, OWL’s management does expect to receive credit rating upgrades and likely eventually achieve an A rating.
In the meantime, OWL’s balance sheet is in excellent shape with over $1 billion of liquidity, an average 13-year debt term to maturity, and a mere 2.9% cost of borrowing as of the end of Q3.
Blackstone Vs. Blue Owl: Dividend Outlook
As per our previously discussed differing growth profiles, OWL’s dividend is expected to grow much more rapidly than BX’s in the coming years. Both companies pursue a pretty stable payout ratio of ~85%, so we expect their dividends per share to grow in-line with normalized (i.e., distributable) earnings per share growth.
Wall Street consensus analyst estimates put BX’s dividend CAGR at 11.1% through 2024 and OWL’s dividend CAGR at a whopping 25.4% through 2024. Given their fairly sticky earnings – especially OWL’s – through all market cycles, we view their dividends as likely to continue growing over time. that said, BX’s dividend payout level will inevitably be choppy quarter-to-quarter due to the timing of carried interest being realized whereas OWL’s is expected to be consistent and progressive in-line with distributable earnings per share growth. OWL’s will be more consistent because it does not generate carried interest on its balance sheet and instead generates virtually all of its distributable earnings from fee-based earnings.
Blackstone Vs. Blue Owl: Catalysts And Risks
As already discussed, OWL generally benefits from rising interest rates (especially when economic conditions are at least relatively stable) whereas BX generally suffers from rising interest rates.
Both businesses would likely see their existing AUM decline in value during a severe economic downturn and their fundraising would likely also suffer. That said, both businesses are in excellent shape to capitalize on opportunities that a sustained downturn would likely provide, so there is no reason to be concerned about their long-term wellbeing due to a recession.
The biggest risk facing BX long-term is that interest rates remain higher for longer. Meanwhile, OWL’s biggest risk is managing a severe and prolonged recession given that a lot of its capital is tied up in high yield loans to businesses that may struggle in a severe economic downturn. That said, its business model is structured such that it should be able to manage its way through a period of prolonged difficulty without too much trouble.
Furthermore, JPMorgan (JPM) just announced the other day that it is looking to enter the direct lending industry as well. Given that JPM has a very good read on economic trends given its treasure trove of proprietary economic data points, this bodes well for the near-term outlook for the direct lending industry.
Blackstone Vs. Blue Owl: Valuation
On a valuation basis, BX looks slightly cheaper on a dividend yield and P/Normalized Earnings basis.
However, OWL is cheaper on a P/FRE basis and also has a vastly superior growth profile for both its Normalized Earnings and dividend per share in the coming years.
Both businesses are very well run and have bright prospects for delivering attractive total returns to shareholders over the long-term. That said, we continue to favor OWL over BX despite its recent outperformance given that their valuations are currently very similar across its P/DE, P/FRE, and dividend yield metrics but OWL’s business is poised to grow at roughly twice the pace of BX’s business in the coming few years.
We rate BX as a Buy at the moment and OWL as a Strong Buy and hold it as one of three alternative asset managers at High Yield Investor.
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