It is reported that Dyal Capital, an investor into the management companies of investment firms, may merge with a management company in which it holds a stake and also go public via SPAC merger. A two-for-one merger, if you will. Dyal Capital own stakes in well-known investment management companies like Vista Equity, a famous technology private equity company.
Founders of investment firms — typically folks who conceive of themselves as talented investors of other people’s money — will accumulate valuable stakes in their own companies if their funds have been successful. Though earning money from management fees earned on the funds deployed by the firms, the holdings in management companies themselves are typically illiquid with some exceptions like Blackstone or Carlyle Group.
These two firms are both publicly traded management companies. Each firm invests money on behalf of institutional investors such as public employee retirement funds and earns a management fee and other income from these funds. Blackstone’s stock price has done fairly well as shown below:
Reports of the merger seem to be based on unattributed rumor – the websites of neither Owl Rock nor Altimar Acquisition Corp show any formal presentations or information – so the combinations may not materialize. But the market’s reception to Blackstone and Carlyle Group stock shows that the variable income of management firms, which can vary with changes to AUM, investment performance, fundraising, and other difficult to predict company events, is palatable to investors. Indeed, both firms have shown strong dividend payouts to investor to complement share price increases.
When Institutional Investor Magazine asked around about the transaction, the response was of bafflement: “I’ll be frank,” one allocator said. “It left me scratching my head.” However, a bit of probing can point toward an explanation. Dyal Capital is itself a liquidity provider to owners of illiquid stakes in management companies. Robert Smith, founder of Vista Equity, infamously owes $140 million in taxes – a liquidity need like this would certainly prompt one to see if anyone would be a taker in his stake, perhaps explaining his sale of a stake in Vista to Dyal.
Although Dyal Capital positions itself as a permanent capital vehicle for owning these stakes in management firms, one can imagine that its own investors may be seeking liquidity. Indeed, Dyal secured a $1bn loan against its $5.3 billion Dyal Capital Partners III LP fund earlier in 2020 for the purpose of returning cash to investors. With regard to merging with Owl Rock, one can only guess that Owl Rock’s founders are seeking an exit rhyming with prior exits from GSO Capital, another credit investment firm of which Owl Rock’s Doug Ostrover was founder and was sold to Blackstone.
In other words, a dedicated liquidity provider seeks liquidity in its own right. The simultaneous merger with Owl Rock would be an elegant and appropriately thematic exit for Owl Rock’s founders. The SPAC, Altimar Acquisition Corp is of course sponsored by HPS Investment Partners, another investment management firm and no stranger to SPACs, leading to some more, uh, cynical commentary around the interrelation between the management firms. A more generous take might reflect the fact that Owl Rock is already publicly traded so it may be lending its own credibility among investors to the finalized SPAC deal. Time will tell if these firms deliver on a unique two-for-one merger deal.
San Francisco Securities Outlook 