Lone Star targets $5bn for Fund VIII

The John Grayken-led firm has launched its eighth distressed debt fund, but will not raise it with its third real estate fund as it has done in the past.

Lone Star has launched its eighth distressed investment fund targeting $5 billion less than two years after closing its prior fund, according to limited partner sources.

The firm declined to comment.

Lone Star closed its seventh distressed fund in 2011 that was targeting $4.5 billion. It’s not clear how much the firm raised by the final close. Lone Star also closed its second real estate-focused investment vehicle in 2011 on $5.5 billion.

While those funds had been raised simultaneously, sources tell Private Equity International the firm is raising the eighth distressed fund separately, as its second real estate fund is not yet deployed enough to warrant marketing a third vehicle.


The firm, led by John Grayken, raised eyebrows in 2009 when it launched the two funds with an overall target of $20 billion, or $10 billion each. Those ambitious targets were quickly reduced in the sluggish fundraising environment.

UBS worked as placement agent on the two prior funds, though it’s not clear if the bank will be back for Fund VIII.

Lone Star recently received a $125 million commitment from the New Mexico Educational Retirement Board, an existing LP with the firm. “We like their capabilities in the distressed marketplace,” Bob Jacksha, chief investment officer with the board, said in a recent interview.

The fund comes with some creative terms, according to one LP who has seen the fund offering but has not yet committed. The LP stressed the terms are preliminary. For example, the management fee varies from 90 to 110 basis points, depending on commitment size, the LP said.

Carried interest is structured on a deal by deal basis and is generally 20 percent, though if the firm achieves a more than 25 percent return on any given investment, carry jumps to 25 percent, the LP said.

A first close is scheduled for February, the LP said.

Lone Star’s prior distressed investment fund invested in non-commercial real estate transactions, including distressed single-family residential, corporate and/or consumer loans and securities. It’s sixth fund closed on $7.4 billion in 2007.