(Bloomberg News) Edward Lampert, the hedge fund manager who controls Sears Holdings Corp., has more than $160 million in paper profits on shares of the retailer acquired last month from a long-standing client, the Ziff family.
The billionaire paid $130 million in early January to personally acquire Sears shares from ESL Investors LLC, a partnership he runs for the Ziffs that follows the same strategy as his hedge fund, according to court documents and regulatory filings. The retailer's stock has more than doubled since then, rebounding from a three-year low and ranking as the best-performing member of the benchmark Standard & Poor's 500 Index.
The Ziffs, heirs to a publishing fortune who backed hedge fund managers Jim Chanos and Bill Ackman early in their careers, provided Lampert with some of the capital he used to buy and then merge Kmart Corp. with Sears, Roebuck & Co. to create Sears Holdings. Lampert revamped his investment partnership with the Ziffs and bought back some of their Sears stock after the retailer faltered in 2011, regulatory filings show.
"The client wants out of the fund and he is choosing to reduce their exposure personally," said James Hedges, a former money manager who said he knows Lampert and now runs Montage Finance, a New York-based art finance firm. "Or they want liquidity and he still likes the position."
Representatives for Lampert and Ziff Brothers Investments LLC declined to comment. The Ziff brothers, including Dirk, Robert and Daniel, set up their New York-based firm in 1993, prior to the $1.4 billion sale of their father William Ziff's magazine company, the onetime publisher of titles such as Car and Driver, PC Magazine and PCWeek.
Lampert, who has never publicly identified the clients in ESL Investors, set up the limited liability company in 1999 for the Ziffs to invest alongside his main hedge fund, ESL Partners LP, in stocks such as AutoZone Inc., Gap Inc. and Sears, court records and government documents show. The Ziff partnership provided $14 million in cash and $235 million of the Kmart debt that Lampert used to acquire a controlling stake in the discount chain through its 2003 bankruptcy reorganization, according to a regulatory filing that May.
Two years later, Kmart bought Sears Roebuck for $12.3 billion and Lampert, now 49, became chairman of the combined company. Lampert and his Greenwich, Connecticut-based firm, ESL Investments Inc., currently control about 57 percent of Sears' common stock.
Sears shares have lost more than two-thirds of their value since peaking at $188.94 in April 2007, even after rallying 19 percent yesterday to $61.80 in New York. The drop has made it difficult for Lampert to replicate the average annual returns of about 25 percent that he produced at ESL Partners during its first 14 years of operation, according to two people with knowledge of the fund's results.
Cashing Out
ESL Partners fell 4 percent in the first nine months of last year, according to the people, who requested anonymity because the information is confidential, besting the S&P 500's 8.7 percent decline after dividends. The fund rose 16 percent and 55 percent in 2010 and 2009, respectively, after slumping 33 percent in 2008 and 27 percent in 2007, the people said.
The hedge fund reported that some investors were cashing out at the end of 2011, a step that's difficult to take at ESL Partners because Lampert requires clients to wait at least five years before withdrawing any money, according to three people familiar with the firm, who asked not to be named because its terms aren't public. Lampert disclosed a restructuring of the Ziff partnership, including the "termination" of his management firm's financial interest in the vehicle, through a Jan. 3 filing with the U.S. Securities and Exchange Commission.