Why Ares and Blue Owl Only Rate Holds from Raymond James

Most sell side analysts rate Ares and Blue Owl as Buys. (Dreamstime)

Ares Management and Blue Owl Capital have outstanding businesses, says Raymond James analyst Wilma Burdis.

They are leaders in making direct loans to midsize businesses, which Burdis sees as a high profit, solidly growing part of the nonbank lending industry. So why does she rate their stocks as Holds, as she assumes coverage Monday of these alternative investment managers?

Ares stock trades at a high-earnings multiple: more than 30-times her estimate of its next 12-month’s earnings. While that is a 50% premium over the average alt manager, Burdis thinks the valuation is fair, given the predictable growth of Ares’ money management fees. The handsome multiple reflects the company’s handsome prospects.

At 21-times her estimate of forward earnings, Blue Owl also seems fairly valued to the analyst. That multiple is about average for alt manager stocks today. Blue Owl has a limited float of free-trading shares, a shorter track record than Ares, and has made a lot of recent acquisitions. Burdis predicts strong growth for Blue Owl, but with less confidence than she does for Ares.

For more than 25 years, Ares has been lending to mid- and small-size businesses. Using capital raised from institutional limited partners, wealthy individuals, and the everyday investors in its business-development company, Ares Capital Corp., the company lends at high interest rates but relatively low risk. Out of its roughly $550 billion in managed assets, about 45% is used for direct loans, with another 20% for other kinds of lending. Most of Ares’ remaining capital goes into real estate and infrastructure projects.

Burdis greatly admires the fee income that Ares reaps from its work. Those fees grow at 16% to 20% a year, made up of fixed management fees and performance incentive payments.

Unlike other alt managers, Ares needn’t wait for unpredictable exit transactions to collect its performance fees. Performance payments come out of the coupons Ares collects on its loans, so they don’t vary with the value of the loan principal. Its lending is pretty good—the loss rate over the last 20 years is 0.02 percentage points.

The investing public gets about two-thirds of the profit from Ares operations, with the rest going to insiders. The public piece of those profits will add up to some $5.08 a share in earnings this year (excluding noncash expenses), which Burdis predicts will grow to about $6.40 in 2026, and $7.60 in 2027. Ares also pays a dividend, which amounts to a 2.4% yield at the stock’s current price of $187.

Blue Owl has grown steeply since it came public in 2021. That growth is fueled by assets that come from institutional investors, insurers, and an armful of business development companies, including the publicly traded Blue Owl Capital and Blue Owl Technology Finance.

About half of the current $275 billion worth of assets it manages go toward private lending, on which Blue Owl claims it earns fees that exceed most private credit managers.

Some 25% of assets go into real estate and digital infrastructure like data centers—which the company sees as a “generational” opportunity. The final 25% of assets are used for minority investments and loans to the management companies of private-equity managers. Blue Owl has a big market share in this specialized niche, because would-be rivals have conflicting private equity units of their own.

Burdis projects a profit of 84 cents a share this year, (excluding noncash charges), growing to $1.04 in 2026, and $1.22 in 2027. Blue Owl’s dividend works out to a 4.5% yield, at the stock’s $19.95 current price.

Most sell side analysts rate Ares and Blue Owl as Buys. But after the doubling the two stocks have enjoyed in the last few years, Burdis sees no near term catalysts.

Write to Bill Alpert at william.alpert@barrons.com