LPs gear up for Lehman asset sell-off

Limited partners in Lehman Brothers' private equity funds have hired law firm Kirkland & Ellis and private equity advisor StepStone Group to give them more of a voice as the failed bank tries to sell off its remaining private equity assets.

“There's a desire on the part of the LPs to get more active on the way this plays out,” a source said. Lehman has worked with the limited partners throughout the process and has encouraged their active participation, a Lehman source added. 

The Lehman source continued: “We didn't think that presenting the LPs with one option and one term sheet without giving them a chance to speak up was the way to go.”

The LPs in question are investors in Lehman's merchant banking private equity funds, the most recent of which is Lehman Brothers Merchant Banking IV, which closed on $3.3 billion last year and has remaining unfunded commitments. A source said the fund is about 25 percent invested.

The investors, all of whom either declined comment or didn't return calls for comment, include Colorado Public Employees' Retirement Association, Pennsylvania Public School Employees Retirement System, Illinois Teachers' Retirement System and New York City Retirement System, among others.

Lehman is in the process of selling its major private equity groups, including merchant banking, venture capital and real estate.

A source at Lehman said the bank hopes to close a deal on the bank's real estate funds in the first half of next year, and deals on the venture capital and the merchant banking private equity funds in the first quarter of 2009.

A Lehman management group recently won a bankruptcy auction for the bank's investment management division, including Neuberger Berman, beating a $2.15 billion bid from private equity firms Bain Capital and Hellman & Friedman. The investment management division included some private equity assets like secondaries, some funds of funds and co-investments, as well as start-up private equity businesses including Lehman's debut infrastructure fund, which was targeting $1 billion.

As the bidding process moves on, Lehman and Lazard, which is managing the asset sales, have been in close contact with limited partners.

Management agreements governing the private equity funds call for the LPs to approve a management change with at least a two-thirds vote. The Lehman source said this is a routine provision in limited partnerships.