Walton Fires Fund Manager; Partners Upset, Then Quiet

Alice Walton has fired Bernard Carrico as manager of the $52 million Heartland Capital Appreciation Fund L.P., initially angering at least one of the fund’s 25 limited partners.

Immediately after the dismissal, George F. Landegger, who represents one of the limited partners, said the action would harm the fund, which contains $17 million that was invested by the Arkansas Teacher Retirement System. Executives at Walton’s Llama Co. of Fayetteville disagree. And Landegger apparently changed his tone after speaking with Walton.

“I was truly shocked this morning to receive your fax,” Landegger wrote in a June 10 letter to Walton. Landegger is chairman of Parsons & Whittemore Enterpr ?ises Corp. of Rye Brook, N.Y. The Whittemore Collection Ltd. is one of the fund’s limited partners.

“A matter of this kind, which will set the Heartland Fund back not less than a year … should have been at least informally discussed with the limited partners and approved by the advisory board in advance,” Landegger wrote.

But Lynn DeVault, chief operating officer for Llama Co., says Carrico’s dismissal “will have no impact on the fund at all.”

“We’ve parted ways with Bernie,” says DeVault. “We don’t make any comments about personnel matters.”

None of the partners contacted for this story would explain why Carrico had been fired, either. Walton, Carrico and Landegger didn’t return calls from the Northwest Arkansas Business Journal. DeVault says Walton, the daughter of Wal-Mart Stores Inc. founder Sam Walton, would discuss the matter with the Journal after she hires a replacement for Carrico, but that hadn’t happened as of press time June 25.

Walton and Carrico, a Texas banking executive, founded th e Dallas-based equity partnership in 1994 to help certain businesses in the American heartland that need financial assistance and show promise of making a substantial profit. The fund has invested some $13 million in four companies since then.

The 10-year partnership appears to be doing well. DeVault says about 38 percent (or $20 million) of the fund’s money has been invested in four companies. The value of those companies increased by 32 percent during 1996, the first year such statistics were available af }ter portfolio companies came on board, she says. The fund’s target was to increase by 23 percent annually.

Although Carrico worked to find profitable companies for the fund to invest in, the investment decisions were made by a consensus of several people affiliated with Heartland.

DeVault says Walton personally spoke with some of the partners after sending out the June 10 facsimile about Carrico and none of them is angry now about the dismissal.

The damage control apparently worked.

A subsequent letter from Landegger seemed to indicate he had changed his mind about the firing. In a June 13 letter to Walton (after a conference c all with her), Landegger asked that she hold quarterly meetings with the partners so they would be informed about what’s going on with Heartland. In the letter, he mentions Carrico once, referring to him as “Mr.” rather than “Bernie,” as in the June 10 correspondence, and misspelling his last name, adding an additional “c.”

After speaking with Walton, John Q. Hammons of Springfield, Mo., a limited partner who owns a large chain of hotels, said, “I’m not upset about it.”

Another limited partner, Walter Smiley, president of Smiley Investment Co. of Little Rock, said he hadn’t spoken with Walton, but he wasn’t upset about the dismissal in the first place.

“I don’t know much about the day-to-day operation of the fund,” Smiley says. “No limited partners do. I think Alice has a great reputati on, and I’m sure she did the right thing.”

Another investor says, as a limited partner, he has no right to complain about the firing because Walton is the general partner and has the right to do as she wishes. Walton provides about one-third of the investment to the Heartland Fund. On paper, the general partner is Heartland Capital Partners, of which Walton is the chairman. But, the investor noted, Carrico had a good reputation in the world of finance and the dismissal came as a surprise.

Another 30 percent of the fund’s money – about $17 million – was put up by the Arkansas Teacher Retirement System, which has a total of $5.7 billion in all its investments. The retirement system came under fire last October after it invested money in the Heartland Fund against the advice of the state’ ?s attorney general and because as much as $4 million of the investment could be used for fees.

In requesting the opinion, Bill Shirron, director of the teacher retirement system, says he referred to the fund as a “venture capital limited partnership.” The attorney general’s office said such an investment would violate the state’s “prudent investor rule,” meaning it wouldn’t be considered prudent by a reasonable investor. In general, venture capital is money invested in start-up businesses. Such investments usually entail more risk, but the potential for above-average profits is greater.

But later, Shirron decided the fund doesn’t provide venture capital. The money goes to growing companies that “have a profitable track record,” he says. Most of the companies the fund invests in have been around for five years, so the investment isn’t for venture capital, says Shirron.

DeVault says the $4 million was a cap for legal purposes put on the total amount of investment that could be us ?ed as fees. “That’s higher than it will ever be,” she says.

DeVault says the investors have a good guarantee from Walton. They will receive all of their investment and fees back, plus a profit of 7.24 percent, “before we receive a penny,” she says.

So far, the fund has invested in ESI Co. of Little Rock, a business-technololgy company; U.S. Housewares of Fort Worth, Texas; Peripheral Systems of Ada, Okla., a distributor of computer chips; and Load Handler of Austin, Texas, a company that makes a contraption to help load and unload pick-up trucks. ESI was the last to become a Hearland portfolio company, receiving some $2.5 million from the fund in December 1996.

“Everything at the fund is doing fine,” says DeVault. “The four portfolio companies are doing fine. They’re meeting or exceeding our expectations. We continue to look for other companies for investment opportunities.”

“I have been in conversation with Alice Walton and feel very comfortable with what she’s done and how it’s moving forward,” says Shir ron. “She said it was in the best interest of everyone concerned.”

Although some investors speculated that the dismissal of Carrico came because the fund’s investments hadn’t been growing fast enough, Shirron says he doesn’t think that’s the case. He says the fund appreciated by about 30 percent over the past two years.

“I don’t think it really had anything to do with performance,” says Shirron. “They have exceeded what they thought the value would be.”

But Landegger, in his June 10 letter to Walton, seemed to think things weren’t going so well.

“I think this will set the Heartland Fund, which was not off to the fastest of starts, back at least a year,” he wrote. “My colleagues and I hold Bernie Carrico in high regard for his professionalism and demeanor. I would very much hope that this decision can be speedily reversed, and toward that end, suggest a conference call be held as soon as possible with the limited partners and the advisory board at which we can effectively mediate any differences that may exist between you and Bernie. …

“I find it difficult to believe, as seems to be implied by this letter [from Walton], that Bernie has done something so demonstrably against the interests of the Heartland Fund that he deserves to me summarily dismissed.”

In a June 13 letter to Walton, Landegger seems to have changed his tone.

“The limited partners regretted that the termination of Mr. Carricco (sic) had not been previously communicated to the limited partners and expressed concern regarding the potential investments in progress,” wrote Landegger.

Although eartland had initially been criticized for being slow to invest funds, Shirron says, ” I had no fault with the way he [Carrico] dealt with us. The game plan, as I see it, will provide continuity.”

Shirron says David Bowe, who is also with the Heartland Fund office in Dallas, will remain on the job.

In a previous interview with Arkansas Business, Carrico said the Heartland Fund concentrates on “consumer products, light manufacturing and certain business services.”

Carrico said then that the evaluation process is lengthy and he prefers to know a firm well before Heartland money is invested.

To receive a loan from Heartland, Carrico said, a company must: be located in the American heartland (or mid-America states from Kansas through the South), have annual revenues of $5 million to $100 million, have a strong reputation or product, be a geographic leader and have opportunities to grow internally and/or through acquisition.