AMERICAS NEWS: Colony asks for seconds

Colony is raising its second debt fund. Meanwhile founder Tom Barrack says no ‘meaningful’ distressed capital has yet been deployed in the industry. PERE March 2010 issue

With more than 90 debt funds currently trying to secure commitments from investors, Colony Capital faces some tough competition as it attempts to raise its second credit fund.

The Los Angeles-based private equity real estate firm is believed to be targeting between $500 million and $750 million for the vehicle, the Colony Distressed Credit Fund II, according to people familiar with the matter.

Tom Barrack,
Colony Capital

However as one of the original debt investors of the RTC crisis, Colony hopes its track record will bring it the same success as seen with its predecessor fund, CDCF I.

In 2008, Colony closed Fund I on $900 million after just one month of fundraising. The fundraising effort was led by founder and chairman Tom Barrack, with Colony approaching longtime investors for commitments. Now with the vehicle majority invested, Colony is off raising the follow-on fund.

It hopes to close CDCF II over the summer, sources said, with Colony expected to approach corporate pensions, high-net-worths and sovereign wealth funds among other investors. The vehicle will primarily invest in real estate debt, with some loan-to-own strategies and with the possibility of some new debt origination.

In January, Colony successfully bid to take over an entire portfolio of more than 1,200 loans from the US banking regulator, the Federal Deposit Insurance Corporation. The loans, with a face value of $1.02 billion, were acquired with an equity investment of $90.5 million and government financing of $233 million in corporate guaranteed notes.

The deal, which saw Colony take a 40 percent stake in the venture alongside the FDIC’s 60 percent interest, was split across three Colony vehicles, PERE learnt at the time, including the CDCF I, the $4 billion Colony Investors VIII and the mortgage REIT, Colony Financial.

Barrack though has already warned that distressed investors face anxiety and discontent as they “languish in the doldrums of status quo”.

In his January chairman’s corner column, Barrack said the mantra of extend and pretend had sent the industry into a “holding pattern that has become a bit surprising”, not least because “big guns” were “convinced that the opportunistic wave of the day would be distress”.

“There are dozens of distress strategies and theories and most of them have not yet resulted in meaningful amounts of attractively deployed capital,” he said. “Likewise, borrowers who themselves are in distress as a result of high debt loads and underperforming businesses and properties are finding that banks are not interested in lending money. Amazingly, banks also are not in a hurry to protect their security or foreclose on businesses or properties. We are all stuck in the middle of a flat sea with no waves and no wind.”