Sixth Street Partners sues to block $12.5 billion SPAC merger

Sixth Street Partners CEO Alan Waxman is known for his sharp elbows, befitting someone who created a leader in special situations lending. Now he's jabbing one right in the gut of Dyal Capital Partners, which has owned a passive minority stake in Sixth Street since 2017.

Driving the news: Sixth Street has sued Dyal in Delaware Chancery Court, seeking to block Dyal's proposed merger with direct lender Owl Rock Capital, and the pair's subsequent agreement to go public via a SPAC at a $12.5 billion market cap.

The complaint won't be publicly released until Wednesday, once redactions are completed, but details have emerged from sources and via a letter that Sixth Street sent yesterday to its limited partners.

Plaintiff: Sixth Street is a multi-strategy investment firm that last year spun out of TPG, and which now has over $50 billion in assets under management. It claims that its contract with Dyal includes a clause whereby Dyal agrees not to ever directly compete with Sixth Street, and that merging with Owl Rock would materially violate that agreement.

• Sixth Street also claims to have consent rights over a transference of its ownership stake, which it believes the merger and SPAC deal would constitute. As such, it either wants the deal blocked or some sort of carve-out.

Defense: Dyal, a Neuberger Berman subsidiary that primarily invests in alternative fund managers, is expected to respond that Sixth Street is misinterpreting the contractual language.

• On the consent side, that would include a claim that Sixth Street only can block a transfer of ownership of the Dyal fund in which its stake is held, not of Dyal itself.
• The head of a different firm in which Dyal has a stake tells me that there is indeed anti-competitive language in his firm's contract, but adds that it’s “very fuzzy.”

Behind the scenes: Multiple sources say that the two sides engaged in brief negotiations before the lawsuit was filed.

• Sixth Street, which claims it first heard of the merger via a Wall Street Journal story, asked to buy back its stake at cost.
• Dyal said no, saying to do so would violate its fiduciary duty to its own limited partners.
• It stands to reason that Sixth Street's value has increased significantly since 2017, although Dyal is said to be carrying it at cost (plus distributions).

Added layer of complexity: The SPAC buying Dyal/Owl Rock is sponsored by HPS Investment Partners, in which Dyal owns a stake.

• Moreover, Dyal invested in the PIPE for a prior HPS-sponsored SPAC deal (Desktop Metal). No wonder Dealbreaker referred to the Owl Rock tie-up as “the most incestuous SPAC deal yet.”

Coming attractions: Don’t be surprised if Dyal is hit with one or more additional lawsuits from its “partner” firms, possibly within the next week, and for all of us to get more clarity on the contract language tomorrow.