Term change wins $400m for Lone Star

The Oregon Investment Council approved a $400m commitment to Lone Star, partly because the firm altered its fee structure and governance procedures to be more ‘LP friendly’.

Lone Star has scored big at the Oregon Investment Council Wednesday, winning $400 million from the pension and a tentative commitment of another $400 million depending on the early performance of the firm’s funds.

OIC, with $60 billion in assets, committed $300 million to Lone Star Real Estate Fund II and $100 million to Lone Star Fund VII. The two global funds are targeting a combined $20 billion, or $10 billion a piece. Fundraising for the two funds, with a target IRR of 25 percent, began in April.

The tentative, additional $400 million commitment was not part of the agenda, but was discussed during the public meeting, according to a spokesperson for the pension.

The real estate fund will focus strictly on distressed commercial real estate, while Fund VII will target distressed residential mortgages, defaulting corporate bonds and loans and acquisitions of “real estate rich entities such as banks”, according to OIC board documents.

A factor that helped push the Oregon pension board into approving the commitment was Lone Star altered its fee structures and governance procedures to make their funds more “LP friendly”. Details about changes Lone Star made to its fee structure and governance were not available.

Oregon has published a list of recommended principles it follows when considering investments with private equity firms. The principles include lower fees, keeping carried interest at 20 percent and giving investors more power over the fund. “Lone Star made some changes to try and follow the principles,” the spokesperson said.

Oregon has committed $1.37 billion to Lone Star over the past few years, about $162 million of which remains undrawn. Lone Star is Oregon’s largest real estate investment manager, representing about 16.5 percent of the real estate holdings.

Lone Star raised $10 billion last year for distressed and real estate investments, closing Lone Star Real Estate I on $2.5 billion and Lone Star Fund VI on $7.5 billion in July 2008. More than 80 percent of the funds are invested.

Lone Star was founded in 1995 and has more than $24 billion under management.