Debt is the sweet spot they have targeted partly because many banks and other lenders have left that business, they say. The fund will make

New Fund Targets Real-Estate Debt

Father-Son Team, Ex-Blackstone Executive to Raise Over $750 Million

Oct. 28, 2014 4:06 p.m. ET

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A well-known father-son investment team has joined forces with a former BlackstoneGroup managing director to raise a Debt is the sweet spot they have targeted partly because many banks and other lenders have left that business, they say. The fund will make junior debt and bridge loans new real-estate debt fund.

William and Richard Mack, players in such ventures as private-equity firm Apollo Real Estate Advisors and Mack-Cali Realty Corp., will raise the fund with Peter Sotoloff, who was head of debt originations for Blackstone. They hope to raise more than $750 million for the fund, according to a person familiar with the matter.

The private-equity fund will be managed by a new company they are forming that also will make first mortgages and run a hedge fund trading real-estate securities.

Debt is the sweet spot they have targeted partly because many banks and other lenders have left that business, they say. The fund will make junior debt and bridge loans available to developers in the U.S. and Europe, charging higher rates because the loans are riskier than more senior debt.

“The opportunity is to focus on more difficult assets that have a story to them in development and redevelopment,” says Richard Mack, 47 years old, who declined to comment on how much the private-equity fund plans to raise.

The new company, named Mack Real Estate Credit Strategies, is being born at a time when U.S. and European real-estate markets are improving, investor appetite is growing and fundraising has become easier among private-equity firms. Big names in the private-equity world, like Mr. Sotoloff and the Macks, have been positioning themselves to take advantage of these trends.

Private-equity real-estate fundraising globally reached $65 billion in the first three quarters of 2014, the largest amount of capital raised in the first three quarters of any year since 2008, when $118 billion was raised, according to data-tracker Preqin. Last year, about $56 billion was raised in that period, Preqin says.

Mr. Sotoloff surprised the private-equity world in June when he left Blackstone, one of the world’s most active real-estate investors and a firm that doesn’t see many departures of senior executives.

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The decision by the Macks and Mr. Sotoloff to focus on debt is likely to generate debate in the industry over whether the private-equity structure is suited to debt real-estate investments.

Most private-equity real-estate funds buy property rather than lend to property owners because there is no limit to how much property values can increase. That boosts their chances of producing returns.

Some advisers say institutions need to be careful when investing in private-equity debt funds to make sure their returns are better than other types of debt investments that are more liquid and transparent, and charge lower fees. Sometimes investing in private-equity debt funds “is difficult for me to reconcile on a net-of-fees basis,” says Brett Cornwell, head of fixed-income research for Callan Associates, an institutional adviser.

But Richard Mack says there is a big advantage to debt investments: They are easier to exit than equity. In some down cycles, private-equity firms haven’t been able to sell property and repay investors because values have fallen too far.

“If you hit the cycles right, returns are going to be great,” he says. “If you hit the cycles wrong, returns are going to be terrible.”

Debt investments skirt that problem because loans mature at specified dates, Mr. Macksays. “You don’t have the same friction costs getting out of debt assets. The risk-adjusted returns on the debt business are better.”

The Mack family has ties to the real-estate industry that date back nearly 100 years. In the late 1990s, much of the family’s office-building holdings merged with Cali Realty Corp. to become Mack-Cali Realty.

William Mack, now 74, also was a founder with Leon Black of Apollo Real Estate Advisors, a major buyer of distressed assets in the real-estate downturn of the early 1990s. Richard Mack also worked for that firm, which initially had ties to Mr. Black’s Apollo Global Management LLC.

In 2000, the real-estate unit became independent from Apollo Global Management. It changed its name to AREA Property Partners in 2008 to formalize its independence.

Write to Peter Grant at peter.grant@wsj.com