Torchlight closes latest debt fund at $2.04bn

Torchlight Debt Fund VII is the largest US real estate debt fund to be closed this year.

Torchlight Investors has closed Torchlight Debt Fund VII, a $2.04 billion vehicle that is also the largest US-focused real estate debt fund to be raised this year. The New York-based investment management company targeted $1.5 billion for the fund, which was launched about 15 months ago.

The fund will originate high-yield loans and acquire commercial mortgage-backed securities conduit B-pieces, with collateral that is composed of traditional property types, hotels and student housing properties. The vehicle likely will have 75 to 125 underlying investments of $5 million to $75 million, according to a 2020 presentation from the Nebraska Investment Council viewed by affiliate title Real Estate Capital USA.

The fund will originate subordinate debt on transitional properties in growth markets. In addition to acquiring CMBS B-pieces, the fund could also buy other CMBS securities and Freddie Mac K Series B-pieces, the presentation said.

The 10-year fund is targeting net IRRs of 10 percent to 12 percent, with an anticipated 6 percent annual distribution and a 1.35x net equity multiple.

Torchlight Debt Opportunity Fund VI, the fund’s immediate predecessor, has so far produced a net IRR of 5.8 percent, with a net equity multiple of 1.04 percent. That fund closed in February 2019 at $1.68 billion.

The fund’s investments are expected to have a hold period of five to seven years. The vehicle includes a 1.5 percent fee on committed capital during the investment period, with a 20 percent incentive fee that includes an 8 percent preferred return that is followed by a 50/50 catch-up.

The firm’s investors include the State Universities Retirement System of Illinois, which approved a $50 million commitment in March. The Ventura County Employees Retirement Association inked a $25 million commitment in late 2020 while the Baltimore City Fire and Police Employees’ Retirement System made a $15 million allocation to the vehicle.

Special servicer distinction

The presentation highlighted Torchlight’s special servicing capabilities, which the firm believes is a key differentiator due to its focus on CMBS B-pieces. The firm’s special servicing group is rated by Fitch Ratings.

“Typically, in any conduit CMBS securitisation, one to five loans out of a pool of 100 is expected to default,” the presentation stated. “When the fund buys CMBS B-pieces, it can direct the special servicing of defaulted loans to its affiliate.”

This article first appeared in affiliate publication Real Estate Capital USA