<bold>HUMAN CAPITAL</bold><br/>Lehman's latest revival

The architect of Lehman Brothers' private equity strategy is to head a new investment business with the firm that advised on its overhaul in bankruptcy

Michael Odrich, a 23-year veteran of Lehman Brothers, spent 15 of those years building up the former investment bank's private equity businesses. When Lehman filed for the largest-ever bankruptcy in the US in September 2008, Odrich had the painful task of watching that build-up unravel. He was at the table as restructuring advisor Alvarez & Marsal helped spin out various Lehman private equity businesses into independent firms.

Three of the businesses were spun out into independent firms through management buyouts. Asset management giant Neuberger Berman kept its name but broke away from Lehman; the merchant banking private equity division became independent firm Trilantic Capital Partners; and the former venture capital unit pulled away to become Tenaya Capital with the help of fund of funds giant HarbourVest Partners.

“I spent 15 years building those businesses. They're incredibly solid with great growth prospects, and to see that come apart was really difficult for me,” Odrich said during a recent interview. “I hired most of the people in those businesses.

“It was important to me that the various parts got transitioned in a successful way, focused on the right things for the people and the investors,” he says. “The unwinding was very difficult, but what I'm very proud of is if you look at how those businesses got re-positioned, they're in good hands these days with the management teams that are running them. They are separately capitalised and owned, and that's really a great thing.”

Now Odrich himself is looking at a new beginning: with the very firm that advised on the Lehman restructuring. Alvarez & Marsal has hired Odrich to build and run a new buyout unit, Alvarez & Marsal Capital. It will target “underperforming companies where we believe we can improve the operations of those companies and create value by improving the performance of the business”, Odrich says.

The unit will not target companies in bankruptcy, and will not make many distressed debt investments, though opportunities will be evaluated as they arise, he says.

We'll be looking for “direct investments for control and significant minority stakes”, Odrich says. “What's going to be important is that we will opportunistically take minority positions to the extent we can have board representation [to have] significant influence over operational capital structure and corporate governance decisions.

“We won't get hung up on, “do we need full control or significant minority control?””, Odrich says. “We want to be in a position where we can effect operational improvements that we believe we can deliver into these portfolio companies”.

A&M Capital will target mid-market companies in the $100 million to $750 million enterprise value range. The investment unit will be “industry opportunistic”, using the knowledge of the army of industry experts employed by Alvarez to explore the best opportunities across the industry in which the company already has expertise, Odrich says.

“There are 1,700 people in the firm. The firm's engagements have spanned across well over 100 industry sectors,” Odrich says.

Avoidance of conflicts of interest will be a high priority with the investment unit, Odrich says. A&M Capital will not invest in any companies for which the parent is an advisor. The key to avoiding conflicts is “communication between the agency business and the investing business”, he says. “We do have in place the right procedures to make sure we will successfully manage any conflicts that arise.”

Odrich brings to A&M a wealth of experience and lessons learned from his time building Lehman's private equity businesses, which had 38 different investment strategies with $35 billion under management.

At Lehman, the private equity managers “made a conscious decision not to overlever our company and to stay conservative on industry exposure. We were worried about [the] consumer [sector], we were worried about credit, we thought it was mispriced”, Odrich says.

Through the boom times between 2005 and 2007, the Lehman private equity businesses stayed “very disciplined”, he says. Pity the same might not have been said about the business as a whole.