SDCERS commits $50m to Torchlight

The commitment comes just three months after SDCERS added a sub-allocation to opportunistic real estate. 

The San Diego City Employees’ Retirement System (SDCERS) approved a $50 million commitment Torchlight Debt Opportunity Fund IV at its investment committee meeting last week, a spokesperson told Private Debt Investor.

SDCERS will invest in the vehicle through its 8 percent Opportunity Fund allocation, which is dedicated to strategies that do not fit neatly within a clearly-defined asset class.

In June, SDCERS approved the addition of a 2-3 percent sub-allocation to its opportunistic real estate allocation within the Opportunity Fund. The retirement system’s advisor, Hewitt EnnisKnupp, indicated that the ideal opportunistic real estate strategy should focus on distressed themes and that the ideal manager would offer a high degree of transparency, strong risk management practices, well-established teams and a well-defined and disciplined investment processes, according to a staff memorandum.

“After researching several other funds currently in the market and engaging in discussions, staff and HEK have identified Torchlight DOF IV as an opportunity that meets both investment theme and type,” according to a staff recommendation.

Torchlight has a $1 billion target for Fund IV, which will invest in commercial real estate debt, including mortgages, mezzanine loans, CMBS and other real estate related investments, according to presentation materials made available by the retirement system. The fund will complete 50 to 150 deals between $5 million to $50 million in size, according to the presentation materials.

Torchlight is targeting an annualised net internal rate of return of 15 percent-plus and a distribution rate of 6 percent-plus.

The firm is offering a 1.5 percent management fee for the fund. That fee falls to 1.25 percent for fund commitments of at least $50 million or more and 1 percent for commitments of $100 million or more. 

“As an active participant in this space Torchlight has the opportunity to underwrite large volumes of securities and underlying loans giving them a unique perspective on conditions in the commercial real estate lending market,” according to Hewitt EnnisKnupp’s investment recommendation. “Torchlight has added expertise on the private direct lending side to take advantage of additional attractive opportunities where opportunistic returns can be earned.”

Hewit EnnisKnupp also indicated that Torchlight’s track record is not without blemish. The firm’s Debt Opportunity Fund II had generated a 0.7x net equity multiple and a negative 8.4 percent net internal rate of return. Even so, the firm has done a “solid job” managing that fund’s portfolio since its 2007 inception.

“It has rebounded from the depths of its write downs, when it was marked at a 0.4x equity multiple in Q1 2009,” according to the recommendation. “Torchlight avoided utilising any debt on DOF II which precluded the Fund from experiencing any margin calls and ultimately allowing it to participate in the market recovery.”

Fund IV has raised at least $414.1 million towards its $1 billion target, according to a document filed earlier this month with the US Securities and Exchange Commission. Torchlight is expected to hold a final close for the vehicle at some point in the fourth quarter.