On the private equity real estate stage, the relationship between Lone Star Funds and Hudson Advisors can be described like this: Lone Star, one of the world’s largest private equity real estate firms, was the star performer in the spotlight, while Hudson was the stage manager working behind the scenes, helping Lone Star to shine as brightly as possible.

Now, after more than two decades, the relationship between the two firms – both owned and founded by industry titan John Grayken – will be evolving. Hudson will remain the asset manager and commercial real estate servicer for Lone Star, for which it executes loan servicing and workouts, corporate restructurings and turnarounds, rehabilitation and repositioning of real estate assets and land and real estate development. However, the firm now will also be seeking to carry out similar duties for third-party clients globally in core and core-plus real estate, a space where many of Lone Star’s rivals have already established large businesses. More importantly, Hudson will also be pursuing a far more high-profile role as an investment manager.

The firm has already taken key steps in advancing both new initiatives. In February, it registered its debut commingled fund, Hudson Residential Credit Fund I, with the Securities and Exchange Commission. A month later, Hudson hired Jerome Foulon, formerly managing director at Canadian pension investment manager PSP Investments, as chief investment officer of the new third-party asset management and servicing business, or what it calls its commercial real estate platform.

Nick Beevers, Lone Star’s former president of North America and Hudson’s new chief executive, said the decision to expand the latter firm’s business was driven partly by the desire to maintain more stability within the 800-strong Hudson team,which spans offices across North America, Europe, Asia and Latin America. “We’ve seen Hudson’s asset management capability, which has always been tied to the success or the aspirations of Lone Star’s business, have to scale up and down accordingly pretty substantially in the various markets in which Hudson has been active and Lone
Star has been active,” he said.

Indeed, Fitch Ratings “noted continued elevated turnover and the potential for further turnover as a concern as assets per asset manager ratios continue to trend down due to resolutions,” in a January report on Hudson Americas, Hudson’s US subsidiary. Overall turnover was 21 percent during the past 12 months, compared with 23 percent in the year before, the report said.

Such dramatic fluctuations in staffing have “certainly been a challenge that we’ve managed to manage our way through,” Beevers said. However, as Lone Star’s latest funds have reached the point in their life cycles where Hudson expected to once again be liquidating assets for its affiliate, the latter firm questioned whether it should simply wind down some of its staffing capacity, or instead utilize that capacity on behalf of third-party business.

“To not offer your services to a third party, to not consider expanding the business and growing the business in that way, clearly is not taking advantage of all the opportunities from a commercial perspective that may be out there,” he noted. Moreover, while Hudson had previously considered taking on third-party clients, the firm’s current size was a key factor in finally pulling the trigger, Beevers said: “Why now? We had more to lose from Hudson’s point of view than we ever did before, in the sense that it’s a bigger operation as we’ve ever had.”

In the past 10 years, Hudson has expanded from six offices in Dallas, New York, London, Frankfurt, Paris and Tokyo to more than 20 locations globally, including opening in Houston in 2008; Chicago in 2011; Madrid in 2012; Amsterdam in 2014; Miami and Hong Kong in 2016; Lisbon, São Paulo, and Beijing in 2017; and Buenos Aires in 2018. Maintaining staffing capacity and a global scale also would benefit Lone Star. “It would be an advantage to have a battle hardened team ready to go,” Beevers said. “It is extremely reassuring for anyone to be able to turn back and work again with the same people you had worked with in the prior cycle, with the same teams, rather than having to build it up again from scratch.”

Conflict resolutions

The relationship between Lone Star and Hudson has raised concerns about potential conflicts as the latter firm enters the third-party management business, although Beevers has already anticipated some of those concerns. For instance, Hudson would avoid taking on mandates that could potentially be in competition with that of Lone Star, hence Hudson’s focus on core and core-plus mandates for its commercial real estate business.

Grayken’s expansion into the core-plus real estate space through Hudson, and not Lone Star, has not gone unnoticed. For one placement agent, such a decision was logical: “It gives them separate branding. There’s less conflicts if they’re not under the same company name.” Meanwhile, a Lone Star investor observed that having a Hudson-branded real estate fund “is partly to diversify product offerings while maintaining the Lone Star ‘brand’ as high return.”

Hudson declined to comment, but PERE understands that Hudson Residential Credit Fund I will be focused on lower-risk, lower-return investments in whole loans and non-performing loan portfolios in the US residential sector, in contrast to the Lone Star Real Estate Funds series, which targets opportunistic and distressed debt investments in commercial real estate globally.

Moreover, it is highly unlikely that third-party asset management clients would be rivals of Lone Star, Beevers said: “I don’t expect that groups who would traditionally see themselves as competitors of Lone Star, for example, would have interest in us managing their assets, nor would I think we would necessarily be comfortable with doing so, because it’s clearly important to us to ensure that we manage conflicts properly. I think most of these conflicts can be managed, but putting yourself in a position where you expect it to be conflict after conflict is a good way of lining yourself to frustrate the relationship with your client and so probably not terribly sensible.”

Instead, potential third-party asset management clients would be institutional investors, such as sovereign wealth funds, that do not have significant asset management capabilities in overseas markets where they may have property investments, Beevers said. As for limited partners for the new fund, he anticipates they would be similar to the types of investors in Lone Star funds.

A murkier area is if Lone Star assets would be rolled over into Hudson funds as a seed portfolio. “That’s obviously a natural challenge in terms of conflict,” Beevers acknowledged. For a sale from a Lone Star to a Hudson fund to make sense, Lone Star would need to ascertain that the price being offered by Hudson would be truly market price and the best exit option for that investment. However, such a transaction would be highly unlikely, he said.

There is also some blurring of lines in terms of staffing. For example, some professionals who had been working on US whole loans at Lone Star have now been transferred to Hudson. Meanwhile, the fundraising team at Lone Star has become the business development team at Hudson, and will be charged with raising funds for both Hudson and Lone Star. Beevers explained: “Hudson can provide services to Lone Star. Lone Star does not provide services to Hudson, so if that team is to raise capital for both groups, then it should sit at Hudson.”

Growth prospects

It is still early days for Hudson’s new business initiatives. The firm has not begun marketing in earnest or landed any clients to date. Of the commercial real estate business, Beevers said “conversations at this point have been informal and will become more developed over the coming weeks and months.”

He was less forthcoming about fundraising momentum, citing SEC marketing restrictions. However, at least one Lone Star investor has already decided not to back Hudson’s new offering. Anthony Breault, senior real estate investment officer at the Oregon State Treasury, said that the Oregon Public Employees’ Retirement Fund, one of Lone Star’s largest investors, is not pursuing the Hudson fund because it does not fit with the pension plan’s current investment focus. “The Oregon real estate portfolio is focused on equity real estate (not credit) at this part in the cycle,” Breault told PERE. “When we do look at credit, it tends to be when there are disconnects in the equity/credit markets and we can do so opportunistically.”

Beevers said Hudson will not have any set weighting for its three business lines. “It is hard to predict where exactly the volume will be, and of course, part of that will be dictated by
the interest and demand from what I expect to be a relatively small and carefully curated list of clients that we take on,” he said. Nor has Beevers set any specific growth targets for Hudson’s multiple platforms.

“Rather than focusing on a near-term certain number of clients or number of billions of assets under management in each of the individual categories we’ve spoken about, my focus and my interest is in ensuring that we have this solid footprint, this foundation from which we can build something which will be substantial and will have the ability to last for many decades.” It is clear if Beevers has his way, Hudson’s days behind the curtain will soon be numbered.