Investors Pull Back From Lampert’s Fund

The storied investing empire of Edward S. Lampert is shrinking.

David Geffen, the entertainment mogul, got out in 2007. Members of the Ziff family cashed out more recently, between 2011 and earlier this year. And now more investors are heading for the exits, discouraged by the declining fortunes of Mr. Lampert’s signature stake in Sears Holdings.

Near its peak in 2006, Mr. Lampert’s hedge fund, ESL Investments, managed more than $15 billion. As recently as the end of 2011, it still managed more than $10 billion. But the disclosed total late last year was less than $6 billion.

On Tuesday, ESL Investments announced that for the second consecutive year, it had reduced the size of its stake in Sears Holdings to meet investor redemptions, dropping below 50 percent for the first time since 2008.

While Mr. Lampert is not selling any of his personal stake in the company, which he created by combining Sears, Roebuck & Company and Kmart, his firm announced that it had distributed 7.4 million shares, then worth $411 million, to investors who exited in 2013. The distribution cut his fund’s stake to 48 percent from 55 percent. The remaining Sears stake of 51.6 million shares, worth $2.9 billion, remains ESL’s largest holding.

The action is the latest sign of investor disenchantment with Mr. Lampert, who was once hailed as a canny value investor in the same league as Warren Buffett. His partnership has boasted big-name investors including Mr. Geffen, the Ziffs, and members of the Tisch family, which owns a reported 21 percent of the Loews Corporation. Thomas Tisch, who manages certain Tisch family assets, is a Sears director.

A spokesman for Mr. Lampert did not comment.

Mr. Lampert, who is 51, is a onetime protégé of financial luminaries like Robert Rubin, who once led a takeover stock trading desk where Mr. Lampert briefly worked at Goldman Sachs, and the Texas investor Richard Rainwater, who helped him start his own fund in 1988, the year he turned 26.

He gained majority control of Kmart as it emerged from bankruptcy in 2003 after investing in its debt at distress prices. With that and a minority stake in Sears, he merged the two companies in 2005. At the peak in 2007, Mr. Lampert has said, his original investment in Sears had increased 20-fold. But the price fell about 75 percent in the market-wide downturn of 2008, and after a strong two-year rebound, it has fallen back over the last three years.

The news of the ESL redemptions hit Sears stock hard Wednesday, when it fell $4.63, or 8.3 percent, to $50.92. It edged up slightly on Thursday. Both Sears and Kmart “have been deteriorating for years,” said Mary Ross Gilbert, a securities analyst at Imperial Capital in Los Angeles. In a report earlier this year, she said the retail operations had underperformed because of “the lack of a cohesive strategy, management talent and capital support.” After a succession of four other chief executives under his control, Mr. Lampert took the job himself in February.

Mr. Lampert said he remained focused on transforming Sears “into a membership-focused company and on creating long-term value for shareholders. My significant personal ownership in the company is a sign of my confidence and alignment with all shareholders.”

In recent years he has moved to break Sears into pieces, spinning off parts of its smaller Sears Hometown and Outlet Stores as well as Sears Canada; he is also considering separating its Lands’ End and auto service centers.

Although he has traded in and out of a few dozen stocks since 2007, Mr. Lampert has held onto a handful of core holdings like Sears and the car retailer AutoNation, according to a tally by Dealogic. He sold most of what had been a 41 percent stake in AutoZone, worth $3.2 billion in late 2009, between 2010 and 2012 as the stock price tripled. But he has held onto a 41 percent stake in AutoNation, worth $2.5 billion.

Some investors say Mr. Lampert has failed to deliver with Sears.

Margaret Black-Scott, president of Beverly Hills Wealth Management, which manages $500 million, said that ESL’s stake in the “big old names” of Kmart and Sears had “run up on anticipation” that Mr. Lampert’s “buy-and-hold approach would build value” similar to that created by Mr. Buffett.

Instead, she said, “you have not seen the fulfillment of what people expected. You’ve not seen the value built from their skeletons. They expected this new humongous company to be built out of what I would call yesterday’s stores. So now it’s sort of, ‘You know what? I’m out of here.’”

Some of the recent investor withdrawals may have also been influenced by the stringent “lockup” terms imposed by Mr. Lampert. When ESL raises funds from outside investors, it typically requires them to keep their money with ESL for five years.

In 2007, Goldman Sachs led a $3.5 billion investment in ESL by wealthy individuals and institutions, which included a lockup that expired at the end of 2012. Investors who wanted to keep their money in at that point had to agree to another five-year lockup.

The marquee investors who have withdrawn were reluctant to discuss their rationale.

Mr. Geffen, who founded three record companies and co-founded the film studio DreamWorks SKG and is now retired, told Fortune Magazine in 2006 that he had made more money from a $200 million investment with Mr. Lampert in 1992 than he had “from all the businesses I’ve created and sold.”

But in an email last month, he said, “I have not been an investor with ESL since 2007.” He added, “during the many years I was with Eddie he was very successful and his returns were extraordinary.” He declined to discuss why he exited, explaining that Mr. Lampert “is a friend of mine.”

Ziff Brothers Investments, a family office of three sons of the publishing billionaire William Ziff Jr., began winding down their ESL investment in late 2011 and completed it earlier this year, according to someone briefed on the move. A spokesman for Ziff declined to comment.