DALLAS—Distress game behemoth Lone Star Funds is now gearing up to raise a new fund, this time with a target of $6 billion. The latest vehicle, Lone Star Real Estate Fund III, comes a month after the locally based private equity firm completed fundraising on its $5-billion residential fund. The news was reported earlier this week by Pensions & Investments, and confirmed when the firm filed documents with the Securities & Exchange Commission yesterday.
When contacted, a Lone Star representative stated the firm does not comment on its fundraising activities. Yet according to the SEC documents, the firm indicated the minimum investment for the fund is $25 million, though “the general partner reserves the right to accept commitments of lesser amounts.” At the time, no capital had yet been committed to LSREF III. The firm also declined to disclose its revenue goal in the filing.
The $6-billion target is almost as much as the capital the firm raised for LSREF III's predecessor funds, a combined $8 billion. Most recently, LSREF II raised $5.5 billion in 2011, of which the firm had invested roughly 75% as of last month and expects to have it fully invested by the end of the summer. LSREF II targeted distressed commercial real estate equity and debt in the US, Western Europe and Japan. LSREF III is expected to pursue a similar strategy.
As testament to the competitive rise of private equity, the fund was just 50% invested in December 2012.
Lone Star, headed up by former Brazos Group vet John Grayken, has had much success with its investment vehicles. Since establishing its first fund in 1995, the firm has launched 11 private equity funds with aggregate capital commitments totaling over $38 billion. Its most successful has been the Lone Star Fund series, delivering north-of-20% returns to investors.
The main difference between the Lone Star Fund series and LSREF series is that the latter puts more emphasis on commercial real estate. The firm's also had more luck deploying the capital in its longer-running series, and its returns are higher as well. According to PEI—which cited documents from the Oregon Investment Council, one of Lone Star Funds' oldest investors—LSREF II had a net projected IRR of 19.8% as of year-end 2012, whereas that figure was 26.7% for Lone Star Fund VII.
Lone Star Fund VI and VII, which held their final closing in July 2008 and July 2011, respectively, raised over $12 billion in combined capital and acquired $31 billion in assets. The investments were in distressed loans and securities—primarily single-family US residential mortgages, as well as commercial real estate, consumer and corporate debt products and financially oriented and real estate-rich operating companies. The US mortgage fallout also led to opportunities abroad, including the Fund VI's purchase of IKB Deutsche Industriebank, a large German financial institution, at what was said to be a major discount. It also bought European mortgage portfolios and non-performing loans and other operating companies in Japan.
The latest fund in the series, Lone Star Fund VIII, has the same focus. It started collecting capital in March 2013 and raised about $5.1 billion by May—oversubscribed by about $1 billion.
Lone Star is just one of several institutional players that have announced capital raising efforts for commercial real estate investment. In the past two weeks alone, the Los Angeles County Employees Retirement Association announced it would allocate $1.2 billion to domestic and global real estate for the 2013 to 2014 fiscal year. Carlyle Group is also said to be raising up to $4 billion for its seventh real estate vehicle, its largest property-focused fund to date.
And at the Institutional Investor Roundtable, held by GlobeSt sister publication Real Estate Forum and Transwestern last week, every single participant indicated their firms planned to increase their acquisition activity and, therefore, their real estate allocations. Check out the upcoming July/August issue of Forum for the full story.
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Sule Aygoren
Aygoren oversees the editorial direction and content for ALM’s Real Estate Media Group, including Real Estate Forum and GlobeSt.com. In her tenure with ALM, she’s held roles of increasing responsibility, including Managing Editor. Aygoren has received several awards for her coverage including Best Trade Magazine Report from the National Association of Real Estate Editors and the James D. Carper Award for Young Journalists. Under her direction, Forum has received four national NAREE awards for Best Commercial Real Estate Trade Magazine.
