Fee Compression And Regulatory Burdens Will Erode Alternative Models

Key Takeaways

• Shifts toward passive investing and fee compression threaten Blue Owl's traditional revenue streams, increasing structural fundraising and margin challenges.
  
• Regulatory changes, integration risks from acquisitions, and rising bond yields could elevate costs, complicate operations, and slow future growth.
  
• Blue Owl Capital benefits from strong demand for alternatives, stable recurring revenue from permanent capital, scale in digital infrastructure, and growth via acquisitions, innovation, and global diversification.

Catalysts

Operates as an alternative asset manager in the United States.

• The increasing shift toward passive investment vehicles and lower-fee products threatens to erode the opportunity set for traditional alternative asset managers. As investors continue to reallocate away from higher-cost alternatives, Blue Owl could face structural fundraising headwinds and downward pressure on management fees, directly impacting revenue growth and future margin expansion.
  
• Regulatory scrutiny and new transparency requirements targeting private markets are likely to increase compliance costs, introduce operational complexity, and diminish the historical appeal of alternatives. This could drive higher expenses and dent net margins, while also fueling potential investor outflows as allocators reconsider the risk-reward tradeoff of these investment vehicles.
  
• There are growing risks of fee compression and competitive pressures across the private credit and alternative asset platform landscape, with both new entrants and established players seeking to win business on price and scale. This environment can force Blue Owl to cut management and performance fees, directly reducing both top-line and bottom-line growth.
  
• Blue Owl's accelerated growth through strategic acquisitions and platform expansion exposes the firm to significant execution and integration risks. Failure to realize anticipated synergies, or missteps with integrating new businesses-especially when expanding into adjacent verticals or international markets-could result in elevated operational costs, goodwill impairment, and lower reported earnings.
  
• A sustained rise in traditional bond yields, spurred by normalization of global monetary policy, reduces the relative attractiveness of illiquid private credit and other alternative assets. As institutional allocations revert to simpler fixed-income strategies, Blue Owl's organic asset under management growth will likely decelerate, slowing fee-related earnings and stalling further fundraising momentum.

Blue Owl Capital Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Blue Owl Capital compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Blue Owl Capital's revenue will grow by 15.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 2.9% today to 58.6% in 3 years time.
• The bearish analysts expect earnings to reach $2.3 billion (and earnings per share of $1.24) by about August 2028, up from $75.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 17.9x on those 2028 earnings, down from 170.5x today. This future PE is lower than the current PE for the US Capital Markets industry at 26.8x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.35%, as per the Simply Wall St company report.

Blue Owl Capital Future Earnings Per Share Growth

Risks

• Secular growth in private markets continues as both institutional and high-net-worth investors increase allocations to alternatives, driving robust long-term demand for Blue Owl Capital's offerings, which supports recurring management fee revenue and the potential for further AUM growth.
  
• Blue Owl is capitalizing on major secular trends like digital infrastructure and data centers driven by AI adoption, positioning itself as a leading provider of funding to hyperscalers and participating in some of the largest data center projects, which could lead to significant multi-year earnings expansion as these markets scale.
  
• Permanent capital vehicles and evergreen funds make up a substantial and growing portion of Blue Owl's AUM, reducing near-term redemption risk and providing enhanced earnings visibility, thereby supporting net margin stability and predictable free cash flow.
  
• Strategic acquisitions and organic platform expansion have already been integrated and are yielding operational synergies, boosting broad-based fundraising across channels and verticals, which underpins management's objective of growing fee-related earnings and management fee revenues to multibillion-dollar levels.
  
• Ongoing globalization and innovation in product structures have enabled Blue Owl to access new geographies, institutional channels, and retirement markets (such as 401(k) offerings with Voya), which creates new avenues for multi-year revenue growth and mitigates risks to earnings from potential cyclical downturns in any single channel.

Valuation

• The assumed bearish price target for Blue Owl Capital is $17.31, which represents two standard deviations below the consensus price target of $23.29. This valuation is based on what can be assumed as the expectations of Blue Owl Capital's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $29.0, and the most bearish reporting a price target of just $16.5.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be $4.0 billion, earnings will come to $2.3 billion, and it would be trading on a PE ratio of 17.9x, assuming you use a discount rate of 8.3%.
  
• Given the current share price of $19.75, the bearish analyst price target of $17.31 is 14.1% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.