Oregon commits $400m to Lone Star

The $62.2 billion pension plan has agreed to invest in the Dallas-based private equity firm’s latest fund, which will target distressed debt, distressed real estate and real estate entities.

The Oregon Investment Council has approved a commitment of up to $400 million to Lone Star Funds’ Lone Star Fund VIII, on behalf of the Oregon Public Employees’ Retirement Fund (OPERF). The vehicle, which is targeting $5 billion in commitments, will invest in distressed debt, distressed real estate and banks and finance companies where real estate can be acquired on an opportunistic basis. Lone Star will invest globally on behalf of Fund VIII, with an estimated 40 percent of its capital going to the US, 40 percent to Europe and 20 percent to Japan. 

The Lone Star Fund series is distinct from Lone Star’s Real Estate Fund (LSREF) series, which focuses on commercial real estate debt and equity products. The LSF series, however, 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, excluding commercial real estate.

While the firm raised the previous funds in the two series – Fund  VII and LSREF II – simultaneously in 2010, the capital deployment of Fund VII has outpaced that of LSREF II. Therefore, fundraising for LSREF III is anticipated to begin once the predecessor vehicle has invested its remaining capital. Fund VII has a projected net internal rate of return of 26.7 percent, while LSREF II has a projected 19.8 percent return, according to pension fund documents.

“Lone Star’s long and successful track record investing in distressed debt merits investment at this time to take advantage of current market dislocations,” OPERF Real Estate staff wrote in a board recommendation.

The firm, which was founded by John Grayken in 1995, has become the pension plan’s largest real estate investment manager, currently accounting for 16.5 percent of OPERF’s portfolio in the asset class. The state has committed $1.87 billion to previous Lone Star funds, including Lone Star Funds I-VII and Real Estate Funds I and II.  Lone Star also is the best-performing real estate manager for Oregon, with previous investments yielding more than $1 billion in returns to OPERF.

“Essentially, each new fund they raise is a recycling of previously distributed capital from prior investment funds,” Nori Gerardo Lietz, partner at Areté Capital, wrote in a letter to John Skjervem, chief investment officer, and Anthony Breault, interim senior real estate investment officer, at OPERF. “The opportunistic model has worked particularly well with Lone Star because of their ability to harvest and distribute gains in a comparatively short time period versus their peers.”

The OPERF staff recommendation noted that Fund VIII’s proposed terms overall were “more LP friendly” than most other funds currently market, including its management fees and distribution waterfall structure.

OPERF had $7.4 billion of assets under management in real estate at the end of March, representing 11.9 percent of its overall portfolio, slightly above its 11 percent target for the asset class.