Lone Star pulls aboard $3bn-plus in three months

The Dallas-based private equity real estate giant has continued attracting capital commitments for its investment funds, hauling more than half the capital originally targeted for its third commercial real estate fund.

Lone Star Funds, the Dallas-based private equity real estate giant, has raised more than half of the $6 billion capital raising target for its latest global commercial real estate opportunity fund in just three months, PERE can reveal.

It is understood that the firm has already won commitments of between $3 billion and $4 billion for Lone Star Real Estate Fund (LSREF) III, the third in its series, with a first official closing anticipated at the end of the month.

Lone Star, originally set up by John Grayken in 1995, launched its fundraising effort in June after it had invested more than 75 percent of the $5.5 billion of equity in its 2011 second fund, LSREF II. Such has been the demand for its incoming fund from its investors, the firm increased its hard cap by 10 percent to $6.6 billion, Bloomberg reported last week.

In a strategic shift from LSREF II, which was initially heavily deployed into US distressed debt investments, the third vehicle is expected to be deployed more evenly between the US and Europe. While the firm has a relatively flexible geographic allocation, it is expected to deploy LSREF III approximately 40 percent in the US, 40 percent in Europe and 20 percent in Asia.

Lone Star’s third real estate fund is currently the largest opportunistic fund offering open to investors following the final closing of The Blackstone Group’s $13.3 billion Blackstone Real Estate Partners (BREP) VII global opportunity fund last year. Both firms are benefiting from heightened investor enthusiasm as they have performed well lately against many firms in their peer group, particularly as the global financial crisis was taking shape. Indeed, LSREF II was projecting a 19.8 percent net IRR as of December 31, basically matching the universal return expectation among institutions from opportunistic property funds of 20 percent IRR.

Blackstone runs a separate fund series focused on real estate debt acquisitions and that would historically compete with Lone Star’s funds on deals more so than its flagship BREP series. However,  Lone Star is understood to be considering the US market as today increasingly offering opportunistic hard asset investments and that could see the two industry giants hunting more commonly in similar pastures in the near term.

Meanwhile, the firm is thought to consider that more distressed credit investments today will come from European markets. Indeed, while Lone Star’s second real estate fund began its investing programme with a heavy US orientation, during the latter stages of its investment period, much of its capital was deployed in non- or sub-performing credit situations in Europe. Indeed, after its purchase this year of a $6 billion UK property loan book from Commerzbank, again alongside Wells Fargo, approximately $2.6 billion of the $5.5 billion of LSREF II fund will have been invested in Europe.

Lone Star declined to comment.