SOURCE:  OREGONIAN

Oregon invests heavily in Grayken's 'distressed debt' fund

By Ted Sickinger, The Oregonian

September 30, 2009, 7:25PM

The Oregon Investment Council doubled its bet Wednesday on the profit potential of John Grayken, king of the bare-knuckled corner of the investment industry referred to as "distressed debt."

Lacking many of its conventional investment opportunities amid the wreckage of last year's stock market crash and credit market contraction, the OIC voted to invest up to $800 million more with Grayken and his Dallas-based Lone Star Funds.

That's not only double the amount the Treasury Department's investment staff came to the regular council meeting recommending, but was on top of previous commitments of $1.37 billion to Lone Star Funds, $820 million of which is still invested. That makes Grayken's funds one of the largest single managers of Oregon's $48 billion public-employee pension fund.

Grayken, a ruddy faced 50-something who renounced his U.S. citizenship in 1999, buys troubled loans of all flavors -- corporate, commercial real estate, residential mortgages -- in bulk. He hopes to raise $20 billion from institutional investors for his two new distressed debt funds.

Once the money is invested, Grayken's team of 1,000 employees does the commercial equivalent of sending the boys 'round, either restructuring the loan or foreclosing on the collateral as quickly as possible in order to sell it and earn a quick return.

"It's a machine," said Nori Gerardo Lietz, a real estate consultant to the OIC

Grayken told the council his funds results wouldn't be dependent on growth or economic recovery. "It's about getting a wholesale discount, then selling the assets back into the market," he said.

If council members had any concern about the nature of the investments, it was only the risk that if Grayken were incapacitated, the one-man show would cease to function. But Lietz suggested that Grayken was unlikely to keel over anytime soon. "I think he has ice water running in his veins."

Past returns have been handsome -- 29 percent to investors. And opportunity abounds today as banks, insurance companies, foundations and other big investors look to unload billions in loans and the global property market undergoes an unprecedented deleveraging.

Grayken told the OIC that his firm has few large competitors at the moment. Most of the investment banks are on the sidelines, either bankrupt or dealing with their own balance sheet problems. Many big private equity firms are trying to unwind the real estate investments they took on during the boom. And a shriveled credit market means that any investor has to be willing to make deals with higher levels of equity, not borrowed money.

Still, Grayken has been controversial. His firm ran into political and legal problems in South Korea -- it was accused of market manipulation -- after buying a bank. He told the OIC Wednesday that those troubles had "blown over."

Some also questioned the ethics of the council investing state employee pension money in a fund that aggressively forecloses on borrowers to increase its profit margin.

"Should the OIC be giving Grayken billions that will result in a massive wave of residential foreclosures while the Legislature and others at the same time attempt to stem the tide of foreclosures?" asked Bill Parish, a Portland investment adviser who regularly attends the council's meetings.

If council members had any moral qualms, they didn't raise them at the meeting. And state Treasurer Ben Westlund, who campaigned for his job sponsoring mortgage reform legislation to protect consumers, seconded the motion to double the council's proposed investment with Grayken. Westlund didn't respond to requests for comment.

Ted Sickinger