No need to pass the hat for Edward Lampert just yet.
Overlooked by the reports that investors are fleeing his ESL Partners is that the legendary hedge fund manager is a major shareholder of two of the four stocks his fund owns. If the stocks perform well in the future, he stands to make multiples of what he would have earned if the stakes were held solely by the fund.
Meanwhile, for all the bad publicity surrounding Lampert’s largest position, Sears Holdings Corp., ESL is faring fairly well this year — at least based on the disclosed long positions. We have no way of knowing whether ESL is short any stocks or invested in markets other than stocks.
Sure, it is bad news for Lampert — who last year moved his hedge fund to south Florida, outside Miami, from Greenwich, Connecticut — that longtime investors are redeeming from his fund and have clearly lost confidence in the man BusinessWeek once suggested might be the next Warren Buffett. Presumably to avoid dumping stock in the market at once to raise cash, Lampert chose to distribute shares of Sears to those investors bailing out of his fund. This dropped the combined holdings of ESL and Lampert below 50 percent for the first time, which seemed to unnerve Sears investors.
However, while it looks like ESL is slowly loosening its grip on Sears and is perhaps losing confidence in the struggling retailer’s prospects, in reality, Lampert, who also serves as chairman of Sears, has even more at stake personally if he can turn the company around and add substantial value. That’s because he is close to personally becoming a larger shareholder of Sears than ESL is.
When ESL completes the latest distribution of more than 7.4 million shares of Sears to its investors, it will be left with more than 26 million shares, according to its most recent regulatory filing. Lampert will own 25 million shares, although a lockup agreement with Lampert restricts the purchase and sale of securities that he owns, according to the regulatory filing.
And he keeps adding to his stash, thanks to his employment contract with Sears. Under a March 18, 2013, agreement with Sears’ compensation committee, Lampert will be paid an annual base salary of $1 to serve as CEO. As part of his deal, he will receive stock valued at $4.5 million per year, payable monthly. The number of shares issued to Lampert will be based on the value of the stock on March 18, 2013, for shares issued through January 31, 2014, and on February 1 of each successive 12-month period.
On March 18, Sears’ stock closed at $52.10. This means Lampert is entitled to roughly 86,372 shares this year. Of that sum, he is poised to receive another 7,200 or so shares in December. If he receives the same number next year, he will own approximately 25.2 million shares of Sears by the end of 2014.
The situation is similar with ESL’s second-largest holding, AutoNation, the country’s largest auto retailer. While ESL and Lampert own 26.1 percent of the total outstanding shares — down from 43.7 percent at the end of November 2012 — Lampert personally owns nearly 15 million shares, while ESL and other related partnerships own nearly 17 million shares.
What does this mean for Lampert? If Sears and AutoNation perform well in the future, Lampert personally stands to make much more money than if all of the stock had been held in his fund. Why? Because if he owns the stock himself, he receives 100 percent of the gains.
However, Lampert gets to keep only 20 percent of the gains enjoyed by ESL Partners — the fund’s performance fee. He shares the remaining 80 percent of the gains with the investors in the fund.
Of course, Lampert also has his own money in the hedge fund, for which he gets to enjoy the full gains (although some fund managers do pay management and performance fees on their own capital in their funds.)
This huge stash enabled Lampert to make $750 million last year, to rank him sixth on Alpha’s Rich List. Altogether, he has qualified for the Rich List in eight of its 12 years in existence.
Meanwhile, ESL is doing pretty well this year despite the recent selloff in Sears’ shares. The stock is still up 14 percent year to date. AutoNation, its second-largest holding, is up more than 25 percent. Gap, its third-largest holding, is also up 25 percent. The smallest among the firm’s four stock holdings — Sears Hometown and Outlet Stores — is down for the year by nearly 16 percent.
Add it up and ESL is up somewhere in the low teens. That’s not great, but it’s a little better than the average hedge fund, although less than the average long-short equity fund, which is up about 15.8 percent year to date, according to industry tracker eVestment.
Not too shabby for a guy whose hedge fund world is supposedly falling apart.
