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Inside the Explosive Lawsuit That Started a Legal War Between Sixth Street and Dyal

Sixth Street claims a competitor will own a stake of the firm after Dyal merges with Owl Rock and goes public. Dyal says the claims are “meritless.”

Sixth Street Partners has asked a Delaware court to stop the merger between Dyal Capital Partners, whose third fund owns a stake in Sixth Street, and rival Owl Rock Capital. Sixth Street alleges that the deal violates its investment agreement with Dyal. 

According to Sixth Street’s lawsuit against Dyal Capital Partners III and Neuberger Berman, which owns Dyal, Sixth Street said it’s bringing the case because Dyal intends to merge with a direct competitor. Both Sixth Street and Owl Rock have direct lending platforms that make loans to small- and medium-sized businesses. The lawsuit, which was filed in Delaware, was made public on Friday. 

Dyal and Owl Rock announced last year that they would merge and go public with $45 billion in assets. Rather than a traditional initial public offering, the two managers are going public through Altimar Acquisition Corp., a special purpose acquisition company sponsored by HPS Investment Partners.

[II Deep Dive: How Owl Rock, Dyal Decided to Merge Via a SPAC — and What’s Next for Blue Owl]

“The proposed merger would fundamentally compromise the bargain Sixth Street struck in partnering with Dyal: Dyal’s principals will now co-manage and economically benefit from a directly competing business that will control Dyal’s minority interest in Sixth Street,” the firm said in the lawsuit.

Sixth Street Speciality Lending CEO and chairman Josh Easterly addressed the suit earlier this week in the firm’s earnings call.

“We’re in the partnership business and we take our partnership obligations seriously,” Easterly said on the call. “We honor our deals and expect our partners will, too. In this case, Dyal didn’t.” 

In the court document, Sixth Street alleged that its investment agreement with Dyal includes “robust protections,” including consent rights and transfer restrictions that guard against the possibility of being owned by a competitor.

Sixth Street is asking the court to stop the transaction, which will transfer Dyal’s ownership interest, until the parties address the issues it has raised. 

“We believe Sixth Street’s claims are baseless, lack merit, and we will vigorously defend them,” said David Wells, a spokesman representing Dyal and Owl Rock. “Sixth Street is attempting to assert the existence of a consent right that we believe simply does not exist. We appreciate the broad support from investors, partner managers, and other key stakeholders. The strategic combination is tracking towards a close in the first half of this year.” 

Late Friday, Dyal filed a notice with the Delaware court, challenging the confidentiality of the investment agreement between Dyal and Sixth Street. Dyal alleged that Sixth Street has “selectively and misleadingly quoted” from the agreement to prove their case, while keeping confidential the parts of the contract that would “show….that their claims are meritless,” according to the challenge.

Dyal argued that there is no reason the contract shouldn’t be made public as it doesn’t contain sensitive information.

“Sixth Street’s contractual misreading is evident from the full text and plain language of the investment agreement,” Dyal said in the court document. “The desire to avoid clarity is precisely why Sixth Street does not want the Investment Agreement to be made public.”

A spokesperson from Sixth Street responded to the challenge from Dyal on Friday, saying that “only a few short paragraphs” of the investment agreement are relevant to the dispute.

“Dyal’s attempts to coerce us into publicizing our — and their — confidential information should concern anyone who shares such information with them, and is a key reason we felt we had to bring this action to protect our rights,” the spokesperson said.

Dyal Capital runs so-called GP stakes funds that invest in alternatives firms, provides capital, and helps the firms grow. As part of these deals, the firms share confidential information. When Dyal and Sixth Street struck a deal in 2017, “Dyal assured Sixth Street that it would not become a competitor and that its interests would be aligned,” the Sixth Street lawsuit claimed. “If Dyal had been a competitor, or had even expressed that near-term possibility, Sixth Street would not have allowed Dyal to become a strategic partner.”

Earlier this week, Sixth Street sent a letter to its own investors alerting them to the lawsuit. In the letter, Sixth Street argued that its agreement with Dyal prohibited Dyal from competing with its business. 

In the lawsuit, Sixth Street claimed that its investment agreement gives it the right to consent to any changes in ownership. 

“These broad consent rights, which could be exercised by Sixth Street in its sole discretion for any reason or no reason at all, were subject only to narrow and limited exceptions,” Sixth Street said. According to the complaint, the exception was only for Dyal to provide liquidity to limited partners, which is not happening under the Dyal-Owl Rock merger.

Among other provisions, Sixth Street claimed its rights were defined so that they cover not only direct sales of ownership interests in the firm by the Dyal fund but all types of transfers, including mergers or other similar transactions involving “Dyal’s upstream affiliates.” 

Sixth Street said its investment agreement also “prohibits the direct or indirect transfer — specifically including by mergers or other similar transactions involving Dyal affiliates — of all or part of Dyal’s pecuniary or non-pecuniary interests in Sixth Street, absent Sixth Street’s consent.” 

“The merger is so openly antithetical to the spirit of the parties’ partnership that Dyal did not even attempt to reach out to discuss the proposed transaction with Sixth Street, as it has in the past, much less seek Sixth Street’s consent,” the firm said in the lawsuit. 

Both Sixth Street and Owl Rock were founded by longtime credit veterans. Alan Waxman, CEO of Sixth Street, co-founded the firm in 2009 as an affiliate of TPG after a long career in special situations at Goldman Sachs. Doug Ostrover, one of the three founders of GSO Capital Partners, KKR’s Marc Lipschultz and Goldman’s Craig Packer launched Owl Rock in 2016. Dyal, owned by Neuberger Berman, created some of the first funds to take stakes in alternative investment managers and advise them on strategic growth opportunities. Private funds that invest in general partners, or GPs, are now an established and lucrative business dominated by Dyal, Blackstone, Goldman, and others. 

Dyal and Owl Rock anticipated some of these risks to their merger, which it disclosed in its regulatory filings. “Our funds hold and make investments in partner managers and there may be provisions within our arrangements with partner managers that could affect our business including our ability to undertake follow-on investments,” according to Altimar’s disclosure documents. 

In the court documents, Sixth Street said Dyal pitched itself in 2016 as a better alternative to other GP stakes funds, whose sponsors had competing lines of business. To protect itself, Sixth Street said it baked “sweeping protections designed to grant Sixth Street an absolute say over who its investment partners would be in the event that Dyal sought to transfer its investment in Sixth Street.” 

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