Not Your Father's Banker

Bloomberg Markets|April - May 2020

Not Your Father's Banker
Owl Rock Capital co-founder MARC LIPSCHULTZ says direct loan funds fill a gap in the market and take risk out of the financial system. Now the 4-year-old business is being tested
KELSEY BUTLER

Lending to midsize companies once seemed like the boring side of banking. Not anymore. A decade of ultralow interest rates and stricter bank regulation inspired a generation of financiers to create funds to provide companies with credit that banks no longer offer. In exchange, investors got juicier yields than almost anywhere else— as much as 5.3% more than on junk bonds or leveraged loans, according to a Goldman Sachs analysis in December.

The poster child for this boom in direct lending is Owl Rock Capital Partners LP, a 4-year-old firm founded by three Wall Street veterans: Douglas Ostrover from Blackstone Group, 57; Marc Lipschultz from KKR, 51; and Craig Packer from Goldman Sachs Group, 53. By late 2019, when it sold a 20% stake to Neuberger Berman Group’s Dyal Capital Partners, the company was valued at $2.5 billion. By capitalizing on its founders’ Wall Street connections and zeroing in on one part of the $800 billion private credit market, Owl Rock built up about $16.5 billion in assets under management.

Now the coronavirus pandemic and its economic consequences are set to challenge this model in an unprecedented manner. In February—and again in early March— Bloomberg Markets sat down to talk with Lipschultz, the company’s president, about how this new business model evolved and what he expects to happen if there’s a global recession.

KELSEY BUTLER: Will the current market volatility impact your strategy or what kind of investments you make?

MARC LIPSCHULTZ: While none of us wish for this particular volatility, we really strove to build a business for such periods of time. We have permanent capital and a very long-term view on investing. We are, of course, extremely focused on our portfolio but are also very actively engaged in new loan origination to meet corporate capital needs when many other sources are no longer available—and we do so in a manner that doesn’t present systemic risk. At the end of the day, we remain focused on being a reliable source of capital to high-quality, stable businesses.

KB: How are you preparing for any impact on companies in your portfolio?

ML: We really are vigilant about our portfolio at all times. Because we’re often the lead financing source, we benefit from very close working relationships with our companies and their sponsors. We are all in this together with a common goal, which is to see these businesses thrive over the long term. Our team has very deep experience working with many businesses through many cycles, and [we] are fully equipped to manage our portfolio during this time.

KB: Let’s go back to the beginning. Can you take me through how the company came together?

ML: We started the business in 2016 with the observation that would found many businesses, which is that we saw a clear market need. On the one hand, there was a real need for an institutional-quality, large-scale direct lender to provide credit to middle-market companies that were seeing retreating availability of capital from traditional bank sources. At the same time, we were able to provide an institutional-quality access point to investors to be able to provide capital into that marketplace, seeking to earn a very attractive risk[-adjusted] return.

So we saw this opportunity where the need for private credit had grown, the availability of credit from traditional sources had retreated, and we wanted to build a best-of-breed provider to bridge that gap.

KB: How does the Owl Rock partnership work with you and your co-founders?

ML: We’re really a founder-led business. All three of us spend day and night, seven days a week focused on this business. That’s been the model from the beginning. We all share responsibilities, we all share accountability.

We’re all responsible for making sure, most important, that we’re exceptional stewards of the capital, that we’re doing vigorous underwriting, that we’re originating so we can see all the best opportunities, and that we’re managing our portfolio very carefully. We all really try to team up and make sure that at any given time we always have one or more of us available to address the task, the question, the opportunity of the moment.

By being a dedicated firm with three co-founders, we’re able to deliver that boutique experience. But at the same time we draw from what we have learned as the best practices from spectacular firms like KKR, Blackstone, and Goldman Sachs, which are the origins of our founders, plus our CFO and COO [Alan Kirshenbaum], who comes from TPG.

KB: Is there a story behind the name? Where did Owl Rock come from?

ML: When it comes to naming companies, it’s not easy—both in terms of [deciding on] the name you want to have and in terms of what’s, in fact, available. So we thought we’d have these very intelligent-sounding names with Greek words or Latin words, and of course all of those were long gone. And then we went through a variety of different phases and ultimately settled on something simple but aspirational that I think captures who we are and intend to be. We like the vigilance, wisdom, and watchfulness of the owl and the stability and durability of the rock.

It turns out that owls have two really interesting attributes beyond that. One is that a lot of people really like them. And it also turns out to be a word that has a lot of really great puns associated with it. So when we do our fantasy football league at the office or other team activities, everyone gets to name their own team and you can do things like “Going Owl the Way” or “I’m Owl In.”

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April - May 2020