The Cottonwood Group, a private equity firm based in Los Angeles, has closed a $1 billion fund aimed at investing in distressed loans and new real estate developments. The firm doubled its original fundraising target of $500 million, according to Bloomberg.
The new fund is described by Cottonwood as targeting “special situations,” with about $300 million already deployed. Most of these investments have been structured as loans that allow the firm to take control of properties if borrowers default.
Cottonwood reports that the vehicle has delivered an internal rate of return of 20 percent so far. The initial close for the fund occurred in 2023.
Alexander Shing, founder and chief executive officer, commented on the firm’s approach: “We’re two years into a high-rate environment and there’s a lot of stress and distress out there,” Shing said.
Market data from Newmark indicates that roughly $2 trillion in commercial real estate debt will require refinancing by 2027. Of this amount, nearly $600 billion is considered potentially troubled due to rising borrowing costs and declining property values since 2022.
Among its recent transactions, Cottonwood took over Madison Realty Capital’s position on a $90 million note secured by condo units at 262 Fifth Avenue in Manhattan after sales at the project stalled. Madison Realty had also provided mezzanine and senior debt on the building; those were paid down earlier this year while Cottonwood supplied an additional $50 million in mezzanine financing.
Other projects supported by the fund include a mixed-use development in Austin and redevelopment plans for the Viper Room site in West Hollywood. The company is also negotiating terms related to a $240 million construction loan it extended two years ago for St. Regis Residences in Boston.
Investors in Cottonwood’s latest fund include Taiwan’s Fubon Financial Holding, Korea Investment Holdings, and North Atlantic States Carpenters Benefit Funds. Capital was raised through both the main fund and separately managed accounts.
Overall, Cottonwood manages about $1.5 billion across its funds or approximately $2.65 billion when including separately managed accounts and other vehicles. Since its founding in 2012, it has transacted or advised on deals totaling about $7 billion.
