Lehman’s fourth buyout fund closes on $3.3bn(2)

European and Middle Eastern investors made up roughly one-third of Lehman’s latest private equity fund, which the firm said reflected the growing importance of European investment opportunities.

Lehman Brothers has closed its fourth private equity fund, Lehman Brothers Merchant Banking Partners IV. The fund received commitments of $3.3 billion (€2.5 billion), exceeding its initial target of $3 billion.

Fundraising, which began in the summer of 2006, was led by Lehman’s in-house placement team. European and Middle Eastern investors account for one-third of the total capital of Fund IV, which Vittorio Pignatti Morano, Lehman Brothers’ vice chairman and head of European private equity, attributed to the increased importance of European investment opportunities in Lehman Brothers’ global platform.

“We see great opportunity for continued investment in premier European companies,” Morano said. $1.2 billion of Fund IV is earmarked for investments in Europe.

The new fund is more than twice the size of Lehman’s previous buyout fund, which closed on $1.2 billion in July 2005. Fund III invested in a diverse array of companies, including the European seafood business of global food group HJ Heinz, Italian bottled drinks company Spumador, and the New York-based music catalogue roll-up Evergreen Copyright Acquisitions.

Fund IV will have a similarly diverse investment strategy, which a source in the firm described as “opportunistic”. The fund will seek control or significant minority stakes in small- to mid-cap companies in the Americas, Europe and Asia. Rather than targeting a specific industry, the fund will look for companies with proven management teams, strong fundamentals, good growth prospects and positive cash flow.

Charles Ayres, managing director of Lehman Brothers and global head of its Merchant Banking unit, will lead the investment of the fund. Ayres joined Lehman in 2003, prior to which he was a founding member of buyout firm MidOcean Partners, and also head of  DB Capital Partners North America, the US buyout arm of Deutsche Bank, where he oversaw $1.2 billion of investments. When he came to Lehman Brothers, the merchant banking division had not raised a fund since 1997. Ayres closed Fund III in 2005 and Fund IV just two years later.

Lehman accepted that there was some potential for conflicts of interest between its investment banking and private equity divisions. However, a source close to the firm said that because the fund is too small to compete with the large private equity deals the firm brokers, the limited partners did not express concern about this possibility while the fund was being raised.

Since it was established in 1986, Lehman Brothers Merchant Banking has raised more than $8 billion in capital. It has invested in 44 companies, including Pacific Energy Partners, L-3 Communications Holdings, and Eutelsat SA.