Starwood Property Trust is marketing a debt fund that will invest in the B-pieces of commercial mortgage-backed securities.
Company president Jeff DiModica broke the news at the KBW (Keefe, Bruyette & Woods) Mortgage Finance Conference this week in Manhattan.
The firm is targeting $1 billion and will co-invest its own money alongside third party capital, aiming to take advantage of impending risk retention rules that go into effect in December, sources told Real Estate Capital.
The move comes as a strategic response to the new rules, which will likely create opportunity for larger players while proving burdensome for smaller B-piece buyers.
For CRE loans that do not meet the criteria for qualified commercial real estate (QCRE), risk retention will require a securitizer to retain a 5 percent of the risk for a five-year holding period.
The 5 percent will likely require B-piece buyers to move up the capital stack, which would be of benefit to dominant B-piece buyers and well-capitalized entrants with enough scale to satisfy the requirements, KBW noted in its yearly Commercial Mortgage REIT Primer.
“We believe risk retention could benefit specialty finance companies with enough permanent capital to hold the B-piece for five years, and we believe dominant B-piece buyers/special servicers… should be well-positioned,” KBW analysts wrote.
KBW also noted that the two-year implementation phase of the rule, beginning in December, will coincide with CMBS maturities of the 2006-2008 vintages, which could create “unique investment opportunities.”
Among others looking to enter the B-piece playing field, Jonathan Strain has reportedly departed Goldman Sachs as its co-head of US Real Estate Finance to start his own B-piece fund.
Ladder Capital Corp. also hinted at the KBW conference that a B-piece fund would be a potential option down the road, though executives said no concrete plans had yet been made.
Starwood will continue with its broader focus of originating large loans (average loan size of $100 million) in gateway markets with strong sponsors, which have incurred lower loss severities historically, DiModica said at the conference.
Starwood declined to comment further.