UNITED STATES - Los Angeles City Employees Retirement System has made a $20m (€12.7m) to the Mesa West Real Estate Income Fund II, in a bid to capitalise on the supply and demand financing opportunities in the mid-size segment of the marketplace.

Lenders have become very selective about the capital they are putting into the market and this has even affected solid performing real estate so the number of deals being completed is way down for 2008 and there is no indication lending conditions will change anytime soon.

Investing in debt has been an area where many pension funds have sought to invest capital this year. This is being fuelled by a major increase in the amount of debt offerings being marketed over the past few years.

In the entirety of 2005, just 13 debt commingled funds were being marketed but today the number has exploded to more than 60 and these funds are now seeking to raise a total of $27bn of equity from institutional investors.

That said, there is some concern that too many managers are raising capital in debt funds, when they have no proven track record in the sector as several firms have recently put together teams to pursue the strategy.

Los Angeles City made its investment decision to invest in the commingled fund at its board meeting on July 22 and brought in their real estate consultant, Courtland Partners, to help with the decision-making process.

The pension fund liked the commingled fund so much they decided to double its commitment from the original amount of $10m to $20m.

Mesa West Capital is looking to raise $400m of equity for Income Fund II so the real estate manager will also be making a $10m co-investment into the commingled fund before its final closing sometime in September.

The projected net leveraged IRR returns for investors in Income Fund II are in the range of 12-14%.

Interestingly, officials intend to use the fund to offer one-stop financial solutions for borrowers, whether the deals are structured as first mortgage, mezzanine, participating debt or equity.

Transaction sizes are likely to be in the range of anything between $5m to $100m but the commingled fund is taking a regional focus and investing only western stretch of the United States, such as Arizona, California, Colorado, Idaho, Montana, Nevada, New Mexico, Oregon, Utah, Washington and Wyoming.

The fund will be looking to place capital into traditional real estate such as office, industrial, retail and apartments while the loan-to-value will be in the range of 75-80%.

Topics