Lehman Property Boss Returns

Mark Walsh, the lead executive who loaded Lehman Brothers Holdings Inc. with toxic property investments, is part of a group chosen by Lehman to take over the bankrupt firm's real-estate private-equity arm.

Mr. Walsh and a team of former Lehman colleagues are setting up a new stand-alone business to manage the private-equity portfolio. They stand to profit if the portfolio of distressed assets -- for which they once paid top dollar -- recovers only some of its value.
The arrangement is a remarkable second act for 49-year-old Mr. Walsh, formerly Lehman's global head of real estate. When it filed for bankruptcy protection last September, Lehman directly held roughly $43 billion worth of real-estate loans and assets, exposure that played a key role in its collapse.
Federal prosecutors continue to investigate, among other things, whether Mr. Walsh and his team improperly valued commercial-real-estate holdings to prop up Lehman's balance sheet.
New Jersey Attorney General Anne Milgram also has filed a civil suit against Mr. Walsh and others accusing them of defrauding the state's pension funds by misrepresenting the value of Lehman's real-estate holdings.
Anton Troianovski/The Wall Street Journal The InterContinental hotel in New York's Times Square is among the property investments made by Lehman Brothers Real Estate Partners.A lawyer for Mr. Walsh declined to comment
While helping strike deals using Lehman's own balance sheet, Mr. Walsh also oversaw a separate unit called Lehman Brothers Real Estate Partners. Set up as a trio of private-equity funds, the unit eventually invested in $5.6 billion worth of deals, attracting some of the nation's largest pension funds as backers. Lehman itself also contributed about 20% of the unit's capital.
Properties in the portfolio include the 34-story InterContinental hotel in New York's Times Square, 60 hotels in the United Kingdom, and a commercial-real-estate development in Mumbai called Santa Cruz. About three-quarters of the portfolio is located outside the U.S. And it is valued at about 50% of its original purchase price, according to people familiar with the matter.
To maximize recovery for creditors, Lehman's restructuring advisers Alvarez & Marsal have been trying to find a buyer for the unit since late last year. Dozens of prospective buyers expressed interest, but it winnowed the group to five finalists, including AREA Property Partners, formerly Apollo Real Estate Advisors LP, and a group led by Raymond Mikulich, the former co-head of the group who left the firm in early 2007.
Lehman's estate eventually chose a management group that had run the business for years, which includes Mr. Walsh and executives Brett Bossung and Mark Newman. Lehman will retain its roughly 20% stake and hold seats on the new firm's oversight committees.
The group paid about $10 million for the business, according to a person familiar with the deal. The number was low, say people familiar with the matter, because continuing management fees are likely to be consumed by the costs of managing the existing properties.
The fund also will shrink the size of its most recent vehicle, a $3.2 billion fund, closed just days before Lehman's collapse. The fund will forgo about $1.6 billion in uninvested capital from investors, limiting new management fees.
The funds' new managers and Lehman creditors will thus only profit if the value of the properties increase over time. Lehman's investors agreed to "reset' some incentive fees for the managers, giving them payouts if asset values rise above their current distressed levels.
Typically managers would receive 20% of the "carry," or cut of certain profits, but that figure is expected to be lower for the new management, according to people familiar with the transaction.
"We fully support this management team and believe not only that they are best equipped to maximize the value of the assets," a Lehman spokeswoman said, "but also that they will be extremely successful in the growth of the new platform."
The transaction follows similar spinouts by the Lehman estate, including its flagship private-equity fund and its venture-capital unit.
The largest of those deals was a management buyout of Neuberger Berman, Lehman's money-management unit, which is 51% owned by its employees, with Lehman retaining the balance.
The Lehman group's sale comes at a time of crisis for the real-estate fund industry. During the boom years, funds run by Wall Street banks and boutique firms funneled billions of dollars from pension funds and other big investors into highly levered bets on office buildings, shopping malls, warehouses and other commercial property around the world.
Funds at Goldman Sachs Group Inc., Morgan Stanley and elsewhere have been marked down by more than half their equity value. Industry experts and investors, known as limited partners, expect the losses to mount.