By Roshni Padhi, Winston Shum, Jin Yin Moh (Stanford University) and Zahra Malik, Matilda Oculy, Deimante Chailenko, Baliny Ganeshakumaran, Devi Vanalia (The University of Manchester)
Overview of the deal
Deal Structure: Double reverse merger (Dyal Capital Partners and Owl Rock Capital Group) into a SPAC (Altimar Acquisition Corporation) to form Blue Owl Capital (NYSE: OWL)
Total Transaction Size: $12.5 billion
Financial Advisors: Perella Weinberg Partners, Goldman Sachs, and BofA Securities are advising Owl Rock. Evercore and Ardea are advising Dyal. JP Morgan is advising Altimar. Citigroup, Ardea, and UBS are advising Neuberger Berman.
Dyal Capital Partners, a General Partner (GP) with stakes in some of the largest alternative asset managers worldwide and a unit of Neuberger Berman Group, spent $500 million on a 20% equity stake in Owl Rock Capital Group last November. In addition, the SPAC that the transaction will be using is sponsored by HPS Investment Partners, which is partially owned by Dyal, lending itself to an exceptionally complicated transaction structure. While this could lead to conflicts of interest between the relevant parties, going public via the SPAC route could lead to a higher valuation for the combined entity, which will have more than $45 billion AUM. Synergies will arise from public investors seeing their diversified revenue streams in a positive light. The deal will also allow Dyal to expand beyond its GP stakes operations, allowing the company to approach any GP and offer them a variety of financing options (including debt, preferred, and term financing). The pro forma valuation of the company is expected to hover around $14.4 billion with a 25x multiple for Dyal earnings and a 20x multiple for Owl Rock earnings.
Company Details - Dyal Capital Partners
Dyal Capital Partners aims to acquire minority equity stake as well as provide financing for alternative asset managers. Dyal Capital Partners has over 10 years of experience transacting with institutional financial firms with over 50 completed equity and debt transactions. Dyal’s central service is the “Business Services Platform”(BSP), which provides strategic support (Capital Strategy and Advisory services) to their partners.
Founded in 2011, headquartered in New York, United States
CEO: John Dyment
Number of employees: more than 2,100
LTM Revenue: $3.7 million (as of Q4 2020)
Company Details - Owl Rock Capital Group
Owl Rock Capital Group is one of the largest alternative asset managers with deep expertise in the credit markets. It focuses on a broad range of sectors, including business services, healthcare services, pharma and healthcare technology, aerospace and defence, software and technology, manufacturing and industrials. With approximately $14.6 billion in assets under management, Owl Rock is comprised of a team of seasoned investment professionals with significant and diverse experience from the world’s leading investment firms and financial institutions.
Founded in 2015, headquartered in New York, United States
CEO: Craig W. Packer
Number of employees: 164
Market Cap: $4.68 billion (as of Q3 2020)
LTM Revenue: $456.742 million
LTM EBITDA: $615 million
Projections and Assumptions
Post entry into the public markets, Dyal and Owl Rock are likely to attain a valuation significantly higher than would otherwise have been achieved in the private markets. Securing this spread in valuation could yield immense benefits for all parties involved, including Dyal, Owl Rock, and Neuberger Berman insiders.
Moreover, the merged entity would be able to offer a much wider range of services than each can at the moment, resolving one of the core challenges faced by Dyal: its hitherto unsuccessful efforts to diversify away from its core GP stakes business. Dyal previously attempted establishing a debt fund to provide financing to GPS, but the effort was less successful than hoped for. By merging with Owl Rock, Dyal places itself in a good position not only to launch GP-focused debt funds but further to initiate novel, GP-related financing offerings. A few of the options the combined entity could offer include financing an LBO and underwriting a loan. These strategies in turn have the potential to contribute substantially to Dyal’s AUM.
Given, lastly, that the merged entity is likely to be unrivalled in both size and scope, the deal is set to pave the way for Dyal and Owl Rock to collectively establish market dominance, paving the way for them to further distinguish themselves as market leaders in the rapidly growing direct lending and GP staking space.
Over the long term, the newly merged Blue Owl will increase its market presence and establish itself as an industry leader in a sector largely dominated by competitor firms such as Blackstone and Goldman Sachs. The large permanent capital base, with over 92% of the combined $45 billion being permanent capital, allows Blue Owl to be in a position for growth in its asset base and earnings. Specifically, the unique concept of creating a “one-stop-shop” for private equity and other private firms allows Blue Owl to create a holistic platform to support both financing and investment options, increasing more products that other competitors may not offer. For instance, Michael Rees, Dyal founder, stated that the lending business of many banks cannot compare to Owl Rock’s long-term debt-financing in which Owl Rock can lend up to a period of 10 or even 15 years.
At the same time, Blue Owl will grow to become more attractive in investors’ eyes as the sponsored funds will benefit from the new “autonomous by complementary” services offered by Blue Owl; an increasing number of opportunities will arise as the firm combines relationships between the direct lending business and the GP capital solutions business. Ultimately, this strategic combination will lead to deepened connections within the asset-management space, allowing unrivaled access to investments while opening a path for greater distributed earnings for current and future investors.
Risks and Uncertainties
This deal is not risk-free. Publicly listed entities face short-term pressure to meet earnings expectations and grow. Substantial Neuberger Berman and insider ownership should prevent a shift toward short-term thinking, but being a public entity could derail Dyal and Owl Rock’s current competitive advantage: longer-term thinking. Additionally, the merger may discourage other credit-focused firms from selling stakes to Dyal for fear of selling to one of their competitors. However, a parent company managing a private credit strategy has not deterred credit-focused shops from selling stakes to other GP staking firms such as Blackstone.
While the deal has been formally announced, there is no guarantee that it will receive regulatory approval. If the deal goes through, risks that should be accounted for include unexpected costs involved in integrating the operations of both parties. Owl Rock and Dyal have announced their intent to retain the investment teams and processes which are already in place. The transaction is of high complexity, combining financial entities with very different expertise. It should also be noted that the deal may further be affected by the general changes in economic conditions resulting from the COVID-19 pandemic.