Side Letter: Carried interest under fire, Dyal’s credit conundrum

A group of Democrats is pushing for carried interest reform in the US. Plus: Why not all of Dyal's portfolio GPs might be happy about its Owl Rock tie-up; and how NAV facilities transitioned from niche to mainstream. Here's today's brief, for our valued subscribers only.

They said it

As a long-term global investor, we are also concerned that companies with boards that are not diverse will not be able to maintain the trust of their customers, investors and society at large over time.

Oslo’s Norges Bank Investment Management, which invests on behalf of the world’s largest sovereign wealth fund, says companies with less than 30 percent representation for either gender should consider setting targets.

Just happened

Keep calm and carry on
House Democrats have taken their first shot against PE in the new Congress. New Jersey Democrat Bill Pascrell and colleagues introduced a bill on Tuesday to change the tax treatment of carried interest to ordinary income, which can run as high as 37 percent, sister title Buyouts reports (registration or subscription required). Carry is currently taxed at the capital gains rate of 20 percent, though critics consider this a loophole for wealthy GPs. PE has been anticipating a more aggressive stance from a Democrat-controlled Senate, with issues such as 401(k) participation in the asset class also a potential focus. Watch this space.

Dyal’s credit conundrum
Got a strong cup of coffee in your hand? You might need one to wrap your head around this: Sixth Street, a credit-focused firm in which Dyal Capital Partners owns a stake, has brought a lawsuit to try to prevent its minority owner from merging with Owl Rock Capital Partners (also a credit shop) in a SPAC deal on the basis that Owl Rock is a direct competitor with Sixth Street. Sixth Street wants its own stake to be excluded from the deal, Bloomberg reported (subscription required) this week, citing a letter sent to Sixth Street LPs (the latter did not respond to a request for comment by Side Letter). To make matters more complicated, the SPAC by which Dyal and Owl Rock’s merger is proposed is backed by HPS Investment Partners (also a credit firm) in which Dyal also owns a stake. A spokesman for Dyal and Owl Rock told Side Letter the firms believe Sixth Street’s claims are “baseless, lack merit” and that they will vigorously defend them.

Market sources have pointed out to us over the years that the GP stakes game can be a recipe for potential conflicts of interest. We contacted the 10 other Dyal-owned firms involved in private credit to ask whether they’re thinking of taking similar action to Sixth Street; three declined to comment, while the others did not reply. One did tell us on an anonymous basis that they have no plans to take any action against the merger as credit does not form a large part of their business. See the list of firms Dyal owns stakes in here.

NAV-igating the crisis
In Day Three of Fund Finance Week, PEI examines a small and little-understood lending community that has emerged from the pandemic stronger than ever. As liquidity concerns rocked the industry last year, CFOs turned to institutions prepared to offer loans against concentrated pools of underlying net asset value. Though such facilities were initially used to execute bolt-ons teed up prior to the pandemic, usage has expanded over time to include refinancing underlying portfolio companies, making last-mile funds available for bolt-on acquisitions, making opportunistic buy-backs from minority shareholders and even GP financing.

With GPs and LPs alike warming to NAV financing, the popularity of this sector shows little sign of abating. Expect to see a raft of new providers and innovative uses of proceeds in the year ahead.


Home office
Real estate titan Brookfield says three-quarters of its employees at its US headquarters in Manhattan have returned to the office since late November, the Financial Times reports (paywall). The firm has developed a covid-19 playbook it says others can follow, including regular testing, cleaning and addressing staff concerns over public transport. Its conviction is unsurprising given that 40 percent of office assets in the US and Europe – sectors in which Brookfield is highly active – could be facing obsolescence, per sister title PERE (registration or subscription required). Still, promising news for those looking forward to socially distanced chats around the water cooler.

Brexit bargains
PE firms are eyeing bargains in the UK stock market, per the FT. Six approaches have been made for take-privates of UK-listed companies so far in 2021, versus 14 for the whole of 2020, with Signature Aviation and brewery Marston’s among the most high-profile targets. The FTSE 250, which includes smaller companies with high exposure to the UK, has lagged in comparison to the S&P 500, prompting some to strike. Perhaps Brexit isn’t all doom and gloom for PE.

Dig deeper

Institution: Connecticut Retirement Plans and Trust Funds
Headquarters: Hartford, US
AUM: $41.07 billion
Allocation to alternatives: 19.2%

Connecticut Retirement Plans and Trust Funds approved $225 million-worth of commitments to private equity funds at its February 2021 investment advisory council meeting, a contact at the pension told Private Equity International.

The commitments comprised $125 million to One Rock Capital Partners III and $100 million to Insight Partners Opportunities Fund I. Both funds have exceeded their equity capital fundraising targets.

Connecticut has a 10 percent target allocation to private equity that stood at 7.6 percent as of 31 December, the most recently available data.

The $41.07 billion US public pension’s recent private equity commitments have been predominantly to North America-focused funds pursuing a variety of investment strategies.

For more information on Connecticut, as well as more than 5,900 other institutions, check out the PEI database.

Today’s letter was prepared by Alex Lynn with Adam Le and Rod James.
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