The Cottonwood Group raised a ten-figure sum for a fund that aims to capitalize on the current high-interest, distress-filled loan market.
The Los Angeles-based private equity shop raised double its original $500 million target, hitting a $1 billion close, Bloomberg reported. The fund, earmarked for what it describes as special situations, focuses on new developments as well as those that need restructuring. About $300 million is already at work, largely through loans structured with options to take over properties in default scenarios.
Cottonwood said the vehicle has delivered a 20 percent internal rate of return so far. The initial close was in 2023.
Founder and chief executive officer Alexander Shing told the publication the strategy is built for this cycle. Roughly $2 trillion of commercial real estate debt will need refinancing by 2027, including nearly $600 billion flagged as potentially troubled, per data from Newmark. Higher borrowing costs and sliding property values since 2022 have only added pressure.
“We’re two years into a high-rate environment and there’s a lot of stress and distress out there,” Shing said.
Cottonwood’s strategic fund has already placed bets in multiple markets. That includes a residential tower rising at 262 Fifth Avenue in Manhattan, where pricing and a sales launch have stalled.
In June, Cottonwood bought out Madison Realty Capital on its $90 million note secured by the building’s condo units, according to public records. In addition to its original $90 million construction loan, Madison Realty provided $20 million in mezzanine debt and $20 million in senior debt, which was paid down in 2024. Cottonwood provided the extra $50 million in mezzanine debt.
For the fund, there’s also a mixed-use development in Austin and the redevelopment of the site of the Viper Room, the West Hollywood nightclub with a colorful history. The firm is also in talks over a $240 million construction loan it extended two years ago for the St. Regis Residences in Boston.
Taiwan’s Fubon Financial Holding, Korea Investment Holdings and the North Atlantic States Carpenters Benefit Funds are among the fund’s investors. Capital came through both the main fund and separately managed accounts.
Cottonwood manages roughly $1.5 billion across its funds, or $2.65 billion including separately managed accounts and other vehicles. Since launching in 2012, the firm has transacted and advised on some $7 billion worth of deals.
— Holden Walter-Warner
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