Lehman Nets 550 Percent Return On Formula One Investment

lehman brothersImage source: Made with Photoshop

Lehman Brothers, the investment bank whose downfall was based on ill-fated investments in opaque mortgage-backed securities that many say was a catalyst for the 2008 financial crisis, did make an astute investment decision in 2006 to back a Formula One racing group.

The investment ultimately generated a 550% return, delivering $2 billion of additional revenue to the bank’s creditors, according to a Forbes article. Before anyone gets too excited, that is nothing more than a drop in the bucket relative to the $450 billion the bank left in debt after the fallout from the 2008 financial crisis.

The investment initially began as a $300 million loan secured by a stake in SELC, the holding company for Formula One Group.  This loan was later converted into a 14.2% stake and sold to a private equity firm in 2006, netting Lehman only $209.3 million, nearly $90 million below their loan amount.  Rather than cash out, Lehman invested their proceeds in Delta Topco, Formula One Group’s current parent company.  Lehman Brothers Holdings Inc Plan Trust (OTCMKTS:LEHMQ) was then the third largest shareholder behind the private equity firm CVC and Kansas City-based asset management firm Waddell & Reed Financial, Inc. (NYSE:WDR), which itself would shortly be ensnarled in the 2010 “flash crash,” blamed as the primary cause in an SEC report.

While its mortgage backed securities portfolio would soon collapse, Lehman’s decision to invest in Topco turned out to be highly beneficial.

Lehman Brothers’ legal battle

But the success also came amidst a legal battle.  Two years after taking the investment stake, CVC sought to take control of Lehman’s holdings in according with Topco’s articles of association, that state if an investor becomes insolvent the firm must sell its shares “at a fair price.”

“In reality, we are the only buyer,” Nick Clarry, CVC’s UK managing director, was quoted as saying at the time. “We have made an offer to buy Lehman’s shares in the past and may do so again.”

The legal team for Lehman’s estate objected based on US bankruptcy law overruling the deal, and Lehman worked out a deal with CVC that allowed Topco to be placed in LBI Holdings, the holding company created for Lehman Brothers Holdings Inc Plan Trust (OTCMKTS:LEHMQ)’s assets that had value.  After selling off a 3% stake to the Teachers Retirement system of Texas for nearly $200 million, LBI continues to benefit.  In 2012 Lehman received a $148.8 million dividend payment on their ownership.

IPO in the works

The firm is planning an IPO on the Singapore Stock Exchange potentially valuing the company at $12 billion.  The big question, the report noted, is when will Lehman sell its shares and who will be the buyer?  Speculation is a strategic buyer, one that could take greater control of Topco with the Lehman shares, would find the holdings of the most value.

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About the Author

Mark Melin
Mark Melin is an alternative investment practitioner whose specialty is recognizing a trading program’s strategy and mapping it to a market environment and performance driver. He provides analysis of managed futures investment performance and commentary regarding related managed futures market environment. A portfolio and industry consultant, he was an adjunct instructor in managed futures at Northwestern University / Chicago and has written or edited three books, including High Performance Managed Futures (Wiley 2010) and The Chicago Board of Trade’s Handbook of Futures and Options (McGraw-Hill 2008). Mark was director of the managed futures division at Alaron Trading until they were acquired by Peregrine Financial Group in 2009, where he was a registered associated person (National Futures Association NFA ID#: 0348336). Mark has also worked as a Commodity Trading Advisor himself, trading a short volatility options portfolio across the yield curve, and was an independent consultant to various broker dealers and futures exchanges, including OneChicago, the single stock futures exchange, and the Chicago Board of Trade. He is also Editor, Opalesque Futures Intelligence and Editor, Opalesque Futures Strategies. - Contact: Mmelin(at)valuewalk.com

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