Lone Star, however, is no amateur. It stands out for its expertise in working out mortgages on houses, apartments and offices.
“Lone Star has its origins in working the real estate up; they would buy a portfolio of loans and build a large platform of people who would work through every loan, case by case,” said Brad Child, senior real estate investment officer for the office of the Oregon state treasurer, which has invested about $1 billion with Lone Star over the years. “It’s a very granular business, and they’ve been at this for years.”
Lone Star has an affiliate, Hudson Advisors, that works out individual loans and mortgages. Hudson employs about 800 of the firm’s 900 workers worldwide. Mr. Child said Oregon’s investments have returned more than the 20 percent goal set by Lone Star.
After a chain reaction of devaluations, defaults and recession rocked East Asia in the late 1990s, Lone Star became one of South Korea’s largest foreign investors. Mr. Grayken’s firm bought everything from troubled loans to a controlling interest in the Korea Exchange Bank, which it purchased in 2003 for $1.2 billion. Lone Star remains a major investor in Japan, where it has acquired everything from banks to golf courses. It has also moved aggressively into Germany, where Deutsche Post World Net, a logistics company, recently sold the firm a portfolio of 1,300 properties for 1 billion euros.
Now Lone Star is hunting for bargains in its own backyard by buying in the residential real estate market in the United States, investors in its funds say.
Mr. Grayken grew up around Boston, graduated from Harvard Business School and worked in Morgan Stanley’s real estate department before teaming up with the Texas billionaire Robert Bass in the early 1990s. Mr. Grayken cut his teeth running Brazos, an entity formed by the Resolution Trust Corporation and Mr. Bass to buy up and work out troubled mortgages from savings and loans. Brazos ultimately posted a 77 percent return on its portion of the portfolio.
Mr. Grayken was soon off to the races, raising his own funds and scouring the globe for investments. He renounced his United States citizenship in 1999 and moved to London; he now splits his time between the United States and London, said a person familiar with his situation.
Lone Star’s expertise makes it a popular destination for opportunistic investors. The group just raised two funds, both of which were oversubscribed: Lone Star VI was slated to be $5 billion and the group raised $7.5 billion; the principals aimed to raise $1.5 billion for a real estate fund and closed with roughly $2.5 billion.
Their timing seems impeccable. Banks have been reluctant to sell large portions of their portfolios at available prices. But shareholders have suffered through four painful quarters, and other banks may follow Merrill’s lead and try to offload their toxic securities.
People briefed on Lone Star’s plans say the firm views Merrill’s decision to sell at such low prices as a sea change in the way banks are approaching their holdings of troubled investments. Lone Star expects other banks to come knocking — and it is ready to buy, for the right price. “They are not satiated,” said one person who is not authorized to talk about the funds’ goals.
In recent months, Lone Star funds or affiliates spent $1.5 billion to buy the home lending business from the CIT Group (the Lone Star funds also assumed debt and liabilities) and acquired the operating assets or rights to operating assets of the Bear Stearns Residential Mortgage Corporation.
To be sure, things have not always gone smoothly for Lone Star. Its decision to sell its stake in Korea Exchange Bank to HSBC in 2007 prompted accusations of stock manipulation and led to a top Lone Star executive’s being sentenced to five years in prison. A Seoul appeals court overturned the verdict in June.
