Four Pros Leave Willis Stein, Eye New Fund

Four senior investment professionals of Willis Stein & Partners, which last established a fund in 2000, have left to form a Chicago buyout shop and will try to raise $150 million for a debut limited partnership.

Daniel Blumenthal, one of the founders of Willis Stein and one of three managing partners, takes the reins of Blue River Partners as managing partner. Joining him are Partner P. Roy Jain, previously a principal at Willis Stein; Partner Bradley Shisler, previously a principal; and Partner and CFO Todd Smith, previously CFO. At Willis Stein a principal has responsibilities comparable to that of a junior partner at other shops.

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

A source close to Blue River described the four 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 aging third fund, a $1.8 billion pool.

The fund has its share of winners, including a $225 million investment in Roundy’s Supermarkets Inc. likely to return several times that to investors, according to a source close to Willis Stein. But the firm has struggled to overcome a large, ill-timed bet—an estimated $420 million in net cash—placed on technology publisher Ziff Davis Media early in the life of the partnership.

The founders of Blue River plan to reach into their own pockets to stake their fund to a $5 million head-start. For the rest they’ll market the fund to both institutional and wealthy investors, according to our source close to the firm. They have yet to decide whether to employ a placement agent.

Should the fund get raised, the firm intends to build a portfolio of about 10 Midwestern companies operating in such fields as basic manufacturing, consumer services, business services, distribution and health care. Build-ups, buyouts and corporate carve-outs would be its signature deal structures. Blue River also plans to recruit a pool of veteran executives ready to provide operational expertise to portfolio companies.

The strategy of the debut fund is akin to that taken by Willis Stein with its first fund, a $343 million fund raised in 1995 that has performed well, according to our source close to Blue River. Over the years, a number of buyout pros have marched out of their old shops to the theme of a return to roots and smaller deals. They often find a sympathetic audience at the offices of institutional investors.

As for track record, both Willis Stein and Blue River have agreed to let the start-up 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. It made 2.5x its $115 million investment over three years in the purchase and sale of book distribution company Baker & Taylor Corp.

Meantime, Willis Stein remains trained on generating liquidity in a third fund whose performance appears central to the firm’s long-term viability. While its first fund performed well, backers have likely been disappointed with the performance of the $840 million second fund that the firm raised in 1998—at least as of early this year. According to the University of Texas Investment Management Company, that fund had generated an IRR of -7.1 percent through May 31. However, it’s impossible to close the book on Fund II’s performance until all of the money has been returned to investors.