Blue Brothers

At present it is unclear how the collapse of Lehman Brothers will effect the private equity industry, although it will surely be a question of how rather than if. For starters, the investment management unit, which includes all Lehman’s private equity activity may not have been a party to the bankcruptcy filing, with the bank’s cornerstone commitments to the various Merchant Banking funds coming from the broker-dealer units of the bank, but someone has to manage the portfolio of direct and fund investments. On the direct side, a spin-out of the management team, a sale of the portfolio en masse to another private equity firm, or partial sales to various bidders are the likeliest options. With Lehman having a number of UK-based businesses in its portfolio, with its most recent deal the buyout of waste management company Graphite Resources, this presents buying opportunities should it opt for a sale of the portfolio. On the debt side Lehman has underwritten a number of leveraged buyouts and the private equity sponsors of these deals will be seeking assurances that lines of credit will remain in place whilst positions are unwound and alternative financing put in place. Similar opportunities may exist on the fund-of-funds side, with a sale of fund positions mooted, which would interest a number of secondaries players. The other unknown is how the fall of Lehman will impact on market confidence and the potential for a further tightening of liquidity as banks pull-back from lending to each other. At the time of writing US stocks had suffered their worst day of trading since September 11th 2001 and markets across the world had reacted to the news with mass sell-offs. In many ways the shock is that Lehman is the first major global financial institution to fall on its sword. Without financial injections and support from central banks others would surely have fallen sooner. As market commentators predict further collapses, the private equity industry will certainly bear a portion of the pain but is also well-placed to take advantage of the opportunities this correction throws up.