Eddie Lampert / ESL Investments
medium confidence — compiled with source citation from the investment brain.
Eddie Lampert / ESL Investments
Eddie Lampert / ESL Investments
Edward S. Lampert is the founder and manager of ESL Investments, the hedge fund named for his initials. In 2002–03 he bought enough of Kmart's defaulted debt to control 51% of the equity in the retailer that emerged from Chapter 11, became its chairman, and in November 2004 had Kmart acquire Sears for roughly $11 billion to form Sears Holdings. Before ESL, Lampert worked in risk arbitrage at Goldman Sachs under Robert Rubin. The case that documents him opens with his January 2003 kidnapping and closes with BusinessWeek's cover asking whether he was "The Next Warren Buffett?"
From financial buyer to strategic buyer
The Kmart–Sears case frames Lampert as the rare investor who crossed the line from financial buyer (buying an asset purely for its return) to strategic buyer (buying to operate it for synergy). ESL "tended to buy big chunks of companies' common stock and then stick with its investments for a few years at a time", hewing closer to the line of Warren Buffett in acquiring substantial but noncontrolling stakes in public companies. The path to control ran through the activism-playbook and special-situations: distressed debt bought at a discount and converted to equity through the bankruptcy process.
The trade's downside protection was real estate. Kmart's stores sat on long-term, below-market leases, and analysts later estimated Kmart's shares traded at "a minimum 24%, and perhaps as high as 133%, discount to the net asset value of Kmart's real estate holdings." ESL bought bank claims "for approximately 40% of their face value" and accumulated more than $1 billion in face value of the defaulted debt before taking 51% of the new company's equity.
Investment philosophy
Lampert is described against Buffett as the benchmark, with two stated deviations: he bought stakes in companies "in worse shape than those Buffett favored", and he showed "no indication of preferring unlimited holding periods" — unlike Buffett, whose stated holding period is "forever." His own stated philosophy, at the Kmart–Sears news conference of November 17, 2004, was to manage strategically and for the long term and to let the operating business — not the property — be the source of value.
Quotes
- "I don't think any retailer should aspire to have its real estate be worth more than its operating business." — news conference, November 17, 2004
- Given the large ownership that we will have on the Board, we will be able ... to manage the business strategically and for the long term without having to worry about figuring out how to make monthly same-store sales, hit a specific target, and without giving any type of quarterly earnings guidance and then trying to manage the business to that guidance. — November 17, 2004
- "I think well-run retailers over time should be able to earn a 10 percent EBITDA to sales ratio." — November 17, 2004
Contrast with Buffett
The case quotes Buffett's own words to mark where Lampert departs: "it's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." Lampert instead took "minority positions in fair companies selling at a discount to benefit from potential improvements in operating businesses" — a quality-vs-statistical-cheap choice tilted toward the statistical-cheap and distressed end, in companies "neither near death nor extremely successful."
See also
- warren-buffett — the benchmark Lampert is repeatedly measured against
- activism-playbook and special-situations — the route from minority stake to control
- julian-robertson — another hedge-fund founder in the corpus who ran concentrated public stakes
- capital-allocation — the operating discipline Lampert applied inside Kmart and Sears
Sources
textbooks/markdown/banking-valuation-training-pdfs__Kmart--Sears--and-ESL--How-a-Hedge-Fund-Becam_2018_Investment-Banks--Hedge-F.md