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GP stakes funds helping PE firms ‘play offense’ in covid-19 down-cycle: Dyal’s Rees

Substantial minority capital on the balance sheet lends financial capabilities to managers second only to those afforded to “the largest public guys,” Dyal Capital Partners head Michael Rees told Buyouts.

Private equity firms that recently secured minority capital from GP stakes funds are well-placed for upside opportunities in a pandemic-spurred slowdown, Michael Rees, head of Dyal Capital Partners, told Buyouts.

“Raising a sizeable amount of permanent capital eliminates liquidity issues for private equity firms,” Rees said. “As much of this capital remains on balance sheets, firms are now positioned to play offense and move on an opportunity that is timely.”

GP stakes funds, which acquire minority interests in firms in exchange for a share of income, emerged strongly in the past few years, amassing ever-larger dedicated pools. In December, Private Equity International estimated the top three funds – Dyal, Blackstone’s Strategic Capital Holdings and Goldman Sachs’ Petershill unit – had accumulated nearly $24 billion.

Resources of this type and magnitude were not available to PE firms during the last downturn.

GP stakes investing ramped up in the years following the financial crisis. Over 2014-2018, for example, 119 managers sold pieces of themselves, Bain & Company reports. Dyal, a division of Neuberger Berman, was especially active, acquiring interests in 40-plus shops, among them Bridgepoint, Cerberus, HIG Capital, Platinum Equity, Silver Lake and Vista Equity Partners.

Deals allowed PE firms to fund top priorities, including GP commitments to new funds and strategic initiatives. Managers were also provided with a hands-off, value-adding partner with a long investment horizon.

Due to the growth in stakes investment “it’s a completely different story today,” Rees said, as PE firms are better armed for both the challenges and opportunities of a down-cycle. Above all, he said, substantial minority capital on the balance sheet lends financial capabilities second only to those afforded to “the largest public guys,” such as Apollo, Blackstone, Carlyle and KKR.

Fuel for new strategies

Dyal’s recent discussions with firms in its portfolio have touched on dislocation opportunities, including stressed credit and structured credit, Rees said. Utilizing permanent capital, managers have a variety of ways of launching strategies targeting related deal flow – from unveiling a fund and hiring a team to acquiring an investment platform active in a niche market.

If time-sensitive opportunities require more money than is available, Rees said, PE firms can request advances on forthcoming capital installments. In addition, they can tap into Dyal’s long-dated credit offering, which supports many of the same goals as stakes investment, including opportunistic initiatives.

Demand for Dyal’s $1 billion-plus private debt option has spiked since the onset of the health crisis, a person familiar with the matter told Buyouts. Rees declined to comment.

Minority capital will also come in handy in an increasingly tough fundraising market, Rees said. In addition to giving new dislocation vehicles a head start, he said, resources will allow managers to do deals at an earlier point than might otherwise be possible.

Along with capital, Dyal offers a business services platform that works alongside PE firms to help them achieve specific objectives. The platform is also playing a significant role at present, Jessica Renner, a senior team member, said.

Renner said Dyal is “helping many partners transition to a virtual fundraising process,” an approach that is becoming more common with restrictions on face-to-face meetings. Dyal is assisting firms by facilitating the introduction of e-documents and virtual-meeting technologies and sharing best practices.

Rees emphasized the importance of the slowdown as a measure of the ability of GP stakes funds to support managers over the long-term and across multiple cycles: “I think this is a very good battle test for the GP stakes industry. Because of the size and makeup of Dyal’s portfolio, it’s a particularly good test for us.”

Dyal last October collected a record $9 billion-plus for its fourth GP stakes fund. The New York firm is reportedly in talks with limited partners about launching a fifth vehicle with a target of at least $9 billion. Rees declined to comment.

Action Item: View Dyal Capital Partners’ portfolio here.

(This story was updated to attribute the size of Dyal Capital Partners’ private debt offering to an undisclosed source.)