Inside the SPAC-Fueled, Highly Unusual Merger Plans of Dyal and Owl Rock

“I’ll be frank,” one allocator said. “It left me scratching my head.”

Michael Nagle/Bloomberg

Michael Nagle/Bloomberg

In 2018, Neuberger Berman Group’s Dyal Capital Partners purchased a minority stake in credit manager HPS Investment Partners. Just over a year later, Dyal bought another minority stake, this time in Owl Rock Capital Partners, a direct lending platform.

Then in 2020, HPS joined the ever-growing number of investment firms forming a special purpose acquisition vehicle. The credit manager launched a SPAC called Altimar Acquisition Corp., pricing its IPO at $250 million.

Here’s where things get tricky: On December 2, Dyal and Owl Rock announced that they are in discussions “regarding a potential strategic combination,” confirming an earlier Wall Street Journal report. The two firms said they are in exclusive negotiations with Altimar, which would facilitate the deal if it comes to fruition.

In other words, Dyal owns a stake in Owl Rock, which Dyal may merge with through a SPAC owned by HPS, which Dyal also owns a stake in. Got that straight?

If a deal goes through, founders of Owl Rock and Dyal would lead the standalone firm and would own “meaningful positions” in the business, along with Neuberger Berman, according to the announcement.

“It does make some sense on why [Dyal and Owl Rock] may want to partner,” one allocator, who asked to speak anonymously, by phone. “When you add the SPAC element of it and HPS, I’ll be frank. It left me scratching my head.”

The allocator theorized that the prevalence of SPACs in the market, high price to earnings ratios, and rising EBITDA multiples may be motivating the deal conversation.

Another investor pointed out that the deal could be motivated by another market force: the desire for cost-cutting and scale.

“Pressure on fees and performance means managers seek to maintain margins through scale (which means, cost-cutting),” the investor said via email. “This is a trend that will continue.”

The market has been consolidating this year. Just this week, Blackstone Group announced plans to buy quantitative credit firm DCI, while the Macquarie Group revealed a planned purchase of Waddell & Reed Financial.

[II Deep Dive: Inside CalSTRS’s $1 Billion Direct Lending Allocation]

According to the allocator, Owl Rock is a desirable asset. The firm’s co-founders are experienced: They include Doug Ostrover, co-founder of Blackstone’s GSO Capital Partners; Marc Lipschultz, ex-energy and infrastructure head at KKR; and Craig Packer, former co-head of leveraged finance for the Americas at Goldman Sachs.

The investment manager also just received a $1 billion allocation from the California State Teachers’ Retirement System through a customized mandate. CalSTRS has also made an investment in HPS’s direct lending fund, according to its limited partnership list dated June 30, 2019.

Roughly 33 percent of Owl Rock’s more than $20 billion in assets under management comes from public pension funds like CalSTRS, a source familiar with the matter told Institutional Investor previously. That number is expected to grow.

“What Doug has done with Owl Rock is partnering with some of the institutions and providing them a little more skin in the game,” the allocator said. “That might be why something like this is attractive.”