01/16/2013

Dyal, in Deal-Making Spree, Backs Halcyon

Dyal Capital, a Neuberger Berman vehicle that acquires minority interests in hedge fund firms, wrapped up a flurry of yearend deal making with the purchase of a stake in the $12 billion Halcyon Asset Management.

The agreement with Halcyon, finalized on Dec. 21, was the fourth such transaction Dyal completed last month. That almost certainly represents a record for firms that back fund operators, with Dyal acquiring stakes in shops that run a combined $23.9 billion in the space of just a few weeks.

New York-based Neuberger Berman, which spent more than two years raising capital for the private equity vehicle before holding a final close on Sept. 30 with $1.3 billion, clearly had stockpiled a number of acquisition targets. But the hurried pace of deal making in December likely reflects an effort to close as many transactions as possible before the capital gains rate for high earners jumped to 20% from 15% on Jan. 1.

Dyal acquired a 20% stake in Halcyon, a multi-strategy fund operator that also manages collateralized loan obligations. The firm is twice the size of the next largest manager Dyal has backed to date — the $6 billion MKP Capital. Dyal’s mandate is to acquire 15-25% stakes in firms with at least $1.5 billion under management. In the wake of last month’s deal making, the vehicle has now deployed close to half of its capital.

As a condition for its backing, Dyal typically requires a firm’s principals to reinvest most of the proceeds of a deal into their funds — a term agreed to by Halcyon’s partners. The Halcyon Partners fund, a U.S.-domiciled version of Halcyon’s flagship vehicle, was up 11.4% in 2012, with a 3.5% average annual return over five years. That includes a big loss in 2008.

Like other managers backed by Dyal, Halcyon now can rely on Neuberger Berman, with $203 billion of assets, to market Halcyon’s funds to its institutional clients.

The three other deals Dyal inked in December were with debt-fund operator MKP; Pinnacle Asset Management, a $2.3 billion commodity-focused fund-of-funds manager; and Scopia Fund Management, a $3.4 billion equity shop. Dyal also holds stakes in Mast Capital and Capital Fund Management. All of the fund managers in Dyal’s portfolio are based in New York except Mast Capital, which operates out of Boston.

“We believe that with our recent transactions, Dyal has a well-diversified portfolio of six minority stakes in leading hedge fund firms,” said Sean Ward, who runs the business with Neuberger colleague Michael Rees. “That being said, many attractive opportunities continue to exist, particularly in the U.K., and we will continue to actively pursue potential deals this year.”

The four firms Dyal invested in last month produced a weighted-average return of 8.8% last year and took in a combined $3.5 billion of fresh capital. Rees and Ward expect to take another 2-3 years to invest the vehicle’s remaining capital. The long-term exit strategy is to list the fund on a public exchange.

When Dyal buys a stake in a management firm, it typically aims to acquire a proportional amount of each owner’s equity. In Halcyon’s case, that included acquiring part of the stake once held by the firm’s late founder, Alan Slifka, who died in February 2011. His estate’s remaining interest in the firm is held by a charitable foundation. Halcyon is led by chairman and chief investment officer John Bader.

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