The firm that rose from the ashes

Trilantic Capital Partners, the firm that span out of bankrupt Lehman Brothers' merchant banking private equity funds, is preparing for its first official annual meeting this month.

At the meeting, LPs and the GP may ask themselves a question to which even they will struggle to find an answer: how did we get here?

That's because a year ago, the world looked very bleak to Lehman Brothers and its affiliates – including its merchant banking private equity funds. The world must have also looked a tough place to the limited partners invested in those funds.

But little more than a year on from the investment bank's historic bankruptcy filing on 15 September 2008, many of the merchant banking arm's limited partners are pleased with the outcome. LPs that stuck with the spinout have high hopes for the future. And much of the optimism comes from their confidence in the firm's management team, led by Charlie Ayres.

“[Trilantic] has an annual meeting in October. There will be a lot of people there who will look back and say, ‘imagine where we were a year ago and look where we are today’,” according to a former Lehman merchant banking limited partner. “In a very difficult situation, I think the outcome was remarkably fortuitous.”

The team was very good about trying to communicate with their LP base

The weeks preceding Lehman's collapse were times of tension for many of Lehman's LPs. The organisation found itself in more and more distress in the weeks before 15 September, and LPs began to think the unthinkable – that the bank's plight would end in bankruptcy.

“It was evident to many people that Lehman could be in trouble before it actually filed,” said one former Lehman Brothers merchant banking LP. “That caused everyone who was an experienced investor to start to think about the implications.”

Some LPs looked to the partnership agreements to figure out how they should proceed in a bankruptcy. And they were in for a surprise – the agreements said nothing about such an eventuality.

“It was never contemplated; no one would have thought when they were negotiating the documents that this would happen,” the LP said.

But what been building up for so long finally did happen. Lehman folded and plunged into the largest-ever bankruptcy in US history. Shortly after the filing, the Lehman merchant banking team got in contact with LPs to keep them informed about what was happening. LPs also frantically got in touch with each other.

An intense level of communication never abated through the entire process, until Trilantic spun out as an independent firm, according to sources.

“The team was very good about trying to communicate with their LP base,” an LP source said of the merchant banking management team.

The team sought the help of the LP advisory board throughout the process, using it as a sounding board for different ideas, the LP source said. There were around 300 investors the GP had to take into account, which made it “very difficult to have a meaningful conversation. It was unwieldy”, the LP said.

In the early days of the bankruptcy, different people had different views about the future of the private equity interests. Some LPs were having liquidity problems, which was driving a desire to get out of the funds. Lehman hired law firm Kirkland & Ellis as counsel for the LPs, and eventually brought in private equity adviser StepStone Group for LPs that needed more of a guiding hand through the process.

“In the beginning, it could have been any outcome,” the LP said about the future of Lehman's merchant banking funds. In retrospect, LPs which opted to go to the secondaries market with their interests in the latter months of 2008 would have had a “very difficult time selling their existing LP interests. There was high supply and very little demand”, the LP says.

The idea of a management spinout started to gain traction in November and December, but certain problems existed – including a huge, $230 million unfunded commitment held by the bankrupt Lehman estate.

The management team found a solution when Johann Rupert, a South African billionaire, agreed to take on the unfunded commitment and pay $10 million for a 49 percent stake in Trilantic itself.

Under the arrangement, bankrupt Lehman would retain its limited partner interests in about $230 million of investments in Funds III and IV. Trilantic would manage about $3.3 billion in assets, including about 20 holdings in Lehman's merchant banking Funds III and IV, and the bankrupt estate and Trilantic's management team would retain their interests in the general partnership of Fund III.

More than 300 LPs in the merchant banking funds voted in March 2009 to approve the management buyout, and Trilantic was born. Trilantic's management team consists of Danny James, Vittorio Pignatti, Joe Cohen, Javier Banon and Charlie Ayres – all transplants from the former merchant banking team.

Today, Trilantic is fully operational, with offices in New York and London. On an average morning, the firm's dealmakers at the New York location, which once housed some of Lehman's doomed operations, dart back and forth into meetings or to the elevators on their way to the airport to catch a plane to the next potential deal.

The firm has $1.7 billion of dry powder to invest and recently entered into its first deal, a $130 million growth equity investment in an existing portfolio company. The future appears bright for a young firm that a year ago had great trouble seeing through the storm clouds.

“We're fully back in business with the whole team, our portfolio is in extremely good shape,” Ayres said during a recent interview. “We have about 10 to 20 actionable situations between here and in Europe. Patience is our focus, we're not in any rush to put out any money,” he says.

In time, Ayres and co will need to prove the faith placed in them by investors was justified. For now, comfort can be taken from the minor miracle they have already pulled off.