Blue Owl Maintains Focus on Financing Big Tech’s AI Investments
Marc Lipschultz, the co-founder and co-CEO of Blue Owl (ticker: OWL), affirmed on Thursday that the company intends to continue its aggressive financing strategy for Big Tech’s increasing expenditures in artificial intelligence (AI).
The private credit powerhouse saw a significant rise in its share price, climbing as much as 13% after announcing robust growth in its asset management division for the quarter. This growth was largely fueled by a 6% increase in the area dedicated to data centre financing and leasing.
Lipschultz noted, "We observed numerous tech announcements… virtually every company signalled an increase in their capital expenditure. This trend directly benefits our digital infrastructure and triple net lease sectors."
Recent earnings reports from major tech firms such as Microsoft (MSFT), Amazon (AMZN), Meta Platforms (META), and Alphabet (GOOG, GOOGL) revealed a collective rise in AI spending projections for this year, which increased from approximately $670 billion to over $700 billion. Lipschultz expressed optimism about the richness of their pipelines, commenting on the appealing risk-return dynamics.
Despite experiencing a volatile quarter that impacted private credit returns, Blue Owl’s earnings were mostly in line with analysts’ predictions. The company reported a 15% increase in total assets under management (AUM), reaching $315 billion compared to the prior year. Distributable earnings also rose by 11% to $293 million, translating to $0.19 per share, while fee-related revenue climbed 13% to $700 million. Analysts had anticipated AUM of $316 billion, distributable earnings of $287 million, and fee revenue of $688 million.
While Blue Owl’s direct lending business noted a 1.1% net loss, it still constitutes over a third of the firm’s total assets. In contrast, this core private credit strategy had yielded a net return of 2.3% in the previous year’s first quarter. The company also indicated that fundraising from its wealth channel had decreased compared to the previous year, although institutional inflows compensated for the decline from financial advisors. Lipschultz remarked, "Institutions are seeing this as an opportune moment to invest in credit. Some that had paused may be returning."
Blue Owl faced challenges in the private credit landscape following its cancellation of a planned merger between one of its non-traded private credit funds and a larger publicly traded entity last November, citing "market volatility." Since then, many large non-traded funds in the private credit sector have reported increases in investor redemption requests. Even with Thursday’s gains, Blue Owl’s stock remains down 35% year-to-date.
Up until the earnings report, the primary concern for Blue Owl had been the potential deterioration of credit quality or significant hindrances to fundraising amidst the backdrop of turbulence in the private credit market. Lipschultz stated that the firm is actively "working down" its exposure to software companies that may face disruptions from AI advancements, particularly in anticipation of a crucial refinancing juncture in 2028. He emphasised that, even in worst-case scenarios, Blue Owl possesses more safeguards and capital reserves than typical private equity investors.
Oppenheimer analyst Chris Kotowski, who maintains an "Outperform" rating on Blue Owl, commented on the firm’s earnings, saying, "The sky didn’t fall. We believe there is substantial upside potential."
Blue Owl’s strategy towards data centres comes with its own set of risks as it aligns with several other innovative financing models aiming to support Big Tech in its debt accumulation. Lipschultz’s perspective aligns with that of other private equity executives who view the AI boom as a significant opportunity despite the recent challenges faced by their debt businesses. For instance, Blackstone’s COO, Jon Gray, heralded the firm’s early foray into AI infrastructure as crucial for long-term growth. Blackstone also recently launched a dedicated unit to invest billions into data centres and AI infrastructure.
The overall performance of Blue Owl highlights the evolving landscape of private credit and the strategic opportunities that lie within the burgeoning AI sector, even amidst market volatility.
