Locust Point Capital has closed on a $428 million fund in the senior housing and healthcare sector, beating its $425 million target, according to a news release and to Eric Smith, Locust Point’s chief executive officer and managing director.
The fund, Locust Point Seniors Housing Debt Fund II, follows the manager’s launch of its $312 million debut fund in 2016, which also beat its target of $250 million. Fund II received strong interest from diverse investors, including pension funds and endowments, with some 30 percent of the fund’s capital commitments coming from European institutional investors and the remainder from investors in the US, Smith said in an email.
Like its predecessor, Fund II’s strategy is to invest in subordinated debt and first-lien debt and preferred equity in owner-operators of small to mid-size businesses in the senior housing and care industry throughout the US. The fund’s capital will be used primarily for acquisitions, refinancings, recapitalisations, new construction and working capital.
“Our pace of new investments reflects the tremendous opportunity we are seeing today in the seniors and housing care sector,” said Smith, who has been working in the senior housing and care industry for more than 25 years. Management believes that investing in subordinated debt offers investors the most attractive risk/return profile because the senior housing market is uncorrelated to other real estate asset classes.
The fund is targeting a pre-tax internal rate of return to limited partners of about 12 to 14 percent, net of overheads including management fees, fund expenses and the general partner’s carried interest, Smith said. Because the fund’s investments are structured with a current pay component, the management team anticipates that quarterly distributions to LPs will commence about 12 months after the final fund closing and will continue quarterly thereafter. The fund uses no leverage.
As of 12 April, Fund II had invested in eight transactions with aggregated investment commitments of $68 million, Smith said. Locust Point anticipates it will invest about $150 million to $250 million a year over the four-year investment period, and that about 40 to 50 percent of the committed capital will be recycled, or refinanced and repaid using federally facilitated lending programmes such as HUD’s 232 programme. Other exits for portfolio investments may include conventional commercial bank refinancing, collateral facility sale or refinancing by a REIT, and loan amortisation.