Lone Star targets $6bn for next CRE fund

The Dallas-based private equity firm has begun pre-marketing its third commercial real estate fund, after completing fundraising on its $5 billion residential, corporate and consumer debt fund last month.

Lone Star Funds is gearing up to raise its latest commercial real estate fund, Lone Star Real Estate Fund (LSREF) III, with a hard cap of $6 billion, according to a person familiar with the new fund. The Dallas-based private equity firm is expected to hold a first close on the new vehicle at the beginning of the fourth quarter. Lone Star declined to comment.

In recent weeks, Lone Star has informed existing investors that it is in the process of creating a successor vehicle or vehicles to LSREF II, which raised $5.5 billion in 2011. The John Grayken-led firm had invested about 75 percent of the predecessor fund at the end of May and expects to have substantially all of the capital invested by the close of the summer. 

Investment activity for LSREF II has picked up in recent months, as the fund was just 50 percent invested as of December. LSREF III is expected to pursue a similar strategy to the predecessor vehicle, which focused on distressed commercial real estate debt and equity investments in the US, Western Europe and Japan.

The new fundraise comes on the heels of Lone Star’s final close for Lone Star Fund (LSF) VIII, its distressed debt and residential fund, in late May. The latter fund, which was oversubscribed, amassed $5 billion in about six months. Although the firm raised the previous funds in the two series – Fund VII and LSREF II – concurrently in 2010, the capital deployment of Fund VII has outpaced that of LSREF II, according to documents from the Oregon Investment Council (OIC), which committed $400 million to Fund VIII last month on behalf of the Oregon Public Employees’ Retirement Fund

The two fund series pursue distinct strategies. While the LSREF series focuses on commercial real estate assets, the main series targets non-performing loans and sub-performing single-family residential real estate-secured debt; corporate and consumer debt; investment in real estate-rich operating companies; and securitized debt. LSREF II had a projected 19.8 percent net internal rate of return as of December 31, while Fund VII had a projected return of 26.7 percent, according to the OIC documents.