YouSaid · the spoken record

Michael Rees

lines on the record: 72
first: 2022-10-31
most recent: 2022-10-31
sittings or episodes: 1
sources: podcast

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“Compelling strategic logic for the hedge fund deals 15 or 20 years ago, there was a financial tax motivation. And so maybe it didn't have the positive halo effect back then and maybe the cash out description was more fitting. But as the time evolved, there became needs for additional capital, really growth capital in these industries. And the last decade, in particular the last six or seven years, has been marked by really providing growth capital to a growth industry and allowing these firms to continue to grow and solidify their platform by having additional permanent capital. So it's been a long arc, but I think luckily now the market has realized there's a huge strategic value to bringing on passive capital like the business we provide.”
2022-10-31 · Capital Allocators · Michael Rees – Inside GP Stakes at Dyal Capital (Capital Allocators, EP.278) · IDENTIFIED FROM THE TRANSCRIPT · source
“Yeah, and air quotes cash out are the two words that I detest the most because most of these deals have a strategic logic to them that is quite important and particularly the private markets ones over the last decade. We could come to those. It probably was more of a cash out trade vis- ⁇-vis the hedge fund industry 15, 20 years ago because the motivation was really a tax arbitrage and a hedge fund that is trading relatively actively is going to generate mostly short-term gains and that will pay in New York City a 50% tax rate and the management fee profits are also at 50%. So if you could convert that to long-term capital gains by selling a forward slice of that, you could reduce your tax rate by approximately half. And so while there was not a huge or”
2022-10-31 · Capital Allocators · Michael Rees – Inside GP Stakes at Dyal Capital (Capital Allocators, EP.278) · IDENTIFIED FROM THE TRANSCRIPT · source
“The ownership of a minority stake has changed so much in 20 years. You look back, you know, it was a darn near four-letter word in the...”
2022-10-31 · Capital Allocators · Michael Rees – Inside GP Stakes at Dyal Capital (Capital Allocators, EP.278) · IDENTIFIED FROM THE TRANSCRIPT · source
“But much smoother, earlier out of the gate, no J curve. So it has a really attractive return dynamic because we still keep that original cash on cash mentality.”
2022-10-31 · Capital Allocators · Michael Rees – Inside GP Stakes at Dyal Capital (Capital Allocators, EP.278) · IDENTIFIED FROM THE TRANSCRIPT · source
“From an underwriting perspective, we still use that original lens of cash on cash returns. We certainly don't get the type of cash on cash returns that we got back then in the hedge fund space with 25% yields. But we really think about it from an underwriting perspective as how long we can get our money back, how long until we can make a private equity-like return, and those are cash-based. We do believe that there is enterprise value at the end of the rainbow here, but we don't want to underwrite a sale. We don't want to underwrite that we can achieve that value. We want our investors to think about this as a long-dated cash flow stream that will be very attractive for them. And if we can unlock an enterprise value exit, then we've got some ideas around that. But if we can, it's going to be upside. So we can get investors a private markets like return that is cash flow-based.”
2022-10-31 · Capital Allocators · Michael Rees – Inside GP Stakes at Dyal Capital (Capital Allocators, EP.278) · IDENTIFIED FROM THE TRANSCRIPT · source
“How do you think about the return profile of what you get back, right? So in the hedge fund world early on, it was cash on cash and presumably really low multiples if you're talking about 25% cash on cash. There's enterprise value, there's cash flow, there's carrying these businesses. How do you model out what an investor in Dial thinks about in terms of what their returns would be?”
2022-10-31 · Capital Allocators · Michael Rees – Inside GP Stakes at Dyal Capital (Capital Allocators, EP.278) · IDENTIFIED FROM THE TRANSCRIPT · source
“Promise to anyone, and certainly a downside of six was not the likely case. So we had to start thinking about the model and was there a place in alternatives where there was real institutional value being created and in true enterprise, something that you could own for longer than the period of time before the person turned the lights out. Now, I think the hedge fund industry has shown that a number of organizations have real longevity and that there would have been money to be made sticking with hedge funds. We just saw a lot more of an institutional drive really led by investors, but also a willingness of the private markets firms to start thinking about institutionalizing their platform and making them more of an enterprise. We saw more of that in private equity, in real estate, infrastructure, et cetera.”
2022-10-31 · Capital Allocators · Michael Rees – Inside GP Stakes at Dyal Capital (Capital Allocators, EP.278) · IDENTIFIED FROM THE TRANSCRIPT · source
“Firms in the industry, it even exceeded our underwriting expectations. So a dollar went in the ground. By year three or four, you already had $1.50. And by year six or seven, you had more than that. And so that's what the model was and even was the foundation for dial one. Get your money in the ground to a really good firm. Not the biggest firm out there. Somebody who had a little bit of growth left in them participate in the management fee growth and what had been unbelievably consistent returns. We underwrote that every hedge fund could get 8 to 10 percent net every year. A bad year was eight, a good year was 12 and that was it. What started happening as we sort of moved into the middle and end of dial one, 2010, 11, and 12 was that some of those return dynamics started to change in the industry. And as we all recall, 8% wasn't”
2022-10-31 · Capital Allocators · Michael Rees – Inside GP Stakes at Dyal Capital (Capital Allocators, EP.278) · IDENTIFIED FROM THE TRANSCRIPT · source
“We started buying minority stakes in hedge funds because the cash on cash return was so attractive, the multiples were low, and you could make your money back in four or five years and have a really nice return in six or seven, even if the business wasn't a platform. It wasn't going to be institutional. Because remember sort of late 90s, the two biggest hedge funds in the world, Tiger and Soros, literally turned their lights off on a Friday afternoon at 5 p.m. and the enterprise had no value. So it wasn't a logical statement back then that you could say we're going to invest in a hedge fund because this thing's going to be around for 30 years. The obvious response would be the two best firms just literally turned out overnight. So what really happened was we had to look at it on a cash on cash basis and getting the money back quickly. And given the fast growth and the average performance of the high quality”
2022-10-31 · Capital Allocators · Michael Rees – Inside GP Stakes at Dyal Capital (Capital Allocators, EP.278) · IDENTIFIED FROM THE TRANSCRIPT · source
“And the management team at Lehman said, What are we doing for all these big checks? And turns out we didn't have to do anything. We had to be a passive minority partner and sit and wait and collect checks. So that's how the whole genesis of the idea started and how we got thinking about how you could participate in the economics of the hedge fund industry without owning and controlling a hedge fund outright.”
2022-10-31 · Capital Allocators · Michael Rees – Inside GP Stakes at Dyal Capital (Capital Allocators, EP.278) · IDENTIFIED FROM THE TRANSCRIPT · source
“Well, the biggest brick, it's probably a lot of bricks, was public company called Newberger Berman. And so that became the vast majority of what was Lehman Brothers asset management effort. We bought a fixed income business called Lincoln Capital in Chicago and a number of things in alternatives, but sort of swept it all together. And that's what ultimately was Lehman's asset management arm that was part of the management buyout post bankruptcy that ultimately became Newberger Berman and where we launched the dial business. But really, as part of that whole long arc of acquisitions, every time we did one of these minority stakes in hedge funds, we started with GLG and then we did a firm called Marble Bar and Osprey and DE Shaw. We were doing a lot of work in a lot of other areas in these 20% stakes in hedge funds were paying the bills. The mailbox was full of checks from these guys.”
2022-10-31 · Capital Allocators · Michael Rees – Inside GP Stakes at Dyal Capital (Capital Allocators, EP.278) · IDENTIFIED FROM THE TRANSCRIPT · source
“A law firm boutique called Aaron Krantz and Aaron Krantz. And so that really got us going and was the first brick that we put on the ground way back then”
2022-10-31 · Capital Allocators · Michael Rees – Inside GP Stakes at Dyal Capital (Capital Allocators, EP.278) · IDENTIFIED FROM THE TRANSCRIPT · source
“Oh, we wanted to start with the fund of hedge fund world. So we really dug in there. We figured alternatives was a wave of growth. And I guess that's an understatement now looking backwards 20 years. And we thought the safest way to start was a fund of hedge funds, get our sea legs in the hedge fund space, but not by picking one by having a more institutional approach. And so we looked around, we looked at everything. I think we looked at K2, at Mizro, at Groverner, a lot of great conversations. And when you're doing M&A, going down a process with someone is an educational experience. And so we really got to learn a lot about the industry, even though a number of those didn't get to the finish line. And ultimately, we set up a joint venture where we threw half of the team in from Lehman Brothers, and then we brought in some very experienced hedge fund investors.”
2022-10-31 · Capital Allocators · Michael Rees – Inside GP Stakes at Dyal Capital (Capital Allocators, EP.278) · IDENTIFIED FROM THE TRANSCRIPT · source
“That probably can't be as good as Alcoa or Eaton Cutler Hammer, but I'll try this interview out. So it was one of those really unique times. There's a lot of luck and timing in anybody's career arc. And it just so happened that engineers got a knockup on the pecking order in the 1999 timeframe, and I was able to use that to get into finance. So where did you start? I started at a financial consulting firm called Maricon Associates, and it was pitched to me as McKinsey with a lot more numbers. And I figured, you know, like I said, with a mechanical engineering background, it spoke to me. So had a great run, worked inside a lot of banks and really looking at how they were structured and what a financial services company was and then was asked by a friend to give corporate development a try over at Lehman Brothers. And so went over there. I had a great group I worked with.”
2022-10-31 · Capital Allocators · Michael Rees – Inside GP Stakes at Dyal Capital (Capital Allocators, EP.278) · IDENTIFIED FROM THE TRANSCRIPT · source
“Please enjoy my conversation with Michael Rees. Great to see you. Ted, good to see you as well. Well, why don't we start with your background? You can go all the way back to diapers. It doesn't matter to me where you start. Well, you know, if you want diapers, it starts in Pittsburgh, Pennsylvania, hopefully over the course of our chat today. You'll hear some good Steelers stories. Born and raised there, went to school there at the University of Pittsburgh, and then hopped up to Boston where I studied engineering at MIT, was an engineer through and through and figured I'd spend my entire career at Alcoa or somewhere in the mechanical engineering ward of some big company. And then while up in Boston in 1999, all of the quote really smart kids started going into the dot-com world. And that left us lowly engineers with these great interviews for this company called Goldman Sachs and McKinsey. And it was amazing. I'd never heard of it. I thought, wow.”
2022-10-31 · Capital Allocators · Michael Rees – Inside GP Stakes at Dyal Capital (Capital Allocators, EP.278) · IDENTIFIED FROM THE TRANSCRIPT · source
“Airline travel takes a lot longer these days. Security lines go on as far as the eye can see, and that's even with pre-check, clear, or the pre-check clear combo. And flights seem to get delayed regularly for no apparent reason. Well, the next time you have even an inkling of a delay, and long before you have to board, deboard, board again, and sit on the tarmac for an hour before you leave, might I suggest you fill that idle time with successive episodes of capital allocators? By the time your plane leaves, you'll have gotten through at least two or three amazing episodes and probably made friends with your equally frustrated neighbor in the seat next to you who may not have had the benefit of listening until you tell them to. Make a new friend, productively pass the time, and find your way around the world smarter than you started. Thanks for spreading the word.”
2022-10-31 · Capital Allocators · Michael Rees – Inside GP Stakes at Dyal Capital (Capital Allocators, EP.278) · IDENTIFIED FROM THE TRANSCRIPT · source
“My guest on today's show is Michael Rees, the founder and head of Dial Capital Partners and co-president of Public Company Blue Owl after Dial's merger with Alrock last year. Dial is the market leader in buying general partner steaks from established private equity and alternative asset managers and overseas $45 billion in its strategy. Our conversation covers Michael's background, the early years of minority stakes, motivations of sellers, changing perceptions of the business, and return profile of investments. We then turn to Dial's process across relationship-driven sourcing, best practices in fundraising and operations, conducting deals, and behavior of GPs after a sale. We close by touching on common critiques of dial strategy and the outlook from here. Before we get going, have you noticed that”
2022-10-31 · Capital Allocators · Michael Rees – Inside GP Stakes at Dyal Capital (Capital Allocators, EP.278) · IDENTIFIED FROM THE TRANSCRIPT · source
“Hello, I'm Ted Sides and this is Capital Allocators. This show is an open exploration of the people and process behind capital allocation through conversations with leaders in the money game, we learn how these holders of the keys to the kingdom allocate their time and their capital. You can join our mailing list and access premium content at capitalallocators.com.”
2022-10-31 · Capital Allocators · Michael Rees – Inside GP Stakes at Dyal Capital (Capital Allocators, EP.278) · IDENTIFIED FROM THE TRANSCRIPT · source
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2022-10-31 · Capital Allocators · Michael Rees – Inside GP Stakes at Dyal Capital (Capital Allocators, EP.278) · IDENTIFIED FROM THE TRANSCRIPT · source
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2022-10-31 · Capital Allocators · Michael Rees – Inside GP Stakes at Dyal Capital (Capital Allocators, EP.278) · IDENTIFIED FROM THE TRANSCRIPT · source
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2022-10-31 · Capital Allocators · Michael Rees – Inside GP Stakes at Dyal Capital (Capital Allocators, EP.278) · IDENTIFIED FROM THE TRANSCRIPT · source
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2022-10-31 · Capital Allocators · Michael Rees – Inside GP Stakes at Dyal Capital (Capital Allocators, EP.278) · IDENTIFIED FROM THE TRANSCRIPT · source