Jul 26, 2021 · 1h 1m · capital-allocators
Private Equity Masters 6 – Doug Ostrover – Blue Owl Capital (Capital Allocators, EP.205)
0:00 / 0:00
gold bands on the timeline = statements, start to end. Hover to read, click to jump. CC turns on captions
In this episode of Capital Allocators, Blue Owl Capital Co-Founder and CEO Doug Ostrover discusses the rise of private credit, the mechanics of direct lending, and the importance of disciplined underwriting and firm culture.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. Ted holds 17.3% of the talking time here. How this is scored →
Ted as informed peer 3.0 Guest teaching 1.7 Guest disagreement 0.3 Ted pushing back 1.1
speaking balance: gold is Ted, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 42:15 Doug critiques traditional credit fund structures
Ostrover dismisses traditional closed-end credit fund structures, explaining how adverse selection hurts investors when top-performing loans refinance early and leave only troubled debt at fund maturity.
Hardest push from Ted ▶ 50:39 Ted pushes on resemblance to legacy investment banksSeides directly challenges Ostrover's narrative of building a sponsor solutions platform, asserting that providing debt, equity, and advisory makes Blue Owl look like a legacy Wall Street investment bank.
Biggest teaching moment ▶ 38:25 Doug explains syndicate desks and velocity of capitalOstrover educates the audience and host on how investment banks operate on capital turnover velocity rather than long-term credit holding, creating a persistent structural opportunity for direct lenders.
Ted holds their own ▶ 41:15 Ted connects velocity slowdown to permanent capital liabilitiesSeides demonstrates deep sector mastery by explaining how slowing down asset-side velocity fundamentally requires restructuring the liability side through permanent capital vehicles.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Ted as informed peer | Guest teaching | Guest disagreement | Ted pushing back | Why |
|---|---|---|---|---|---|---|
| Podcast Sponsorships and Platform Advertisements | 0 | 0 | 0 | 0 | Sponsorship announcements and platform advertisements read by the host with no guest participation. | |
| Introduction to Doug Ostrover and Blue Owl Capital | 0 | 0 | 0 | 0 | Introductory monologue outlining Doug Ostrover's background at GSO, Owl Rock, and Blue Owl Capital. | |
| Early Career and Accidental Entry into Leveraged Finance | 2 | 1 | 0 | 0 | Ostrover recounts his accidental start in leveraged finance after tax code revisions shuttered his municipal finance division at EF Hutton. | |
| Navigating Wall Street: From Boutique Firms to DLJ and Ace Greenberg | 2 | 0 | 0 | 0 | Ostrover shares an anecdote about receiving a personal phone call from Ace Greenberg while choosing between Bear Stearns and DLJ. | |
| Co-Founding GSO Capital Partners and Principles of Partnership | 3 | 1 | 0 | 0 | Ostrover explains leaving Credit Suisse to launch GSO in 2005 and highlights the importance of economic alignment and partnership trust. | |
| Cultivating a High-Performance and Empathetic Firm Culture | 4 | 2 | 1 | 3 | Seides presses on how a kinder, gentler culture can function within cutthroat financial markets, prompting Ostrover to explain his standard of high expectations balanced with personal flexibility. | |
| Establishing Owl Rock and Direct Lending Market Dynamics | 4 | 3 | 0 | 1 | Ostrover illustrates the competitive pyramid of direct lending, explaining why targeting upper-middle-market loans offers superior downside protection and less competition. | |
| Deal Funnel Strategy, Retail Democratization, and Software Underwriting | 4 | 3 | 0 | 1 | Ostrover outlines Owl Rock's deal funnel, pari passu retail democratization, and strict focus on mission-critical software credits with low revenue churn. | |
| Sponsor Collaboration, Covenant Protection, and Risk Management | 4 | 2 | 0 | 1 | Ostrover explains his strategy for managing sponsor relationships, negotiating covenant waivers during COVID-19, and dedicating staff strictly to analyzing indenture vulnerabilities. | |
| Private Credit Growth, Sponsor Multiples, and Market Disruption | 5 | 4 | 1 | 2 | Ostrover breaks down the structural mechanics of Wall Street syndication velocity versus direct lenders holding bespoke credits, noting rising purchase multiples will constrain future private equity returns. | |
| The Permanent Capital Model and the Creation of Blue Owl | 5 | 3 | 1 | 4 | Seides challenges Ostrover's expansive ecosystem strategy by asking if Blue Owl is turning into an old-school investment bank, prompting Ostrover to defend their specialized alternative lending suite. |
Statements from this episode (19)
GSO Pioneered Combining Public Credit Expertise With Direct Lending
“We're going to 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”
Owl Rock Had Zero Voluntary Employee Departures in Its First Six Years
“We have today About 300 people, and we have not had one person in six years voluntarily leave, not one.”
Few Direct Lenders Could Hold $500M Loans When Owl Rock Launched
“When you got to the top of the pyramid, the number of firms that could actually make loans of two, three, four, five hundred million and hold it was relatively small.”
Direct Lenders Achieve Lower Losses Than Syndicated Loans Through Better Diligence
“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 …”
Owl Rock Launched With $12 Billion of Total Investing Firepower
“We raised six billion dollars. We use a turn of leverage, so we had twelve billion A firepower when we launched.”
Owl Rock Has Completed Over $30 Billion in Sponsor Financings
“We cover today over 700 private equity firms. We've worked with well over 500. We've done over thirty billion dollars of financings.”
Owl Rock Is a Top Software Lender Alongside SVB
“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…”
Every Owl Rock Software Loan Is Meeting or Beating Underwriting Targets
“Every single software loan that we've made is hitting or exceeding its underwriting case, and that's coming through the pandemic.”
Owl Rock Assigns Independent Covenant Specialists to Every Deal
“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?”
Owl Rock Reviews Up to 1,600 Deals Annually From Top Sponsors
“From that roughly 152 hundred firms, we're probably seeing 15, 1600 deals a year.”
Blue Owl Targets Direct Loans at Approximately 50% Loan-to-Value
“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 dollar one.”
Private Equity Returns Will Drop Meaningfully Due to High Multiples
“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 …”
Direct Lending Is in the Early Innings of Private Equity Adoption
“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.”
Owl Rock Pioneered Institutional Permanent Capital for Direct Lending
“When we went out to raise permanent capital, it had only been raised retail. Nobody had really done it institutionally.”
Closed-End Credit Funds Suffer Adverse Selection From Early Refinancing
“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 ha…”
Owl Rock Founders Reinvested 100% of Dyal Stake Proceeds Into Funds
“And by the way, we didn't take any money out. We could have. They offered that. 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 …”
Sellers Inflate Stated EBITDA by 20% to 70% With Pro Forma Adjustments
“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.”
Distressed Companies Are Valued on GAAP Cash Flow, Not Adjusted EBITDA
“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 ad backs. People are going to look at its gap cash flow and value it off of that.”
A 2008 Bridge Loan Wipeout Made Ostrover Reluctant to Use Leverage
“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 reall…”