Lone Star raises $1.8bn, eyes $4.2bn for second property fund

The John Grayken-led firm is expected to hold a final close on its second real estate fund in May. The firm has been raising two funds simultaneously since 2009 for real estate and distressed debt investments.

Lone Star Funds is expected to hold a final close on its second dedicated real estate fund in May with expectations the vehicle could corral $4.2 billion of equity.

Lone Star Real Estate II has collected about $1.8 billion, according to documents from the Connecticut Retirement Plans and Trust Fund, but that figure could rise to $4.2 billion in a final close, anticipated in May. Connecticut is considering making a commitment to the fund, though it’s not clear how much.

John Grayken

The real estate fund, which has a hard cap of $5 billion, will focus on commercial real estate investments. The fund will work with banks and other financial institutions that wish to “shed their commercial real estate exposure”, according to a due diligence report from consultant The Townsend Group, which works with Connecticut.

The firm, led by John Grayken, also is raising Lone Star Fund VII, which is targeting $4 billion with a hard cap of $5 billion for broader distressed debt investments. Fund VII will invest in non-commercial real estate transactions, including distressed single family residential, corporate and/or consumer loans and securities.

Lone Star launched the funds in April 2009 with targets of $10 billion a piece, but eventually cut down the target sizes amid a sluggish fundraising environment. UBS is the placement agent on both funds.

The firm has established some limited partner-friendly terms on the real estate fund, including reducing its carried interest from 30 percent in prior funds to 20 percent. During the investment period, management fees are 1.2 percent based on committed capital. Investors committing at least $100 million will receive a 1.1 percent fee, while  $150 million of commitments pays a roughly 1 percent fee and $300 million of commitments are charged a 0.9 percent fee.

After the investment period, which runs three years, management fees are 0.45 percent based on outstanding invested capital.

Lone Star has recently been trying to exit its investment in Korea Exchange Bank. The firm invested $1.2 billion in the bank in 2003.