NEW YORK With Lehman Brothers Holdings Inc.s future in question, institutional investors are focused on the fate of the investment banks highly successful asset management business.
The investment unit, which managed $273 billion as of Aug. 31, is considered by many sources to be the only salvageable business within the wreck of the once-venerable investment bank.
Every institution that uses Lehmans asset management services is counting on George H. Walker, managing director and the charismatic global head of the investment management division along with other Lehman executives to pull off something of a miracle by keeping the investment team together, regardless of the ultimate owner.
This is a classic example of a really strong unit stuck inside an unhealthy company, said Eric C. Weber, principal and chief operating officer of boutique investment bank Freeman & Co. LLC, New York. George Walker is a great talent running what is a wonderful business. Its the one thing of value left within Lehman, and a lot of people will want to get their hands on it.
The unit includes several investment teams, notably Neuberger Berman LLC, the New York-based wealth and mutual fund manager Lehman acquired in 2003 when Neuberger managed $64 billion.
As of Aug. 31, Lehman Brothers Asset Management, of which Neuberger Berman investment teams are the major component, managed $235 billion, while the firms alternative investment units managed $38 billion in private equity, real estate and hedge funds of funds. In total, the firm manages $150 billion on behalf of institutional investors.
At press time, it wasnt clear whether Lehman will be sold in its entirety or in pieces. In its Sept. 10 earnings announcement, bank executives announced they were seeking bidders for a 55% stake of the investment management unit and that they would spin off about $30 billion of commercial real estate assets into a separate company.
At the same time, executives announced a preliminary net loss of $3.9 billion for the quarter ended Aug. 31, mainly the result of write-downs on commercial and residential mortgages and real estate assets.
But the stock market didnt buy it, and firm officials reportedly put Lehman up for sale.
A piece of Lehman
Top 15 pension fund holders of Lehman Brothers common stock as of June 30.
Fund
Shares held
Texas Teachers
4,327,272
New York State Common
4,195,702
New York State Teachers
2,141,440
California Public Employees
1,786,200
Florida State Board
1,269,220
Ohio State Teachers
971,000
California State Teachers
939,952
Ohio Public Employees
890,329
Canada Pension Plan Investment Board
515,291
State Treasurer, State of Michigan
508,096
Colorado Public Employees
436,476
IBM Retirement Plan
358,618
Pennsylvania Public Schools
353,428
Kentucky Teachers
320,800
Texas Employees
254,750
Source: Bloomberg LP
Sources believe that Treasury Secretary Henry Paulson will find a resolution to the thorny Lehman issue over the weekend. A well-connected investment banker with knowledge of the likely players in a Lehman deal, who asked not to be identified, said he thinks the most likely scenario is a quick sale of the entire firm to a strategic buyer.
I think Hank Paulson will get the deal done by Monday (Sept. 15) and wont wait to find suitable buyers to carve out pieces, like the asset management unit. As long as Lehman is out there, theres just too much noise in the financial system and Paulson wants to calm that noise, said the banker.
If the company is sold in its entirety, reported suitors include Bank of America Corp. and Barclays PLC, possibly as part of consortiums.
The investment banker said five private equity managers submitted bids on Sept. 12 to acquire the 55% stake of the investment management unit: Kohlberg Kravis Roberts & Co.; Hellman & Friedman LLC; Silver Point Capital LLC; Clayton Dubilier & Rice Inc.; and Bain Capital Partners LLC.
Investment bankers agreed that a private equity buyer would have to undertake a fairly significant restructuring job of the Lehman investment unit. Thats because many investment professionals especially those at Neuberger Berman would demand new and better compensation schemes.
A new majority stake owner likely will want to at least partially break down the investment team fiefdoms that the Neuberger Berman corporate culture is infamous for promoting.
One investment banker, who asked for anonymity, said that as with any fire sale, investment professionals suddenly gain the upper hand, especially when the client base is geared toward institutional and high-net-worth investors, who are very loyal to their managers and will follow them. Any buyer will have to make sure they tie down the teams with strong compensation and equity participation. This really costs money.
With the kind of silo investment teams within Lehmans asset management unit, especially within the legacy Neuberger Berman teams, any buyer will have to be substantial because you are going to end up buying it twice by the time youve restructured the compensation scheme, agreed John C. Siciliano, managing partner in Los Angeles for Grail Partners LLC, a Boston-based merchant bank.
Sources said Lehman Brothers investment management division has grown in stature and reputation as an institutional powerhouse, especially in the 18 months since Mr. Walker, managing director, took the helm.
Mr. Walkers efforts to market the firms services to an even broader range of institutions paid off, with the unit gaining $29 billion in new reported hires and commitments year-to-date.
Lehmans pension fund clients, meanwhile, are waiting for the situation with Lehman Brothers Holdings to stabilize before taking action.
Well have to wait and see who buys Lehman (Brothers) Asset Management and if they make any changes, said Howard J. Bicker, executive director of the $59 billion Minnesota State Board of Investment, St. Paul. Presumably, whoever buys the stake in Lehmans asset management unit is doing it because they like what they see.
Lehman Brothers manages $2 billion in domestic enhanced fixed income and $57 million in a commingled real estate fund for the board.
The $6.1 billion Sacramento County (Calif.) Employees Retirement System put Lehman Brothers Asset Management, which manages $380 million for the system in an enhanced index bond strategy, on watch in April when problems at the parent company started to surface, said CIO Jeffrey States. He said until recently, it hadnt affected Lehmans asset management business.
Well need to see more details about the proposed sale. As long as the (investment) team stays in place wherever they go, well be OK.
The Teacher Retirement System of the State of Texas, Austin, with $108 billion of defined benefit plan assets, has awarded $1 billion to Lehman Brothers as one of its four strategic investment partners.
Howard Goldman, a spokesman for Texas Teachers, said in an e-mail response to a request for reaction to the Lehman situation that our investments are made through their primary asset management arm Neuberger Berman TRS is keeping apprised of developments at Lehman and any changes that might result relating to the leadership team with which we have a relationship. TRS has every confidence in the team we have in place
David Graham, communications manager for the $12.9 billion Ohio Police & Fire Pension Fund, Columbus, said in an e-mail that fund officials will evaluate the portfolio management teams status, resources and autonomy. The fund has $180 million in high-yield bonds managed by Lehman Brothers.
Lehman manages an international equity portfolio of an undetermined size for the $17 billion pension plan of United Technologies Corp., Hartford, Conn. Robin Diamonte, chief investment officer, said in an e-mail: In the short term, a change in the parent company is always negative, especially during the unknown stage, simply because it is a distraction for the portfolio manager and the team.
In the longer term, it depends on the buyer and how much interference and change is pushed down to the people managing the money. We hire investment managers because of the process and the people. If the team finds a good home and the process is untouched, then in the long run, performance will be fine. As plan sponsors, we just need to evaluate the situation after the fact and hope that the entire transaction gets resolved quickly.