Wall Street lender cuts payments in dispute over $12.5bn Spac deal

A contentious three-way merger to create one of the biggest investment groups in the US has hit new turbulence, after a big Wall Street lending company cut off payments to one of the groups in question.

Dyal Capital, which specialises in buying minority stakes in privately held investment managers, is planning to merge with one of its portfolio companies and then to list the combined group via a deal with a special purpose acquisition company, or Spac.

The $12.5bn plan has proven controversial since it amounts to Dyal going into competition with the some of the investment managers in its portfolio and two of them are suing to halt the deal.

In a previously unreported escalation of the dispute, one investment manager — the private credit group Golub Capital, which has $35bn in assets under management — has halted the regular cash distributions it had been making to Dyal, according to people familiar with the situation.

The move came after Golub executives decided that Dyal’s merger plan meant they would not accept further investment from the group and needed to conserve cash to fund future growth initiatives, one of the people said. 

Dyal, which was founded in 2011 by former executives from the bankrupt investment bank Lehman Brothers, is currently a division of the US asset management company Neuberger Berman. Over the past decade, it has amassed stakes in high-profile private equity groups, hedge funds and direct lenders.

In December it announced a plan to combine with one of its portfolio companies, the private lending group Owl Rock Capital, and then to merge the combined entity with a publicly traded Spac set up by HPS Investment Partners. The combined group would be called Blue Owl.

Golub and another Dyal portfolio company Sixth Street Partners, both big lending groups that view Owl Rock as a close competitor, launched lawsuits claiming the combined group would enjoy unfair advantages such as access to confidential information and the right to influence their business decisions.

Golub sold a minority stake to Dyal in August 2018. Its moratorium on cash distributions to shareholders — which began in late 2020 — will also halt quarterly payments to founders Lawrence and David Golub as well as other investors. The suspended payments were expected to be worth more than $100m over several years, one of the people said.

A $9bn Dyal fund raised in 2019 had been among the recipients of the distributions, and the suspension leaves it more reliant on distributions from other investment managers in its portfolio.

In a letter that Golub sent to Dyal in February, the group said it now intended to retain most of its earnings within the business for at least several years.

Golub Capital declined to comment.

“Dyal supports the growth of our partner managers and Golub’s decision to retain cash and reinvest in their business to drive long-term value creation is consistent with that objective,” Dyal said in a statement. “Golub’s decision should benefit both Golub and the investors in Dyal Fund IV, which holds the interests in Golub.”

The legal disputes have thrown into doubt the creation of Blue Owl, a group that would rank alongside Carlyle Group and Ares Management as one of the biggest listed private equity groups in the US. Both Sixth Street and Golub claim their legal agreements with Dyal give them the right to stop a merger on the terms that have been announced.

One of the first court showdowns is scheduled for Wednesday, when Sixth Street will ask a Delaware judge to block the deal on current terms.

Dyal has argued in court filings that Sixth Street either had misunderstood its contract or was using the controversy to extract concessions.

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