Willis Stein completes Fund III restructuring with backing from secondary firms

The restructuring, financed in part by an investor group that includes Landmark and Vision Capital, is seen as a way of providing options to LPs in a fund that has lived beyond its intended life.

Willis Stein & Company has closed a deal that will restructure its vintage 2001 third fund, allowing limited partners to cash out of their interests or roll over their fund stakes into a new vehicle that will house three remaining portfolio companies.

The restructuring is being financed by secondary firms Landmark Partners, Vision Capital and Pinebridge Investments’ secondary group, along with Willis Stein management. The new vehicle will be managed by Willis Stein and Vision, according to multiple sources with knowledge of the deal.

“This is a very creative solution that delivers fair value to those investors needing or desiring liquidity while at the same time providing the opportunity for those investors who wanted to continue their investment in these companies to maximize the value of those companies over the next several years,” Avy Stein, co-founder of Willis Stein, said in an interview Wednesday.

Coller Capital revealed in its biannual survey of investor sentiment late last year that about half of LP respondents believed they had zombie funds in their portfolios. Coller defined zombie funds as those run by managers with no prospect of carried interest trying to keep funds alive to keep collecting management fees. The firm, based in Chicago, announced the deal Wednesday in a statement. Fund III, which raised $1.8 billion in 2001, has received at least two fund life extensions from LPs. Some investors have in past interviews expressed frustration at the firm’s inability to close out the investment vehicle, while continuing to collect management fees.

Deal terms
Under the terms of the deal, an investor group including Landmark and Vision will contribute a total of $220 million to buy LP interests and form the new vehicle for three remaining portfolio companies, according to several sources with knowledge of the transaction. The firms declined to comment about specific details of the transaction.

Those companies are for-profit Education Corporation of America, telecommunications company Velocitel and recycling business Strategic Materials. The firm is waiting for the most opportune time to exit those companies, and with the restructuring will have five years to do that, sources said.

LPs who chose to cash out of their interests will receive 90 cents on the dollar at a net asset valuation of $280 million, sources said.

The deal will also include an assumed $40 million from LPs rolling over their interests into the new fund, plus $25 million from additional equity or debt financing. The firm will continue to collect a management fee from LPs in the new vehicle, according to a person with knowledge of the deal.

Some LPs took issue with a certain aspect of the deal that could have had existing LPs paying carried interest to the GP, but was ultimately changed. Specifically, the deal would have allowed LPs to roll over up to $30 million on a carry-free basis, and beyond that carry would have kicked in. However, that $30 million cap was removed when more LPs than expected expressed interest in rolling their interests into the new fund, according to a source.

Those LPs protested against the inclusion of carried interest on any of the rollover for existing investors, who had already paid “millions” in management fees to the firm, several LP sources said in prior interviews.

Willis Stein was founded in 1995 by John Willis and Avy Stein.

Creative solution
The Willis Stein deal has received attention in the industry as a creative solution to restructuring a fund that has lived beyond its intended term. The issue of long-lived funds that continue to hold onto investments – some say so the manager can continue to collect fees, especially those who won’t be raising a new fund – will continue to be on the minds of LPs as more funds fall into this category.

In a challenging exit environment, “there are more funds with more assets later in life and GPs who are looking to provide their LPs with solutions for those funds,” said Matt Shafer, partner at Vision Capital. “This is one way we can provide LPs with optionality – the opportunity to either take cash or to participate in continued upside of assets remaining in the portfolio and address the issue of how to create solutions for LPs in a more muted exit environment.”

“Tail-end funds”, or those vehicles that have been extended beyond their original terms, have become common on the secondary market as “LPs have increasingly utilised the secondary market to sell these older vintage funds”, according to Cogent Partners in its half-year secondary pricing report.

“Funds are staying around a lot longer and LPs want to clean things up, they want to be done,” said Todd Miller, partner at Cogent, in a prior interview. “You talk to any LP, one of the most annoying things they get are extension requests from GPs.”