Lone Star Funds
Overview
Lone Star Funds is a private equity (PE) management company founded in 1995 by John P. Grayken in Dallas, Texas, USA. It focuses on so-called 'distressed' investments: buying non-performing loans (NPLs) and undervalued companies and real estate at low prices, then reselling them after restructuring and operational normalization; as of the 2020s, its assets under management (AUM) are known to exceed USD 80 billion. In Korea, it is assessed to have acquired Korea Exchange Bank (KEB) in 2003 and sold it to Hana Financial Group in 2012, earning profit in the range of about KRW 4 trillion, and it is also widely known for investor-state dispute (ISDS) arbitration that continued for more than a decade.
Key Details
Founding and Investment Strategy
Lone Star grew rapidly in its early days by generating results in U.S. failed savings and loan (S&L) assets and Japan's NPL market. It subsequently raised Lone Star Funds I through IX in sequence, and concurrently operated a real estate-focused fund (Lone Star Real Estate Fund) and European and Asian regional blind funds. Its investment methods include purchasing NPL portfolios held by financial institutions, acquiring equity in troubled companies and then restructuring them, and developing and selling collateralized real estate; institutional investors such as pension funds, sovereign wealth funds, and university endowments participate as major limited partners (LPs). Because its closed-end fund structure aims for exit within 3–5 years, it is characterized by a focus on revaluation of asset values and gains from dividends and sales rather than on the long-term growth of invested companies.
Entry into Korea and Acquisition of Korea Exchange Bank
After the 1997–1998 foreign exchange crisis, the Korean government and financial institutions had to resolve large-scale NPLs, and Lone Star entered the domestic NPL market in the early 2000s. In 2003, Lone Star acquired a 51% stake in Korea Exchange Bank for about KRW 1.3 trillion, becoming the first foreign private equity fund to become the largest shareholder of a domestic bank. After the acquisition, Lone Star carried out restructuring, including large-scale layoffs, branch reductions, and stronger risk management, and received both the assessment that it significantly improved KEB's profitability and criticism that it was a 'meoktwi' (eat-and-run) seeking only short-term gains. In 2006, it completed the cleanup of its affiliates through a merger with Korea Exchange Card.
Sale Process and Controversy
In 2007, Lone Star signed an agreement to sell its KEB stake to HSBC, but the deal fell through due to the 2008 global financial crisis, delaying the sale for a long time. In 2010, Hana Financial Group announced its intention to acquire, and in 2012 Lone Star sold a 51.02% stake for about KRW 3.9 trillion, completing its exit. In the process, issues such as the nature of the sale gains, the appropriateness of taxes imposed in connection with the KEB sale, and whether financial authorities delayed approval emerged, and the matter expanded into political and social controversy as National Assembly hearings, prosecutorial investigations, and various lawsuits followed. Lone Star's exit method is often cited as a major case in subsequent domestic discussions of private equity regulation and the foreign investment screening system.
ISDS Arbitration
In 2012, Lone Star filed for arbitration with the International Centre for Settlement of Investment Disputes (ICSID) under the World Bank, based on the Korea–Belgium Bilateral Investment Treaty, claiming that the Korean government had unfairly intervened in the KEB sale process and caused investment losses. The claim amounted to about USD 4.6 billion. In August 2022, the arbitral tribunal recognized partial illegality on the part of the Korean government and ordered it to pay about USD 216.5 million (approximately KRW 280 billion) in compensation plus interest, but in 2023 the annulment committee annulled the award, and the case effectively concluded with a victory for the Korean government. This case remains a representative precedent in Korea concerning the risks of the ISDS system and the scope of investor protection.
Latest Trends
Since the 2023 ICSID annulment decision, Lone Star has focused on winding down existing assets without new investments in the Korean market, and in Korea discussions continue on the need to overhaul the foreign investment ombudsman system and the ISDS response system. Globally, as sharp interest rate rises and the commercial real estate downturn since 2022 have slowed the returns of distressed real estate funds, Lone Star is also observed to be reducing the scale of new fund raising and placing greater weight on exits and investor distributions. At the same time, interest in NPL and special situations investments is rising again across the private equity industry, and attention is focused on Lone Star's future moves related to Asia and Korea.
Related Topics
- [[외환은행]]
- [[하나금융지주]]
- [[투자자-국가 분쟁해결절차]]
- [[사모펀드]]
- [[부실채권]]
- [[외환위기]]