Lehman Joins Co-Investment Fray with $1.6B

Firm: Lehman Brothers

Fund: Lehman Brothers Co-Investment Fund

Initial target: $1 billion

Amount raised: $1.6 billion

Placement agent: none

Legal counsel: Pillsbury Winthrop Shaw Pittman LLC

Lehman Brothers (NYSE: LEH) is the latest large private equity player to plant its flag on co-investment turf. The New York-based firm closed Lehman Brothers Co-Investment Partners with $1.6 billion, and has already committed about $330 million in 10 transactions.

Lehman began raising the fund with a goal of $1 billion, and it held a first close in June with $120.5 million that had a cap listed as $1 billion in documents filed with the Securities and Exchange Commission. Lehman Brothers and Lehman employees contributed $350 million to the co-investment fund.

The firm says that their LPs are a diverse group that includes endowments, financial institutions, insurance companies and pension funds and have a significant number of limited partners that invested in previous Lehman funds and attracted some new LPs as well. The Los Angeles Fire and Police Pension System committed $10 million to the fund.

The fund targets minority investments between $5 million and $150 million in deals led by other private equity sponsors. The firm says it is diversified across deal size and has handled deals with under $200 million in enterprise value to multi-billion dollar enterprise value deals. While the firm began raising the fund in late January and early February this year, Lehman made three fund investments last year. It made two co-investment deals last fall and one in December of 2005. So far the fund has made 10 investments.

The fund has a four-year investment cycle but is currently seeing deal flow that will have it fully invested sooner. Managing Director David Stonberg says that while deal flow is very strong now, the fund’s investment period is flexible enough that it can weather any dry spells in the market. “We some breathing room to the extent that if the private equity market takes a breather of its own we can slow down,” says Stonberg. “We set up the investment period so we can remain as selective and disciplined like we are today.”

Stonberg says that the deal flow the firm is seeing and its opportunistic and agnostic philosophy on doing deals has led to it having a widely diverse portfolio of investments so far. He adds that because it is not taking the lead on investments, the co-investment fund could have a range of 25 to more than 40 portfolio companies. The fund has focused primarily on North America and Western Europe but has also reviewed investments in Asia and Latin America.

Lehman Brothers Co-Investment Partners became a co-investor in metal product provider Firth Rixson, buying a 36% share in the company from The Carlyle Group, which will remain the lead investor in the company (see Buyouts, Aug. 31, 2006). While Carlyle did not get the full realization it had been seeking, the Lehman deal provides Carlyle with what it termed in a statement, a “significant return.” Initial reports said that Carlyle was looking for a complete exit from the company and that the deal could be worth up to $1.14 billion (£600 million). Assuming Firth Rixson maintained its $1.14 billion valuation, the 36% stake purchased by Lehman would be worth around $400 million.

The fund also invested in Leonard Green & Partners‘ acquisition of The Sports Authority Inc. for approximately $1.3 billion and in Welsh Carson Anderson & Stowe’s acquisition of Mobile Storage Group. Along with John Hancock Financial Services, the Lehman fund invested in First Atlantic Capital’s acquisition of BHM Technologies. Lehman Brothers Co-Investment Partners is also a significant shareholder in St. Louis-based cable television provider Cebridge Connections.

“What we’re seeing now is just relative to historical standards that there are assets that are now being approached by, considered by and taken private by private equity firms that before were not available to private equity funds before, either because of their ability to finance the large size of transactions, or because the credit markets couldn’t’ absorb them or there wasn’t sufficient equity capital,” says Stonberg. “With the fund sizes we’ve seen and pools of capital being raised, we’re seeing interest from enterprise value that was not avail to private equity before.”

Lehman is not alone in its enthusiasm for co-investment. AIG Global Investment Group (AIGGIG) closed its premier dedicated co-investment fund, AIG Co-Investment Fund, with a total of $700 million in commitments (see Buyouts, Sep. 25, 2006). Also, on the smaller end of the market, New York-based investment bank The Silverfern Group founded Silverfern Co-Investment Partners, to make equity co-investments with private equity firms. The Silverfern co-investment group has so far committed approximately $100 million to co-investments and plans to invest between $50 million and $100 million in each co-investment transaction. — M.S.