OIC withholds $400m from Lone Star

The Oregon Investment Council, which manages about $65 billion in state pension assets, has declined to invest further capital in Lone Star’s two new fund offerings.

When OIC made its initial $400 million commitment to Lone Star last year, the council gave itself the option to commit additional money – up to $400 million – with the real estate powerhouse near the end of the firm’s fundraising cycle.

OIC lauded Lone Star’s past performance in meeting documents this week, but cited portfolio concentration in the opportunistic sector and management concentration as reasons to ignore the tentative commitment.

“The opportunity is good based on Lone Star’s past track record and its strong team that is well positioned to take advantage of the distressed markets,” OIC said in meeting documents. “The risk is high in terms of portfolio and manager concentration. There currently is no fee advantage for increasing our commitment.”

Lone Star is currently raising two funds, Lone Star Real Estate Fund II and Lone Star Fund VII. The firm’s original target for the funds was $10 billion a piece, but has lowered the targets to $4 billon each. Real Estate Fund II is focusing on commercial real estate investments, while Fund VII focuses on residential distressed debt and acquisition of real estate rich entities like banks.

Last October, Oregon committed $400 million to the fundraising effort, with $300 million going to Real Estate Fund II and $100 million to Fund VII.

The council at the time also pledged a tentative commitment of another $400 million depending on early performance of the fund, an OIC spokesperson told PEO at the time. The fundraising period on the two funds is scheduled to end on 30 November, 2010, according to OIC meeting documents, barring an extension approval.

OIC has had a long and lucrative relationship with Lone Star, but even such a strong partnering has been tested by the financial downturn. Oregon demanded certain fees breaks from Lone Star last year before laying out the initial $400 million commitment to the two funds. While details of the concessions were not made public, Lone Star altered its fee structures and governance procedures to make the funds more “LP friendly”, the OIC spokesperson said at the time.

Also at the OIC meeting this week, council elected to even out its original commitment between the two funds to 50/50 to provide “more exposure to domestic real estate”, the spokesperson said.