The Pennsylvania Public School Employees’ Retirement System (PSERS) committed up to $150 million to Värde Partners’ debut Scratch and Dent Fund at its meeting last week, according to documents released by the retirement system.
The new fund is Värde’s first to target bank and CMBS-held “Scratch and Dent” assets, which are commercial real estate loans with high loan to value ratios, according to a memorandum from portfolio advisor Aksia.
The Scratch and Dent fund will acquire whole mortgage, bridge and mezzanine loans, as well as tranches of small CMBS bonds, residential first lien modification loans, and second lien performing loans, according to Pennsylvania documents. The properties backing those loans will include office, industrial, retail and other miscellaneous properties such as car washes, gas stations and auto repair shops, with values of up to $25 million.
The firm expects to generate a return of 11 to 14 percent on the fund, which is seeking between $300 million and $500 million in capital commitments, according to an investment memo. Värde will launch the fund in the third quarter.
The emergence of Värde’s Scratch and Dent strategy comes a year after the private equity firm’s acquisition of FirstCity Financial, a Waco, Texas-based distressed and special situations specialist.
“We believe that the Varde and FirstCity partnership is an effective way to capitalize on the opportunity set in performing small balance commercial real estate loans, an underserved market segment. It meets key criteria necessary to execute the strategy effectively, and will be doing so against a positive technical backdrop for commercial real estate pricing,” according to Aksia.
Värde maintains officers in Minneapolis, Singapore and London and has approximately $8.5 billion of assets under management.