Willis Stein plots fund IV in wake of Ziff Davis

Willis Stein & Partners is powering ahead with plans to raise $1 billion for its fourth vehicle, its first fund-raising effort since it closed on $1.8 billion in 2001.

The new fund puts to rest speculation that founders Avy Stein and John Willis would not return to market, says a source close to the situation. Willis Stein IV is scheduled to launch within the next two to three months.

Plans for a new fund for the Chicago-based LBO shop come a few weeks after Willis Stein portfolio company Ziff Davis Media filed for Chapter 11 bankruptcy protection.

Willis Stein bought 86% of the New-York-based technology magazine publisher in 2000, and the company’s revenue began shrinking almost immediately following the investment as the Internet bubble burst.

After a round of disappointing bids for the company last summer, Willis Stein sold off the most profitable unit of Ziff Davis late last summer when Insight Venture Partners acquired Ziff Davis Enterprise for $150 million.

Despite the sale, the company’s $500 million debt load proved too heavy. Ziff Davis filed for bankruptcy last month in New York, wiping out a $345 million equity investment from Willis Stein’s third fund and a $100 million infusion from its second vehicle.

In a preliminary debt-for-equity bankruptcy agreement, Willis Stein intends to relinquish control of the company, but hold a few board seats and 25% of Ziff Davis’s junior debt. The agreement values Ziff Davis at about $150 million, and gives junior note-holders, including Willis Stein, an 11.2% equity stake. Pending the judge’s ruling, the buyout firm’s junior paper would be worth about $2.5 million post-bankruptcy.

The failure of Ziff Davis raises questions about Willis Stein’s long-held plan to raise a new fund. Chicago-based Willis Stein invested nearly 20% of its $1.8 billion third fund in Ziff Davis. With an initial $780 million deal value in 2000, Ziff Davis represents one of the largest single deals in Willis Stein’s 18-year history.

Willis Stein’s LPs have known Ziff Davis was in trouble for some time as it increasingly lost advertising revenue to Web-based media, Stein says.

“We had been migrating in the right direction but couldn’t get there fast enough,” says Stein, who maintains that the firm has invested in media for many years and, excluding Ziff Davis, has a strong investment record in the space.

Willis Stein has generated a 69.4% gross return on all of its media deals aside from Ziff Davis, thanks in part to investments in such companies as Peterson Publishing and Transwestern Publishing, according to a source close to the firm. Including Ziff Davis, Willis Stein’s media investments have generated a 50% gross IRR, the source says.

The firm’s third fund is on pace to generate an investment multiple between 1.7x and 2x, the source says. There are eight remaining holdings in the portfolio, and more exits—successful ones—are to come, the source says. —Erin Griffith