Lone Star closes second real estate fund on $5.5bn

The John Grayken-led firm closed its second real estate fund at the end of May and is expected to close its seventh distressed debt fund in July on roughly $4.5bn.

Lone Star Funds has closed its second real estate fund on $5.5 billion, well above its hard-cap of $5 billion. The fund closed at the end of May, according to a person with knowledge of the firm.

Lone Star Real Estate II, which focuses on commercial real estate investments, received the bulk of its commitments in the past few months, as it had collected $1.8 billion as of February. The fund will work with banks and other financial institutions that wish to “shed their commercial real estate exposure”, according to a due diligence report from The Townsend Group, an advisor to the Connecticut Retirement Plans and Trust Fund, which was considering a commitment to the fund earlier this year.

Lone Star’s first real estate fund closed on $2.4 billion in 2007.

The firm, led by John Grayken, also has been raising Lone Star Fund VII, which is targeting $4 billion and could end marketing at $4.5 billion by the end of July. Fund VII will invest in non-commercial real estate transactions, including distressed single-family residential, corporate and/or consumer loans and securities. The sixth fund closed on $7.4 billion in 2007.

Lone Star launched the twin funds in 2009 with targets of $10 billion apiece, but eventually it cut down the target sizes in the anemic fundraising environment. UBS has worked as the placement agent for both funds.

The firm added some LP-friendly terms on the real estate fund, including reducing its carried interest from 30 percent in prior funds to 20 percent. During the investment period, management fees are 1.2 percent based on committed capital, with step-downs for larger commitments. Investors committing at least $100 million will receive a 1.1 percent fee; $150 million commitments pay roughly a 1 percent fee; and $300 million commitments are charged a 0.9 percent fee. After the investment period, which runs three years, management fees are 0.45 percent based on outstanding invested capital.

Last month, New Jersey's $74 billion state pension system made a total commitment of $400 million to the funds.