Ex-Willis Stein pros form Blue River

Four senior investment professionals from Willis Stein & Partners have left the firm to form Blue RIver Partners, a Chicago-based buyout shop, and are aiming to raise $150 million for the debut fund.

The Blue River co-founders include Managing Partner Daniel Blumenthal, one of the co-founders of Willis Stein; Partner P. Roy Jain, a principal at Willis Stein; Partner Bradley Shisler, a former principal at Willis Stein; and Partner and CFO Todd Smith, who held the same title at Willis Stein.

The co-founders of Blue River plan to reach into their own pockets to stake their fund with $5 million. They then plan to market the fund to institutional and individual investors, according to a source close to the firm. They have not yet decided whether to employ a placement agent.

The firm intends to build a portfolio of about 10 Midwestern companies in manufacturing, consumer services, business services, distribution and health care.

The departures leave Willis Stein with six partners, including Managing Partners and co-founders Avy Stein and John Willis; two principals and a handful of associates to support them. Sources close to both firms describe the split as “amicable,” with Willis Stein giving its blessing to the track record Blue River plans to promote to potential backers.

The firms have agreed to let Blue River claim credit for much of the heavy lifting done on at least two of Willis Stein’s better deals. The firm made 4.8x its original $25 million investment over 10 years in a consolidation of veterinary hospitals called National Veterinary Associates, according to sources close to both firms. Willis Stein also made 2.5x its $115 million investment over three years in the purchase and sale of book distribution company Baker & Taylor Corp.

A source close to Blue River described the four co-founders as eager to turn their attention to the fund-raising and deal-making sides of the buyout business. Willis Stein, by contrast, remains in harvest mode as it attempts to lift the performance of its third fund, a $1.8 billion vehicle raised in 2000.

While its first fund of $343 million raised in 1995 has performed well, investors have likely been disappointed with the performance of the $840 million second fund that the firm raised in 1998. The University of Texas Investment Management Co. reported that fund II generated an IRR of -7.1% through May 31.

Willis Stein has had its share of winners, including a $225 million investment in Roundy’s Supermarkets Inc., which is likely to return several times that to investors, according to a source close to the firm. —David Toll