NEW YORK - Lehman Brothers is re-entering institutional investment management after a 13-year absence by buying Lincoln Capital Management Inc.'s fixed-income business.
Lincoln Capital, Chicago, manages $30 billion in fixed income.
Terms of the deal were not disclosed.
Lehman largely exited institutional money management in 1989, when its investment management unit was sold to Lehman-Ark Management Co., which eventually became Ark Asset Management Co. Inc, New York.
While the firm has concentrated on investment banking since then, it has been building up an alternative investment business for high-net-worth individuals.
Late this summer, Lehman Brothers moved its private equity, funds-of-funds and mortgage-lending businesses into a wealth and asset management unit, said Lehman spokeswoman Shawn Butler. Ms. Butler said the acquisition of Lincoln's bond business is in part to satisfy wealthy investors' increasing appetite for fixed-income investment vehicles.
Ted Janulis, managing director, said the "acquisition of Lincoln is part of the strategy to build out our wealth and asset management business." He wouldn't say how much Lehman has under management and whether Lehman plans to market the new unit to its high-net-worth clients.
He also wouldn't discuss any possible plans to rebuild a full-service institutional investment business, but industry sources said they understood this to be Lehman Brothers' intention.
Staying in Chicago
After its acquisition by Lehman Brothers, the bond unit will be renamed Lincoln Capital Fixed Income Management Co., and it will remain in the same offices in Chicago. Kenneth R. Meyer, chief executive of Lincoln Capital Management, will lead the unit. All 60 fixed-income staffers will keep their jobs, said Richard Knee, a managing director at Lincoln Capital.
Lincoln Capital's equity group will be renamed Lincoln Equity Management LLC. David Fowler, president of Lincoln Capital, will become head of Lincoln Equity. The firm will change its structure from a corporation to a limited liability corporation and will start its new life debt free, said Mr. Fowler.
Mr. Knee said the bond team began looking for a new owner last spring year because of continuing problems on the equity side of the shop. Industry sources said Lincoln Capital was unable to find a buyer for the whole firm, settling instead for selling the bond department and its assets.
"We were two firms in one. We've had steady growth, but it has been hard to attract new clients for our bond strategies, given the problems on the equity side. The real catalyst for the search for new ownership was what happened to Lincoln's equity business," Mr. Knee said.
"What happened" to Lincoln Capital's equity business was a spell of terrible performance. Lincoln's flagship large-cap growth equity portfolios took a nose-dive in 2000, when the firm loaded up on technology stocks just as the dot-com and technology stock bubble was bursting (Pensions & Investments, July 9, 2001). Both the market and clients punished the firm for its poor timing, with assets invested in stocks plummeting from a peak of $35 billion to $2.5 billion today. Mr. Fowler said two-thirds of the drop is due to market depreciation.
Lincoln's large-cap growth approach has trailed the Russell 1000 Growth index, from the quarter to the 10 years ended Sept. 30, according to Pensions & Investments Performance Evaluation Report. The gap did narrow, however, for the quarter and year to date.
Within the newly separate equity business, the focus for some years will be on "getting improved market returns and re-establishing our record in the institutional market. Now is the time for execution. We have the team and the tools in place to do this," said Mr. Fowler.
"We have a sufficient client base to survive going forward if we have a reasonably normal market environment. We've seen moderate improvement in performance this year, tracking closer to the benchmarks, and we are extremely well-positioned for a more constructive market environment," Mr. Fowler said.
"From a fixed-income standpoint, (ownership by Lehman Brothers) is a home run. We're ecstatic," said Mr. Knee.
Lehman a good fit
Being owned by Lehman is a plus as Lehman's well-respected bond indexes has made it a household name, Mr. Knee said. In addition, its global broker distribution network will increase Lincoln Capital's asset-gathering potential, he said.
As for compensation, "we've retained the incentives of private ownership through receiving compensation based on the unit's profitability four or five years down the line," Mr. Knee said. Key employees will also haveequity in the firm.
Lehman's strong fixed-income research capabilities will be helpful to Lincoln's bond managers, whose performance in the difficult bond market of 2002 has been good, Mr. Knee said. "We avoided all the bond blowups by good credit work and through diversification, but having access to Lehman's research will be a great resource," he said.
Lincoln Capital's active fixed-income separate account composite outperformed the Salomon Brothers Broad bond index for the one-, three-, five- and 10-year periods ended Sept. 30, according to PIPER. For the third quarter, Lincoln was in the sixth decile among peer funds in the PIPER universe.
Client reaction to the sale of the bond unit has been "unanimously positive," Mr. Knee said.
Ariel Capital Management Inc., Chicago, which uses Lincoln Capital as a subadviser for a $234 million core bond fund and a fairly new $12 million large-cap growth equity fund, has "redoubled our due diligence efforts, as we do whenever there is a change with a subadviser we use," said Mellody Hobson, president.
"We have been assured that the people (on the bond side) will remain in place and there will be no change in the investment process. That's what we care about - people and process," she said. Ariel remains equally comfortable with the establishment of a separate equity company and will not be terminating either part of Lincoln for the foreseeable future, Ms. Hobson said.
Ryan Ball, associate consultant and director of fixed-income research at Stratford Advisory Group Inc., Chicago, who used to work at Lincoln Capital, said the purchase of the bond business by Lehman is an "initial positive, as it clears up some of the uncertainty there and gives the bond team more resources."
"Lehman is a reputable organization, but we always take a wait-and-see attitude with these organizational changes," Mr. Ball said. "It takes a little time for these things to shake out, and sometimes what an owner says at the beginning changes."