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Michael Rees: how a private equity chief turned the tables on his Wall Street peers  – News


Till Michael Rees grew to become a billionaire this 12 months, he was arguably the preferred man on Wall Road.

Like different profitable financiers, Rees works in private equity, an trade with $3tn in unspent capital and a seemingly insatiable urge for food for purchasing homes and hospitals, theme parks and jail payphone techniques, family tree web sites and absolutely anything else that generates money.

However in contrast to most of his friends, Rees makes cash by shopping for items of the monetary trade itself. He has gained the belief of dozens of executives, who bought him shares within the closely held investment firms that underpin their private wealth and have turn into essentially the most highly effective establishments on Wall Road.

In little greater than a decade the agency that Rees co-owned, Dyal Capital, has paid out effectively over $10bn to purchase minority stakes in among the best-performing corporations in finance. He has forked out lots of of tens of millions of {dollars} to the founders of personal fairness corporations together with Silver Lake and Windfall Fairness; to hedge fund managers together with Jana Capital; and to corporations similar to Golub Capital and Owl Rock, that are displacing banks as chief lenders to a swath of company America.

“Rees realised, lengthy earlier than anybody else”, says Egon Durban of Silver Lake, the technology investment group that Dyal took a stake in 5 years in the past, “that different [investment] corporations with their resilient money flows can be significantly enticing for buyers in a low rate of interest world”.

The New York Inventory Change welcomes executives and friends of Blue Owl on Might 20 to have fun its itemizing © NYSE

This 12 months Rees, 46, grew to become a billionaire in his personal proper. Having began Dyal in 2011 as an experimental division on the fringes of asset supervisor Neuberger Berman, he broke freed from his mum or dad firm and pulled off a $12bn transaction that quantities to one of many greatest ever inventory market debuts by a US private capital group. The enlarged company, known as Blue Owl, immediately achieved a market capitalisation near that of Carlyle Group, Ares Administration and different extra established rivals.

The deal created an all-purpose agency that not solely provides prime financiers a approach to convert their paper fortunes into money and probably decrease their tax payments, but in addition supplies billions of {dollars} of debt to finance their buyouts. But it has embroiled Rees in a messy falling-out with among the folks he helped make wealthy.

So uncooked are the feelings surrounding the deal that few are keen to speak about it on the report. However in personal conversations, financiers gave contrasting accounts of a transaction that relying on which contested allegations you consider both concerned damaged guarantees and purloined secrets and techniques, or an opportunistic hold-up during which Dyal’s enemies sought to extract a heavy worth.

Two personal credit score funds — during which Dyal owns stakes — claimed to be so disturbed by the prospect of getting to compete with Rees for enterprise whereas additionally sending him their inner info that they sued to stop the deal.

The acrimonious dispute highlights the tangled relationships governing the US monetary system — and calls into query whether or not Rees, who gained acceptance into the highest echelon of finance, has soured his friendships on Wall Road together with his bid to create a monetary powerhouse of his personal.

“It seems that $1bn is a boatload of cash for Neuberger and its companions,” says a senior govt at a monetary agency that counts Dyal as a serious shareholder, referring to the money that the asset administration agency acquired as a consequence of the Blue Owl deal. Within the govt’s view: “[they have] interact[d] in a transaction that’s unhealthy for . . . shoppers and unhealthy for the prospects of the Dyal enterprise, all to complement themselves.”

Making associates in personal fairness

To prosper as an funding banker is to hitch your personal ambition to that of somebody way more highly effective. Rees, a Pennsylvania native who studied engineering on the College of Pittsburgh and the Massachusetts Institute of Expertise, arrived at Lehman Brothers in 2001. He would go on to work for the scion of a venerable New England clan that, with the inauguration of President George Herbert Walker Bush in 1989, had turn into an American dynasty.

By the point George Walker joined Lehman in 2006, the then president’s cousin had already attained a sure stature, having led Goldman Sachs’ different investing division.

However operating Lehman’s asset administration division was a tough project for Walker. The financial institution’s chief govt Dick Fuld preached progress by way of acquisition, and had already purchased Neuberger Berman, for 70 years the portfolio supervisor of selection for old-money New Yorkers. The acquisition drive sat uneasily with Walker, who knew that monetary teams had been costly to purchase and feared a success to Lehman’s earnings per share.

By the time George Walker joined Lehman in 2006, the then president’s cousin had already attained a certain stature, having led Goldman Sachs’ alternative investing division
By the point George Walker joined Lehman in 2006, the then president’s cousin had already attained a sure stature, having led Goldman Sachs’ different investing division © Christinne Muschi/Bloomberg

Anticipating the profound modifications in finance that might speed up within the wake of the monetary disaster, Rees and Walker discovered a approach to ship the worthwhile dealmaking his bosses needed. The important thing was to disregard old-line funding banks and wealth managers, and goal a brand new kind of establishment that was ascendant on Wall Road. 

Hedge fund managers and personal fairness executives rank among the many richest folks in America. Their $3tn struggle chest of funding capital not but spent comes not from the inventory market or particular person savers, however from pension funds, international governments and different giant establishments, which generally pay charges of two per cent a 12 months. Initially supposed to cowl workplace hire and different fundamental bills, these charges have turn into a supply of big earnings, reliably delivering tens of tens of millions of {dollars} a 12 months to the supervisor of a multibillion-dollar fund.

When bets go effectively, fund managers sometimes hold 20 per cent of the spoils. Wall Road’s share of the earnings on a profitable fund can run into billions of {dollars} over a decade. But, though the senior financiers who personal hedge fund managers and personal fairness corporations are sometimes fantastically rich on paper, they don’t seem to be at all times flush with money.

Walker and Rees devised a scheme that used Lehman’s stability sheet to provide a few of Wall Road’s prime earners an early payday, whereas on the identical time serving to quench Fuld’s thirst for offers. Briefly order, Lehman purchased stakes in a handful of profitable corporations, together with rising markets specialist Spinnaker Capital and DE Shaw, the quantitative fund the place Amazon’s Jeff Bezos began his profession.

The collapse of Lehman in September 2008 interrupted the Rees plan — however not for lengthy. After serving to Walker and his staff at Neuberger deliver the asset manager from the wreckage of Lehman in 2009, he was rewarded with a senior job on the newly impartial agency’s personal fairness unit. There, he recruited one of many agency’s prime attorneys, Sean Ward. Rees and Ward now not had the backing of an funding financial institution, in order that they arrange their very own personal fairness fund to lift outdoors cash from institutional buyers and purchase stakes in personal capital corporations.

Dick Fuld is heckled by protesters as he leaves Capitol Hill after testifying on the collapse of Lehman Brothers
Dick Fuld is heckled by protesters as he leaves Capitol Hill after testifying on the collapse of Lehman Brothers © Susan Walsh/AP

The plan was to amass a portfolio of stakes in personal fairness corporations and, in return, obtain charges of their very own. Rees, whose younger kids had been referred to as Dylan and Alexia, gave the brand new agency a portmanteau of their names.

Dyal Capital was not a direct success. The agency paid a lot for the stakes it purchased in hedge funds that its first fund misplaced $0.04 on each greenback. However a spherical of cash elevating from deep-pocketed buyers in 2014 gave Dyal sufficient capital to pivot to purchasing items of personal fairness corporations. A piece of the money got here from the Koch brothers, the Republican celebration backers and industrialists, in accordance with a number of folks conversant in the state of affairs. 

Among the many greatest winners of the scheme had been a choose group of Wall Road executives. Some wanted money, both to fund enlargement plans or to pay for his or her lavish existence. Others had been attracted by the thought of changing a stream of earnings with a one-off — and calmly taxed — capital achieve.

Dyal buyers prospered, too, as a tide of cash churned by way of personal fairness funds. Vista Equity Partners, a tech buyout agency that bought a stake to Dyal in 2015, raised a record-breaking $16bn fund 4 years later, opening a spigot of charges and making it by some measures Dyal’s most profitable funding. The Silver Lake funding surpassed that report earlier this 12 months. Dyal’s two most up-to-date funds have loved sturdy outcomes with its newest one hitting an annualised return of over 60 per cent, in accordance with the corporate.

By late final 12 months Neuberger and the Dyal founders, who had made themselves wealthy and common on Wall Road by paying prime greenback for slices of different folks’s empires, needed to promote a slice of their very own. Annual payment earnings had quadrupled in simply 4 years to $320m in 2019, in accordance with paperwork reviewed by the Monetary Instances. The outcomes had exceeded Walker’s wildest expectations, equalling the success of the personal fairness managers that Dyal sought to again.

However Dyal may hardly purchase a bit of itself. So Rees and Ward got here up with one other plan — one that might put them in battle with some shut allies.

Column chart of Amount raised and available for private capital transactions ($tn) showing Private equity's cash pile stacks up

Act of ‘betrayal’

When Alan Waxman and William Easterly bought a tenth of Sixth Road Companions to Dyal in 2017, the veteran credit market investors thought that they had struck a gilded friendship.

It was a golden period for Sixth Road and different personal credit score corporations, which had been taking up from America’s weakened banks as major lenders to a swath of heartland companies. With buyers flocking to their funds, a number of lending corporations bought stakes to Dyal. Amongst them had been Sixth Road and its rivals Golub Capital and Owl Rock.

Waxman and Easterly seen it as greater than a enterprise transaction, in accordance with folks conversant in their pondering. Rees and his spouse started parking their cash in Sixth Road funds. Ward and Easterly crossed paths on the New York Metropolis personal faculty the place they each despatched their kids. The lads typically socialised. When Kevin Durant’s Golden State Warriors triumphed over LeBron James’s Cleveland Cavaliers on the 2017 NBA finals in Oakland, Rees and Waxman watched collectively from courtside seats.

But this 12 months they grew to become adversaries. At a Delaware court docket listening to in March, Sixth Road’s attorneys requested a decide to dam the Blue Owl merger, arguing that Dyal was violating its contract. Attorneys for Dyal, which had invested round $400m in Sixth Road solely 4 years earlier, derided it as “a vulture lending agency” that was making an attempt to “extract worth that it didn’t earn”. Sixth Road’s property had roughly tripled to over $50bn for the reason that preliminary 2017 funding.

On the coronary heart of the court docket battles was a dispute over an intricate three-way merger involving Dyal and two personal lending corporations that had beforehand acquired cash from its funds.

One of many corporations, Owl Rock, mixed with Dyal to create a agency managing $52bn in property. The brand new entity wouldn’t solely purchase stakes in personal fairness teams, it could additionally present the debt for his or her buyouts. The opposite, HPS Funding Companions, was the founding father of a particular objective acquisition firm that had raised $275m on the inventory market as an empty company shell. That Spac now merged with the enlarged group to create Blue Owl.

Even some executives near the deal acknowledge it seems rife with battle.

Dyal’s acquisition of a minority stake in the Phoenix Suns valued it at nearly $1.6bn, about four times what Robert Sarver, owner of an Arizona bank, paid for the team in 2004
Dyal’s acquisition of a minority stake within the Phoenix Suns valued it at practically $1.6bn, about 4 occasions what Robert Sarver, proprietor of an Arizona financial institution, paid for the staff in 2004 © Mark J. Rebilas/AP

A Dyal fund had beforehand invested $500m in Owl Rock, earlier than it merged with Dyal. It meant that Rees and Ward had been now managing a fund that can also be one of many greatest shareholders in their very own agency. Whereas the buyers in Dyal’s funds are nonetheless ready for a chance to money out, the inventory market itemizing has already given Rees and Ward massive payouts of their very own.

The sharpest objections came from executives at Sixth Street and Golub Capital, who had been sad that Dyal — considered one of their greatest shareholders — was merging with Owl Rock, considered one of their most formidable rivals. They characterised the transaction as a “betrayal” that might put their confidential monetary info within the fingers of a competitor. And insisted that their cope with Dyal gave them an influence of veto.

Sixth Road instructed defusing the row by permitting it to purchase again the 11 per cent stake it had initially bought to Dyal — at a deeply discounted worth. “They provide[ed] to purchase again their curiosity, our funds’ curiosity of their agency, in a completely uneconomic worth,” Ward, the Dyal govt, testified. “I’m certain they knew it was laughable.” He scoffed at Sixth Road’s declare to be apprehensive about its confidential info, arguing that the updates that Dyal receives from its investee corporations include nothing that’s actually delicate. “[Sixth Street’s] Easterly instructed me to my face he didn’t care in regards to the info,” Ward mentioned in testimony. Nonetheless, Easterly in his personal court docket testimony, mentioned that he did contemplate Owl Rock “a competitor”.

Dyal opted to combat the case. Walker, whose agency Neuberger took out $1.1bn in money whereas maintaining a multibillion-dollar stake in Blue Owl, was stung by the rancour of the litigation, in accordance with an individual conversant in his pondering. Nonetheless, he believed the deal was honest.

Finally, each courts sided with Dyal. When Blue Owl started buying and selling on the New York Inventory Change in late Might, Rees celebrated a triumph in contrast to any in his profession after going through down threats from among the hardest characters in finance.

Simply weeks later, Rees entered a brand new stratum of asset house owners, signing his agency’s first deal to purchase a part of a sports activities franchise in July. The Nationwide Basketball Affiliation has been reluctant to permit monetary corporations to personal stakes in groups, nevertheless it gave preapproval for Dyal to finish such offers final 12 months. A number of financiers who personal NBA groups had been instrumental in introducing Dyal, in accordance with an individual conversant in the discussions.

Dyal’s acquisition of a minority stake in the Phoenix Suns valued it at practically $1.6bn, about 4 occasions the quantity Robert Sarver, the proprietor of an Arizona financial institution, paid for the staff in 2004. On the evening the deal was introduced, the Suns performed and beat the Milwaukee Bucks, itself a staff owned by personal fairness billionaires. The Bucks, nonetheless, had the final snicker defeating the Suns on Tuesday evening to win the NBA championship.

The ascent of Rees has each bewildered and impressed a few of his contemporaries. One in all them marvels that the person he first encountered as a mid-level financier solely a decade in the past now has a billion-dollar fortune and a seat with the most important names in finance — routinely going head-to-head, he says, with a few of “the neatest, hardest, nastiest, greediest sons-of-bitches which have walked the earth”.

Michael Rees: how a non-public fairness chief turned the tables on his Wall Road friends  Source link Michael Rees: how a non-public fairness chief turned the tables on his Wall Road friends 

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