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March 11, 2015
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Investors considering Lone Star Real Estate Fund IV should ask the following questions.

Staff turnover

Two senior managers at Lone Star Funds left the firm in 2013[1], and nearly half the staff at Hudson Advisors’ US subsidiary turned over last year.[2]

 Questions for Limited Partners:

  • Why has there been so much senior staff turnover at Lone Star Funds and Hudson Advisors?
  • How will turnover and brain drain at Hudson Advisors affect its ability to service new acquisitions from Lone Star Real Estate Fund IV?
  • What is Lone Star’s Chairman’s succession plan? 

Korean headline risk

Troubling new stories have appeared in the Korean press about Lone Star’s relationship with the Korean Exchange Bank (“Bribery probe may still over to Lone Star,” Korea Times, 2/5/2015; “Ex-Park aide linked to Lone Star: reports,” Korean Times, 2/9/2015).

Questions for Limited Partners

  • Did Lone Star Funds or an affiliate provide any of the money that was reportedly paid to Jang Hwa-sik?
  • Will Lone Star again be subject to legal and/or headline risk over its activities in South Korea?
  • How does Lone Star intend to handle new inquiries?

CFPB complaints against portfolio companies

Since May 2012, 728 consumer complaints have been filed against Lone Star’s Caliber Home Loans with the US Consumer Financial Protection Bureau.[3]

Questions for Limited Partners

  • How many complaints have been filed in total against Lone Star subsidiaries?
  • How have Lone Star’s subsidiaries responded to those complaints?

Related party transactions/billing of expenses – Hudson Advisors

As of January 2015, Hudson Advisors, principally owned by Lone Star Funds’ founder, provided services to various Lone Star Funds, including all real estate funds.[4]

The SEC has recently focused on the issue of transparency of private equity fees and expenses, including the billing of funds (and by extension LPs) for expenses that the manager might be expected to cover. SEC Office of Compliance Director Andrew Bowden noted in a May 2014 speech that in conducting its first “presence exams” of private equity managers, the agency had found “violations of law or material weaknesses in controls over 50% of the time” in how fees and expenses are handled by private equity funds.[5]

Questions for Limited Partners

  • Beyond acting as a loan servicer, what services does Hudson Advisors provide to the Lone Star funds?
  • Which (if any) Lone Star Funds executives are employees of Hudson Advisors? Which executives’ compensation is ultimately billed to the funds?
  • How does Lone Star determine which Hudson Advisors employees or services are billed to the Lone Star funds?
  • What (if any) transaction and/or monitoring fees has Hudson Advisors collected from Lone Star Fund-owned portfolio companies in the past five years? To what degree did such fees offset management fees?
  • Did the SEC identify any “violations of law or material weaknesses in controls” in how Lone Star Funds and/or Hudson Advisors handled fees and expenses? If so, what violations or weaknesses did the SEC identify?

Portfolio company headline risk – DFC Global

In April 2014, Lone Star Fund VIII acquired DFC Global Corp, a major payday lender and pawnshop operator with operations in the US, Canada and Europe.[6] In 2013, DFC subsidiary Dealers’ Financial Services was required by the US Consumer Financial Protection Bureau (CFPB) to return $3.3 million to more than 50,000 military
servicemembers who participated in
the company’s Military Installment
Loans and Educational Services (MILES) auto lending program.

Questions for Limited Partners:

  • What steps has Lone Star taken to ensure the practices DFC was cited for by the CFPB and the Department of Defense are not repeated?
  • What new standards has DFC implemented since the Lone Star acquisition to prevent future regulatory intervention?
  • Does DFC Global benefit from practices that are illegal in the United States?
  • Will DFC, under Lone Star’s leadership, continue to offer payday loans with five-digit 
APRs?
  • Should Lone Star own a platform whose business practices benefit from lax oversight of predatory lending practices?

 

 

 

 

[1] Bruno Scherrer and Len Allen. “Lone Star senior managing director resigns,” CoStar UK, Jun. 19, 2013 ; <https://web.archive.org/web/20131003220735/http://www.lonestarfunds.com/about-us/leadership/>; <https:// web.archive.org/web/20131104045318/http://www.lonestarfunds.com/about-us/leadershiphttps://web.archive.org/ web/20131104045318/http://www.lonestarfunds.com/about-us/leadership> Accessed Feb. 8, 2015

[2] “Fitch takes ratings action on Hudson Americas LLC’s servicer ratings,” BusinessWire, Jan. 30, 2015

[3] Consumer Financial Protection Bureau Complaint Database accessed Feb. 16, 2015. <http://www.consumerfinance.gov/complaintdatabase/>

[4] Hudson Americas SEC Form ADV, Jan 19, 2015.

[5] “Spreading sunshine in private equity,” Andrew Bowden, May 2014.

[6] “CFPB Orders Auto Lenders to Refund Approximately $6.5 Million to Servicemembers,” Consumer Financial Protection Bureau, Jun 27, 2013.