EXCLUSIVE: Colony to co-invest up to $500m in new fund

The new offering will be the first vehicle that the Los Angeles-based real estate investment manager will raise as a public company.

Colony Capital is gearing up to kick off its latest real estate debt fund, Colony Distressed Credit & Special Situations Fund (CDCF) IV, with plans for the firm to co-invest up to $500 million in the new vehicle. The fund, which is expected to be launched within the coming weeks, will have a $2.5 billion target, its largest real estate debt offering to date, according to multiple people familiar with the fund.


CDCF IV is coming to market less than a year after the final close of its predecessor, CDCF III, last October. The firm has spoken with its existing investors about the new fund, although no private placement memorandum has yet been issued. Colony declined to comment.


The new fund will have more than double the target of CDCF III, which had an original equity goal of $1 billion but ultimately closed at its hard cap of $1.2 billion in commitments. Colony also hauled in an additional $600 million in co-investment capital for the fund.


The new fund marks the first time that Los Angeles-based real estate investment manager will be raising a vehicle as a public company. In April, Colony combined operations with its publicly-traded mortgage REIT, Colony Financial, which subsequently was renamed Colony Capital. As general partner, Colony will commit 25 percent of the total capital raise, up to $500 million, sources said.  Because Colony's principals, which include founder Tom Barrack and chief executive officer Richard Saltzman, own 23 percent of the shares in the public company, 23 percent of the GP co-investment, or up to $115 million, will come from the firm's executives.


PERE also understands the CDCF III was oversubscribed by some $400 million, which means that the firm attracted a total of at least $1.5 billion for the fund. Add to that its $500 million GP co-investment, Colony would need to raise $500 million more in new capital as compared with its last offering.


One major difference between CDCF III and IV is the latter's larger allocation to Europe. The earlier fund, which was projected to be 40 percent allocated to Europe, is currently approximately 90 percent invested, with about 55 percent of the invested capital allocated to the region, sources said. Meanwhile, CDCF IV is said to have a 60 percent allocation target to Europe.


Similar to the previous funds in the series, CDCF IV will be focused on loan acquisitions, high-yield originations and special situations. Despite CDCF IV's large target size, the firm will not be ramping up its investment activity on behalf of the fund.  After all, Colony Capital and Colony Financial previously had split up most of its deals 50-50 between its private funds and the public REIT. Following the combination of the two entities, Colony will be investing in deals as one unified entity.


Colony is said to have a strong pipeline for CDCF III, particularly in Europe, with many potential deals likely to be carried over into the new fund. At its earnings call in May, the firm said that it was close to acquiring a 50 percent interest in a German real estate fund and asset manager.