Limited partners in Willis Stein & Partners' most recent fund, a $1.8 billion 2001 vintage, in June granted the fund a one-year life extension.
Founded in 1995 by John Willis and Avy Stein, the Chicago-headquartered firm agreed to forego a 1.5 percent management fee on several portfolio companies that were already in a sales process, while keeping the fee on the remaining investments in the fund, a person close to the firm told PEO.
The fund life extension was one of three the firm is entitled to ask for on the fund, the person said. It's not clear if the fund has any capital left to invest.
Some limited partners were upset the firm did not offer more of a concession for the extension, a Willis Stein LP said. “It wasn't much of a compromise. They've made [millions] on management fees over 10 years,” the LP said.
Willis Stein's need for a fund life extension is “not unusual” in the current environment, a market source told PEO. “Many firms have found themselves in the position where they have a lot of good investments in the current fund, but the market for selling companies has been absolutely terrible in the last two to three years, and the firms have not been able to monetise very good investments in the fund”, the source said.
The concession the firm granted on the management fee was about the best deal LPs could get without asking the investment team to “work for free”, the source said.
Willis Stein's third fund was one of the largest raised at the time. Fund I collected about $340 million in 1995 and was a “barnburner”, according to an LP. According to performance data from the University of Texas Investment Management Company as of February, the firm's first fund was generating a 20.43 percent internal rate of return and a 2.10x cash-on-cash return multiple.
Fund III needs to prove itself before the market would be there to raise a Fund IV.
Willis Stein limited partner
Fund III, which was somewhat affected by the downturn in the early part of the decade, has more recently struggled to find exits in the stagnant markets. One of the firm's major portfolio companies, Ziff Davis Holdings, a New York-based publisher of technology magazines, filed a pre-negotiated bankruptcy plan in 2008 that wiped out the firm's equity. It has eight remaining companies to be exited.
Meanwhile, Willis Stein had been considering plans to come to market with a fourth fund but had made no decision, the person close to the firm said. Media reports from 2008 said the firm was pre-marketing a fourth fund, targeting $1 billion.
“Fund III needs to prove itself before the market would be there to raise a Fund IV,” one LP said. The firm declined to comment.
Many LPs in today's market have had to make tough decisions about ending funds well past their terms but left with remaining investments to realise. It comes down to a decision about whether the LP wants to take over the remaining investments, or allow a manager to keep trying to derive some value from the investments, a fund of funds manager with no connection to Willis Stein told PEO.
“We've had situations where fund lives have not been extended and … the GPs send you private securities that are completely illiquid,” the fund of funds manager said. “Now, instead of having someone who knows something about the business, you as an LP have a portfolio of three or four private companies that you're kind of undereducated about.
“It's a tricky discussion,” the manager said.