Willis Stein: Pushing Forward Back

Avy Stein says that his firm will raise another fund. It’s a sincere pledge, from a Chicagoan who has been in the private equity business for nearly two decades. It may also be wishful thinking.

Stein is one of two names on the door of Willis Stein & Partners, a mid-market buyout firm formed back in 1995. Its debut fund was capped at just under $350 million, and is considered to be a strong performer. Its second fund came in at $840 million three years later and is, in the identical words of two limited partners, “a disaster.” The firm also managed to raise a $1.8 billion third fund in 2000, which began making some decent deals after doing some cross-investing and shared investing with Fund II.

But that was seven years ago, and there is not yet a fourth fund – a fact which has caused some of the firm’s professionals to abandon ship, and some of its LPs to question whether a fourth fund is even possible.

To understand what happened to Willis Stein, one must return to the “disaster” fund. It was a classic case of style drift, where the profitability principle was scrapped for the bubbly excitement of tech and telecom. Within just a three-week span in 2001, for example, Willis Stein invested in a pair of companies that would quietly go out of business (One Inc. and Orius Corp.). It also made the monumental mistake of pumping a whopping $420 million into Ziff Davis Media, which was compounded by using capital from both Funds II and III.

“Ziff Davis is the biggest investment the firm has ever made,” says a Willis Stein insider. “And it’s probably not going to turn out too good… We’ve made a lot of mistakes.”

Those errors culminated in early 2005, when Willis Stein began looking to raise its fourth fund with a $1.25 billion target and $1.8 billion cap. The looking quickly turned to longing, as limited partners refused to bite. Willis Stein suspended fundraising in order to generate additional liquidity from its current portfolio. Some younger professionals chafed at the lack of new deals, but stuck in hopes that certain deals could still strike it rich. (Update: A WS source says that the firm never formally commenced fundraising, so it would be inaccurate to say that LPs turned down Fund IV)

The most notable was a $225 million investment in Roundy’s Supermarkets, which Willis Stein put on the market earlier this year with a pricetag of around $2 billion. The sale was expected to occur in late summer, which was to coincide with resumed fundraising activities. But then came the credit crunch, which slashed Roundy’s bids so deep that Willis Stein pulled it off the block.
Soon after, managing partner Dan Blumenthal informed Stein and John Willis that he was leaving to form his own firm, along with CFO Todd Smith and principals Bradley Shisler and Roy Jain. The new shop is called Blue River Partners, and later this year is expected to begin marketing a $150 million-targeted fund dedicated to the lower middle markets.
But Blue River is going to have the same troubled track record that Willis Stein has. In fact, it could be even tougher, considering that Roundy’s – still believed to be Willis Stein’s best chance for a homerun – was not done by Blumenthal or his new partners. I’m not saying it can’t be done, but Blumenthal will have to explain why his new firm will be superior to the shop he just left. The likely answer is the lack of style drift, but you can’t justify a troubled track record by only looking forward to track that has not yet been laid.

As for Willis Stein, the jury is really still out. Stein and company seem adequately humbled, but LPs may not offer up a second chance amidst the flood of other mid-market fund offerings.

“They do have some strong companies in their active portfolio, and will need to have some big exits in addition to Roundy’s,” says a Willis Stein investor. “I wish them luck and can certainly forgive past transgressions… but I have other things to focus on in the meantime.”