Dyal: GPs are using stake sale proceeds to capitalise on dislocation

A number of GPs are using flush balance sheets to seed their own distressed debt funds, according to firm head Michael Rees.

Private equity firms are using capital generated from the sale of stakes in themselves to capitalise on market dislocation arising from the coronavirus crisis, the head of Dyal Capital Partners has said.

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The Neuberger Berman unit has received enquiries from managers looking to seed sidecar vehicles targeting distressed loans, Michael Rees, managing director at the firm, told Private Equity International.

He noted that a number of its existing GPs have used their balance sheets to seed opportunistic funds or warehouse opportunistic investments.

“PE firms want a balance sheet to launch opportunistic funds, so the number of inbound calls we’ve seen is quite noticeable, both for equity and for long-term debt financing at the firm level,” Rees said.

“[Some existing partners are] using balance sheet capital to pivot from, for instance, buying a software asset for 20x to buying distressed debt in good software companies with senior loans trading at 75 cents on the dollar. The more nimble [firms] are acquiring some of this unbelievably dislocated paper at very attractive prices.”

Coronavirus is expected to drive a wealth of distressed debt opportunities. Interest in the strategy has been growing for some time as managers geared up for an expected downturn, with closed-end distressed debt funds raising $52.95 billion last year, the third-largest such fundraising since 2008, according to data from sister title Private Debt Investor.

Dyal collected $9 billion for its fourth GP stakes fund last year, of which more than 80 percent has already been deployed. Rees declined to comment on fundraising, but the firm is also understood to have more than $1 billion of capacity in an open-ended credit vehicle.

Closing on new investments might be harder than usual given the uncertainty around portfolio company valuations, Rees noted. Dyal may look to price the pandemic into its valuations or share some of the risk with the seller by utilising earnout-type structures.

“It will be very hard to complete investments over the next quarter or two, unless you have a very anxious seller, because there’s a valuation disconnect,” said Chas Burkhart, founder of GP stakes pioneer Rosemont Investment Group, noting that its exits are also on pause.

Rosemont is deploying a more than $200 million permanent capital vehicle, having pivoted from a traditional fund structure in 2018. The Pennsylvania-based firm’s existing portfolio is weighted towards wealth management or advisory businesses and institutional product firms.

“The institutional managers have a pretty significant correlation with the public markets and will likely have limited cashflow in the near-term, but our wealth management [and] advisory businesses are being impacted very little because they have substantial fixed fees and lower equity beta,” Burkhart said.

“If the public markets were down 35 percent for the year, we might expect around a 15 percent decline in their valuations [or] NAV.”