New York, NY (September 14, 2006) -- KPS Special Situations Funds (“KPS”) announced today the sale of its controlling equity ownership interest in Blue Heron Paper Company (“Blue Heron” or the “Company”) to an employee stock ownership plan (“ESOP”) formed by the Company, creating a 100% employee-owned company. Prior to the sale transaction, the ESOP and senior management owned minority stakes in Blue Heron. Terms of the transaction were not disclosed.

KPS returned more than five times its invested capital in Blue Heron to its limited partners as a result of the sale transaction and a prior dividend distribution.

Blue Heron is one of North America’s leading producers of newsprint and other specialty paper products from a predominantly recycled fiber base, with annual revenue of $220 million and production capacity of over 360,000 tons.

KPS created Blue Heron in May 2000 to acquire the newsprint assets of the Smurfit-Stone Container Corporation in Oregon City, Oregon. In July 2005, Blue Heron acquired the Pomona, California assets of the former Smurfit Newsprint Corporation of California.

Raquel Vargas Palmer, Principal of KPS, said, "This transaction demonstrates the value that can be created when an investor, management and labor work together towards a common goal. We congratulate Mike Siebers, Chief Executive Officer, his senior management team, and the employees of Blue Heron on creating a 100% employee-owned company. Blue Heron’s success is a tribute to Mike’s leadership and the very constructive support of the Association of Western Pulp and Paper Workers of America and the United Steelworkers in making the Company a success.”

"Blue Heron is also a textbook example of KPS’s investment strategy at work. We created a new company six years ago to purchase two severely underperforming paper mill assets, and working collaboratively with management and the employees, helped to transform the Company into a viable, profitable business. After implementing a turnaround plan predicated on cost reduction and targeted capital investment, we subsequently pursued a wide range of growth initiatives, including acquisitions, improved product mix and new product introductions. We are not only proud of the return on our investment, but of the significant opportunities created for the employees of Blue Heron,” Ms. Palmer concluded.

KPS’s legal advisor with respect to this transaction was Paul, Weiss, Rifkind, Wharton & Garrison LLP. Houlihan Lokey Howard & Zukin acted as financial advisors to Blue Heron and structured the transaction on behalf of the Company while Stout Risius Ross, Inc. provided a fairness opinion to the Company.