EXCLUSIVE: Colony to close debt fund on $1.2bn

Colony Capital is slated to hold a final close by the end of the month on its latest distressed debt fund, Colony Distressed Credit and Special Situations Fund (CDCF) III, which has hit its hard cap of $1.2 billion in base capital commitments. PERE understands that the fund, which had an original target of $1 billion, is significantly oversubscribed above its hard cap, with Colony turning away some $400 million in commitments. Meanwhile, the firm also has raised $600 million in additional capital through co-investment vehicles.

Colony, led by chairman Thomas Barrack, launched CDCF III in July 2013 and had raised $491.74 million as of this July, according to filings with the US Securities and Exchange Commission. The approximately 30 limited partners in the fund included the Florida State Board of Administration, which committed $150 million; Fresno County Employees’ Retirement Association (FCERA), which earmarked $20 million; and the Teacher Retirement System of Louisiana, which pledged $75 million, according to documents from those pension plans. About 25 percent of the LPs, including Louisiana Teachers, were first-time investors with Colony. 

Like its predecessor funds, CDCF III will invest in acquisitions of one-off loans or loan portfolios; new loan originations, typically mezzanine debt or preferred equity; and special situations, such as rescue capital and recapitalizations. Approximately 45 percent of the fund’s capital will go to loan acquisitions, 35 percent to originations and 20 percent to special situations, according to documents from FCERA. 

However, the new vehicle will be much more heavily weighted to Western Europe than the prior funds in the series, with 40 percent of the fund targeting the region and 60 percent in the US. By comparison, CDCF II was 93 percent allocated to the US and just 7 percent to Western Europe. 

Colony is seeking 15 percent gross returns and 11 percent net returns for the new fund. To date, the firm has invested 45 percent of the capital in CDCF III in 16 transactions, with an additional four or five deals pending. Completed deals include the acquisition of a portfolio of 415 loans from Freddie Mac in October 2013 at 57 percent of the unpaid balance of $199 million; and the origination of €129 million of notes and a €34 million letter of credit in June to finance the public tender offer for Société de la Tour Eiffel, a French listed real estate company, which subsequently were repaid one month later. The fund, which is using 50 percent leverage, is said to be generating an 18 percent gross return on its investments to date.