[REPLAY] Private Equity Masters 6 – Doug Ostrover – Blue Owl Capital (Capital Allocators, EP.205)

Summary

Capital Allocators – Inside the Institutional Investment Industry
Episode: [REPLAY] Private Equity Masters 6 – Doug Ostroover – Blue Owl Capital (EP.205)
Release Date: May 15, 2025
Host: Ted Seides

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Introduction

In the sixth episode of the eight-part miniseries Private Equity Masters, host Ted Seides engages in a comprehensive conversation with Doug Ostroover, co-founder and CEO of Blue Owl Capital. Doug brings over three decades of experience in leveraged finance and private equity, having previously co-founded GSO Capital Partners, now Blackstone's alternative credit platform. The discussion delves into Doug's career trajectory, the importance of company culture, investment strategies, the formation of Blue Owl Capital, and his perspectives on the future of direct lending.

Doug Ostroover’s Early Career and Entry into Leveraged Finance

Doug begins by recounting his upbringing in Somerset, New Jersey, where his father worked in the textile business. Although his early exposure to business was limited to his father's work, Doug developed a profound interest in the business world. He narrates his initial foray into finance during his college years, securing a position at EF Hutton.

Doug Ostroover [02:32]: "I have to admit with regard to Wall Street I had no exposure... It really wasn't until I got to college that I got any real exposure to Wall Street."

Doug's transition into leveraged finance was serendipitous. Initially placed in municipal finance, a change in tax laws forced him into the junk bond group within corporate finance—a pivot that significantly shaped his career.

Doug Ostroover [03:36]: "Leverage finance actually picked me. And I pinch myself every day that I was fortunate enough to get into it."

Starting at EF Hutton in the mid-1980s, Doug faced the challenge of competing against Drexel Burnham Lambert, the dominant player in the junk bond market at the time. His early years were marked by self-driven learning and adaptability, including seeking tutoring in financial modeling to bridge his knowledge gaps.

Building GSO Capital Partners

After various stints at firms like LF Rothschild and Wasserstein Perella, Doug joined Donaldson, Lufkin & Jenrette (DLJ) in 1992, a decision he later describes as one of his best. DLJ offered him a supportive environment to develop his expertise further. However, in 2005, following significant changes in Credit Suisse's leadership post-acquisition of DLJ, Doug decided to co-found GSO Capital Partners with Bennett Goodman and Tripp Smith.

Doug Ostroover [10:09]: "We were going to do something that nobody really had ever done and that was marry both public market expertise with origination."

GSO focused on direct lending, an area not heavily explored at the time. Despite leaving a lucrative position during a favorable market period (2005–2007), which drew skepticism from peers, Doug and his partners successfully built GSO into a formidable force within the leveraged finance sector.

Emphasizing Culture at Alrock Capital

Post-GSO, Doug founded Alrock Capital in 2016, a direct lender managing $30 billion in permanent capital assets. He underscores the pivotal role of culture in organizational success. Drawing inspiration from his experiences at Blackstone and observing leaders like Steve Schwarzman, Doug aimed to create a work environment that balanced excellence with respect and work-life balance.

Doug Ostroover [13:12]: "My real goal, though, was to create something that was a little kinder, a little more gentle... I think you can have a work life balance."

At Alrock, Doug prioritized hiring top talent, fostering open communication, and ensuring that employees felt valued and respected. This focus on culture resulted in impressive retention rates, with no voluntary departures in six years.

Investment Strategy and Direct Lending

Doug elaborates on Alrock's investment philosophy, emphasizing the preservation of capital and protection against downside risks. The firm specializes in senior secured floating rate loans, targeting industries with stable cash flows such as software and healthcare. By focusing on top-performing companies within their sectors, Alrock minimizes default risks and ensures robust underwriting standards.

Doug Ostroover [22:47]: "The one thing I would say I was maniacally focused on is what's called our deal funnel."

Alrock distinguishes itself by maintaining an extensive deal funnel, enabling the firm to evaluate a broad spectrum of opportunities and select the most viable investments. Additionally, Alrock pioneered offering institutional-quality direct lending products to retail investors, creating a unique retail sleeve that mirrors their institutional fund's investments.

Formation of Blue Owl Capital through Merger with Dial Capital

In a strategic move to enhance service offerings and expand their reach, Doug discusses the merger with Dial Capital, leading to the creation of Blue Owl Capital. This merger was driven by the desire to provide comprehensive solutions to private equity and venture capital firms, encompassing both direct lending and equity stake opportunities.

Doug Ostroover [42:43]: "Our goal is, obviously we want to see the most deal flow possible, but we also want to make sure that we win those deals where there's real alpha attached to it."

The merger aimed to combine the strengths of both firms, leveraging Dial Capital's extensive network and operational expertise to broaden Blue Owl's product suite. Culture compatibility was a critical factor in ensuring the merger's success, with both sides prioritizing mutual respect and shared values.

Perspectives on the Future of Direct Lending and Private Credit

Looking ahead, Doug is optimistic about the growth trajectory of the direct lending market. He highlights the sector's ability to provide tailored financing solutions that offer greater stability and flexibility compared to traditional syndicated loans. Doug anticipates that as private equity firms continue to seek alternatives to Wall Street's conventional financing, direct lenders like Blue Owl will play an increasingly vital role.

Doug Ostroover [34:42]: "We are in the really early innings. I think I've been pretty right on seeing this."

He also touches upon the innovative structuring of permanent capital vehicles, which provide investors with immediate liquidity and long-term investment opportunities, distinguishing Blue Owl from traditional fund structures.

Personal Insights and Lessons

Throughout the conversation, Doug shares personal anecdotes and lessons that have shaped his professional journey. He emphasizes the importance of perseverance, long-term vision, and the value of building strong, respectful relationships.

Doug Ostroover [55:41]: "When you get out there, you're ambitious, and you really think it's a sprint. And the truth is, it's not. You still have to be ambitious, work hard, try to get ahead, but it's really a marathon."

Doug also reflects on his biggest mistake during the 2008 financial crisis, where excessive leverage led to significant losses. This experience instilled in him a cautious approach to leverage, prioritizing sustainable growth over aggressive expansion.

Closing Thoughts

Ted Seides wraps up the episode by thanking Doug for his insightful contributions. Listeners are encouraged to apply the lessons shared in their investing and personal lives, and to engage with the Capital Allocators community for continued learning and growth.

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Notable Quotes with Timestamps

• Doug Ostroover [02:32]: "I have to admit with regard to Wall Street I had no exposure... It really wasn't until I got to college that I got any real exposure to Wall Street."

• Doug Ostroover [03:36]: "Leverage finance actually picked me. And I pinch myself every day that I was fortunate enough to get into it."

• Doug Ostroover [10:09]: "We were going to do something that nobody really had ever done and that was marry both public market expertise with origination."

• Doug Ostroover [13:12]: "My real goal, though, was to create something that was a little kinder, a little more gentle... I think you can have a work life balance."

• Doug Ostroover [22:47]: "The one thing I would say I was maniacally focused on is what's called our deal funnel."

• Doug Ostroover [34:42]: "We are in the really early innings. I think I've been pretty right on seeing this."

• Doug Ostroover [41:29]: "Culture is the key. Acquisitions are hard. And this wasn't really an acquisition, this was a merger. And so it's really a merger of equals."

• Doug Ostroover [55:41]: "When you get out there, you're ambitious, and you really think it's a sprint. And the truth is, it's not. You still have to be ambitious, work hard, try to get ahead, but it's really a marathon."

Conclusion

This episode of Capital Allocators offers a deep dive into Doug Ostroover's extensive experience in the private equity and direct lending sectors. From his unexpected entry into leveraged finance to building successful firms like GSO and Alrock Capital, and culminating in the strategic formation of Blue Owl Capital, Doug shares invaluable insights into effective capital allocation, the critical role of company culture, and the evolving landscape of private credit markets. His reflections on personal growth and professional challenges provide listeners with both inspiration and practical lessons applicable to their own investment and business endeavors.

Transcript

[Doug Ostroover]

Foreign.

[Ted Seides]

Hello, I'm Ted Seides and this is Capital Allocators. This show is an open exploration of the people and process behind capital allocation. Through conversations with leaders in the money game, we learn how these holders of the keys to the kingdom allocate their time and their capital. You can keep up to date by visiting capitalallocators.com over the last decade or two, no asset class has generated as much interest and investment dollar returns as private equity. This eight part miniseries, Private Equity Masters is a set of conversations with some of the longtime leaders in the space. We'll hear their stories, those of their firms and their perspectives on this all important area of the capital markets. My guest on the sixth episode of Private Equity Masters is Dou Ostroover, the co founder and CEO of Blue Owl Capital, a public company born out of a merger between Alrock Capital and Dial Capital. Doug is also the CEO and co CIO of Alroc Capital, a direct lender to middle market companies that he co founded in 2016 and today manages $30 billion in permanent capital assets. The combined Blue owl manages approximately $53 billion in assets, over 90% of which is in permanent capital. Vi Previously, Doug was one of the founders and the O in GSO Capital Partners, which today is Blackstone's alternative credit platform. He's been involved in leveraged finance working with private equity sponsors for 30 years. Our conversation covers Doug's beginnings in leveraged finance, the founding of GSO and keys to his early success. We then turned to the importance of culture, sourcing investment opportunities, the underwriting process and working with both GPS and LP piece. We close with Doug's perspective on the recent formation of Blue Owl and what the future holds for direct lending. Please enjoy my conversation with Doug Ostroover.

[Doug Ostroover]

Doug, great to see you.

Well, thanks for taking the time today. I appreciate it.

Why don't we go back to the beginning and maybe start with what drove your initial interest even in just the business world.

I grew up in Somerset, New Jersey, middle class area. It was a Levitt town with four different styles of homes and the rich people in our neighborhood they had one extra tree because everyone's landscaping was identical. My father was in the textile business, he worked for his brother. We were very close and I was always enamored of business and sat at his hip and learned a lot. But I have to admit with regard to Wall Street I had no exposure. I mean in that area where we lived there was no one who worked on Wall street and so it really wasn't until I got to college that I got any real exposure to Wall street. And I was fortunate enough to get a job after lots of rejection, but it's somehow all worked out.

So if you go back in those early Wall street years, early on, you got into leveraged finance. What was it that made it an attractive place to be?

Well, if I'm being 100% honest, I didn't pick leverage finance. Leverage finance actually picked me. And I pinch myself every day that I was fortunate enough to get into it. I started my career at a firm called the EF Hutton, which probably most of your listeners have never heard of, but it was a pretty big firm back then. And I was in a program where I rotated around the firm and I probably didn't make the wisest choice, but I decided that I would go into municipal finance. And at the time, this was probably 1985, maybe 86, that was one of the most profitable areas at E.F. hutton. And the group I was fortunate enough to get a job with specialized in a form of public finance called industrial revenue bonds, which is a fancy way of saying they would go to companies, they would help them do a financing on a project that would help a community. And if it was helping a community, they could get municipal status, which means interest rates were very high then, but municipal rates were much lower, so they could save a lot. So we were working with small companies building a small factory. It would be 10 employees. We'd get it qualified for this municipal status, and we could save hundreds and hundreds of basis points. So one day I wake up, I'm walking to the subway, I get my Wall Street Journal, and they've changed the tax code, and they have outlawed this area that I had focused on. And so I take the subway downtown. I think I'm 26 years old at the time, and I'm certain I am out of a job. And I've only been working for three, four years. And so I show up and they said, pack up your things. And I thought again, we were getting fired. And they said, you know, this team has worked with a lot of small companies. We're going to move you across the street. You're now the new junk bond group in corporate finance. And that's how I got involved. Pure luck. Drexel was the dominant firm at the time, and we were setting off on a course to try to get maybe a point or two of market share. So it was an exciting time. I think it was 86, 87. And I was very fortunate to get involved in it.

What do you remember Most of your early lessons in the business, I have.

To admit, having been in public finance, moving to corporate finance, I was ill prepared and it was much more accounting focused than working for a municipality. And I remember sneaking out and getting tutored by a professor at NYU on financial modeling and just getting better at accounting. So it was a year or two of really hustling. But it was an interesting time because Drexel was still the dominant player in the marketplace. So to pick up any market share was a real challenge. But this was a really small group. So as a 26 year old associate, I had the flexibility to call on companies and pitch them and I was very fortunate. It was exciting.

So how did it evolve from there through the rest of your time on the sell side of the street?

So E.F. hutton had some financial issues. I left Hutton and I went to a firm called LF Rothschild and then they had some issues at Rothschild. I had made the move after a couple of years of banking. First I became what was called a desk analyst working on special situations. Then I moved into sales. Rothschild had some issues. So I went to Wasserstein Perella who had started a high yield business like being chosen to go into leverage finance. I decided I wanted to go to a bigger firm and I got offers from two firms. One was Bear Stearns and the other was a firm called dlj, Donaldson, Lufkin, Genret. They're both great firms. But I really liked the people at DLJ more. There was just something I related to. The problem was DLJ was offering me materially less than what Bear was offering me. But I just decided I'm going to take a long term approach and I'm going to take the offer at dlj. So I go to Bear Stearns. I tell them, look, unfortunately I'm going to go across the street to dlj. This is a true story. So I'm living in a two story walk up, only air conditioning in the bedroom, not in the living room. Just to give you an idea what it was like, but a great apartment. And so I come home. If you remember the old fashioned answering machines, you'd have to go and hit the button. So I hit the button, it makes the sound beep. And I hear the guy with a bit of a southern accent and he says, Doug, this is Ace Greenberg on the phone. I hear you're about to take a job at dlj. Before you do that, that any chance we could have breakfast tomorrow? So I think I'm 29 at the time, maybe just turning 30. And Ace Greenberg Was a legend. He ran Bear Stearns forever. I never met him. And I have to tell you, I thought someone was playing a joke on me. I thought one of my friends was playing a joke. So I had my wife call the number he left and someone answered, said Greenberg residence. So we hung up immediately. A few hours later I called and I went over and had breakfast with him the next day. And just an incredible gentleman. So impressive, insightful and I really enjoyed my time with him. Unfortunately, he ran the firm and I wasn't going to be working for him. And I decided to go to DLJ and I would say is probably one of the best decisions I've ever made. You know, there's that movie with Gwyneth Paltrow. I think it's called Sliding Doors. She runs to get the subway. One part of the movie is she makes it and she ends up meeting her future husband. The other one she misses, it stays with her current boyfriend. Both work out fine. Both would have worked out fine, but DLJ was a special firm and I made some unique partnerships there.

What led to you ultimately leaving and co founding GSO?

I started at DLJ in 92, I left in 2005. Now in 2000 DLJ was bought by Credit Suisse. In 2005 there was a change at Credit Suisse. John Mack, who had been the CEO was pushed out and a guy named Ozzie Grubel, who was his co head took over. And then they anointed a guy named Brady Dugan, who we were friends with, to run the U.S. but we thought that was a good time to pass the reins. And we had been really intrigued with the asset management business. And so with my two partners who we had been running the business, actually Bennett Goodman ran the business. We worked for him. But the three of us said Bennett Goodman, Tripp Smith and myself, let's go start this firm called gso. We're gonna do something that nobody really had ever done and that was marry both public market expertise with origination. And direct lending wasn't really a thing back then. And we thought we had originated tens of billions of product over our career. And we thought we could continue to do that and not be so reliant on Wall Street. So we left and as you can imagine, leaving a really nice high paying job. It was nerve wracking. And remember we left in 0505-0607 were some of the best years ever for Wall Street. So people were calling us constantly saying you guys made the biggest mistake of your lives. Why would you leave we're killing it. But we had a great partnership and we built a really good business there.

Over the course of the period of time, both at CS DLJ and then gso. What are the key components that allowed you to be successful both on the sell side and leverage finance and then lending to companies directly?

The one thing I learned at a very early part of my career is how important it is to have great partners. If you can find people who you think are better than you in a lot of parts of business. But together we had three of us. If we could take one plus one plus one and make it equal four or five, that's pretty valuable. And so I've believed in that since day one. The other thing is it's a people business, and you've got to hire great people. And I think as an owner of a business, you have to be willing to share the economics, you have to be willing to get the best people, you have to create a great culture. And this is a people business. So we set out, both at GSO and at my current firm, to really attract the best and the brightest and give a great work environment as well as chance for upward mobility and to be really well compensated.

So I want to fast forward when you started alrock. What does that culture mean to you, and what culture did you seek to replicate?

When I left Blackstone in the summer of 2015, I started thinking about leaving in 14, and it wasn't like I was unhappy there. It's an amazing firm, and I felt really fortunate that we sold our firm to Blackstone because we sold in 08. So we were able to get through the crisis being part of Blackstone. And I learned a lot there. I learned a lot about culture watching people like Steve Schwarzman and John Gray, especially watching them during a crisis. They led by example, and they were calm and cool and trying to figure out, you know, there's a lot of pain in the world, but how could we come out of this stronger? And they came out much stronger, and that that helped our business. But as I think about the culture we were trying to create, I think we saw an opportunity to create a culture that we could give people, our investors, the same experience, the investment experience, as a Blackstone, kkr, Carlyle, Apollo, any of the big firms. So whether it's anything in our back office, compliance, legal, cybersecurity, make that as good as you would find anywhere in the world, build an investment team, I think it's better, but as good as anyone. My real goal, though, was to create something that was a little kinder, a little more gentle. No FaceTime. People don't believe me, but I spend a lot of time talking about this and I really believe it. I think you can have a work life balance. And so I tell everyone, don't miss your kids school plays, don't miss the parent teacher event, don't miss your spouse's anniversary, don't plan that business trip to Asia when all of this is going on. Culture is an intangible. You know when it's working, you know when it's not. We have some very basic tenets. When you're here, you have to treat everyone with respect. We expect excellence, but you treat everyone with respect. The other thing is we want to hear every everybody's voice. You think we're doing something we could be doing better, we want to hear it. If we're making an investment, we don't care if you're just out of college, if you think it's a bad investment, don't walk out of the room and whisper to your friend, ah, that's a terrible deal. We want you to speak up and no one's going to be critical. And so the culture is really working. And we have today about 300 people and we have not had one person in six years voluntarily leave, not one. And we're continuing to grow and build and it's an exciting place to be. But we spend a lot of time talking about culture, doing off sites on culture and looking for input from everyone on how to make it better.

How do you balance the kinder, gentler desire of the firm in such a competitive landscape outside the firm?

When I talk about things like mutual respect and constructive discussion, those are easy. Now on the other hand, we are talking about we expect excellence from people. I'm a big college football fan. I can't remember which coach, I think it was Nick Saban. But he said, listen, when you come to practice, we expect 100% effort a hundred percent of the time. That's what we expect when you're here. But we think if you're doing that, we can give you balance. And I think that's what we've largely achieved. Now look, we're only a six year old firm, we're growing a lot. Time will tell if we can maintain it. But I'm pretty convinced that there's more than one way to run a business and you can run a firm and I think be highly successful and people don't need to be here every night till 3 o' clock in the morning just to say that they were beer till three in the morning.

So I want to turn to the firm and the investment side of the business. So why don't we start with when you created Outrock, what were you trying to accomplish as your own strategy?

We started the firm in 2016 and I was lucky to be at Blackstone. When I left, I think we had 80 billion, 90 billion. I don't know the exact number, but it gave me the ability to see quite a bit. I started becoming convinced that direct lending, which is what we specialize in, was going to become a really big asset class. Back in 14 and 15, most big institutions, they allocated to it, but in relatively small size and it wasn't a separate asset class. And as I went out and started talking to folks, I realized that they were going to allocate a lot more money. And at the same time, more and more private equity firms were becoming intrigued with not going to one of the big banks, but going direct to somebody like us who could provide a bespoke solution. When I looked at the world, it's pretty interesting, the competitive landscape. If you were to draw a pyramid and you go to the bottom of the pyramid, the widest part, there were a lot of firms that could make loans of 10 to 20 million dollars. Then you work your way up to 40 to 60 and then 60 to 80, then 80 to 100. When you got to the top of the pyramid, the number of firms that could actually make loans of 2, 3, 4, 500 million and hold it was relatively small. And so I noticed that and I was surprised because that's where I like to invest. Because think about it, if I'm lending to bigger companies, most likely I can better protect the downside. They have more levers to pull to avoid bankruptcy. And what we have always tried to do is lend to a company that's number one, two, three, four, maybe five in their sector. So let's say a company does get in TROUBLE, they're number three in the marketplace. You know, companies 1, 2, 4, 5 are going to have to look hard at that asset. And so the basic premise that we've created and we've really executed on this is protecting our investors capital. Remember, we are a fixed income security. We're making senior secured floating rate loans. And our job is to earn a premium versus what they could get in the syndicated high yield market or the syndicated loan market. The other thing we need to do is, because we can do a lot more diligence than a syndicated participant, is to make sure we better protect the downside whatever the loan losses are in the syndicated market, we need to do a much, much better job because we have better information and we've been able to do that. So I was excited when I saw less competition at the top of that pyramid and I could finance bigger companies. And that's where we focused.

So how do you go from a ground start to amounting sufficient assets that you can make loans in that size and still have a diversified portfolio?

Yeah, it's a really good question because going out with that, it'd be much easier to say we're going to do 10 or $20 million loans. You raise a half a billion dollars, you're in business. We had to go raise billions. I think we were fortunate. We put together a great team. I brought in Mark Lipschultz who is at kkr, Craig Packer who is at Goldman, Alan Kirschenbaum who is at tpg. And the whole idea was, let's give everyone, our investors that big firm experience, but as a new boutique, but highly focused, focused on one thing and let's be best in class at it. And it resonated. And there's an element of luck to this. And trust me, when I was sitting in my lawyer's office, we were working out of a conference room, interior conference room, no windows. There were like 12 of us. That's where we went every day for months. In fact, before I got the conference room, I used to spend every day at the Putnam Diner in Greenwich in the back booth. I was the number one customer. That was my office to save rent. When you're starting something new, it's really scary. But we were fortunate. We got a great response in the market. We raised $6 billion. We used a turn of leverage, so we had 12 billion of firepower when we launched. We had our first close at the end of the first quarter in 2016. And we really haven't looked back since then. But you can imagine when you're starting and you're trying to attract people and you don't have an office. I don't even know if we had a name. We didn't have any capital. Now, I had come from GSO and Blackstone and we had had a lot of success there. But to get people to leave, Goldman and Morgan Stanley and other direct lenders had to take a lot of risk and believe. And I'm incredibly grateful to all those people who took that leap with us. Obviously today, now we're blue out. It's much easier attract great talent. But when you're just launching that's away from raising the money. That's probably the hardest thing to do because you're trying to get someone who is at a point in their career where they're senior enough and you're asking them to take a lot of risk. Now you're hopefully offering them a good reward if it all works. But it's not for the faint of heart, that's for sure.

So when you turn to this investment strategy predicated on protecting the downside, how do you go about filtering your investable universe to figure out where you want to make your bets on loans?

The one thing I would say I was maniacally focused on is what's called our deal funnel. I thought the mistake a lot of direct lenders make is they don't put enough resources into their business people to create a very large deal funnel. So, for example, if you only have four deals in house and your best deal, maybe check six of the 10 boxes you want to track, you do that loan. So what I wanted to do was make sure we had a deal funnel that was as big as any of our competitors, but probably have a little less capital at the bottom of that funnel. So more deals per dollar of investable capital than any of our peers. That's what we set out to build. I can't prove it, but I can tell you I feel pretty confident that we've achieved that. We cover today over 700 private equity firms. We've worked with well over 500. We've done over $30 billion of financings. I don't know the exact number, but probably 200 line items. I think the other thing we've done that most people aren't aware of is early on today, retail, high net worth is really in vogue. So a lot of firms, kkr, Blackstone, a lot of firms are active in that. But when we launched the firm, we decided we were going to be very active in that space. So we started that strategy six years ago. And what we did, which is different, and I don't know how they're running it today, but I looked at a lot of firms with REITs, and I noticed most of the REITs were sold to retail. And then there was institutional capital, and the institutional capital and the REIT capital were playing in different investments. What we decided was we were going to create a retail sleeve that would play in the identical investments as our biggest investors. So let's really bring to the retail market a true institutional quality product. And I'm not saying the others aren't, but we just decided to do Ours a little different. And so we find a loan. There's no cherry picking. We find a loan, it gets allocated to our institutional fund and our retail fund based on their assets. So the portfolio is not 100% identical because of timing when they both started, but pretty close when the investment team.

Goes and narrows that filter. Are there either certain sectors or characteristics of companies that tend to make it through relative to others?

Yeah, I mean, we decided early on, since preservation of principle was the key to us first we start with industries. And so we decided we're not going to play in retail, we're going to avoid oil and gas. We're really going to avoid things that are going through major secular changes. So you can imagine when we launched with $6 billion, we're just getting going. Every newspaper chain in America came through our office. It was a fresh pool of capital and they need capital now. Some of those newspaper chains are going to be fine. But the question which we couldn't answer, if I made a five year loan, what is the value of that newspaper chain in five years if it defaults? We don't know. And so we've decided to focus on things that are more annuity, like, so we're big in insurance. Our single biggest sector is software. Software. I think today we are probably, I don't know if we're the largest, but we are one of the largest dedicated lenders to the software space. We have 22 people focused on software, half in New York, half out in Menlo Park. So I mean, clearly Silicon Valley bank is the single biggest player. But we're definitely, I think, you know, top two or three. And if you think about software, I think this will summarize what we look for. If you can find a piece of software that's mission critical and so it's really involved in helping a company run and there's very little churn. And we can look at cohorts over a long period of time that once it's installed, it doesn't churn off. What that means is you have a credit where the revenue base is very stable. Now a private equity firm is buying it because they think they can really grow that revenue base. But we're looking at it and saying if that revenue base does nothing but stays really stable, will we get our money back? And the way we do that is by loan to value. We make sure that we're coming in at a reasonable loan to value. And I don't know where we are in software today. I think around 10 billion of loans. Every single software loan that we've made is hitting or exceeding its underwriting case, and that's coming through the pandemic. Obviously we have some stuff that might touch hospitality or aerospace, but our core sectors have really come through relatively unscathed. And so healthcare is another one. So we're looking at things like that that are more stable and the cash flows are a little more annuity, like.

With having worked with, call it 500 sponsors. How do you think about the part of the underwriting that involves who that ultimate owner of the business is?

The good news is we have a bunch of people at the firm who have really senior relationships at most of the firms we work with and we've seen their behavior over a long period of time. We are not interested in taking over anyone's company. So we're a really good partner because you hit something like the pandemic. And if, let's say you needed a covenant waiver, if you had a public bond outstanding, you had to go negotiate with a hundred different parties, maybe 200 during the pandemic. If we were the lead on one of your deals, you just had to negotiate with us. So what we asked of a PE firm was shore up your balance sheet. Let's make sure you have liquidity if this crisis goes on longer than expected. And if you do that, we'll waive your covenant. Maybe we want a little more rate, maybe we need a fee, but we'll make it reasonable and we'll give you the ability to extend that equity option. And so we have the luxury of cherry picking because we cover a lot. And by the way, we cover 700 PE firms. We also call on a lot of large private companies. We're looking for people who want to make it a win win. We're not looking for somebody where when it gets tough, they're calling and saying, paragraph C, line item two. We believe there's the ability for us to put more debt or to strip out assets. There's a lot of ways to parse through an indenture. I used to run a distress fund and I've looked at all of them. And you should know every deal we do, we have someone who is focused exclusively on covenants. They don't talk to any PE firms. They are just trying to understand if things go wrong, what is the art of the possible? What could somebody do if they came into this credit, wanted to move assets or put debt somehow layer us? There's lots of nefarious things that happen and it makes sense. Everybody's trying to protect their interests. And so to answer your question, if I think about the 700 firms we work with, probably about a third of them are showing us just commodity business. If we give them the best covenants, meaning no covenants and really low pricing, we win the deal. About a third are firms that we're trying to find our rhythm with, and about a third are firms that we've either gotten a deal over the goal line or it's been close. And what I'm trying to do every year is continue to migrate firms into that, let's call it that bucket on the right where we think we can make it a win win. And the nice thing is from that roughly 150, 200 firms, we're probably seeing 15, 1600 deals a year. So we're seeing plenty of deal flow. And as you're probably aware, there are a lot of private equity firms that are created every month, every year. And then because we play in bigger companies, there's also a lot of smaller firms that maybe were at a billion or 2 billion and the next fundraise is 5 billion. And so this is a good time to be a lender. There's a lot of demand for product. The animal spirits are alive and well. And so look, we're not going to be a fit for every PE firm. And we're not looking for world domination. We're looking for 100, 200 firms that we can work closely with and really be a solutions provider for them.

If you looked across your portfolio and did a composition by the couple of key factors that you look at in underwriting, what ends up being the biggest driver of the package?

First and foremost, I would say it would be tied between the industry and what's our view of that industry. And secondly, how it's capitalized. There are certain PE firms who want to put in as little equity as possible. That's just not going to be a good fit for us in general. What we're striving for is to find a business in a sector we like. And we're trying to make loans at around 50% loan to value. Because at 50% loan to value, I feel pretty good that things have to go really wrong for us to lose $1 in a market like this where it's a little bit frothy, it's definitely starting to tick up a little bit. Maybe it's in the low 50s, but we try to remain pretty disciplined. And having a lot of equity underneath you can really get you through a lot of difficult times.

I'm curious as you go out and talk to your investors. You see all these private equity firms from a perspective that they don't because you're working on deals with them. Inevitably they have to ask you, hey, what do you think of this firm? How should I think about making a decision between private equity firms? How have you found that the unique lens you have in working with them translates to how an investor in one of those private equity firms might think about their success?

We do have some insight into the PE firms. We have a sense of the risk they're taking. And for our LPs, we try to be a really good partner and share with them who we think has a real competitive advantage and maybe a few who got lucky because maybe the pandemic bailed them out. So part of what we try to be is a great partner to our LPs, but in general, the firms we're working with we think are really high quality. They've been great stewards of capital, They've generated really good returns. And I think PE is going to be a good asset class. It's going to be a great asset class going forward. But we have to realize returns are coming down and they're coming down meaningfully. They have to purchase price multiples are exploding. And so the higher they go, the lower the returns are going to be. Things aren't going to go up forever. And so I think most of the big investors we talk to, they're of the mindset that let's invest with the best firms, but let's go in with eyes wide open and know that returns are probably going to come down over time.

How does that impact your vision for what happens with the private credit markets over the next five or 10 years?

The credit markets are massive. These are trillions of dollars, these markets, and there's hundreds of billions issued every year. And so when somebody looks at our business and says, Wow, $30 billion, that's a lot of money. It's really not when you think about it in the scheme of the marketplace. Here's the really interesting thing about Wall Street. When you hear Wall Street's making a loan to a below investment grade credit, say a single B, the type of company we would finance, they might make the commitment, but the commitment is very short lived. They fund it and they lay it off. The day it hits their balance sheet. There's this concept of velocity of capital. I'll just give you a quick example. So when I was at Credit Suisse, let's just say I had 5 billion of capital. If I made 5 billion of loans, and I laid those off and I made three points. I made $150 million. It's pretty good. You quickly realize what you want to do is use that 5 billion and turn it over as quickly as possible, preferably 10 or 20 times. Instead of 150, let's make it a billion and a half or 3 billion. That's what Wall street does. And so because of that, their focus is on bigger credits to do a $300 million deal and a $3 billion deal. It's the identical amount of work. But the truth is, Fidelity and Pimco and blackrock and all the big buyers, they want the bigger, more liquid deal because it's the same amount of work for them and they can get a bigger allocation. So what does that mean? Means the deals that are 100 to, say, 6,700 million. And that's a lot of the market. It we're a pretty good solution. Remember, the big banks, they're trying to figure out what do the end buyers want, and they structure those deals to meet the needs of the marketplace. We don't think about the syndicated market. We don't even look at it. We're focused on what does the company need? How can we create something that's unique for that issuer? And by doing that, get paid a premium. And then maybe 18 months, two years from now, maybe they wanted to make an acquisition, maybe they needed more capital. We can structure around that. And then maybe then they, when they're bigger and now it's a billion and a half, $2 billion deal, then maybe they go to the syndicated market. So I think we're in the really early innings. I think I've been pretty right on seeing this. And more and more PE firms are looking at not just what we do, but the direct lenders in general as a pretty good alternative to the syndicated market. And as I mentioned, especially coming out of COVID you might pay more to us, but it's a very cheap option to make sure if things don't really work out, that you have a party who's rational and that you can work with to try to preserve your equity option.

So on the private equity side, we hear a lot more about permanent capital vehicles. And so this concept of reducing the velocity that that Wall street had has to come with that side of the balance sheet. I wonder if you could talk a little bit about, even from the early days of alroc, how you went about raising the capital such that today you're sitting on really permanent capital base.

When we went out to raise Permanent capital. It had only been raised retail, nobody had really done it institutionally. It's important to understand how a traditional GPLP fund works for a credit fund. So usually you have four years to invest and you hit that four year period and then when the loans pay back, you get back your capital. The problem, if you think about it, think about the loans you make in years three and four. Usually they have a year or two years of call protection. A lot. Today have only a year. So what happens is if a company does well, they refinance you out and so you have adverse selection. Your best loans pay down very quickly. You don't really know how the fund does till the weaker loans pay off, which could be years eight or nine. So we came up with this idea of let's create this pool of permanent capital. We'll get it 100% invested, we'll list it. And if you're an investor and you want to go and put 50, 75 million into direct lending, you could go give it to the newest fund that's being launched, but it's a blind pool, there's no assets. It'll take four years before it's all working. Or you could come to my office, you can sit down with my team, you can diligence every single loan in the portfolio. And just by basically going and buying 40 or 50 million of our stock, you have hundred cent dollars working and you have total liquidity. So we thought that was a real advantage for the investor. For us, we thought having permanent capital would allow us to do some things that our peers couldn't do. The best example I can give you is, let's say regular fund is in year four and so this is their last year to invest. They don't want to do something that might only have a six month horizon or a one year horizon because they're not going to make a multiple on their money. They can't look at it. But sometimes we get these opportunities and someone says, listen, I want to make this acquisition, then I'm going to take the company public, I want to take the debt out. We'll pay you a way above market rate, we'll give you three or four points of fee, we'll let you make a 15, 16% for a year and it should price at a six. But you're helping us get it done and we don't want that debt outstanding when we last. Those are the kind of things we can do and our peers can't. It's been a real advantage for us. So we're still in the early stages. If you were to ask me what's the biggest negative to our permanent capital structure is that you're taking an illiquid asset class and you're adding some volatility to it because it's tied to the public markets. So we have to do a better job of educating everyone. When we trade at a discount, do you want to come in and buy it? Because we're not a stock. It's a senior secured loan portfolio. But early on it's behaved a little bit too much like just a regular common equity. And through education and time, I think people will get a better understanding and hopefully we can dampen that volatility.

So I want to turn to the last iteration and phase of where we're going with all this, which more relates to the ownership structure of alrock. So a couple years ago you sold a stake to Dial and I wonder if you could talk through the thinking at the time.

You asked early on about our initial fundraise. And I think one of the things that got people's attention in that initial fundraise is I put a lot of my own money into the fund. And each fund we've done, we try to be one of the significant investors. Well, you can imagine we've launched a series of products. If we're writing hundred million dollar checks for each fund, we've quickly run out of liquidity. So we were looking at the new funds we were creating and we started thinking about everybody likes it and expects us to be a very big investor. So we went to Dial to give us some capital. And by the way, we didn't take any money out. We could have. They offered that, but. But we said, listen, we're raising this money to put it all into our funds and that's what we've done with it. And today all of us have the bulk of our liquid net worth invested in our various strategies. It's something that's resonated and that was really the rationale.

So now we roll forward a couple years after that and you are now joined at the hip dial through a spac. So why don't you go through that and then we'll talk about what happens from here.

Let me address how we came together with Dial. We can talk a little bit about the spac. Neither of these things I would have anticipated six years ago. The one thing we've looked at since day one is trying to figure out where is the world moving and how do we want to be positioned. And one of our big themes was especially with private equity and venture capital firms both who we work closely with, how can we become more and more relevant to them? How can we sit down with the founders of those firms and say, we can basically meet all of your needs, not everything. We can't help you do a $10 billion IPO. We can help you with quite a bit. And we realized we're doing a really good job at providing solutions down at the fund level, helping PE and VC finance their buyouts or finance some of their holdings or even refinance some debt. And the more I started talking to Michael Reese and his team, I realized that maybe by joining together, we could have a product offering that would be really unique. Not only could we help finance deals, but now when we're sitting with that owner, we can say we can give you a loan up at the GP level, or if you'd like, we could take a passive minority stake and we can give you capital to invest further in your funds. Some of them are looking at making acquisitions, maybe to buy out a partner or just general working capital purposes. And you know, these. You go out and raise a $20 billion fund and you want to put 5%, and that's a billion dollar commitment. These are huge commitments. Many of these people are wealthy individuals, but even for the wealthiest, that is a lot of money. So I kept thinking that together we might have a product suite that would be really unique. And so I went out, I started talking to a bunch of founders of PE firms, and I found they liked it and they thought it made a lot of sense. And our goal is, obviously we want to see the most deal flow possible, but we also want to make sure that we win those deals where there's real alpha attached to it could mean that maybe it has some equity, maybe better call protection, maybe it's mispriced. And by being really relevant to these PE firms and VC firms and other private market firms, we're uniquely positioned. And I like our chances. And I think having Dial as part of the product suite is really going to help us on the other side. For Dial, they live on planes and they are meeting with PE firms and VC firms and real estate firms literally every single day. And it's an incredible team, but we cover over 700 private equity firms. And so now our originators, when they're out talking to the firms, they're not just talking about deals for the direct lending side, they also now have a reason to call the founders and say, listen, you saw the news. If you're thinking about, you want, get just Sit down with Michael Reese and Drew Loreno and Sean Ward and the Andrew Poll. And then the team, we'll be out there tomorrow. We'll give you a sense of value. We can give you debt at that. Up at that level, we have a much broader suite. Final thing I'll mention is, and this goes back to where we started, culture. Culture is the key. Acquisitions are hard. And this wasn't really an acquisition, this was a merger. And so it's really a merger of equals. And so we had to make sure that the culture fit was really good. So we spent a lot of time getting to know each other, talking about our visions for the business. And while I thought it made tremendous economic sense, the culture fit was really good. We're looking at other things to continue to build out the product suite. And the hardest part is not finding a great business, it's finding that cultural fit. That's the hardest part. And it can be the greatest fit financially. But if the people aren't going to come in and buy into our basic values, we won't do it.

The more you talk about creating this breadth of opportunities to provide solutions to sponsors, the sponsors, companies, everything in the ecosystem, the more it starts to sound like an old school investment bank. And I'm curious, as you think about what you're building, what is it that's motivating, where you want to get to in this competitive landscape?

If you take a step back and you think about where rates are today and where they'll probably be for the foreseeable future, there's really incredible tailwinds for the alternative space. And as you mentioned, our ecosystem that we service day in, day out is the private marketplace. So we come in every day and we think about how can we get extra premium in everything that we do for our investors by servicing this group that's growing like crazy. And you'd be shocked how many PE firms, NVC firms, have never talked to a direct lender, never even thought about it. They think that the bank is excited to work on their 300, $400 million deal, and they probably are in a good market, it's relatively easy. But when the markets get a little bit choppy, we provide certainty. When you have to go in and say to a seller, your deal is done. And so we think the PE VC space is going to be super active for the foreseeable future. And as I mentioned earlier, our goal is to come in and try to be that solutions provider. And if we're missing a tool in the tool shed, we're Going to either build it organically or look to acquire it.

Great. Well, Doug, I want to turn to a couple of closing questions. What's your favorite hobby or activity outside of work and family?

Well, I have to say, unfortunately it's golf right now and I started late in life and I am mediocre but determined to try to get better.

How do you find the time?

Well, it's really a weekend pursuit and that's part of the problem. I'm playing really just once a week. I'm hopeful to get out there and hit like Tiger. But the truth is it's just a great opportunity to reconnect with friends and spend a few hours decompressing and not thinking about what we do every single day.

What's your most important daily habit?

I probably have two. The first is taking my dog for a walk. My wife got a new dog and of course I've fallen in love with it. So I get out either every morning or every night with the dog, if I'm being honest. Definitely. I can make some phone calls while I'm doing that, but it's good time. And the other thing is I just try to get a little bit of exercise almost every single day.

What's your biggest pet peeve?

Well, this has nothing to do with investing. It's how wrong the preseason college football polls are and when they talk about the strength of the ACC schedule.

So who's your favorite team?

Well, I married my wife 30 odd years ago and she's from South Carolina, went to the University of South Carolina. So I have become a die hard South Carolina, well, I should say a die hard suffering South Carolina Gamecock fan.

How about your biggest investment pet peeve?

I bet you if you talk to a lot of PE firms, they'll say the same thing. It's what is called EBITDA add backs. And so what that means is it's been a seller's market for a long period of time. Anyone who's selling a company will take this stated EBITDA or cash flow and have sometimes as low as 20, sometimes as high as 40, 60, 70% increase for what are called pro forma cash flow adjustments. Every company is being sold off those adjustments. We're being asked to finance off of that. And a big part of our job every day is trying to figure out what's real and what's fiction. What are we really financing off of. So that's probably my single biggest thing.

And of those add backs, if you were ballparking it, how much of it do you think is real in terms of say recurring and how much of it is just being thrown in there to get a higher valuation.

It really depends on the business. But because we do private style diligence, we have the luxury of sitting down with the accounting firms and really dissecting every single number that's put in there. So it's hard for me to generalize, but I would tell you there's always a meaningful amount that is, there's a real question whether or not it's recurring. And just remember we're a creditor. And so let's say the company gets in trouble. The way it's going to be valued if we go to sell it is not off of this pro forma adjusted EBITDA with these add backs, people are going to look at its GAAP cash flow and value it off of that. So we're constantly saying, okay, a year from now, what will show up in the financial statements? Some people want to get credit for something three years from now, five years from now. Great example is we looked at somebody who managed small convention spaces and small stadiums and they were trying to get credit for a project that hadn't been built yet and wasn't going to come to fruition to 2025. We can't include that because if it gets in trouble in 23 or 24 or even 25 and there was a delay, it will never come to fruition. So those are the kind of things we deal with.

What's been your biggest mistake and what did you learn from it?

Probably my biggest mistake was if I went back to 2010 and obviously the world was in turmoil, there was tens of billions of dollars of loans that were sitting on banks balance sheets that were meant to be syndicated. But because of the crisis, they got stuck with it. They were called bridge loans and we had the ability to come in and buy tens of billions of it where the banks would provide leverage. And I thought it was the greatest opportunity I had ever seen in my life. Senior secured loans, big companies, we could buy them at 80 cents on the dollar and the bank would basically finance it, 4 to 1 leverage. So basically $10 billion purchase, you only had to put up 2 billion 8 billion of leverage. We didn't really think through that if prices went down what that would mean. We thought it was just really cheap. Well, the crisis got worse after we bought it. And some of these loans fell 20, 30 points. Well, if you take 20 points times four, you've lost 80%. You take it times five, your equity is negative. And that's what we went through in 2008. And so I've been really reluctant to be a big user of leverage ever since.

What teaching from your parents has most stayed with you?

Well, I think my father had a very simple thing that made a lot of sense, and I've tried to get my kids to buy into this as well. He had this saying where he wanted me to be able to walk into a bar and sit down at the bar and be able to strike up a conversation with the bartender. And then if a police officer came in and sat down next to me, he wanted me to be able to have a conversation with him. And then if a athlete came in, same thing, a business person, politician, whoever sat down in that seat, he said, you've got to be able to find some common ground to have a conversation. Because in his view, business was so much about being able to get along with people. They have a choice who they can do business with. And if you can find some common ground, it will give you a leg up. And it's simple, easy to understand, but it's definitely something that served me pretty well.

How'd you go about learning to do that?

Really, just watching. He really believed in that and was knowledgeable on everything. He was in the textile business, but he prided himself on no matter who he met, he could talk about history, sports, you name it, he studied it. So I got to see him in action, and I didn't do quite as good a job, but did my best to try to emulate what he did.

All right, Doug, last one.

[Ted Seides]

What life lesson have you learned that.

[Doug Ostroover]

You wish you knew a lot earlier in life?

Well, there are a lot of life lessons, but I think this really rings true for today with your career. You get out there, you're ambitious, and you really think it's a sprint. And the truth is, it's not. You still have to be ambitious, work hard, try to get ahead, but it's really a marathon. Today, it's technology. You see a lot of young people, early 20s, 30s, selling a software business or some app or something, and they make a lot, but that's rare. That's not going to happen for most people. When I got out of school, the big thing were leveraged buyouts, and they were being done for virtually no equity. And at a very young age, I became convinced that I was doing a leverage buyout. I have to tell you, every company that I tried to buy, if the deal had gone done, within five years, it would have been bankrupt, and that would have been really taken me down probably not a very good path and by staying the course, learning, getting smarter, taking risk at the right time we were able to create gso, sell it to Blackstone then leave and go do it again. So I feel really fortunate. I've been more successful in my 30s than my 20s and more in my 40s than my 30s and more in my 50s than my 40s and hopefully not 60 yet but hopefully can keep it going through the 60s, 70s and 80s. That's the goal.

Doug, thanks so much for taking the time.

Sure. I really appreciate you having me.

[Ted Seides]

Thanks for listening to this episode. I hope you found a nugget or two to take away and apply in your investing and your life. If you'd like what you heard please tell a friend and maybe even write a review on itunes. You'll help others discover the show and I thank you for it. Have a good one and see you next time.