Lehman Bros. Bolsters Fund-of-Funds

Lehman Brothers Holdings strengthened its presence in private equity with the acquisition last month of fund-of-funds management firm The Crossroads Group. Terms were not disclosed and the deal is expected to be completed in the fourth quarter. A name for the group has yet to be decided, although it will incorporate the Crossroads name.

Dallas-based Crossroads, which has committed more than $2 billion of capital to over 200 private equity partnerships, will be absorbed into Lehman’s Private Funds Investment Group. Upon the deal’s close, Crossroads Chairman and CEO Brad Heppner will sit beside Lehman’s Anthony Tutrone as co-head of the division.

The relationship had been taking shape over the last year, Tutrone says. “There’s virtually no overlap here and Crossroads brings in a great amount of expertise and capabilities,” he adds.

Jersey City-based Lehman will use the acquisition to target what Tutrone describes as “a pent-up demand” from the firm’s high net worth and institutional client base. “This gives us a world-class presence right out of the box and we expect this business to grow tremendously,” he says.

Crossroads invests across a range of eight primary composites, with a 60% domestic allocation dedicated to traditional venture capital and 40% going to buyout deals.

The firm also dedicates a portion to international opportunities and secondary investments, which are more weighted to LBOs and late-stage investing. Additionally, Crossroads will make direct co-investments in certain situations.

Since Lehman’s present fund-of-funds operations are more heavily weighted toward buyouts, upon completion of the merger, the combined group will have a roughly 50-50 split between buyouts and venture capital.

The two bring different groups of GPs to the merger. Crossroads has invested with Apollo Advisors, Kelso & Co., Behrman Capital, Hicks, Muse, Tate & Furst, Questor Management and Welsh, Carson, Anderson & Stowe. Lehman, meanwhile, has invested with Bain Capital, The Blackstone Group and The Carlyle Group.

As far as keeping Crossroads’ own LPs happy, Heppner said: “We were very careful in the structure and organization of this deal to make sure our customers were comfortable that we can manage future investments as we have in the past.”

While the existing funds will remain segregated, the teams at Lehman and Crossroads will combine. Further, as Lehman typically does in every fund under its umbrella, the firm will commit capital to future funds raised by the combined Crossroads/Lehman team.

Fund-of-fund investing has gained in popularity in recent years, as LPs look to diversify their private equity holdings without necessarily raising their allocations significantly. In 2000, there were 12 buyout fund-of-funds on the market with a combined target of $2.77 billion, according to Thomson Venture Economics (publisher of PE Week). In the first three quarters of this year, there are eight fund-of-funds being shopped with a combined target of $6.12 billion.

“The marketplace for this has started to reemerge here in the last two months,” Heppner says. “The downturns we saw in private equity have turned back around, and a lot of the allocations from the institutions have started to go back up again.”

This story originally appeared in Buyouts, a related publication.