Lehman Brothers looking to spin-off private equity arm

The private-equity arm of failed Wall Street brokerage Lehman Brothers has reached a deal to be spun out as an independent entity, according to a media report Thursday. The business has $4.5 billion under management. Alvarez & Marsal, the restructuring company managing Lehman's liquidation, hired Lazard Ltd. in New York to conduct the sale.

The online edition of The Wall Street Journal, citing unnamed sources, reported that part of the deal involves receiving investment of around $250 million from South African luxury goods billionaire Johann Rupert, while Lehman will retain a "substantial" interest in the private equity group, which is called Lehman Brothers Merchant Banking.

The private equity group has $4.5 billion under management, and holds stakes in more than a dozen portfolio companies, according to the report. Rupert's firm Reinet Investments SCA will assume $250 million in unfunded commitments to the group.

The merchant-banking business was housed in Lehman's private-equity division, along with venture capital and real estate funds that are being sold in separate auctions. Led by Charles Ayres in New York, the merchant-banking group invested in funds that bought stakes in Angelica Corp., the Chesterfield, Missouri-based hospital linens provider, and SRAM Corp., the Chicago-based maker of bicycle components.

Under terms of the deal, Lehman will spin out the private equity group's $3.3 billion fund raised in 2007, which will be owned by the firm's current management. Lehman's bankruptcy estate will also retain ownership of a vehicle that contains $1.2 billion in existing investments and has performed well by returning to investors almost three times invested capital, according to the report.

The management buyout may draw on financial backing from one of the firms that submitted bids for the merchant-banking group last month, sources said. The bidders included New York-based buyout firms Blackstone Group LP and Lexington Partners Inc., and Barclays PLC, the UK's third-largest bank, as well as Pamplona Capital Management, a London-based private-equity firm.

The transaction demonstrates how Lehman, which filed for bankruptcy roughly four months ago, is attempting to retain and manage assets rather than selling them off in a weak market. Lehman agreed to sell its Neuberger Berman investment-management business to its managers last month in an all-stock deal that left the bankruptcy estate with a 49 per cent stake. (See: Private equity firms Bain, Hellman buy Lehman investment unit for $2.15 billion)

Lehman filed for the largest bankruptcy in US history on 15 September, when it listed assets of $639 billion and liabilities of $613 billion. Sales of assets, including Lehman's brokerage operations, have so far brought in about $3.5 billion in cash.

(See: Lehman Brothers heads for Chapter 11 as Barclays walks away / Nomura to buy Lehman's banking, equities units in Europe, Middle East / Barclays to pick select parts of Lehman for $1.75 billion)