Rising out of the mezz

Lehman Brothers’ European mezzanine business is spinning out and rebranding. Toby Mitchenall reports.

Julian Entwisle, a 25-year veteran of the European leveraged loan market, has become the latest industry figure to rise Phoenix-like from the ashes of broken bank Lehman Brothers. Entwisle and colleagues Joris Fletcher and Nathalie Romang have agreed to spin-off Lehman’s European mezzanine management business.

The new entity, named Neovara, will assume the management of the €800 million Lehman Brothers European Mezzanine Fund, which was raised in 2004 and is currently in realisation mode.

Renowned within the industry, Entwhisle is described by one insider as “a big personality, but a very serious guy when it comes to credit”. Having previously headed up Lehman’s European high-yield debt business, he founded the investment bank’s mezzanine business in Europe in 2002. He, Fletcher and Romang built the business up from scratch over eight years.

Before joining to form Lehman’s European mezzanine business, Fletcher was on the leveraged finance capital markets desk at Morgan Stanley and Romang was a member of leveraged finance team at Goldman Sachs.
 The 2004 fund was established to invest in buyouts with enterprise values of more than €200 million, with some of its earliest investments being the buyouts of UK car accessories retailer Halfords and betting group Coral. The fund has also invested in Dutch cable company Casema, cleaning services company Safety-Kleen and over-50s leisure and financial services group Saga.

The three founding partners of Neovara have completed the spin-out with unanimous support from the fund’s 30 institutional limited partners, Joris Fletcher told PEI. The consent process with the Fund’s group of retail investors is ongoing. The Lehman Brothers estate, which is the largest single LP, will retain its stake in the fund.

The founders will be joined by eight further staff – all from the former Lehman team – comprising two partners – Richard Holden and Jason Howard – three investment professionals and three support staff.
 The team has progressively been creating an “independent operating platform” from its former parent since the bankruptcy, says Fletcher. The team moved out of Lehman’s former headquarters in London’s Canary Wharf midway through 2009. Neovara is now based across town on Brook Street in Mayfair.

“We are very excited about this opportunity,” says Fletcher. “We have always operated largely independently from the Lehman Brothers franchise in terms of our sourcing and investment activity.”

With the 2004 fund fully invested, fundraising is “definitely on the agenda”, says Fletcher. A fundraising process had been underway in 2008 but was scuppered when Lehman Brothers collapsed.

Fletcher is upbeat about what is currently a slow market for mezzanine investment in Europe. “Looking at the recent issuance data, the volume of opportunity is limited but we have witnessed a pick-up in recent months,” he says. “Our experience over the last eight years and before indicates that the flow of opportunities is relatively lumpy and it is not unusual to see these types of trough in activity, which are typically followed by surges in new volume.”

The formation of Neovara follows last year’s creation of Trilantic Capital, a firm that emerged from Lehman Brothers Merchant Banking. Trilantic, led by Charile Ayres, spun out from Lehman Brothers in April 2009. More than 300 limited partners in the merchant banking funds voted to approve the management spinout, which included $1.7 billion in “dry powder”.

Another private equity firm to spawn from Lehman’s demise was the buyout unit of Alvarez & Marsal, the turnaround advisor that has guided Lehman Brothers through its bankruptcy. The firm recruited the founder of Lehman’s private equity business Michael Odrich to found Alvarez & Marsal Capital, which will target both troubled and stable companies.