Lehman Brothers Bolsters Fund-of-Fund Ops –

Lehman Brothers Holdings strengthened its presence in private equity with the acquisition of fund-of-funds management firm The Crossroads Group. Terms of the deal, expected to be completed in the fourth quarter, were undisclosed.

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 Anthony Tutrone as co-head of the division.

“This relationship took shape over the period of about a year,” Tutrone said. “There’s virtually no overlap here and [Crossroads] brings in a great amount of expertise and capabilities.”

Lehman will use the acquisition to target what Tutrone described 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 said.

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

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. “We bring a different group of GP relationships to the table and all of those will be combined under the Crossroads umbrella,” Tutrone said.

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.”

A name for the group has yet to be determined, although it will incorporate the Crossroads name in some form. And while the existing funds will remain segregated, the teams at Lehman and Crossroads will be combined. 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.

F-o-F Investing Gaining


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 VentureXpert. 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. 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,” Heppner said.