Multi-stage risk mitigation bolsters private market opportunities
Blue Owl Capital’s due diligence on the range of alternative investments it offers advisors and their clients is helping them more safely navigate this challenging market as they seek alternatives to the poorly performing equity markets.
“There’s a multi-stage process for how we think about mitigating risk,” Sean Connor, Managing Director at Blue Owl Capital and President of Global Private Wealth at Blue Owl Capital, told Wealth Professional.
The Canadian market has notoriously seen a high adoption with top tier institutional money managers and pension funds allocating to alternatives. In 2021 the Canadian Pension Plan, which most Canadians pay into, allocated 50% to alternatives. However, Blue Owl is one of the first large alternative asset managers to bring these products to the Canadian Private Wealth market.
Connor said Blue Owl views itself as a bottom-up investor that provides capital to the private markets. The firm is a leader in direct lending and offers one of its flagship strategies, which gives exposure to high quality, market leading companies in recession-resistant industries, to Canadian investors via some of the country’s largest wealth managers.
He noted that many investors now are now in a “stay rich” rather than “get rich” mode, so they are prioritizing principal preservation. Direct lending, which has traditionally had lower losses than the public credit markets, has done that well. As a secured lender, he noted that Blue Owl is usually first in line if the company goes bankrupt, overall, it is trying to maximize the return and credit underwriting with its due diligence.
“You’re making effectively the same amount in direct lending that you made in equities over the last 14 or 15 years,” he said. “The pendulum has swung, from our perspective, where risk adjusted returns are attractive.”
“The more information you have, the more selective you can be, and that’s really driving results. We transact on less than 5% of the deal flows we see, so we are highly selective. We tend to favor large businesses. In our view, bigger companies are better equipped to navigate difficult markets. Small companies just have less access to resources, less access to a management team that tends to be a bit more concentrated, and they’re not strategically significant in their environment.”
During the recent market volatility, with everything from COVID to rising inflation and interest rates and concerns about an upcoming recession, Connor noted there has been a massive and rapid transition from a low rate, high growth environment to a high rate, low growth environment.
“Everything you’ve done in your portfolio is staring down the barrel of a very different marketplace dynamic,” he said, noting that’s left people wondering what the Federal Reserve will do, employment will look like, and the inflation overlay will be, and what the geopolitical tensions and energy transition will be.
“There are so many questions out there that, from our perspective, it will probably be more volatile than it has been because there’s just less fiscal and monetary stimulus in play. The returns, and the way they were generated over the last 10 to 15 years, are likely to be very different over the near and maybe medium terms because a large part of the risk-free rate has changed dramatically. Our view is that probably won’t go back to zero very quickly.”
That provides advisors, who are devising their alternative investment allocations to meet their objectives, the opportunity to invest in private credit, private real estate, and private equity. Blue Owl, which now has over $138 billion of assets under management, feels that provides this underserved market with more capabilities to add value to portfolios in a high, and still rising rate, environment.
Blue Owl offers three investment platforms – direct lending, real estate solutions, and GP Capital solutions. They offer investors access to private markets via alternative strategies that seek to deliver income and diversification in a portfolio. The products are securities registered and institutionally funded.
“They have an enormous degree of regulatory framework around them,” he said, “The Canadian private wealth channel seemed to lack alternative investment options and we felt a high-quality direct lending strategy would be well received. We are providing an access point for Canadian retail investors to access alternatives.”
