06/17/2009

Walsh in Line to Take Over Lehman Funds

Mark Walsh is leading a team of Lehman Brothers executives who are close to taking over management of the bankrupt company's property funds, a move that would mark the return of one of Wall Street's biggest real estate dealmakers.

The largest limited partners in three funds with $7.2 billion of total equity signed off on transferring the management rights to the Walsh group after considering counteroffers from other fund operators, including AREA Property Partners of New York. It's unclear if the group will also be named operating partner of Lehman's two mezzanine-debt funds, which have $2.3 billion of total equity. The transfer is still subject to a vote by all of the funds' limited partners, who are expected to approve the hand off.

The Walsh team plans to relinquish the right to draw down $1.6 billion of uninvested capital from investors and focus on harvesting existing investments. It will also slash management fees. The fund's largest limited partners evidently were swayed by the team's familiarity with the assets and the fact that the group offered to manage them for less than the other bidders. Lehman declined to comment.

As head of Lehman's global real estate group, Walsh financed dozens of major property transactions during the real estate boom, supplying both equity and debt. He built a reputation as one of Wall Street's savviest and most aggressive real estate operators. But Lehman's mammoth $33 billion real estate portfolio was hammered by the downturn, contributing to the company's bankruptcy filing last September and leading to Walsh's departure.

Real estate players have been speculating about when they would see the re-emergence of Walsh, who was a 20-year Lehman veteran. The operation being formed by the Walsh team to manage the Lehman funds could eventually become an investment platform.

"This is very good for the investors because it brings Mark Walsh back to the market," said one veteran real estate player. "He has had his head down since the bankruptcy, but it is good for the market that he is back."

Joining Walsh are Brett Bossung and Mark Newman, co-heads of Lehman's real estate private equity division, who have continued to oversee the funds since the firm entered bankruptcy. The buzz is that the team also includes Kevin Dinnie and Rodolpho Amboss, both managing directors and principals in Lehman's fund shop.

But Michael McNamara announced in an e-mail to colleagues that he would resign as managing director and principal at the end of the month. He spent nine years in that position, with a focus on acquisitions. The buzz is that he decided against joining the new firm because the Lehman funds won't be making new investments. He plans to explore new opportunities.

The Walsh team would become general partners of three global property funds - the $1.6 billion Lehman Brothers Real Estate Partners 1, the $2.4 billion Lehman Brothers Real Estate Partners 2 and the $3.2 billion Lehman Brothers Real Estate Partners 3. Lehman will retain its equity stakes in the vehicles. The first two funds are fully invested, and the third fund is about half invested.

The management group will draw down a small amount of the $1.6 billion of uninvested capital in the third fund to support existing investments. But investors will be released from most of those commitments.

The management fee will be 0.55%, well below the industry norm of 1.5%. The incentive fees are also being pared back. However, the team would be entitled to higher compensation if prescribed performance hurdles are achieved.

The fund's investments will be wound down slowly to avoid fire sales in the depressed market.

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