The firm is a leader in private credit and data-center funding, two sectors about which doubts have emerged. Marc Lipschultz sees blue skies ahead. By Bill Alpert
After years of adulation, the stock market has soured on private-credit fund managers. Investors have also had second thoughts about the billions of dollars spent on artificial intelligence data centers.
Blue Owl Capital (ticker: OWL) is a leader in both those businesses and its stock is down by nearly half since January, to a recent $13.79. The company suffered a different sort of setback this week, when the deeply discounted valuations of Blue Owl credit funds upended plans to merge two of them.
Barron's recently asked Blue Owl co-CEO Marc Lipschultz whether private credit has lost its mojo, just as the Trump administration is considering the products for 401(k) retirement plans. We wondered if the latest headlines about credit fraud bode ill for the private credit business, or for its banking rivals.
In the past two months, Blue Owl funds have committed more than $50 billion to build data centers for Meta Platforms, Oracle, and other AI hyperscalers. These are the biggest privately funded capital projects in modern history. Will they pay off?
You'll find our questions, and Lipschultz's answers, in the edited interview that follows.
Barron's: The S&P 500 is up 13% this year, but shares of private credit firms Ares Management and Blue Owl Capital have plunged. Investors are spooked by the defaults of the auto-parts supplier First Brands and the subprime lender Tricolor. Is the private credit business imperiled?
Marc Lipschultz: It is a curious time. The marketplace is very bullish, as reflected in record stock-index prices and narrow credit spreads. Banks have reported extremely strong financial results. Their commentary on consumer behavior and consumer credit was all positive.
Then, at the same time people are saying "I'm concerned when I put the word 'private' in front of credit." It's very, very strange.
When you start getting into it with them, the only thing you end up with is some anecdote about First Brands, or some anecdote about Tricolor -- which is almost irrelevant, insomuch as they are small companies, in a specific corner of the world, and they are in a corner of the world that isn't private credit.
The only thing we can do is try to communicate and get the facts to carry the day.
What are the facts?
The facts are that Blue Owl's business is really good. We have had a stellar year in the face of deep volatility. This was the year that had "Liberation Day" tariffs and a whole lot of political turmoil. Yet our returns, risk, volatility -- all the things we focus on in our results -- are meeting, if not exceeding, expectations.
That shows up in the continued investment in our products. We had record capital commitments in the past 12 months. We just grew our top line 20% and our earnings have continued to grow at attractive levels. Yet we aren't being valued like a company with a 20% growth rate, a durable business, and a high dividend. [Blue Owl pays an annual dividend of $0.88 a share, for a yield of 6.5%.]
Your $17 billion listed fund, Blue Owl Capital Corporation (OBDC), is trading at a 21% discount to net asset value. That has derailed plans to merge it with a smaller, private fund, whose holders would have suffered a loss in the deal. What are the takeaways?
We're going to take a look at potential alternatives down the road and find the best way to create long-term value for shareholders. The portfolios of both funds are doing extremely well. The fundamentals and credit quality in both are excellent.
But one fund is public and one is private, so of course we want the investors in the private fund to have more liquidity opportunities. There's no rush to figuring out the best way to do that, because the funds continue to perform well.
Could cockroaches be lurking in private credit portfolios, while the broader economy is OK?
It is fundamentally incompatible, just truly mathematically incompatible to feel concerned about Blue Owl -- to be concerned about the health of the senior lender community -- and then be excited about everything in line behind it to get paid back. They are not compatible worlds.
Either the other markets are right, and there is just a bizarre carve-out happening around senior credit, or all other markets need to go in a different direction. You can't believe both at the same time.
We and our peers are lenders to thousands of companies. If thousands of them are going to default, what is going to happen to the equity market? What is going to happen to the bond market? They would have to get wrecked.
But we see headlines about borrowers defrauding their bank lenders...
Anybody could be susceptible to fraud. I will never stand in a glass house and say, "Huh, look at those other people who fell for it!"
There have been frauds since time began. One of the great advantages of private credit is the depth of engagement and the information flow we demand. Our whole job is to go very deep, make a larger investment, and then monitor it really closely.
That does a lot to root out the risk of fraud.
Aren't a lot of your loans to businesses backed by private-equity firms or a corporate sponsor?
We really like sponsor finance. We want there to be another sophisticated party who has put a lot of capital at risk ahead of ours. If someone's receivables balloon by several billion dollars, I promise you that the junior person on that PE team picked that up and quickly said "Where did all these receivables come from?"
There is a real advantage in credit protection, our biggest job, in having someone sophisticated with a concentrated interest also watching the store.
Has private equity peaked? And is private credit lashed to the slowing ship of private equity?
It is true that private equity has entered a new chapter. PE isn't the hypergrowth market it used to be. That doesn't mean it isn't an attractive asset class. There are just going to be fewer successful funds and fewer skilled practitioners delivering real alpha.
The larger firms are getting larger. Limited partners are consolidating their number of providers, and that decidedly benefits the large firms. We have gotten bigger, too.
Look at the digital infrastructure ecosystem, where we now have an outsize role. Our real estate business pioneered triple-net long-term leases to investment-grade corporate partners. Now there are these AI data centers and the three biggest ones being built in the past year are all Blue Owl projects.
Since you mention AI data centers, investors have lately become worried about the hundreds of billions that hyperscalers such as OpenAI, Oracle, Microsoft, Meta, and Google are spending. Should they be?
In the next 10 years, is AI going to be a significantly transformative force in the world and economy? I think it would be hard to "take the under" on that argument. Its transformative force is going to be incredible.
Are these deca-billion-dollar valuations going to every new AI company worth it? That's an appropriate question. You can have as much or as little skepticism about the valuation: It's manic, it's not manic. It's overstated, it's understated. That's what makes a horse race -- or the venture market, as the case may be.
Is that where you should be betting?
There is a lot of gold mining going on out there. Maybe someone is going to strike tremendous gold and maybe it is worth paying X billion dollars for that. I don't have that expertise. I don't have that tolerance for risk. We don't try to invest that way at Blue Owl.
I will tell you that the best risk-return investments I have seen in my career -- and I have been in the private investment business for 30 years -- are attached to the digital infrastructure component of this transition. That's because they are large, tangible assets that are leased ironclad for 15 or 20 years, with the biggest companies in the world.
What we're saying is that the underlying infrastructure is a necessity, that the transformation is real, and -- if you want to really get down to it -- that Microsoft will pay its bills. Now, if you're on the negative side of Microsoft and Meta and Google paying their bills, I suspect you have graver concerns.
Those companies are thriving. They became the biggest companies in the world because they understand this tech way better than any of us do. If you wonder whether they're right or wrong, I would start with the trillions of dollars they're putting where their mouths are -- versus the opinion of anyone on Wall Street. They actually understand what these models are capable of. They are looking two generations ahead of what we have seen, and they are saying, "I'm good for a trillion over the next two years" among these five hyperscalers.
Maybe they'll get a really great return, maybe they won't. But they aren't foundationally wrong. They aren't going to wake up two years from now and say, "Oh, that AI thing? That's silly." It is real.
These companies are using special-purpose vehicles that aren't on their balance sheets, so how are they obligated?
They are obligated through these lease arrangements, which is exactly what we have done, literally in thousands of iterations, over in our real estate business. The right lease -- with no ability to leave your lease, and with a guarantee from the corporate parent -- is an exceptionally secure instrument. There is no way for them to say "Oh, I don't want that thing anymore." Unless they are bankrupt, they owe the money.
These are monumental undertakings and that is the opportunity for investors. Anytime markets shift, where there is suddenly a massive need for capital where there wasn't before, and it is imbalanced in favor of the provider of capital, well, that is a good opportunity set.
President Trump wants to plug alternative investment products like yours into 401(k) retirement plans. Does that benefit retirees, or just the fund industry?
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