A three-way merger that would create one of the biggest listed investment groups in the US has opened up a rift on Wall Street over some of the most closely guarded secrets of the booming private capital industry.
The dispute centres on Dyal Capital, a division of US asset manager Neuberger Berman that specialises in buying minority stakes in other privately held investment groups — a business that gives Dyal access to the internal information of its partners.
Some of these companies are now up in arms because Dyal is merging with Owl Rock Capital, a leading provider of debt financing to leveraged buyouts, in a $12.5bn deal being made via a special purpose acquisition company.
Two other private capital groups that have sold stakes to Dyal have gone to court to block the transaction, alleging it would create a competitor with sensitive information about their operations and even input into some of their internal decisions.
“Dyal threatens to compete with Golub while retaining a partnership interest in it,” Golub Capital said on Tuesday in a filing in New York state Supreme Court that claimed the merger was “untenable and forbidden” under the terms of its 2018 sale of equity to Dyal.
The lawsuit follows a similar action in Delaware last week by another private credit group, Sixth Street Partners, which told a state court it had sold a stake “on the fundamental understanding that Dyal would act as a partner — not a competitor”.
“We honour our deals and expect our partners will, too,” Sixth Street co- founder Joshua Easterly told analysts last week. “In this case, Dyal didn’t.”
Buying stakes in private equity groups has been a lucrative business for the former Lehman Brothers bankers, including Michael Rees and Sean Ward, who created Dyal in 2011. The deals have also enabled hundreds of top private equity partners to cash out of part of their equity at valuations running into eight or nine figures.
But the special relationship between Dyal and some of its partners frayed after it revealed plans in December to combine with Owl Rock. Like Golub, which manages $35bn, and Sixth Street, with more than $50bn in assets, Owl Rock is part of a new breed of “direct lending” companies that have supplanted banks as big lenders to private equity-owned businesses.
The combined company would go public by merging with a Spac set up by HPS Investment Partners, another Wall Street lender. Dyal, in turn, owns minority stakes in both Owl Rock and HPS.
With a $12.5bn valuation, the merged company — to be christened Blue Owl — would rank alongside Carlyle Group and Ares Management as one of the biggest listed private equity groups. Neuberger plans to sell some of its Dyal shares, and is expected to rake in more than $1bn from the transaction.
Private equity groups are typically guarded about granting equity stakes to anyone other than their own partners, and often demand consent rights if an investor such as Dyal seeks to sell its stake to another owner.
But Dyal executives never contemplated granting its partner companies what amounts to a veto over their own strategic initiatives, according to people familiar with their thinking.
In a letter to Dyal investors that the company released on Wednesday, Rees addressed concerns about the handling of its partners’ secrets, saying Dyal had “crafted a robust and comprehensive information control policy designed to restrict access to confidential partner manager information”.
In court papers filed in Delaware, Dyal suggested that Sixth Street either had misunderstood its contract or was using the controversy to extract concessions. Sixth Street, it said, had “orchestrated a one-sided and misleading media campaign . . . in an effort to strong-arm [one of Dyal’s funds] into selling its stake in Sixth Street at a price that is grossly unfair”.
Dyal said in the letter released on Wednesday that pension funds and other backers were lending support to the Spac transaction. “We are receiving investor consents,” it said.
And investment groups still seem willing to take Dyal’s cash. As recently as December, it struck a deal with venture capital company New Enterprise Associates that was Dyal’s “largest minority equity stake to-date”, it said.