SDCERS approves $20m for Torchlight Fund V

SDCERS has made a commitment to the fund following a previous investment in Torchlight Debt Opportunity Fund IV.

The $10.6 billion San Diego City Employees Retirement System (SDCERS) has approved a $20 million commitment to Torchlight Debt Opportunity Fund V from its real estate investment programme, according to documents sourced by PDI Research and Analytics.

Staff at SDCERS and consultant Aon Hewitt made the commitment during an investor committee meeting, which took place on 24 April 2015, after deciding that the opportunity meets with the pension fund’s investment criteria for its fiscal year 2015 real estate plan of which $60 million will be made to real estate investments.

Fund V is the successor fund to Torchlight Debt Opportunity Fund IV, which held a final close of $956 million in March 2014 and in which SDCERS made a $50 million investment. The New York-headquartered Torchlight Investors launched Fund V in October 2014, targeting $1 billion. As at March 2015, it had raised $367.7 million.

The fund is a closed-end, non-core fund focused on high yield real estate debt investments in both public and private markets, according to documents from the SDCERS’ meeting. It can opportunistically invest across a spectrum of real estate debt strategies including first-lien commercial mortgages, commercial mortgage backed securities (CMBS), mezzanine loans and commercial real estate backed collateralised debt obligations (CDOs).

Fund IV, Torchlight’s seventh fund, launched in August 2012 and like Fund III, targeted net IRRs of 14 to 16 percent. It has a targeted net equity multiple of 1.55x to 1.65x.

Torchlight’s eighth fund, Fund V, is seeking a net IRR of 13 to 15 percent and annualised distribution rate of 6 percent. The strategy has a maximum fund-level leverage ratio of 30 percent, compared to 60 percent or higher for other opportunistic real estate funds, according to documents.

SDCERS’ staff had meetings with Torchlight on 27 January and 16 April to gain a better understanding of the fund and the team. In documents from Aon recommending the investment, consultants explained that real estate continues to experience an imbalance in supply and demand of debt capital for real estate assets, particularly for tenyear loans originated in the peak of 2007 that are nearing maturity.

Aon continued: “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. 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.”

Aon highlighted that a previous fund from Torchlight, Fund II of 2007 vintage, is currently marked at 0.8x net equity multiple and a -3.4 percent net IRR but sought to mitigate concerns by explaining that the fund avoided utilising any debt which precluded it from experiencing any margin calls and ultimately the fund will return equity to investors albeit short of its original target return. Another concern Aon addressed is the potential conflict of interest posed by Torchlight’s special servicer business, Torchlight Loan Services (TLS), which carries out special servicing for CMBS trusts, when affiliated with an investment manager. Most prominent among these potential conflicts is the ability of a special servicer to acquire defaulted loans out of a CMBS trust. “To the extent that TLS were to ever exercise this option with respect to a CMBS controlled by Fund V, Torchlight would offset this conflict by purchasing the defaulted note at fair market value (as mandated by the Pooling and Servicing Agreement) and the acquisition would be for the benefit of Fund V,” the documents read.

Founded in 1995, Torchlight was originally founded as a joint venture with Jones Lang Wootton Realty Advisors. It changed its name to ING Clarion Capital in 2002 and again in 2010 to Torchlight Investors, when management purchased ING’s equity position. The firm, now 100 percent owned by its management team, has $4 billion of commercial real estate debt assets under management. It is a rated special servicer on $27.7 billion par value of commercial real estate debt and manages $1.9 billion in distressed assets.