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Blue Owl has earned a high public market valuation. And the private capital upstart is showing that it is not afraid to use it. So far the manager has announced $1.4bn worth of deals this year, across three acquisitions. This month, in its latest transaction, it acquired the credit manager Atalaya Capital Management, for $450mn.
More interestingly, it has used its own shares for about two-thirds of the total consideration paid across the trio. Companies and private capital firms, in particular, are typically reluctant to issue new stock and the subsequent shareholder dilution. But private capital firms do not like to take on debt at the manager level either. Blue Owl itself is a nascent firm that was created by a 2021 special purposes acquisition company, or Spac, merger and will soon manage more than $200bn.
Its growth prospects and focus on steady private credit investing, as well as ownership stakes in other large private equity managers, has intrigued Wall Street. Its price to trailing last 12 months cash earnings per share ratio is a healthy 28 times. This formidable currency has allowed Blue Owl, whose equity value is $26bn, to make big bets.
The largest deal Blue Owl has struck was for Kuvare, an insurance investing specialist. A third deal, for Prima Capital Advisors, got it deeper into real estate. All three acquisitions were for firms led by their founders. Stock payment can be a form of incentive to persuade the target’s employees to continue running hard. All three deals also include earnout incentives where the targets’ respective owners can earn additional payouts if operating targets are hit.
Earlier this year, Blue Owl sold $750mn of 10-year bonds at a healthy coupon of 6.25 per cent. Comparing that after-tax debt cost with its stock market valuation roughly suggests why share issuance is a reasonable choice.
Integrating people-driven businesses, especially when the Masters of the Universe are involved, is hard and Blue Owl has reportedly had its challenges. Blue Owl’s quick ascent and emphasis on M&A as its rocket fuel is also notable. Many other firms have preferred to grow steadily and organically. But Blue Owl sees the future as now and wants to win the land rush. The good news for them is that they have shown enough promise to Wall Street to make their stock currency very deployable.