Lone Star Funds founder and Chairman John Grayken is investing $330 million of his own money in the company’s new $6.6 billion commercial real estate fund, a bet on strong returns for property.
The capital commitment was disclosed during a meeting yesterday of the Oregon Investment Council, which voted to invest $300 million in the new fund. Grayken’s pledge is the most the billionaire has put into one of his Dallas-based firm’s funds by both dollar and percentage.
Lone Star’s new fund is the biggest global pool being raised for real estate private equity, according to Preqin, a London-based research firm for alternative assets. The target was increased from the original $6 billion in response to investor demand. The first capital pledges are scheduled to be completed on Sept. 27, according to yesterday’s Oregon meeting.
About half of the new fund will be invested in Europe, Nick Beevers, head of investor relations for Lone Star, told the Oregon pension trustees. About 30 percent to 40 percent will be in the U.S. and the remainder in Japan, he said.
“We see the investment opportunities being extremely heavy” in Europe, he said during the meeting in Tigard, Oregon. “We expect continued substantial investment in the United States.”
Lone Star expected to close yesterday on the purchase of 265 loans backed by 313 properties, said Andre Collin, head of North American commercial real estate acquisitions for Lone Star and a member of the firm’s investment committee. Collin didn’t say where the assets are located.
Grayken’s investment represents 5 percent of the fund, higher than normal for a general partner. The firm’s partners will make a 1 percent combined investment in addition to Grayken’s personal pledge, Beevers said. Employees of Hudson Advisors, Lone Star’s asset-management arm, are contributing 1.5 percent through a co-investment vehicle, Beevers said.
The commitments by the firm’s executives and employees are in addition to the $6.6 billion of third-party investor capital, Beevers said.
“The pipeline that we are looking at right now in Japan, in Europe, especially in Europe, and in America is very, very strong” for distressed real estate investments over the next three years, Collin said. “In Europe, the market is way bigger than America right now in terms of that pipeline.”
Excluding 2011, when Lone Star won the bidding for about half of Anglo Irish Bank Corp.’s $9.65 billion of U.S. real estate loans, the portion that was mainly subperforming or nonperforming, “it’s been by far our best year in all the regions,” Collin said.
In the U.S., Lone Star is focused on distressed debt, with more than $1 trillion of commercial real estate debt maturing in the next three to four years -- or more than 30 percent of the country’s total supply of commercial-property loans, Collin said. More than half that debt is subperforming or nonperforming, he said.
In the U.S., “our focus right now is mainly on the secondary markets,” Collin said. “We’re not the primary market guys right now because that cycle, that market, has passed for us,” with more competition and easier financing having driven up prices, he said. In secondary markets, there are fewer lenders and “we benefit from very strong relationships with a lot of these lenders.”
In Europe, aside from Lone Star deal makers, Hudson Advisors has about 300 people competing with Blackstone Group LP (BX:US), Apollo Global Management LLC, Cerberus Capital Management LP, Fortress Investment Group LLC (FIG:US) and Kennedy Wilson (KW:US) for workouts of distressed-property investments. U.S. investment banks, once Lone Star’s biggest rivals, have largely exited the market, Collin said.
“What our colleagues in Europe are working on is north of $25 billion of files,” he said. “It’s very significant.”
Blackstone, the world’s biggest manager of alternative assets such as real estate, has raised $2 billion in the first phase of fundraising for its fourth European property fund, targeted to reach 5 billion euros ($6.7 billion), a person with direct knowledge of the process said yesterday.
In addition to stepping up purchases, Lone Star and other real estate private-equity managers have been paying out more proceeds to investors this year as they take advantage of a strong market to sell assets, said Anthony Breault, Oregon’s interim senior investment officer for real estate. Lone Star represents about 8 percent of Oregon’s real estate portfolio.
Grayken’s investment “certainly does show his level of conviction regarding the market opportunities and his belief in the fund’s success,” Breault said.
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