The Perfect Storm: What Happens When the Market Moves Four Standard Deviations?

Adam Carter was the portfolio manager for Tate Modern Finance III, L.P. (“Tate” or the “Fund”), the third in a series of U.S. commercial real estate debt funds sponsored by the London-based Tate Partners. The Fund was capitalized with $700 million of equity commitments, including a $50 million Sponsor commitment. The Fund’s objective was to acquire income-producing commercial real estate mortgages at conservative attachment points in the capital structure, leverage these investments modestly, and generate mid-teen, net returns. The return objectives were consistent with prior funds and represented an alternative means of investing in commercial U.S. real estate equity that was felt to be overvalued at the time (2006). In theory, a debt strategy would provide more protection, and be more conservative, than an equity-oriented strategy due to the multiple layers of debt and equity subordination that insulated the Fund’s investments.