New Lone Star Fund could be record size

Real Estate Alert, March 17, 2004

Lone Star Partners, whose current $4.2 billion fund is the largest high-yield real estate vehicle ever, could be poised to break its own record. With Lone Star Fund IV now in the final stages of investment, the Dallas firm has started raising equity for its next vehicle. While the operator won't comment, market sources said Fund V might be even bigger than its predecessor.

The fund operator has been one of the top performers in the business, with returns surpassing 20%. Its investors have included many giant pension funds, such as New York State Teachers, California State Teachers, Washington State Investment Board, Oregon Public Employees and Wisconsin Investment. The firm also caters to foreign investors, which supplied about 40% of the equity for Fund IV.

Many of Lone Star's previous investors are likely to participate in the new vehicle. But the firm will probably solicit numerous first-time investors as well. Lone Star's timetable for raising equity could not be learned.

Lone Star finished raising Fund IV in 2002. Strong investor demand pushed the vehicle way above the original equity goal. The capital was invested in distressed loans in Asia and other parts of the world, including the U.S. Fund V will follow the same strategy.

The Lone Star fund series was started 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 a $475 million portfolio 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.