Warren Lichtenstein’s fight to keep his investors at bay is compulsory watching for its internecine drama but also as a potential test case for the hedge fund industry.
Lichtenstein — join the crowd — had a tough year in 2008. His main fund, $1.26 billion Steel Partners II, was down 39 percent and received redemption requests on at least 38 percent of its assets. Either number would have been bad news, but combined they were devastating. He responded by announcing he would turn the fund into a publicly traded limited partnership through a reverse acquisition of WebFinancial Corp., a New York–based holding company in which Steel Partners has an 85 percent stake. He said he would name the new outfit WebFinancial and list it on an exchange to be determined later.
Lichtenstein, 43, who first earned his stripes as an activist investor in the early 1990s, announced the change to his more than 200 investors in a happy-New-Year letter, saying he was doing it because “all investors must be treated fairly.” Lichtenstein isn’t talking publicly, but people familiar with his thinking say the move is meant to achieve two things: protect what’s left of the fund’s capital and allow investors who want to pull out to do so by selling their stock (assuming anyone wants to buy it).
Enter Carl Icahn, through the pension fund of ACF Industries, a railroad-car maker he controls. ACF once had $15 million in Lichtenstein’s fund, a stake now worth $5 million. Icahn argues that the plan is beneficial mostly to Lichtenstein because he would continue to collect management and performance fees, and last month the pension fund sued Lichtenstein to block the deal and get its money back.
“The solution that Steel is seeking to implement will permanently lock up capital, which we believe is disadvantageous to investors, although we can certainly see the advantage to Steel,” says Keith Schaitkin, a lawyer for Icahn Enterprises.
And Icahn is not without support. New York–based Archstone Partnerships, a $1.4 billion fund of hedge funds, has joined him in objecting.
Lichtenstein wrote a follow-up letter on February 4 saying he wouldn’t do anything without putting it to an investor vote, which could conceivably go his way. Elcot Capital Management, a family office in London and a Steel investor, has been outspoken in its support of the change.
A court date is set for July 20, but the investor vote is June 30. However the balloting turns out, the results could affect the legal case.
