The New Jersey Division of Investment (DOI) has expanded its real estate debt portfolio with a commitment of up to $100 million to True North Management Group’s True North Real Estate Fund III. The non-core fund represents the pension plan’s first property debt fund investment since its commitments to M&G Real Estate Debt Funds II and III in July 2013.
Fund III, which has a target size of $650 million, will pursue investments in high-yield commercial real estate debt and equity in the US. The fund will focus on three transaction types: distressed debt, opportunistic equity and rescue capital. Distressed debt investments will involve purchases of deeply discounted nonperforming loans on assets affected by capital structure issues or undercapitalized sponsorship. Additionally, True North will seek to buy sub-performing mortgages at discounts from banks and insurance companies.
In a memorandum to the New Jersey State Investment Council, which oversees the DOI, director Christopher McDonough cited the “compelling opportunity set” offered by the fund. “Senior mortgage capital has largely returned for fully leased, cash-flowing assets in major market, but transitional assets in suburban and secondary markets have had trouble finding the same level of interest, creating a massive funding gap,” he wrote.
Fund III also complements the existing five investments in New Jersey’s real estate debt portfolio, McDonough added. CT High Grade Partners II, a 2008 vintage fund, is focused on core opportunities, while the 2007 Guggenheim Structured Real Estate III, which now is being liquidated, targeted mortgage-backed securities and trophy properties. Meanwhile, Lone Star Fund VII, a 2011 investment, targets large portfolios, and the M&G funds specialize in European mezzanine debt. “True North also targets smaller properties outside of major markets, which have not garnered as much attention from institutional capital following the financial crisis,” McDonough wrote.
Given the size of New Jersey’s commitment, which represents 15.38 percent of equity target of the fund, the pension plan negotiated a 1 percent management fee, discounted from the standard 1.5 percent. New Jersey also was granted a two-month initial fee holiday on top of the discounted management fee, which effectively lowers the overall management fee to 0.98 percent. Additionally, the vehicle has a 9 percent preferred return and a 70 percent catch-up over a 12 percent hurdle, compared with a 50-50 GP catch-up over a 9 percent hurdle for other investors.
True North was founded by former Deutsche Bank executives Richard Gunthel and Paul Turovsky in 2004. The White Plains, New York-based firm, which currently has $856 million in assets under management, previously raised two other non-core real estate debt vehicles. Fund I, a 2006 vintage fund, currently is generating a 9 percent projected net internal rate of return (IRR) and a 1.6x projected net multiple, while Fund II is yielding a 16 percent projected net IRR and a 1.6x projected net multiple. Atlantic-Pacific Capital is serving as placement agent on the fund.