Private Equity Briefcase

September 16, 2008

What's Old Is Often New Again

What’s old is often new again, or so goes a variation of a phrase.

The phrase couldn’t be more suitable this year than in the world of Wall Street, where a perfect credit storm just brought down the 158-year-old storied banking franchise Lehman Brothers and resulted in JPMorgan’s bargain-basement purchase of Bear Stearns earlier this year. All the cliffhanger-like speculation that had been swirling this summer about the fate of Lehman Brothers ended on Monday when the investment bank announced its bankruptcy filing.

The middle-market private equity business within Lehman, though, is likely to face a more promising future than its parent. Lehman Brothers Merchant Banking (LBMB), a 22-year-old leveraged buyout-making unit within the investment banking house, will most certainly have to find a new home as a result of the bankruptcy, which doesn’t affect the bank’s subsidiary units. The group has 35 professionals spread between offices in New York, London and Hong Kong. It also manages four funds including its latest $3.3 billion investment vehicle raised last year.

There had been questions about whether LBMB it would be absorbed into an acquirer of Lehman the way One Equity Partners became part of JPMorgan following its acquisition of Bank One a few years ago. But, that scenario wasn’t overly promising since many banks have sought to reduce their exposure to private equity in the wake of last year’s housing finance market and subsequent leveraged loan credit crunch. Asset management businesses like the one Lehman had been shopping are more in vogue as acquisition targets than private equity firms at the moment.

Hence, the more probable option is that LBMB executives like leveraged buyout veteran and global merchant banking head Charles Ayres, a former Deutsche Bank private equity executive, will run a standalone investment firm in the wake of Lehman’s Chapter 11 filing. That’s been the tack taken by another bank leveraged buyout investment unit overseen by a troubled banking parent, Bear Stearns Merchant Banking, when JPMorgan assimilated Bear Stearns.

It’s also been the path taken by many former banking executives since the buyout industry’s earliest days. The more well-known examples involve a former Lehman chief executive and ex-Lehman M&A chief: Peter Peterson and Stephen Schwarzman, respectively. Peterson and Schwarzman, who began his finance career at Lehman, set up The Blackstone Group in 1985 with a secretary. The pair followed the trail blazed nine years earlier by former Bear Stearns bankers Jerome Kohlberg Jr., Henry Kravis and George Roberts with the launch of Kohlberg Kravis Roberts.

If the success of these two alternative asset behemoths offers any indication, there may be a bright spot in the Lehman crash, particularly for the executives enmeshed within the bank’s merchant banking group.

After all, what’s old is often new again.