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 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 securitization, 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.”