ESL’s Goldman Clients Hurt by Sears Fiasco

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.

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