Fund of funds shortfall drives RE debt fund target miss

Contrarian Capital recently missed its $450m target on a distressed real estate fund amid a drop-off in commitments from funds of funds. 

Challenges to the fund of funds model have complicated the fundraising efforts of a Greenwich, Connecticut-based firm investing in distressed real estate debt.

Earlier this month, Contrarian Capital Management closed its Contrarian Distressed Real Estate Debt Fund III on $378 million, below the $450 million target set when the fund launched in February 2015, according to PDI Research & Analytics.

Its predecessor fund, Contrarian Distressed Real Estate Debt Fund II, exceeded its initial target of $360 million and closed on $450 million in 2012.

A source told Private Debt Investor that the deficit was the result of an approximately $100 million shortfall from two fund of funds investors. The source said that the funds had committed to Contrarian Distressed Real Estate Debt Fund II, but now find their business model under pressure from LPs, which are increasingly reluctant to pay extra fees rather than contact firms such as Contrarian directly. 

Contrarian Distressed Real Estate Debt Fund III has between 25 and 30 investors, according to the source, including Denver Employees Retirement Plan , the Iowa Municipal Fire and Police Retirement System of Iowa and the University of Kentucky.

The fund targets mid-range equity and mortgage debt that is senior in the capital structure, often originated by regional banks or non-bank lenders in the US. It has no specific sectoral or regional focus and investments from the fund are generally in the $15 million to $20 million range. Contrarian partner Gil Tenzer told PDI that Contrarian Distressed Real Estate Debt Fund III is already half drawn and he expects it to make about 45 investments in total.

Given the focus on distressed real estate, anything that makes refinancing troubled assets more challenging is good for the fund's strategy, Tenzer said. In the current environment, he added that only things that are easily financeable are going forward. Many of the opportunities Contrarian Distressed Real Estate Debt Fund III will pursue arise from the commercial mortgage-backed securities market, where new risk retention rules have made such refinancing assets more expensive.

Contrarian is a distressed investment firm with $3.7 billion in assets under management founded in 1995. Aside from is Greenwich headquarters, the firm maintains offices in Paris, London, Sao Paulo and Hong Kong.