Lampert’s Clients Pull Money Unimpressed by Sears Rally

Sears (SHLD) Holdings Corp. gained 54 percent this year through November. It was the best performer among the U.S. listed stocks held by Eddie Lampert's hedge-fund firm and the biggest contributor to an estimated 41 percent return from those investments.

For some of Lampert's clients, who have to commit to a five-year lockup to invest with the billionaire, that wasn't good enough. His firm disclosed this week in a regulatory filing that his main hedge fund, ESL Partners LP, issued 7.42 million Sears shares to meet client redemptions. The stake, worth $471 million before the distributions were made, has since lost a fifth of its value.

The retailer, which posted 27 straight quarterly sales declines, has been struggling since Lampert, 51, engineered the merger of Kmart Holding Corp. and Sears, Roebuck & Co. in 2005. While Lampert said this week he's still focused on creating long-term value at Sears, some of those who invested with ESL in 2007 and 2008, when the stock was trading at much higher prices, aren't taking another leap of faith.

"Lampert's eternal optimism regarding Sears is not shared by a growing number of his investors, and with good reason after all these years," said Erik Gordon, a professor at the University of Michigan's Ross School of Business in Ann Arbor.

Steven Lipin, a spokesman for Lampert who works for Brunswick Group LLC, declined to comment.

In Kind

Lampert, who took over as chief executive officer at Sears in February, distributed stock in the retailer rather than cash to investors exiting his fund, forcing him to surrender majority control. While such redemptions in kind are rare within the hedge-fund industry, Lampert has used the technique several times, paying investors who want to withdraw their money with shares from his stakes in companies such as AutoZone Inc. (AZO) and AutoNation Inc. (AN)

Redemptions in kind are primarily used when a fund holds such a large stake in a company that any sales would depress its shares, said David Guin, a partner at law firm Withers Worldwide whose areas of expertise include hedge-fund formation and structuring. Had Lampert sold Sears shares to meet the redemptions, his remaining investors would have had to bear the decline in value, said David Tawil, a money manager at New York-based Maglan Capital LP, an event-driven hedge-fund firm that focuses on distressed situations.

"Instead of him taking the pain, the redeemers are taking that pain," Tawil said in an interview. "This could make a disgruntled ESL investor even more unhappy."

Concentrated Bets

ESL Investments Inc., the Bay Harbor, Florida-based money-management firm that Lampert founded in 1988 after working on the merger-arbitrage desk of Goldman Sachs Group Inc. under Robert Rubin, takes concentrated stakes in publicly traded companies.

As of Sept. 30, RBS Partners LP, the vehicle used to run Lampert's hedge fund, held four U.S.-traded stocks with a total market value of $3.5 billion -- $2 billion of Sears shares; a $1 billion stake in AutoNation; a $265 million position in clothing retailer Gap Inc.; and a $184 million bet on Sears Hometown and Outlet Stores Inc., according to a Form 13F filed with the U.S. Securities and Exchange Commission last month.

Lampert's U.S.-traded stock holdings, as reported in quarterly filings with the U.S. Securities and Exchange Commission, have gained 30 percent this year. More than half of the gain, or 17 percentage points, has come from Sears, according to data compiled by Bloomberg. The investments had risen an estimated 41 percent through November, before the three-day slump in Sears. The returns don't include leverage, fees and holdings other than U.S. stocks.

ESL's Returns

ESL Partners produced average annual gains of 25 percent for the first 14 years, before returns became more volatile. The fund declined 27 percent in 2007 and 33 percent in 2008, then rebounded with gains of 55 percent in 2009 and 16 percent in 2010, two people familiar have said. ESL Partners fell 4 percent in the first nine months of 2011, these people said, requesting anonymity because the information was confidential.

Lipin, the spokesman, declined to provide more recent returns and redemption figures.

One reason for the fund's decline in those years was its investment in Sears, whose shares have declined 70 percent to $50.92 from their peak of $169.82 in April 2007. In 2012, the same year that ESL Partners reported it had received redemption requests, filings with the SEC show that the fund's gross assets declined 24 percent to $5.1 billion while the number of investors in the fund shrank to 164 from 250.

Personal Stake

This week's filing shows that ESL Partners distributed Sears shares to investors "that elected to redeem all or a portion" of their holdings in the fund. As a result, ESL Partners' holdings in Sears declined to 21.99 million shares from 29.41 million as of a month ago.

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Lampert continues to personally hold about 25 million Sears shares and control a small number of the retailer's shares held in other partnerships. His total stake, including Sears stock controlled through ESL Investments, now equals 51.6 million shares. In percentage terms, his stake declined to 48 percent from 55 percent prior to the latest redemption.