NEW YORK – Lehman Brothers is creating a $350 million to $400 million venture fund that will invest in small companies. In an unprecedented move, the firm is offering its institutional and high-net-worth clients an opportunity to buy into the fund with a minimum investment of $500,000.
“This is really an extension of our investment banking business,” a Lehman spokesperson said. “Around the world we are talking to companies in a broad range of industries, and the opportunities are as diverse as the people we do business with.”
The firm will provide 25% of the fund, while Lehman employees will invest another 25%. The spokesperson said that institutional and high-net-worth investors will put in the balance and that Lehman would first approach investors from other previous funds. The firm expects to close the fund by the end of the year.
While no formal transaction parameters have been set for investment size or industries, the spokesperson said the Lehman fund will invest in second- and third-stage opportunities and will allow co-investing.
In 1998, Lehman used capital set aside for venture opportunities to invest $37 million in 10 companies, including Regenerations Techology, VerticalNet Inc. and Metapath Software. Lehman invested in a broad range of industries, including technology, health care and real estate. The spokesperson said similar types of investments will come out of the new fund.
The firm would not disclose any additional information about the fund or who would manage it.
A source who previously worked with Lehman’s merchant banking division said that Managing Director Michael McKeever, who also is co-head of investment banking, would likely oversee the fund. The source speculated that the fund’s managers would mostly come from within the firm. Mr. McKeever did not return a phone call by press time.
Lehman has had difficulty retaining managers of previous private equity funds. In January 1998, Steve Berger, managing director of Lehman Brothers Merchant Banking Partners II, L.P., resigned from the firm over compensation issues. Later that June, two more directors of the buyout fund left the firm. Lehman experienced a similar exodus in 1994 with the managers of its first buyout fund.
The source said he was confident that the firm would ultimately raise the targeted capital but also said the level of venture capital experience among Lehman staffers could be in question.
Pennsylvania Public School Employes’ Retirement System was the largest outside investor in Lehman Merchant Banking II, investing $200 million in the $2 billion fund.
As of early April, Chief Investment Officer John Lane said he was unaware Lehman was raising a venture fund, although the firm said it was setting up the fund March 30.
“It will happen in 1999,” said the spokesperson. “Our next stage is to put together documentation.”
Mike Odrich of Lehman Brothers has confirmed his appointment to manage the venture fund; however, no timetable has been set.