JANUARY 23, 2012
By GREGORY ZUCKERMAN
Article from The Wall Street Journal
Edward Lampert and shareholders of Sears Holdings Corp. aren't the only ones hoping for a turnaround of the big retailer. Goldman Sachs Group Inc. and some of its clients are sweating it out, too.
Clients of Goldman invested about $3.5 billion in Mr. Lampert's hedge fund through a special deal more than four years ago. Goldman invested about $75 million of its own money as part of the arrangement.
At the beginning of this year, that investment was down several hundred million dollars, in large part due to a 57% plunge in Sears stock in 2011. Sears is one of the largest investments of Mr. Lampert's fund, ESL Investments Inc., according to the most recent securities filings.
A sudden rebound in Sears this year has put Goldman and its clients in the black on the deal, although ESL still trails the average return of rival hedge funds since the Goldman money was invested.
Goldman and its investors need to see the Sears rally continue. The reason: They can't withdraw their money until the end of this year, according to terms of the investments. And some analysts are skeptical about whether the recent gains will last.
The ups and downs of the Lampert investment show that even being a favored client of a top-ranked investment bank isn't always a surefire path to investment success.
At the time of the arrangement, it seemed like a home run for all involved. Mr. Lampert was a star fund manager, being compared with Warren Buffett, thanks to annual gains of more than 20% over his career and a recent string of successful investments.
Certain Goldman institutional clients, including endowments and foundations, took up the offer to invest with ESL.
The $3.5 billion that was raised in the summer of 2007 represented one of the larger one-time fund-raising efforts in hedge-fund history, according to people in the business. It increased ESL's size to more than $15 billion, people familiar with the matter said.
The deal allowed Mr. Lampert, who got his start on Goldman's trading floor, to raise a big slug of money without spending months courting potential investors. Mr. Lampert required clients to invest a minimum of $25 million and commit their money for a minimum of five years, an unusually long time for hedge funds.
The deal earned Goldman about $75 million in fees, according to people familiar to the matter, money the firm invested in Mr. Lampert's fund. The arrangement also represented a coup for Goldman, giving it a deal to show to clients at a time when hedge funds were all the rage.
Mr. Lampert's big bet on Sears ran into problems as the stock market collapsed and the U.S. economy fell into recession. Sales at stores open at least 12 months have slid every year since the new company was created in 2005. Recently, Sears decided to close as many as 120 stores. Shares, as high as $191.93 in 2007, closed Friday at $49, up $5.65, or 13%, amid expectations the retailer will be able to reassure companies financing its merchandise that it will be able to meet its obligations.
Goldman clients invested in Mr. Lampert's fund in four stages between August 2007 and January 2008, people familiar with the matter said.
Mr. Lampert's fund lost about 13% in the last three months of 2007, investors said. The fund lost an additional 33% in 2008, according to investors. It then rebounded with gains of 55% in 2009 and 16% in 2010. ESL lost about 12% last year, investors said. So far this year, the fund is up 11.5%, according to a person familiar with the matter.
Mr. Lampert's historic annual return remains higher than 21%, beating the market and most rivals. The average price ESL paid for shares of the combined Kmart and Sears, which merged in 2005, is about $15 a share, suggesting it is still sitting on gains.
But overall, the Goldman clients are up less than 1%, as of the end of trading on Friday, according to people familiar with terms of the deal.
While returns vary depending on when investors got into the fund, the Goldman investment trails the performance of other hedge funds. Hedge funds scored an average gain of about 4.8% between the four points at which Goldman investors placed money in ESL in late 2007 and January 2008 and last week, according to hedge-fund tracker HFR Inc.
If the Goldman clients choose to keep their money with Mr. Lampert's fund beyond this year, they will be required to commit their cash for another five years, according to people familiar with terms of the arrangement.
Mr. Lampert is the largest investor in his hedge fund, so the limp performance has hit his own wallet. But, like other hedge-fund managers in similar circumstances, his losses have been cushioned by fees he has charged over the years.
Like some other hedge funds, Mr. Lampert charges an annual fee amounting to 1% of all the outside money he manages. As such, he has been able to collect hundreds of millions of dollars of management fees over the past decade, investors estimated. Also, like most hedge funds, he charges investors 20% of the gains in the value of his fund each year, resulting in hundreds of millions of dollars from those gains. Mr. Lampert won't be able to charge future 20% performance fees until he regains his fund's losses.
Write to Gregory Zuckerman at gregory.zuckerman@wsj.com
Article from The Wall Street Journal
