Torchlight Investors has received a $20m commitment from the San Diego City Employees Retirement System (SDCERS) for its Torchlight Debt Opportunity Fund V, Real Estate Capital sister publication Private Debt Investor reported.
The fund is focused on high-yielding real estate debt investments including first-lien commercial mortgages, mezzanine loans, commercial mortgage-backed securities (CMBS), and collateralized debt obligations (CDOs).
The SDCERS commitment is part of $60m that it plans to invest into real estate in fiscal year 2015. The $10.6bn pension fund made a previous $50m commitment to Torchlight Debt Opportunity Fund IV, which held a final close of $956m in March 2014.
“Current market conditions create a compelling opportunity in high-return debt investments, as lending conditions remain depressed, loan maturities loom, and bank funding for nonstandard loans is scarce,” SDCERS consultant Aon Hewitt wrote in a letter recommending the Fund V investment.
“Investors focused on filling that capital void through loan originations and acquisitions are able to achieve risk-adjusted returns that appear attractive to traditional equity alternatives.”
The recommendation from Aon came despite less-than-stellar performance logged by a previous Torchlight fund, Fund II of 2007 vintage, which is currently marked at 0.8x net equity multiple and a -3.4 percent net IRR. But while short of its original return target, that fund will return equity to investors, Aon noted.
Fund V is seeking a net IRR of 13 to 15 percent and a 6 percent annual distribution, with a maximum of 30 percent leverage at the fund level.
Aon also noted a potential conflict of interest between Torchlight’s CMBS special servicer business, Torchlight Loan Services (TLS), which can acquire defaulted loans out of a CMBS trust. But Torchlight would “offset this conflict by purchasing the defaulted note at fair market value… and the acquisition would be for the benefit of Fund V,” Aon added.
Torchlight has $4bn of commercial real estate debt assets under management. It is a rated special servicer on $27.7bn par value of commercial real estate debt and manages $1.9bn in distressed assets.