The relationship between Lone Star Funds and Hudson Advisors can be described like this: Lone Star, one of the largest private equity real estate firms, is the star performer in the spotlight, while Hudson is the stage manager, working behind the scenes.
Now, after more than two decades, the relationship between the two will be evolving. Hudson will remain the asset manager and commercial real estate servicer for Lone Star, for which it executes loan servicing and workouts; corporate restructurings and turnarounds; rehabilitation and repositioning of real estate assets; and land and real estate development.
However, the firm now will be seeking to carry out similar duties for third-party clients globally in core and core-plus real estate, a space where many of Lone Star’s rivals have already established large businesses. More importantly, Hudson also will be pursuing a far more high-profile role as an investment manager.
In February, Hudson registered its debut commingled fund, Hudson Residential Credit Fund I, with the Securities and Exchange Commission. The fund will be focused on investments in whole loans and non-performing loan portfolios in the US.
A month later, Hudson hired Jerome Foulon, formerly managing director at Canadian pension investment manager PSP Investments, as chief investment officer of the new third-party asset management and servicing business, or what is also known as Hudson’s commercial real estate platform.
Nick Beevers, Lone Star’s former president of North America and Hudson’s new chief executive, says the decision to expand the latter firm’s business is driven partly by the desire to maintain more stability within the 800-strong Hudson team, which spans offices across North America, Europe, Asia, and Latin America.
“We’ve seen Hudson’s asset management capability, which has always been tied to the success or the aspirations of Lone Star’s business, have to scale up and down accordingly pretty substantially in the various markets in which Hudson has been active and Lone Star has been active,” he says.
Indeed, Fitch Ratings noted “continued elevated turnover and the potential for further turnover as a concern as assets per asset manager ratios continue to trend down due to resolutions”, in a January report on Hudson Americas, Hudson’s US subsidiary. Overall turnover was 21 percent during the past 12 months, compared with 23 percent in the year prior, the report said.
Such dramatic fluctuations in staffing “has certainly been a challenge that we’ve managed to manage our way through”, Beevers says. However, as Lone Star’s latest funds have reached the point in their life cycles where Hudson expected to be liquidating assets for its affiliate, the latter firm questioned if it should simply wind down some of its staffing capacity, or utilise that capacity on behalf of third-party business.
“To not offer your services to a third party, to not consider expanding the business and growing the business in that way, clearly is not taking advantage of all the opportunities from a commercial perspective that may be out there,” he notes.
The relationship between Lone Star and Hudson has raised concerns about potential conflicts as the latter firm enters the third-party management business, although Beevers has already anticipated some of those concerns. Hudson will avoid taking on mandates that could potentially be in competition with that of Lone Star, hence Hudson’s focus on core and core-plus mandates for its commercial real estate business.
Potential third-party asset management clients will be institutional investors, such as sovereign wealth funds, that do not have significant asset management capabilities in overseas markets where they may have property investments, Beevers says.
Hudson will not have any set weighting for its three business lines, he adds. “It is hard to predict where exactly the volume will be and, of course, part of that will be dictated by the interest and demand from what I expect to be a relatively small and carefully curated list of clients that we take on.”