Lehman to sell private equity, real estate operations

Announcing plans to save the investment bank from collapse, Lehman Brothers has confirmed speculation it will sell a majority stake in its investment management unit, which includes Lehman Brothers Merchant Banking, Lehman Brothers Real Estate and groups managing venture capital, infrastructure, credit and funds of funds.

Lehman Brothers, which today reported a third quarter net loss of $3.9 billion (€2.8 billion), will sell a 55 percent stake in its investment management division, which includes private equity operations.

A source at the firm said this includes major alternative investment fund management divisions including Lehman Brothers Merchant Banking, Lehman Brothers Real Estate and groups managing venture capital, infrastructure, credit and funds of funds.

Kohlberg Kravis Roberts and The Carlyle Group are just two of the private equity firms reportedly interested in buying the bank’s investment management assets, which include its highly prized Neuberger Berman unit. The source said the sale had moved “nicely along” and that Lehman had not ruled out separating out some of the divisions to separate buyers.

Analysts have speculated the entire investment management division could fetch as much as $10 billion.

Lehman will also spin off its $30 billion commercial real estate operation into a separate public company, in a bid to prevent the storied Wall Street investment bank from collapsing.

By hiving the assets off from the rest of the investment bank, Lehman hopes to protect its balance sheet from further write-downs. Private equity and real estate investment firms have been circling the embattled bank for the past few months in an effort to take advantage of the firm’s distress.

Lehman is also expected to close a $4 billion deal with asset management giant BlackRock Financial Management in the next few weeks for part of its UK residential mortgage portfolio.

Chief executive officer Richard Fuld said the episode marked an “extraordinary time” for Lehman, and “one of the toughest periods in the firm’s history”.

The bank announced the restructuring plan as part of its third quarter returns, which revealed write-downs of $7.9 billion, including $5.3 billion on residential mortgage-related positions and $1.7 billion on commercial real estate positions. Overall, the bank reported a $3.9 billion net loss for the quarter. The firm said it had reduced its commercial real estate exposure by 18 percent to $32.6 billion during the quarter and would have reduced its residential mortgage exposure by 47 percent to $13.2 billion following the sale of its UK mortgage assets to BlackRock.

The news came as the Korea Development Bank finally said it would not provide Lehman with a much-needed capital lifeline, saying in a statement: “We are announcing that we ended talks at this point in time because of a disagreement over conditions of a transaction and considering domestic and foreign financial-market conditions.”

Founded in 1850, Lehman has been on the verge of collapse at least four times: in 1929 when the stock market crashed; in 1973 when the firm lost $6.7 million betting on interest rates; in 1984 following the takeover by American Express; and in 1994 when the bank faced a capital shortage.

Zoe Hughes contributed to this report.