GP stakes market growing faster than funds can invest: Blue Owl’s Rees

Estimated to total about $530bn this year, Michael Rees expects the investable market for GP stakes funds to reach about $749bn by 2025.

The investable universe for GP stakes funds is expanding faster than funds can deploy capital, Michael Rees, co-president of Blue Owl Capital, told Buyouts.

Rees, who heads Dyal Capital, Blue Owl’s GP capital solutions business, said the market – consisting mostly of private equity managers – is by enterprise value growing by roughly 10 percent per year.

Estimated to total about $530 billion this year, he expects it to reach about $749 billion by 2025.

This rate of growth, Rees said, exceeds the capacity of the GP stakes industry to raise and invest capital. “The fish are reproducing faster than we can pull them out of the pond.”

GP stakes funds, which acquire minority interests in PE firms in exchange for a share of income, have emerged strongly in the past five to eight years. Blue Owl’s Dyal, together with Blackstone GP Stakes and Goldman Sachs’ Petershill Partners, dominate, accounting for most fundraising and deals.

Intensive dealmaking has prompted concern about the market becoming saturated, with fewer and fewer quality candidates available for minority investment. This argument is rooted in estimates of the investable universe according to the number of active managers.

Calculating market size by enterprise value, Rees said, is more accurate because it takes in not only new investments but existing investments. In mature GP stakes portfolios, like Dyal’s, a significant opportunity lies with the appreciation of interests and re-ups.

For example, three of Dyal’s most recent investments – Dragoneer, KPS Capital Partners and Veritas Capital – were all re-ups.

Dyal’s strategy focuses on investing in large, well-established PE brands in North America and Europe. It today has a portfolio of about 55 managers, reflecting familiar names like Clearlake Capital, CVC, HIG Capital, NEA, Platinum Equity, Silver Lake, TSG Consumer Partners and Vista Equity Partners.

Along with re-ups, the deal pipeline includes “new names coming into the space every year,” Rees said. Among these opportunities are mid-sized firms turning into large ones through step-ups between funds. In addition, Dyal continues to explore opportunities in new geographies.

Dyal is on the verge of wrapping up the biggest GP stakes vehicle on record. Dyal Capital Partners V, targeted to bring in $9 billion, has so far secured $10 billion, Rees said in Blue Owl’s second-quarter earnings call, some $3 billion of which came in between April and June.

Fund V is expected to close later this year at more than $10.5 billion, he said. If this happens, it will be 17 percent larger than the 2019-vintage Fund IV, which set the prior record.

In the earnings call, Rees said Fund V had as of this month deployed $7.4 billion, or nearly three-quarters of the current capital pool. Because of this, he anticipates the launch of a sixth Dyal offering toward the end of 2023.

Dyal Capital Partners IV was as of June earning a gross IRR of 112.1 percent, Blue Owl reported, while Dyal Capital Partners III was earning a gross IRR of 31.2 percent.

Rees founded Dyal in 2011 as a division of Neuberger Berman. Last year, it merged with direct lender Owl Rock Capital Partners to form the listed Blue Owl. Overseen by more than 70 professionals, the firm presently holds almost $46 billion of Blue Owl’s total assets of $119 billion.