Lehman Bros. Closes $800M Secondary Fund –

The secondary market continues to attract substantial funding, with limited partners clamoring to get into large secondary funds. A case in point is Lehman Brothers, which closed on its inaugural secondary fund, Lehman Brothers Secondary Opportunity Fund, with $800 million. This first effort at a secondary fund by the New York-based financial giant was initially targeted at $500 million, but generated as much as $1.2 billion in LP interest.

Lehman Brothers began raising the fund in April 2005. The fund held a first close last July with more than $300 million and a final close on Dec. 1, 2005. It raised its cap to $800 million soon after fundraising began due to LP demand and strong deal flow, according to the firm, and stopped fundraising after six months.

Limited partners in the new fund include Dominion Resources, Erie Insurance Group, the General Retirement and Pension Authority of Qatar, the Rockefeller Foundation, San Bernardino County of California and the University of British Columbia. Lehman Brothers and Lehman employees have invested $100 million.

While this is Lehman Brothers’ inaugural secondary fund, its investors are not new to secondaries. The Lehman team is comprised of Deutsche Bank veterans Brian Talbot, who is Lehman’s managing director and global head of secondary investing and his fellow Deutsche Bank veterans Ethan Falkove and Tristram Perkins, who are senior vice presidents. The three joined Lehman in October of 2004 after helping Deutsche Bank sell its private equity portfolio.

The fund’s primary focus will be on buyout fund assets and the team expects that between 70% and 80% of what they buy will be buyout assets. The geographic breakdown of the fund’s assets will consist of approximately 60% to 70% U.S.-based assets with the rest being international assets primarily from Western Europe.

The team has been doing deals while fund raising and has about one third of the fund already spoken for. Lehman says that it has closed on about $80 million in transactions with another $180 million under letters of intent. Most of the group’s transactions have been privately negotiated deals with Lehman Brothers clients.

“The secondary market is pretty competitive,” says Talbot. “Where we have an edge is that Lehman has relationships with thousands of private equity funds, corporate funds and other clients.” Talbot estimates that 90% of its deals so far have been generated through Lehman clients.

Talbot says that the secondary market has changed considerably since he began working in secondaries in the early 1990s. “What has changed,” says Talbot “is the acceptance of the secondary market as an asset management tool. Most funds have had at least one transfer and it’s just becoming more commonplace.”

Lehman Brothers’ secondary fund is among other large secondary players that are currently fund raising or expecting to raise funds soon. Simsbury, Conn.-based Landmark Partners may raise up to $1 billion for Landmark Equity Partners XIII and expects to close on the fund by the end of the first quarter. New York-based Lexington Partners is currently raising Lexington Capital Partners VI and London-based Coller Capital expects to begin raising Coller International Partners V this year.