The liquidators of Lehman Brothers are hammering out a deal to sell the collapsed bank's merchant banking business to its managers.

The business, which contains two private equity funds, will become an independent company in which Lehman, which filed for bankruptcy last September, will retain a stake.

It is the second time that Alvarez & Marsal, Lehman's restructuring advisers, have decided to spin out part of the bust bank rather than sell assets in a depressed market.

Last month the advisers sold Lehman's asset management operations including the prized Neuberger Berman to the managers, snubbing a number of private equity firms interested in the businesses.

Private equity firms including Blackstone and Carlyle were known to be interested in the merchant banking business.

The funds have about $4.5 billion in assets, including stakes in more than a dozen companies, but it is not yet clear what the management will pay for their share of the business.

The managers, led by managing director of the business Charlie Ayers and executive Daniel James, will take the merchant bank's most recent fund, a $3.3 billion investment vehicle set up in 2007.

Lehman will keep the other $1.2 billion fund plus about $230 million nworth of investments held by both funds.

This will allow Lehman's creditors to benefit from the potential growth of the funds.

Johann Rupert, the South African billionaire, is also expected to take a stake of about $250 million in the spun-out business.

The funds' existing investors, which include Pennsylvania Public School Employees' Retirement System, the New York City Retirement System, must agree to the deal before it can be completed.

Under the terms fo the deal, investors will also be allowed to cut their unfunded commitments to the funds by 25 per cent. This is designed to help ease the pressure on cash-strapped investors.

Alvarez & Marsal are also currently auctioning an $800 million venture capital business and a $10 billion property private equity business as it dismantles the Lehman estate.

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