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Lone Star raises $10bn for distressed private equity, real estate deals

The private equity firm beat its combined target of $6.5bn for the two funds. It is the first time Lone Star has raised separate, side-by-side funds for each investment strategy.

US private equity firm Lone Star Funds has closed its sixth buyout fund and first real estate fund on a combined total of roughly $10 billion (€6.3 billion).

Lone Star Fund VI raised approximately $7.5 billion, while Lone Star Real Estate I garnered commitments of roughly $2.5 billion, a source familiar with the matter told PERE's sister website, PEO. A Lone Star spokesman declined to comment.

The funds will be run side-by-side, making global “opportunistic” investments in distressed debt, distressed real estate and real estate entities, according to January 2008 investment committee minutes from the Oregon Investment Council. Their target internal rate of return is 25 percent.

The buyout fund will focus on “distressed debt and in asset rich or financially oriented operating companies”, according to the minutes.

Lone Star managing partner John Grayken gave a brief overview of the firm’s global footprint and trends in investment opportunities to the public pension, which ultimately committed up to $500 million in Fund VI and up to $100 million to the real estate fund.

He also reportedly stressed the firm’s ability to deliver returns amid economic downturns and difficult market environments.

Last month, Grayken and his firm were cleared of allegations of stock price manipulation pertaining to the acquisition of Korea Exchange Bank. Lone Star has agreed to sell its 51 percent stake in the bank to HSBC for $6.3 billion, but the deal has yet to clear all hurdles.

Earlier this week, in an effort to assuage public and regulatory concerns, HSBC vowed to keep KEB publicly listed, maintain current employment levels and a board of directors whose majority of directors are Koreans.

Lone Star has been actively picking up distressed mortgage-related assets in the past 10 months, most recently paying $5.9 billion for commercial lender CIT Group’s subprime mortgage unit.

The Texas-headquartered firm’s fifth buyout fund, which was technically organized as two funds, one registered in the US and the other registered in Bermuda, closed on $5 billion in September 2004.