Blue Owl Capital Corporation, the direct lending behemoth, just released its first quarter 2024 earnings, and the results are, well, _consistent_. Another quarter of strong earnings, another NAV per share record, another dividend increase. At first glance, it’s the kind of predictable performance that might lull some investors into a comfortable, if not slightly uneventful, slumber. But what if that very consistency is the key to unlocking a deeper understanding of Blue Owl's strategy, a strategy that may be overlooked by analysts chasing flashier narratives?

Craig Packer, Blue Owl's CEO, repeatedly emphasized the company's unwavering focus on "recession resistant sectors," citing software, insurance brokerage, food and beverage, and healthcare as stalwarts in their portfolio. He highlighted their preference for businesses with "predictable and recurring revenue streams," a characteristic that underpins their entire underwriting thesis.

This "boring" approach, however, might be the secret sauce behind Blue Owl's impressive performance. While other firms are scrambling to capitalize on fleeting market trends and chase short-term gains, Blue Owl is steadfastly building a portfolio based on stability and long-term value creation. It's a strategy that may not grab headlines, but it's one that has consistently delivered for shareholders.

Evidence of Blue Owl Capital's Strong Performance

Blue Owl's non-accrual rate, a key indicator of credit quality, remains remarkably low at 1.8% of debt investments at fair value. This compares favorably to the broader BDC sector, which has seen non-accruals creep upwards as the impact of higher interest rates ripples through borrower portfolios. Furthermore, Blue Owl's portfolio companies, despite a full year of elevated rates, continue to show "steady top and bottom-line growth" with an average interest coverage ratio of 1.6 times.

"Key Performance Indicators Metric Value Non-accrual Rate 1.8% Average Interest Coverage Ratio 1.6x Total Return Since May 2023 Investor Day 30%"

This resilience isn't a fluke. It's the direct result of a disciplined approach to portfolio construction, one that prioritizes stability over speculation. By focusing on large, high-quality businesses in sectors less susceptible to economic downturns, Blue Owl has built a portfolio capable of weathering volatility. However, the "boring is brilliant" strategy goes beyond sector selection. It permeates Blue Owl's entire approach to direct lending. Their emphasis on maintaining a "flexible liability structure" allows them to adapt to changing interest rate environments, a critical advantage in a market where rate volatility has become the new normal.

Navigating Interest Rate Volatility

The recent refinancing of a significant portion of their second-lien loans offers a compelling illustration of this principle. While some might view the repayment of these higher-yielding loans as a loss of income potential, Blue Owl sees it as an opportunity to redeploy capital into a more balanced portfolio, mitigating risk and ensuring long-term sustainability. Packer noted that these second-lien companies "deleveraged by roughly 1.5 turns" during their time in the portfolio, showcasing Blue Owl's commitment to responsible underwriting and proactive portfolio management.

A Hypothesis: Boring Leads to Outperformance?

Could Blue Owl's "boring" strategy actually lead to outperformance in the long run? Let's look at the numbers: since their first BDC Investor Day in May 2023, Blue Owl has seen a 30% total return for shareholders, outperforming both the S&P and its BDC peers. This performance, coupled with their consistently strong credit quality, suggests that a focus on stability and long-term value creation might be a winning formula. But what about the future?

Dividend Trends Over Time

The chart below tracks Blue Owl Capital Corporation's dividend payouts over the past several years, highlighting the company's commitment to consistent returns for shareholders.

Preparing for Future Challenges

The market is currently expecting "rates to continue to stay elevated with limited to no Fed cuts over the course of the year." This prolonged higher rate environment, while beneficial for floating-rate investments, could also create stress for borrowers with more constrained liquidity. Blue Owl, however, seems prepared for this challenge. Packer highlighted their role as administrative agent or lead lender on the majority of their loans, providing them with greater influence and control over any potential workout situations. This, combined with their recovery-focused underwriting approach and the financial strength of their private equity sponsors, suggests that they are well-equipped to handle any credit challenges that may arise.

A Commitment to ESG Principles

One intriguing aspect of Blue Owl not explicitly discussed in the transcript is their commitment to ESG (Environmental, Social, and Governance) principles. While they may not shout it from the rooftops, their emphasis on responsible underwriting and portfolio management aligns with a growing investor demand for companies that prioritize sustainability and ethical business practices. This commitment to ESG could further enhance their long-term value creation potential.

Conclusion

While Blue Owl's consistent performance might not be the most thrilling narrative on Wall Street, it's a story that deserves closer attention. Their unwavering focus on stability, credit quality, and long-term value creation, coupled with their flexible liability structure and proactive portfolio management, suggests that "boring" might indeed be the new "brilliant" in the world of direct lending. Only time will tell, but the evidence so far is compelling.

"Fun Fact: Blue Owl Capital's name is inspired by the blue owl, a creature known for its wisdom, keen eyesight, and ability to navigate complex environments—qualities that the firm sees as reflective of its own investment approach."