← Alt Goes Mainstream: The Latest on Alternative Investments, WealthTech, & Private Markets
Alt Goes Mainstream: The Latest on Alternative Investments, WealthTech, & Private Markets
Future Proof Citywide Replay: Alt Goes Mainstream Live with Blue Owl's Marc Zahr
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- [00:00]
A
Shake brings all the boys to the job they like it's better than yours Damn right it's better than yours. Better than yours.
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B
Please welcome to the stage Ben Carlson. Now she want a photo you already know though you only live once.
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C
That's the model.
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D
Hey, everyone, when you go on someone else's podcast, you are contractually obligated to go on social media and say, I had so much fun on this podcast. You just have to say it. But when I do it, I really mean it. And we had a guy named Michael Sidgemore come on our podcast Animal Spirits a number of months ago, and we had such a good time chatting about the alternative asset management space that I went on his podcast. So I had fun on his. He had fun on mine. We're gonna do a live version of Alt Goes Mainstream today with Michael Sitchmore, the host, and Mark Zar from Blue Owl. So welcome to the stage, please.
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A
This is how we do it. This is how we do it. La la la la la.
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C
Live AltCo's mainstream podcast here in Miami.
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B
How are you?
- [01:33]
C
Good. Pleasure to see you, Mark.
- [01:35]
B
Good to be here with you.
- [01:37]
C
It's great to have you. I think what you've done over the course of your career at both Blue Owl, before that, Oak street, you didn't even start in the real estate space and you've ended up really pioneering the triple net lease space. There's so much to talk about with that, with data centers, AI, everything real estate related. And then you've obviously worked the wealth channel. So excited to get into it first. Would love to just start with your background because I think you didn't start in the real estate space. So tell us how you got there.
- [02:06]
B
Sure. I actually started my career at the Chicago Board of Trade. I worked as a fixed income trader. I spread the futures yield curve at a firm called TM Associates. From there I went to Merrill Lynch. And while I was at Merrill Lynch, I learned what a triple net lease was, which we'll talk about today. And I was so blown away by this lease structure that I left Merrill lynch and I went to join a private equity firm that was focused on a single tenant triple net strategy.
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C
What was the light bulb moment for you about what a triple net lease strategy is? And maybe start by explaining what it actually is.
- [02:47]
B
Sure. So a triple net lease is a lease where the tenant in the building, not the landlord, is responsible for paying the taxes, insurance, maintenance, utilities, capex. So taking a step back, think about that. So you think about investing in anything you have revenues and you have expenses. If you structure your triple net lease the right way in real estate, you're effectively pushing the expense side of the equation onto the tenant in the building. Not the landlord, not the investor.
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C
Why would a tenant do that?
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B
So that's changed over time. So now I would actually say, depending on the sector that you're in, within real estate, a triple net lease is the norm. How well you structure your triple net lease is important. But back in the day, I'll give you an example. Let's think of a company that owns a lot of real estate, Amazon. So Amazon is not in the business of owning real estate. They're in the business of doing something else. And they have hundreds, thousands of locations with multiple different landlords. So imagine if that landlord didn't pay the taxes, didn't insure the building, and it affected Amazon's ability to operate from that location. That would be catastrophic to Amazon. So from their perspective, they're like, we'll cover all of this, we'll cover the expense out of the equation because we want to operate the buildings and we want to control our destiny for the next 20 plus years.
- [04:19]
C
Interesting. So bigger companies, particularly in categories of consumer, probably data centers. Amazon's a hyperscaler, as are many others. You're seeing something like triple net lease become the norm and then you add in the data center piece. That's probably related to get into that a little bit.
- [04:39]
B
Yeah, look, so in our strategy, we do all different kinds of real estate sectors. So with Amazon, we actually started on the industrial side of the equation. Right. Distribution facilities, robotic distribution facilities. You can also do grocery stores. Amazon acquired Whole Foods a number of years ago. They got into the convenience store space, so you could describe it as essential retail as well. And now to your point, data centers. And that's all the rage today. And that's what everybody wants to talk about. I think about it a little bit differently. And take a step back. You can invest in a company a number of different ways. You can buy their equities, you can buy their stock, you can buy their fixed income, you can buy their bonds, you can also buy their real estate. And from my perspective, and again, I'm extremely biased, you'll hear me say that a number of times. I think it's the best of both worlds because if you are buying their real estate and you're structuring a triple net lease, you're generating a higher yield than you are owning their bonds. And it's more tax efficient. And I've learned from my compliance department not to play too much with this, so consult your tax advisors. But because you can depreciate real estate, that income that you're generating from that investment is generally offset. So it's a return of capital, which is lowering your cost basis, which isn't taxed at ordinary income rates. And if you buy that real estate, as I just mentioned, you should be able to generate an equity like return. And so again, returns aren't historic returns, but we've delivered a 24% net return in a strategy that I would describe as core risk. Very low risk, but delivers high returns.
- [06:27]
C
I want to dig deeper into that, but before we do, I think it's fascinating to see your background and how you've evolved. So you started Oak street in 2009, right after the depths of the financial crisis. I would love for you to start there and tell us what that journey was like. You started with a $17 million fund and now you have over 34 billion in core real estate strategy loan at Blue Owl. So let's start there and rewind the tape to hear your journey because I think that relates so much to what we're just saying today about data centers and kind of puts everything in context.
- [07:02]
B
Yeah. So again, it was probably 2005, 2006 when I learned what a triple net lease was. And at the time I couldn't find a private equity firm that was focused on that strategy. So it was so new, if you will, but I found one, went to go work for them, and from 2007 to 2009 I was in New York from peak to trough. And that was the best learning experience I could ever have in my life. So I found a firm that was doing this triple net lease strategy. And I saw the world. Commercial real estate is bought and sold with a metric called cap rate or capitalization rate, that means unlevered yield. So if you're buying a property for a million dollars, you're buying it at a 5% cap rate. It's generating 50,000 in net operating income in the first year. So I saw properties trading at fives and six caps go up to seven and eight caps, a big move in a very short period of time. But the companies whose real estate you were buying were still great companies. So you were getting those companies at a 25, 30% discount overnight. And so again, I was 29 at the time when I left, and 30 by the time we launched Oak street and it was the depths of the global financial crisis, I didn't have a bunch of great firms knocking on my door. Offering me a job, wanting to pay me a lot of money and it didn't exist. So it just felt like the right time to go do it. And the first fund was, to your point, 17 million. I thought I was going to retire after that fund. I didn't.
- [08:38]
C
Well, you didn't end up retiring, that's for sure. Let's roll the tape forward. You ended up growing Oak street, focusing on the triple net lease space. You then come across Blue Owl. What was the anatomy of the partnership like and why did you two ended up teaming up?
- [08:58]
B
I'll try to keep this short. So in 2020 I realized that what we had was pretty unique. We were a 25 person team based in Chicago and we were raising more money in single tenant net lease than any other company in the world. And there was a lot of companies approaching us to acquire Oak Street. So I ended up running a process and my intent was to find a company, a strategic partner that I could take what we were doing and grow it dramatically. I'd never left the country to raise any money. All of our investments were investment grade only. And we had one major investor in private wealth and it was, I believed, a phenomenal investment strategy for private wealth. And so I hired a firm, we went out on a process and I actually couldn't find the right partner. There was a number of our larger peers, competitors that everybody would be aware of that were interested and bid on my company. But it wasn't perfect. And so I did a minority stake deal with Goldman five months later. Dial and Alrock merged in May of 2021 to form Blue Owl. I got a call from them and started spending time with them and six months later a deal came to fruition. And the reason is the perfect company for my business didn't exist when I ran my process. So I actually unwound my process. The stake that I had sold 15% to Goldman and ended up merging my company into Blue Owl.
- [10:40]
C
So I think there's a bunch of interesting things there when it comes to thinking about Blue Owl. So one is permanent capital. Blue Owl has, I think 91% of its capital and permanent capital are very long term lock funds. Across the three strategies that you have, two is there's the insurance business now you acquired Kuvar on the insurance asset management side. And three is just the focus on the wealth channel. Blue Owl's for those who don't know, one of the top three, if not two capital raisers within the wealth channel. And that's because you've invested a ton in working with wealth in a way that they really understand. So as you think about those three things, some of that was there when you decided to get acquired by Blue Owl, some of that was not. But how does that all factor into the real assets business that you're building at Blue Owl today?
- [11:33]
B
Yeah, so I'll focus on real assets. So we launched our private REIT in September of 22, arguably the absolute worst time to launch a private REIT competing with all the names that we know, that we're losing flows, we're hemorrhaging and we're gating. And from that period of time, from September 22nd to date, we've become the largest capital raiser with a zero start in real estate in private wealth. And that's again to me a tremendous feat because we were offering something that was completely different than all the other groups that were out there. We were offering a strategy that reduced exposure to expenses, that had investment grade counterparties, that was distributing a current monthly income stream from cash flow from real estate that was 40% higher than everybody else's. And again, I could not have done that alone. It's definitely one plus one equals 30.
- [12:39]
C
What about the way that you've built the real assets business and the types of strategies that you have? Why does this fit so well with the wealth channel?
- [12:49]
B
So we're not going to be all things to all people. And when I think about what we do at Blue Owl, and just to be clear, we went from when Blue Owl and Oak street merged in the fourth quarter of 2021, we were 12 billion in assets. Today we're at 64 billion in assets literally three years later in one of the worst commercial real estate environments that we've seen. And it's because what we do is different. The three things that we focus on are income producing, downside, protected and have substantial total addressable markets. And the teams executing on those strategies are truly pioneers in what they do. Like in net Lease, we have an 80% market share, that's a tremendous market share in real estate credit. We're a lender to other real estate strategies and companies. We have a 32 year track record in a company that we acquired called Prima, that is the leader in real estate securities. And so when you think about that, to have such a dominant position is in Net lease, to have such a dominant position in real estate credit. Downside protected income generating strategies, I think that's what people want today.
- [14:05]
C
How much does scale and certainty of funding matter?
- [14:10]
B
This sounds self serving because we're one of the biggest in both. But I think it is, I think it's really important we'll stick with the Amazon example. And people are always shocked that we're buying at the levels or the yields that we're buying. When we're buying from great credits like Amazon, if you only have a billion dollars, you're not going to be able to move the needle for that company. So when you're approaching them and you're saying, I want to do what we do, a lot of is something called a sale, leaseback. We're going to the company, we're buying assets that they own and they are renting those assets back from us. Or what you're hearing about today, specifically with data centers, it's something called a build to suit. So the company says, I want to build a data center right here, but I don't want to use my own money to build that data center. You negotiate a lease and then you build the asset for them. When you have scale, when you can do multiple billions of dollars together and deliver a proposition that reduces risk execution risk, that's worth something. So it allows you to buy better.
- [15:22]
C
When you think about data centers, you think there's all sorts of ways to play the AI trend. You can invest in publicly traded companies, you can invest in private companies, depending on the accreditation status, the investor, the funds that you're in, et cetera. You can also invest in real estate. Is real estate the best risk adjusted way to play the AI trend?
- [15:47]
B
So for the second time I'm biased. I think it's this. I think you get your AI exposure, but you own a physical hard asset. And so regardless of what's going on, and some people believe AI will go like this, compute will go like this, but honestly, I have no idea and I don't want to make the bet and I don't want to see this type of volatility in my portfolio. If it does extremely, extremely well, then obviously the value of the underlying mission critical building that you own should increase in value. But if it doesn't, I still own a hard asset that's paying me rent for the next 20 years and covering the expense side of the equation. So on a risk adjusted basis, I do think it's the best way to play it.
- [16:29]
C
What do you think are the biggest risks associated with investing in real estate tied to the build of data centers? Are, I mean, that we saw recently some firms have pulled back on building more data centers. Maybe there's another technology or from another region of the world that that creates some sort of cheaper way to produce or store data for AI. What in your mind are the big risks of putting money in the ground today?
- [16:56]
B
Two things. So number one is when you're investing, if you're going to be investing in data centers, at least the way that we want to invest in data centers, you don't want to do it speculatively. You don't want to say, oh, I'm going to buy that piece of dirt and Google, Microsoft, Amazon will want to be there and then I'm going to bring power there. So the way that we do it is we know where they want to be and we know that power already exists and we negotiate a lease before a shovel hits the ground. So again, a relatively public project that we're involved in is something called Stargate. I'm not sure if anybody's familiar with this or not, but Stargate is a joint venture between Oracle, OpenAI and SoftBank. And it's a half a trillion dollar initiative to fund the infrastructure for AI for the US and we are funding the first large portion of that project in Abilene, Texas. The first phase has already been publicly disclosed. The tenant in that building is Oracle. So Oracle signing a long duration lease, they're basically already paying rent on the project and regardless of if there's any delays, they will pay the full amount of rent. And we know that power exists there. So we've completely de risked that investment from some of the concerns that people have. Is does it have power? Will they if we build it, will they come? We already know they're there.
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C
Given the size of a deal like that, there's probably only a handful of firms that Oracle can call or you and others would go to Oracle and SoftBank and OpenAI to do that. Do you find that in spaces like this there's actually less competition or is there more because it's the biggest firms who've gathered the most capital be able to invest in these types of projects. You have to compete furiously for a smaller set of assets of that size. Or is it there's only a few players in any given transaction that you might do. And there's so much. We look at some of these trends, right? There's a trillion plus dollars I think you had in your Investor day presentation that's going to need to be invested to support this infrastructure build of data centers. So maybe there's enough capital to go around for all the biggest firms.
- [19:03]
B
We want to focus on areas that we think have a massive supply demand imbalance. So huge total addressable market, massive supply demand imbalance data centers today is one of those very unique sectors. So you keep hearing about it and regardless if you're hearing good things or bad things, the projections are a trillion dollar capex spend over the next five years. Let's just say that number is completely wrong. Let's say it's half a trillion dollar capex spend. That's a massive amount of money to build infrastructure that doesn't exist today. So from my perspective, again I'm completely indifferent if it's a trillion or half a trillion, it doesn't matter as long as you're working with the company and providing a solution to help them build the assets they want to be in. So to answer your question, I think you're going to see a handful of players that can do very, very big deals. But in this space there's more than enough to go around. And again, think about it this way, let's move off of data centers because maybe people are sick of talking about data centers. Just take a step back and you think about it this way. What we focus on primarily are investment grade rated companies. And if you look up, not every company discloses the amount of real estate that they have on the balance sheet. But Most companies disclose PP&E, property, plant and equipment. According to S and p In the US, Canada and Europe, there is 20 trillion of PP and E on the balance sheet of investment grade rated companies. Here's the kicker. These are not real estate companies and they earn zero to own those assets. So it's a non earning asset sitting on the balance sheet. And so again companies like Oracle, OpenAI, Microsoft, Google, these technology companies that are trading at higher multiples, it's an inefficient use of their capital base to use that money to build those assets or to own those assets. Big, big, big need, very large total addressable market.
- [21:12]
C
You make a really important point and this was actually where I wanted to go next, was around how investors should look at this effectively. You're just underwriting investment grade credits and their ability to pay rent at a very simple way of looking at things.
- [21:27]
B
I'll just answer yes for now, but keep going.
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C
So the next question though is how should investors, particularly in the wealth channel, think about where does this come out of their asset allocation? Is it a real estate allocation, is it a credit or fixed income allocation? How do they think about this?
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B
So I think it depends on your duration, how long you're willing or looking to invest and what you're looking to generate out of your investment. And so we have received a lot of allocations when I think about it institutionally, from groups that have alternative investment allocations that allocate from real estate. The next bucket would be their credit bucket because 99% of the tenants in our portfolio are large investment grade rated companies that offer fixed incomes, that offer bonds that they can underwrite and compare to. And then when I think about it from a high net worth standpoint, I think about it from my parents standpoint, I put it in their fixed income bucket. Upside is great, but if you're not selling something and you want to generate a long duration income stream, I'd put it in fixed income. But again, it all depends on how long you want to be in it and what you're trying to achieve from that allocation.
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C
On that point as well, how have you thought about productizing the investment strategies you have within real assets for the wealth channel and also for the institutional channel? I think one interesting thing there is you've also created product structures like evergreens that would be thought of as for the wealth channel for institutional investors too. With your O Ren product. I would love for you to talk about how you think about how to productize these products for both wealth and institutional channel.
- [23:10]
B
Again, this was one of the other major benefits of merging my company into Blue Owl. I had people that were ultra focused on this and understanding what made sense for private wealth. I wasn't thinking about it from a structure standpoint, I was thinking about it simply from an investment standpoint. I'm investing the money, so obviously that's where I want to be spending my time. But historically we had built the business on a closed end drawdown fund model. And a large percentage of our investors were allocating to us because of the income generation and the downside protection. I don't think any of them were really anticipating us selling our portfolios that quickly. Our weighted average holding period was less than three years by fund. That's really, really fast to be returning capital in a drawdown structure. So a lot of our institutional clients came to us and said, would you create an evergreen structure with a similar strategy? So that's why we did it. And so we created an evergreen structure with a very similar longer duration strategy. And what we did was we had high net worth investors invest in that structure. And what we learned is high net worth investors don't really like the institutional open ended product structure. And so we launched O Rent to give the high net worth community exactly what they wanted, which was this investment strategy in a different wrapper. And I couldn't have done that without the help of my partners at Blue Owl.
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C
What's been the hardest part about educating the wealth channel on both real estate as well as evergreen structures?
- [24:44]
B
When we started the strategy again In September of 22, it was the really, really bad time for commercial real estate. So it was about explaining that not all commercial real estate is the same and it's just painted an extremely wide brush. Most of the carnage, if you will, was in gross leases because the expenses were running away from people. Shorter duration leases and multi tenant, which is the exact opposite of what we do. We do single tenant, long duration, triple net. And so we were completely insulated from everything that was happening. And that was hard. Then the next thing was, oh, in an inflationary environment, there's this view that everything goes up. That's not necessarily true. It's actually quite the opposite. In an inflationary environment, you know, what goes up are your expenses. Your revenues don't necessarily go up in an inflationary environment. So what was happening in most other real estate asset classes is taxes were going up, insurance, even in this great state, insurance was going through the roof. You couldn't even insure some of the most amazing real estate in the world. Expenses, utilities, the cost to build, all of those things were going up. What wasn't keeping up with that was people's ability to increase their rents, their revenues, more than the expense side of the equation. So that was a learning piece. And once people got that and saw that, year after year, I think a light bulb went off and that's when we saw substantial flows.
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C
I have to imagine that the light bulb also went off for competitors as well in terms of creating a triple net lease strategy. How has the market structure changed from that perspective in terms of others employing a triple net lease strategy, and how much more competitive has it gotten?
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B
So we've always had competitors. In 2020, when I decided not to sell to one of the big names and all the names that we all know at that time, in 2020 and 2021, you saw every major large asset manager launch net lease strategy. And what you saw was the world dramatically changed in 2022. And most large asset managers do everything. And what you saw is everybody retrench because all the stuff that they bought and we sold 3 billion to someone that would be viewed as a competitor at the time. And even my partners were like, why would you sell 3 billion to let them enter the space. I said, if they want to buy at something that generates a 28% net return for our clients, we're sellers. And shortly Thereafter they sort of left the marketplace. They weren't doing Net Lease anymore. Today you're seeing more groups enter Net Lease and one of the largest private wealth platforms that we're on. Actually we did so well on that platform that they created a product to compete with us on their platform. And so look, I think competition is healthy. When you have a $20 trillion total addressable market, when you've got a 15 year track record, when you've got a good track record, you're going to draw competition. I think it's a good thing.
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C
You talk about a more competitive market and more competition that may have happened in the U.S. you also talked about recently in your Investor Day presentation that Europe is an interesting market for trade. Triple net lease, I think the US is 11.9 trillion market size. Europe, I think you have at 11.2 trillion or so. Talk about the European opportunity and why go over there? What's the opportunity?
- [28:13]
B
Yeah, and again, it's for 13 years we would look at other parts of the world and say, okay, do we want to do our strategy there? And Europe was always as tight as it was here. From 2015 to end of 21 to 22, when cap rates, when yields compressed, when we were living in a zero rate environment, there was massive credit availability. Europe was even tighter than the US So we weren't seeing opportunities. So again, I'll stick with Amazon. We were buying Amazon at higher yields in the US than you could in Europe. So it just didn't make sense. You were taking credit risk, you were taking currency risk, you were taking tax leakage. Why would you do that? Well, that all changed in 2023. And as we saw massive dislocation, we saw massive dislocation across the globe and we saw it in Europe happen dramatically. And to double click on that, a lot of our partners, investors, tenants in our buildings were saying to us, we've done a great job with you in the US and Canada. Will you do this facility in Germany? Will you do something in the uk Will you do something in Italy? And our answer for the first time is yeah, it makes sense. It's a great entry point.
- [29:26]
C
I think you bring up a really interesting point when you talk about Amazon and you talk about them. They're a global company. There are many big companies that have footprints all over the world. How much of working with these types of firms is kind of an enterprise level sale where you end up working with one of these big companies in one region of the world. They like you, they know you, and then that creates this footprint globally, that you can work with them and you become the partner of choice on the real estate side.
- [29:55]
B
I'll tell you in 24 months. So we're just starting to feel that now. And we're starting to feel that for a number of reasons. Number one is our scale is unlike anybody else in the space and we are working on substantially larger projects. And you're seeing a lot of these companies look to do things globally today. So they're saying either we want to unlock value or we want to build this manufacturing facility. And that's what's allowing us to capture the opportunity. But we hope it translates to exactly what you just said.
- [30:27]
C
Where are we in the real estate market right now?
- [30:33]
B
This is always a tough question. So I think if you have not been investing in real estate over the last 24, 36 months, you've missed one of the best buying opportunities that I've seen in my life. And so again, since the global financial crisis, this has been a tremendous opportunity for a number of reasons. Number one, for all the reasons that we know that make it difficult to buy, interest rates went up, inflation went up, and I think the biggest driver of deal flow is credit availability. Lenders stop lending on commercial real estate. It truly fell off of a cliff. So when you see debt capital go down and you see interest rates go up, it makes it very, very difficult to buy. Most people associate a tough interest rate, tough real estate environment with interest rate. It's interest rates plus spread, plus credit availability. The highest interest rate environment that we've lived through over the last two decades was actually 2006. The 10 year treasury on average was 4.8%. That was an extremely frothy environment for all asset classes, specifically real estate. Why? Because all the major banks were lending 85, 90 cents on the dollar. 10 years interest only. You're going to see euphoria. So to directly answer your question, I think we have barely scratched the surface. Depending on where you are in real estate, you're seeing credit enter the market again. I'm not picking a bottom or a top or where interest rates are going. That's a fool's errand. From my perspective, I want to be buying at a specific cap rate or yield that delivers a specific cash flow after debt service. And I want to have a view for 15 to 20 years. So I think it's a great environment. To answer your question differently, $20 trillion market opportunity, people say, what inning are you in the game? Hasn't even started. There was 41 billion in transaction volume on a $20 trillion market last year. Forget all the new builds that are taking place. Just existing product, massive, massive opportunity.
- [32:44]
C
Have a lot of firms been really deploying over the last 24 to 36 months? Have they recognized that and seen okay, this is the time does sounds like going forward is as well, but maybe a little bit different based on where rates go.
- [32:56]
B
Yes, there's been groups that have been investing, but if you think about transaction volume, it has gone down for most and I would say for us it has gone up dramatically. And again, I want to be thoughtful. I'm not saying that a lot of those companies miss the opportunity. I think a lot of those companies had so much trouble in their existing portfolios. It's tough to be offensive when you're playing defense. And I think that's what creates opportunities. But if you have a portfolio. Again, going back to the point built the strategy coming out of the global financial crisis, the intent was to have a strategy that I thought could exist through another global financial crisis or another black swan event. And the first test that we all faced as investors from 2008, 2009 was the global pandemic. And depending on what strategy you invested in, there's a different way to measure the manager and see how they did in that period of time. I think in real estate it's pretty simple. How much rent did they collect when the world was shut down? It's a pretty simple way to measure a real estate manager. And again, it's a very self serving measurement because we collected 100% across all of our tenants in every portfolio on time. And that's what I think is useful.
- [34:12]
C
What in your mind were the biggest drivers of making that happen? Was it underwriting? Was it the way you structure deals? Was it finding the right credits to work with?
- [34:23]
B
I think the biggest thing, and again, you won't hear a lot of real estate firms talking about this is credit quality. But that's not all we're focused on, but credit quality, lease structuring and buying real estate. Well, understanding what sectors you want to be in and why you want to be there and then making sure that you're structuring a deal, that if the tenant no longer wants to be there, and by the way, they're obligated to be there for the life of the lease. But if they decide at some point that they want to leave that you can retenant that property relatively quickly.
- [34:56]
C
What are you most worried about in real estate right now?
- [35:01]
B
That's always a tough question. I am worried about massive movements in Technology that my mind can't comprehend. Again, when you think about the way that we've built our strategy and our business models, it's about making things simplistic. It's about you cover the expenses. I want great credit quality. I don't want to bet on when the market's coming back. I want 15 to 20 year leases. I want my rent to go up every year contractually. So we've eliminated a lot of the major risks that you think about in other strategies. The risks to me are the things that I can't even think about that my team can't quantify today. And we're spending a lot of time trying to get ahead of those on that point.
- [35:50]
C
You think about data centers as being one of the biggest trends right now. What in your mind is next?
- [35:59]
B
No clue.
- [36:01]
C
As it comes to real estate and as you think about, okay, we're financing the build of data centers, is there something else? Decarbonization is another one that's a big mega trend. Is there something like that? And done that a bit with, with Crusoe as one example. That's a combination of the two.
- [36:15]
B
I think it's this. I think, look, there's the areas that we're seeing the biggest capital flows. Our number one data centers is unlike anything anybody has ever seen. Truly the amount of capex needed and supply demand imbalance is once in a generation opportunity. The other thing that's smaller and far less sexy but I think is a massive opportunity is manufacturing facilities and the onshoring movement of manufacturing facilities. And when I think about the type of stuff that we want to be buying, the things that we want to invest in, it's where the products are made and there's a massive need for the company to be in that area building that product.
- [37:00]
C
I want to ask a slightly more personal question based on your experience. So you started in 2009 with $17 million under management. You now collectively and real assets Platform Blue AL65 billion 34 in the triple net lease strategy. Given how important C scale is in today's world, if you were starting today, do you think you could start with a $17 million fund and build what you built at Oak Street? And now what today is Blue Al?
- [37:28]
B
I think it would be incredibly, incredibly difficult. I think it has been incredibly difficult. But there's no reason that somebody else out there can't do that.
- [37:39]
C
On that point, what advice would you give to somebody trying to build the next great asset manager?
- [37:46]
B
Number one, myopic focus. So over 15 years there's a lot of different things that were appealing that look good. But I kept going back to there was so much white space in the one thing that we were doing, there's no reason to go try and do something else. And so I would say perfecting your craft, picking one thing, specializing in blocking out the noise is the best advice that I would give somebody.
- [38:21]
C
How do you think your perspective on asset management has changed now being part of a bigger platform? I mean, just to give context to the question, when I think about Blue Owl, it's like there aren't many firms a that have scaled the 265 billion of AUM in nine years. But it's almost like if you could pick the features of an asset manager that you'd want to have from the start, you kind of have it. You have permanent capital. You have three strategies that seem to really fit together. You have scale, you have a wealth channel business that's humming. What are some of the things you've learned from being part of this bigger platform?
- [38:57]
B
So it falls back to the same idea that I needed to do other things, meaning this. What I had pre Blue Owl was a really, really, really good investment strategy and a great investment team. And in order to be a phenomenal asset manager, you need to have great compliance, legal, human resources, technology, distribution. I had none of that. We had such a good investment strategy and such a good track record. We were raising our unfair share. And so the ability to plug in to infrastructure, not to use that word, beat that word to death and have that infrastructure be a plus, that allows my team to do what they do best, has been instrumental. You could not grow at the level that we've grown unless you have all of those things humming now.
- [39:55]
C
You sit on the other side of the table from where you were in 20, 20, 21 when you got acquired by Blue Owl. You've acquired a number of businesses. IPI on the data center side, Prima the real estate side, Kuvar on the asset management, insurance asset management side. What are you looking for when you think about acquiring other businesses to fit.
- [40:18]
B
Into Blue Al's platform pioneers in what they are doing. Truly strategies that we believe in that have massive supply, demand, imbalance, massive total addressable marketplaces, an existing cohesive team that is focused day in and day out on that strategy and a track record of delivering higher returns than risk taken in that strategy. And so when you think about that, you've talked about a number of things that we've acquired and I try to oversimplify this for people because it does Seem like we've been acquisitive, and we have. But on the real asset side, to me it was do we want to build versus buy in real estate credit? So again, real estate credit, phenomenal opportunity at our investor day. I talk specifically about this. In 2021, you could look at a building, you'd buy it. If you wanted to lend on that building, on a great asset, you were going to earn something with a 3% range on it. On that exact same building, 36 months later, you could earn a 9% while that building's trading at a 20% discount. And there's $5 trillion of loans rolling over over the next three to five years. That's a boat you want to get on. Massive, massive opportunity. So we looked at buying a bunch of different firms and everybody had so many legacy issues because it was a tough market for real estate. So we figured what we wanted to do is do a combo approach. We wanted to build and buy. So what we did was we found a specialist in real estate securities. Prima 32 year track record, 20bps of default. It's insane. It's like nothing I've ever seen before. And then I got to hire somebody that was an investor of mine for many years and who became a great friend. Jesse Hamm, who was the head of real estate credit for the government of Singapore for gic, one of the largest investors in the world, built the largest real estate credit book over 16 years, hired him to be my CIO and run that strategy for us. That's what we're looking for, is sort of being able to be relevant day one in scale with players that get that market.
- [42:28]
C
What you're getting at is how do you build the right culture on that point, how do you think about building the right culture within the business?
- [42:39]
B
So that's something else that I've learned, and I'm humbled to say that when I started a firm in 2009 and you were begging, borrowing and stealing to get things going, culture was you work and you outwork everybody every single day of the week and you have really crappy office and you got to be gritty and you got to want it and you got to be hungry. I can tell you that I've learned since becoming a part of Blue Owl and spending time with my partners, there is something to that, but there's also something to having your team generate the benefit of all that hard work. And I can give you a silly example. When I joined Blue Owl, we have a work from anywhere August policy. And I remember Coming on board and saying that's the craziest thing I've ever heard. We're going to let all of our people work from anywhere they want for the month of August. That's crazy. No one's going to do anything. I was completely wrong. Morale went through the roof. Our employees absolutely loved it. Productivity was great and it's a massive, massive win. So long winded. Answer to your question. Culture's important. You want people to work really hard, feel the grit, but also generate some benefit from all the hard work that they're doing and feel like they're wanted and working for a higher purpose.
- [43:59]
C
I want to end this with a question about looking towards the future. So you have a ton of experience, but you also don't have that much gray hair show for it. Despite how hard you've worked, you could probably be doing this for another 20 plus years where it feels like we're only at the early innings. You mentioned that we haven't even started yet in certain aspects of this the wealth channels, adoption, another early innings. If not, we haven't even gotten there yet. Trend. What excites you the most about the next 10, 15, 20 years in private markets?
- [44:28]
B
I really do think the biggest opportunity is in private wealth today. I think moving a large portion of the average high net worth asset allocation from stocks and bonds into alternatives and getting access to that asset class and doing it in the right asset class with specialists that are in line with what those managers and what those advisors want, I think is again a very, very interesting and tremendous opportunity today. And I think you want to be with firms that you believe, understand what the advisors want and can service those advisors because that's important. Having just the strategy isn't the full picture. You need more than that.
- [45:17]
C
That's great to hear because that means I don't need to change the name of the podcast. Alt goes mainstream for a while. We have a while before it goes truly mainstream. So, so awesome conversation. Mark. Congrats on what you've built. Thanks so much for doing this.
- [45:27]
B
Thank you.
- [45:28]
A
This is how we do it. This is how we do it. This is how we do it. This is how we do it.
- [45:51]
C
Ram.