Walton Street’s second RE debt fund reaches $800m

Fund I, a $655m vehicle, is expected to bring in an 11% gross IRR.

Walton Street Capital is marching toward its $1.25 billion target for its latest real estate debt fund, having collected $800 million by the end of 2018, according to meeting documents from the San Joaquin County Employees’ Retirement Association.

The Chicago-based firm held a first close on $415 million for Walton Street Real Estate Debt Fund II, which has a $1.5 billion hard-cap, as Private Debt Investor previously reported. Fund I, which closed on $655 million, is expected to generate an 11 percent gross internal rate of return with a 7 percent debt yield. Walton Street’s debt vehicles levy a 1.25 percent management fee.

The firm declined to comment.

Walton Street’s real estate debt platform invests in junior loans for commercial real estate buildings by originating whole loans and then working with senior lenders, according to its website. In doing so, the firm says it can capture pricing arbitrage between the whole loan and senior portion of the capital structure.

The firm is also getting ready to launch its new real estate equity fund at the end of January or early February, the meeting documents show. Its current such vehicle, Walton Street Real Estate Fund VIII, wrapped up fundraising at $1.3 billion and has invested $850 million-$900 million. The firm also just launched a core-plus investing program with a $250 million commitment from a US anchor investor.

Real estate debt fundraising, while robust in recent years, took a steep nosedive last year, according to data from sister publication PERE. The strategy saw a 48 percent decline from 2017 to 2018, falling from $39.08 billion to $20.39 billion.

In PDI Perspectives 2019, this year’s installment of an annual LP survey, the proportion of investors that said they were increasing their allocation to the strategy – 16.7 percent – was largely in line with the 15.3 percent that said they were decreasing their real estate debt bucket.

In a separate survey conducted by PDI alongside THL Real Estate in October, investors that committed to the commercial real estate debt strategy said the two most important reasons for doing so were stability and income. LPs named the US as the most attractive commercial real estate debt market, a geography in which a plurality, 42 percent, said they expect a return of 8-11 percent.