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Walton Street launches first RE debt fund

The Chicago-based private equity real estate firm, which recently wrapped its latest equity fund, will seek to originate floating-rate loans amid anticipated rising interest rates.

Fresh off completing its seventh opportunistic fundraising, Walton Street Capital currently is marketing its first real estate debt vehicle, Walton Street Real Estate Debt Fund. The first closing of the fund, which has a $500 million target, is expected during the second quarter, while a final closing is slated for the second quarter of 2015, according to documents from the Texas Municipal Retirement System.

Texas Municipal will be an early investor in the new vehicle, having approved a $100 million commitment to the fund at its board meeting last month. In exchange, the pension plan will receive favorable terms that will yield annual savings between $250,000 and $500,000 in management fees, the documents stated.

Walton Street Real Estate Debt Fund will invest in whole loans, mortgage participations and mezzanine loans backed by real estate and other real estate-related assets in the US. The firm will structure junior loans by originating whole loans and selling the senior loan to a network of relationship banks while holding onto the junior portion. However, the fund’s predominant focus will be on floating-rate loan originations in what is expected to be a rising interest rate environment. Walton Street will target gross returns of 11 percent to 13 percent and net returns of 9 percent to 11 percent for the fund.

The vehicle primarily will be a blind pool with one pre-specified asset. Loans will be collateralized by properties in the typical sectors covered by Walton Street, including office, industrial, retail, hotel and multifamily, and in US markets where the firm already has a strong presence, such as New York, Chicago, Boston and San Francisco. Mortgages will have a maximum loan-to-value (LTV) ratio of 75 percent for most property types except for hotels, which have a maximum LTV of 65 percent.

While this is Walton Street’s first real estate debt vehicle, the firm previously was an owner of Los Angeles-based portfolio lender Mesa West Capital and served on the investment committee for two Mesa West funds, Mesa West Real Estate Income Fund and Fund II. A Walton Street affiliate, Brener Street International Group, along with the Royal Bank of Scotland together owned 50 percent of the firm until Mesa West’s management bought out its former partners in 2012. While Walton Street has retained its interests in both Mesa West funds, it no longer has an economic stake in the company.

The launch of the new debt fund follows the final close of Walton Street’s latest opportunistic real estate offering, Walton Street Real Estate Fund VII, in late February. That fund attracted a total of $1.4 billion in equity commitments.