POBA to commit $200 mn to Square Mile’s $825 mn debt fund

The Public Officials Benefit Association (POBA) will commit $200 million to a real estate debt fund of Square Mile Capital, a US investment company, which is set to raise $825 million from POBA and two other investors.

The new debt fund will be managed like a separately managed account for the three investors - Square Mile’s minority shareholder USAA Real Estate Company, POBA and an unidentified large US pension fund, according to investment banking sources on July 5.

POBA, a $10 billion retirement fund for South Korean local government employees, will commit the $200 million via a domestic vehicle of KB Asset Management for an expected annual return of around 7% over a 10-year investment period.

POBA’s investment committee has recently approved the capital commitment.

The US debt fund will focus on transitional real assets which have a wide valuation gap between sellers and buyers, or decrepit facilities with low income-generating potential.

It will extend whole loans to finance acquisitions of a wide range of commercial real estate assets, including shopping malls and office buildings. They may invest part of the committed capital in development projects.

The loans will be securitized into tranches A and B according to seniority for repayment to lift returns. It will sell the senior note A to banks or other investors, while holding onto the junior tranche B.

The vehicle can use leverage of up to $500 million, or the equivalent of 60% of its principal, which means it can deploy as much as $1.3 billion to investments.

POBA plans to make additional co-investments with global pension funds and commit capital to specialized management companies.

In April, it set up a $400 million joint venture with a California pension fund to invest in US senior real estate debts. PCCP LLC, a US real estate investment company, manages the venture.

In late 2017, POBA committed around $70 million to a US securitization fund backed by real estate debts which an affiliate of Mack Real Estate Group manages.

Square Mile is one of the top three US real estate debt companies, along with PCCP and Mack Real Estate Group.

By Daehun Kim

daepun@hankyung.com