Lone Star raises record $5 billion with ease

Real Estate Alert, July 7, 2004

Lone Star Partners has lined up an astonishing $5.5 billion of equity for its fifth opportunity fund in just over three months of marketing. The vehicle can not only lay claim to being the largest opportunity fund ever, but it can also boast of unprecedented success at raising equity quickly. By comparison, the typical fund has only $300 million of equity but needs nine months for marketing.

The Dallas fund operator already held the record for the largest opportunity fund. It raised $4.2 billion of equity two years ago for Lone Star Fund IV in a little more than a year--which was considered extraordinarily fast.

While Lone Star declined to comment, sources familiar with its plans said the operator would likely wind up capping the new fund at $5 billion. That means it would have to turn some investors away or reduce the size of commitments. The firm has not formalized most of the commitments yet, but investors have made clear how much they are willing to pledge.

Most of the interest comes from previous Lone Star investors, which will likely account for about 95% of the equity in Lone Star Fund V. Previous major investors include New York State Teachers, California State Teachers, Washington State Investment Board, Oregon Public Employees and Wisconsin Investment.

If the firm uses its usual leverage ceiling of 75%, a $5 billion vehicle would have total buying power of $20 billion--an amount few fund operators can fathom spending in the typical investment period of three to five years.

Lone Star Fund IV invested mostly in distressed loans in Asia, with some capital also allocated in Europe and the U.S. The new fund is likely to follow the same strategy.

Lone Star's fund series was launched in 1996 by veteran money manager John Grayken. The first Lone Star fund, with $400 million of equity, invested largely in mezzanine loans and operating companies. The vehicle also acquired some distressed foreign assets, including $475 million of loans from the South Korean government. It was followed by a $1.2 billion fund in 1998, a $2.2 billion vehicle in 2000 and then the $4.2 billion fund two years ago.