Dyal Capital eyes uniquely structured secondary on third GP stakes fund

Dyal Capital Partners is shopping an unusual secondary transaction in the market that will use a pricing framework different from more routine secondary deals.

The GP stakes firm, backed by Neuberger Berman, is working on a sale of stakes from its third fund that would allow investors to cash out of their interests, sources told Buyouts.

Dyal is working with PJT Partners on the sale. Non-binding bids are expected next week, with final bids due by early next year.

The deal has an unusual structure, reflecting the unique nature of the GP stakes business. Fund III holds stakes in private equity management companies, rather than underlying portfolio businesses. The stakes are intended to be held for the long-term and perpetually income-generating, so pricing should reflect that, sources said.

In that case, pricing on the deal would not be tied to net asset value as of a certain reference date; rather, it should reflect the perpetual nature of the investment.

“This is a secondary deal happening and being priced using an entirely different framework, as if you’re buying a piece of an ongoing operating business you’ll hold on to forever,” one of the sources said.

“Buyers are buying essentially access to a set of cash flows generated by 10 of the leading private equity firms in the world that are not going away any time soon,” the source said. “This is not a finite set of portfolio companies you’re going to sell off over time.”

As part of the deal, Fund III LPs will have to sell a minimum of 10 percent of their stakes in the pool, or up to a maximum of 20 percent, the sources said.

Buyers who have shown interest so far include some traditional secondary firms, but also strategic-type buyers like sovereign funds and insurance companies that might be a better fit for perpetual capital, the sources said. Such institutions aren’t limited by closed funds with term limits like secondary buyers, they said.

Dyal explored a secondary transaction earlier this year, but ended up completing a $1 billion securitization in June. The securitization, backed by 20 investors, bundled future cash flows from management fees of its 10 underlying GPs, Secondaries Investor reported at the time.

The firm recently re-engaged on the process. The secondary is one of several liquidity options for investors in Dyal’s funds. The securitization deal was another, while on occasion the firm can find a buyer for an individual exposure. This occurred when sovereign fund Mubadala Investment Co. bought half of Dyal’s stake in Silver Lake, announced in late September.

Dyal has stressed that it is happy to hold its GP stakes investments for the long term. Dyal gets paid by taking a share of cash flow, including fees and carried interest. So as long as firms are generating fees and carry across multiple funds over time, Dyal’s investments will be productive for the firm.

“We have investors who want to own these cash-flow streams not just for the typical seven-to-10-year periods but for decades,” Michael Rees, head of Dyal, said at an industry conference in 2018.

“So while they may not ever get a terminal value, they’ll get a very long-dated cash-flow stream that should adequately compensate them for the risk they’re taking.”