Oct 31, 2022 · 58m · capital-allocators
Michael Rees – Inside GP Stakes at Dyal Capital (Capital Allocators, EP.278)
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gold bands on the timeline = statements, start to end. Hover to read, click to jump. CC turns on captions
Michael Rees, founder of Dyal Capital and co-president of Blue Owl, joins Ted Seides to discuss the evolution, underwriting mechanics, and strategic impact of minority GP equity stakes in alternative asset management. He details how permanent capital, robust operational support platforms, and strong LP-GP alignment enable leading private market managers to build enduring institutional franchises.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. Ted holds 20.1% of the talking time here. How this is scored →
Ted as informed peer 5.0 Guest teaching 6.1 Guest disagreement 1.5 Ted pushing back 1.5
speaking balance: gold is Ted, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 17:14 Pushing back hard against the 'cash out' characterization
Rees emphatically rejects the premise that modern GP stakes represent a cash out for founders, pointing out how proceeds fund required skin-in-the-game GP commitments.
Hardest push from Ted ▶ 49:30 Ted directly challenges manager returns at massive scaleTed presses Rees on the classic premise that size is the enemy of performance and questions whether GP stakes inherently degrade manager motivation.
Biggest teaching moment ▶ 11:20 Explaining why hedge fund franchises lacked enterprise durabilityRees educates on the structural vulnerability of hedge funds by recalling how iconic giants like Tiger and Soros closed overnight, necessitating Dyal's pivot to locked-up private markets.
Ted holds their own ▶ 47:02 Ted drills down into LP objections around permanent capitalTed frames the allocator dilemma between investing directly in underlying PE funds versus taking a GP stake vehicle with illiquid, permanent duration.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Ted as informed peer | Guest teaching | Guest disagreement | Ted pushing back | Why |
|---|---|---|---|---|---|---|
| Michael Rees's Background and the Genesis of GP Stakes | 4 | 6 | 1 | 1 | Ted guides Rees through his early career at Lehman Brothers, asking targeted questions about early fund of funds and minority stake acquisitions. Rees explains how minority stakes in hedge funds generated massive cash-on-cash returns passively. | |
| Evolving from Hedge Funds to Private Markets and Underwriting Returns | 5 | 7 | 2 | 1 | Ted asks how Dyal transitioned from hedge funds to private markets and how returns are underwritten. Rees explains why hedge fund enterprise value lacked permanence after Tiger and Soros shut down, shifting their strategy toward long-dated private markets. | |
| Overcoming Stigma, GP Commitments, and Growth Capital Dynamics | 5 | 6 | 2 | 2 | Ted probes the negative perception of sellers cashing out. Rees directly pushes back against the 'cash out' descriptor, detailing how GP stakes evolved into vital growth capital for GP fund commitments sparked by Bain Capital's alignment model. | |
| Modern Sourcing, Market Consolidation, and Large-Cap Focus | 5 | 6 | 1 | 1 | Ted inquires about sourcing deal flow and the concentration on the top 250 firms. Rees explains their anti-funnel relationship approach and why large-cap alternative platforms like CVC possess superior institutional longevity. | |
| Dyal's Business Services Platform and Strategic Support Pillars | 4 | 6 | 1 | 1 | Ted asks what strategic value Dyal provides beyond capital. Rees breaks down Dyal's 50-person business services platform across fundraising, data science, talent, and operational infrastructure. | |
| Sponsor Break: Ridgeline Investment Management Tech | 5 | 6 | 1 | 2 | Following the mid-roll break, Ted presses on due diligence findings, valuation sensitivity to public market multiples, founder behavior, and competition. Rees reveals how private market valuations remain flat and stable despite public equity multiple swings. | |
| Portfolio Construction, Permanent Capital Structures, and Exit Liquidity | 6 | 6 | 2 | 2 | Ted asks direct questions regarding portfolio construction, lack of traditional fund exit dates, and LP comparisons to fund investing. Rees explains why permanent capital vehicles are structurally essential despite complicating LP fundraising. | |
| Debating Scale vs. Performance and Future Strategy Growth | 6 | 6 | 2 | 2 | Ted challenges Rees with the classic industry critique that size is the enemy of performance. Rees acknowledges the academic critique while arguing recent market data showed significant scale advantages for the largest mega-firms. |
Statements from this episode (15)
Rees: Lehman Took 20% Minority Stakes in GLG and D.E. Shaw
“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 D.E. Shaw. We were doing a lot of work in a lot of other areas, and these 20% stakes in hedge funds were paying the bills…”
Rees: Dyal underwrote hedge funds to return 8% to 10% net annually
“We underwrote that every hedge fund could get eight to 10% net every year. A bad year was eight, a good year was 12, and that was it.”
Rees: Dyal underwrites GP stakes purely on cash flow, not exit sales
“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 …”
Rees: Early hedge fund GP stake sales were primarily tax arbitrage plays
“It probably was more of a cash out trade vis-a-vis the hedge fund industry, 1520 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 …”
Rees: Bain's $1B fund commitment sparked industry-wide GP skin-in-the-game standard
“In just shortly after the financial crisis, there were questions around skin in the game from the perspective of investors and investors were saying, yeah, your performance in the industry hasn't been that good through this cycle. And so how do I know you're i…”
Rees: Vast majority of GP stakes capital funds GP commitments, not cash-outs
“As these firms did get bigger, they were using up a lot of capital, and that's been the major use case for almost all the capital that's gone in the ground over the last decade. There are secondary use cases. Of course, there are times when we're buying out a …”
Rees: Only a handful of private equity firms effortlessly hit hard caps
“You could probably count on one hand the types of firms that can snap their fingers and hit their hard cap.”
Rees: In-house data science is inefficient even for top asset managers
“It's not really economical or efficient for even the largest firms that we're partnered with to have their own data science team.”
Rees: Management fees generate immense profits, defying the lights-on myth
“Well, it's not something we like to shout from the rooftops, and I guess here I am shouting it from the rooftops, but these businesses can be extremely profitable. I think the old adage that the management fees keep the lights on, I think that's a good motto. …”
Rees: Dyal has completed 19 of 22 GP stake deals over $600M
“And so in our world where we've done, I want to say, 19 of the 22 deals above six hundred million of check size. So we have a high eighties percent market share.”
Rees: Dyal operates permanent capital funds with zero investor redemption rights
“We look like a private equity fund on the way in, we get commitments from investors, we call capital to do deals, but we never plan on selling a partnership or ending a partnership, and we really don't ever have a way for investors to elect to redeem. There's …”
Rees: Traditional LP fund portfolios rarely outperform GP stakes portfolios
“It's hard to model a portfolio of LP interests, investing in funds, that will outperform a portfolio of investing in stakes.”
Rees: Large Private Equity Fund Returns Defied the Conventional Scale Penalty
“While there was this prevailing wisdom that as firms got bigger, the returns would suffer the last several years. Was antithetical to that.”
Rees: Top 250 Alternative Firms Are Growing Faster Than GP Stakes Funds Can Raise
“Well, even if you just look at the top 250 firms, the organic growth in those firms is outpacing the ability of us and our two peers to raise capital.”
Rees: Investment teams of pure bankers need naysayers to counter deal bias
“When you put a team of bankers in a room, man, everything seems like a deal that can be done. It can be structured. We can find a way. So I'm glad our team has evolved now to have a few more naysayers where the few of us that have banking in our background wou…”