Dyal Capital Partners, which raised a record $9 billion-plus for its fourth fund, sees considerable room for GP stakes investing despite the market’s proliferating pools of capital.
“We’re not changing our playbook going forward,” Michael Rees, head of Dyal, told Buyouts in an interview. “We see a continued ability to put out capital over the next several years.”
New York-based Dyal, a division of Neuberger Berman, closed Dyal Capital Partners IV in October after upping the target by more than $3.5 billion due to increased deal flow and demand from limited partners. Commitments across all Dyal funds and co-investment vehicles now total more than $21.6 billion.
Dyal has not been slow to deploy the fresh resources. When announcing Fund IV’s close this month, the firm said it had already committed about 64 percent of capital to minority investments in 10 private equity firms, among them Bridgepoint, Golub Capital, HGGC, HIG Capital and Owl Rock.
Rees said he expects the fund to soon reach 80 percent committed, suggesting Dyal could be back on the fundraising trail in the near future. Rees declined to comment on the firm’s plans.
Dyal’s latest fundraising puts total capital secured by the market’s leading players – Dyal, Blackstone’s Strategic Capital Holdings and Goldman Sachs’ Petershill unit – at nearly $24 billion, Buyouts’ sister publication Private Equity International estimated. New offerings by Blackstone and Goldman Sachs could add a minimum of $7 billion.
This burgeoning fundraising comes amid reports that the GP stakes investing space is becoming saturated.
In its 2019 global PE report, Bain & Company questioned how much opportunity remains in the market with the population of “most obvious candidates” for minority investments shrinking. A June study by PitchBook took a similar view, noting the apparent “sweet spot” for GP stakes investors – PE firms that have raised $10 billion to $25 billion – is almost fully tapped.
Rees said he is not concerned by these assessments, partly because Dyal is steadily diversifying its investments by asset class, strategy and geography.
“There are still a lot of great firms that don’t have partners,” Rees said. He pointed to opportunities abroad, including the “big six firms in Europe,” which have not recently raised permanent minority capital. “The market is not just about North American buyout managers,” he said.
The universe of established PE and hedge fund managers of interest to Dyal is also expanding, Rees said, as mid-sized firms become large firms through step-ups between funds. “The pond grows slowly, but it grows,” he said.
Dyal’s next opportunities could also take in the current portfolio, which in December consisted of 41 minority partnerships. “We see an ability to increase existing stakes,” Rees said.
Dyal acquires minority stakes to participate in a firm’s cash flow. Income from carried interest and fees is highly attractive as it is continuous and rises with the scaling of managed assets. PE firms have a strong incentive to receive minority investments as a way of bolstering the balance sheet and funding top priorities, such as GP commitments to new offerings and strategic initiatives.
Along with capital, Dyal offers value-adding services. Its business services platform, led by John Dyment, is a 30-person post-investment advisory team that supports partner goals in areas like capital strategy, product development, talent acquisition, operations, technology, and preferred arrangements with third-party service providers.
The platform is a key differentiator for Dyal, Rees said, and a “big driver of our market share.”
Dyal, which also has offices in London and Hong Kong, was founded in 2011 by Rees, a former Lehman Brothers executive. Neuberger transitioned from Lehman two years earlier through a management buyout.
Dyal Capital Partners III generated a net multiple of invested capital of 1.27x and IRR of 24.08 percent as of September 30, according to a report by Minnesota State Board of Investment. Fund IV in the same period generated a net multiple of 1.41x and IRR of 34.55 percent.
Action Item: View Michael Rees’ biography here.