LBOs And The Circle Of Life

Anyone familiar with Disney’s The Lion King understands the “circle of life.” If not, the idea can easily be explained using the example of bankrupt investment bank Lehman Brothers Holdings and the potential sale of its investment management business.

We’ll start the story five years ago this month. In October 2003, a then-healthy Lehman Brothers struck a deal to acquire The Crossroads Group, a Dallas-based fund-of-funds management firm that had made north of $2 billion in commitments to more than 200 private equity partnerships. Lehman Brothers absorbed The Crossroads Group into its own Private Funds Investment Group.

The deal broadened the private equity exposure of Lehman Brothers from a portfolio weighted heavily toward buyout funds to one that included domestic venture capital, which made up 60 percent of The Crossroad Group’s portfolio. Post-deal, the plan was for Lehman Brothers to strive to have a 50/50 split between buyout and venture funds. Since then, its fund-of-funds business has broadened further to include strategies such as distressed debt and turnaround investments.

The most recent fundraise completed by the Lehman Brothers fund-of-funds group was Lehman Crossroads Fund XVIII, which closed in March 2007 with more than $1.5 billion in commitments from institutions, wealthy individuals, and eligible Lehman Brothers employees. The firm was rumored to have begun fundraising for a follow-on fund, Lehman Crossroads Fund XIX, in the first quarter of 2008, but no data is available on the status of that vehicle.

In March of 2008, Lehman Brothers’s fund-of-funds group had also cobbled together $170 million for Lehman Brothers Emerging Manager Fund, a fund that at the time was still seeking capital, according to a Dow Jones story. That fund reportedly had an original target of $125 million and a mandate to invest in limited partnerships managed by women or minorities.

Now, however, the predator has become the prey. Lehman Brothers, bankrupt and in need of capital, is selling off its investment management business, which includes the fund-of-funds business and a host of other assets, including crown jewel Neuberger Berman. The investment bank originally began mulling its options for an asset sale to raise some quick cash earlier this summer. Back then, the likely move was selling just a stake in Neuberger Berman.

But the deal came too late, and the company toppled because of bad debts on mortgage-backed securities. Buyout firms Bain Capital and Hellman & Friedman teamed up and bought not just the whole of Neuberger Berman but the fund-of-funds business and select other assets as well for a cool $2.15 billion. The all-equity deal illustrates another, harsher law of the jungle: only the strong survive.