Critics of the blank cheque merger frenzy despair at pie-in-the-sky financial projections put out by newly listed companies. In one high-profile deal, however, a new Wall Street firm has claimed that its key strength is the reliability of profit targets. Credit specialist Owl Rock Capital and private equity firm Dyal Capital announced last month that they would merge with a special purpose acquisition company. The new business, rechristened as “Blue Owl Capital”, will have a whopping equity value of more than $12bn. Together they manage about $50bn.
Owl Rock and Dyal have little in common as businesses. The former is a middle-market lender, the latter buys up stakes in other private equity managers. But in one respect they are a perfect fit. Both focus on steady management fees from “permanent capital”. Flashier firms such as Blackstone and KKR rely on “carried interest”, the big gain from buyouts, for outsized profits. This is erratic and difficult to forecast.
The difference means that a set of obscure private capital players have achieved valuations twice that of the Masters of the Universe.
The combined entity Blue Owl says adjusted profits in 2020 of $304m will reach $561m in just two years. Its bridge to that surge is a straightforward calculation of so-called “fee-related earnings” or management fees against assets under management. Blue Owl says that 100 per cent of its fees are contractual and that almost all of that is “permanent”, meaning that they will self-replenish without time-consuming fundraising.
Firms that resemble this model — Hamilton Lane, EQT, Partners Group, StepStone — trade at 32 times 2022 earnings. By contrast, the group comprising Blackstone, KKR, Apollo, Ares and Carlyle, trade at just 16 times.
The Spac merger values Blue Owl at 22 times earnings and allows previous investors to take $1.5bn off the table. That is a nice result for the pair, both of which were formed in the past decade. Taking cash now for the promise of future results, no matter how certain, is the best possible outcome for those involved.
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