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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.

The gains didn’t change the mind of some of Lampert’s clients, who have to commit to a five-year lockup to invest with the billionaire. Lampert’s 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 more than 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, a group of clients that invested about $3.4 billion in his main fund as early as 2007, when the stock was trading at much higher prices, wasn’t ready to take 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.

Photographer: Daniel Acker/Bloomberg

Shoppers wait for a Sears Holdings Corp. store to open ahead of Black Friday in Peoria, Illinois. Close

Shoppers wait for a Sears Holdings Corp. store to open ahead of Black Friday in Peoria, Illinois.

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Photographer: Daniel Acker/Bloomberg

Shoppers wait for a Sears Holdings Corp. store to open ahead of Black Friday in Peoria, Illinois.

Goldman Investors

The investors who are departing Lampert’s fund originally made their commitment in 2007 and early 2008, when Goldman Sachs Group Inc. raised $3.4 billion in new capital for ESL Partners, according to a person familiar with the situation who requested anonymity because the information is confidential.

All of the investors were required to commit their money for at least five years, Lampert’s standard lockup period, the person said. By the beginning of this year, ESL had received notice from these investors that they wanted to redeem all of their money, the person said. ESL had the right to meet the redemptions over a one-year period rather than pay out at once.

Lampert’s firm began returning the money last year and continued to do so this year, using both cash and securities such as stock in AutoNation Inc. (AN), AutoZone Inc. (AZO), and Sears, according to the person. In June, ESL Partners reported in a regulatory filing that it distributed $393 million of AutoNation shares to clients who had elected to redeem all or a portion of their investment in the fund.

Majority Control

The institutions exited with a gain on their holdings, this person said, while declining to comment on what their return had been on the five-year investment with Lampert. ESL Partners is up more than 25 percent this year, the person said.

Steven Lipin, a spokesman for Lampert who works for Brunswick Group LLC, declined to comment. The Wall Street Journal reported earlier today that the redemptions came from investors who were part of the Goldman Sachs placement.

Lampert, who took over as chief executive officer at Sears in February, surrendered majority control of the retailer by distributing shares in the retailer. Such 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 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 SEC, have gained 25 percent this year. Almost half of the gain, or 11 percentage points, has come from Sears, according to data compiled by Bloomberg. The investments had risen an estimated 41 percent through November, before this week’s four-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 returns and redemption figures.

One reason for the fund’s decline in those years was its investment in Sears, whose shares have declined 71 percent to $49.98 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.

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.

To contact the reporter on this story: Miles Weiss in Washington at mweiss@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net

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