Raising $1 billion in today’s market is no small feat—especially when it’s double the original target. Cottonwood Group’s latest fundraising success shows how a disciplined credit strategy, paired with true operational depth, can capture LP confidence even in uncertain times. Tang Tang, Head of Capital Markets & Managing Director, shares how Cottonwood is redefining what it means to be a multi-strategy real estate platform—and why their approach resonates so strongly with investors.
Q: Cottonwood recently announced a $1.0 billion fundraise for your Special Situations Strategy, double the original target of $500 million. What makes Special Situations so compelling to LPs?
Tang: Given current market conditions, debt investments offer a great opportunity for risk-adjusted return. Equity is seeing continued pressure on the supply chain—labor and material costs that are critical for the ability to build. This means that on a risk-adjusted return basis, equity investment are often less desirable when compared to credit investments with equity-like returns but also benefit from additional downside protection.
Our team has spent 13 years building a real estate platform that is truly multi-strategy and comes with operational and development capabilities. Our investors find compelling value in our comprehensive in-house expertise, spanning construction, management, and development. This integrated capability sets our multi-strategy platform apart from pure-play real estate debt funds. Unlike typical debt funds, which often lack development and operational capabilities, Cottonwood possesses the robust execution capabilities necessary to effectively manage complex projects and navigate downside scenarios, particularly those involving construction risk.
Cottonwood launched our Special Situations Strategy with strong support and trust from existing investors that was built as the direct result of our strong track record over the last 13 years. We’ve also been fairly conservative over those years. It seemed like most fund managers really tried to deploy as much capital as possible when the market peaked, coming out of the pandemic. We, on the other hand, took a more cautious approach and remained more selective and limited in our deployment of capital during the same period. As a result, when the market conditions changed over the last few years, we did not experience the losses that other funds may have. I think we’ve earned a lot of respect for that from our investors.
Q: Beyond a sharp strategy, what other factors—both inherent to Cottonwood as a business and external—played into such massive fundraising success?
Being a mid-sized manager, with a strategy commitment size of up to $1 billion, is kind of a sweet spot. Without the type of deployment pressure that comes from being a much larger fund, we can take our time and focus our energy to thoroughly explore the vast and dynamic U.S. real estate market, which currently sits at about $1.7 trillion, for the best risk-adjusted returns. Mega managers are so large that they lean harder into market sector trends for scale than we do. Cottonwood is more focused on finding the needle in the haystack deal because we only have to deploy into a select number of deals in a single year. Being larger isn’t always better.
For example, when a mega fund manager wants to invest in hospitality, they are so large that they would likely invest in an entire hotel chain or a portfolio of hundreds of hotels across the country. Whereas, if Cottonwood chooses to lean into a sector trend, we find one to two hotels with the best risk-adjusted return. Then, we identify our preferred piece of the capital stack that we believe delivers the most desirable risk-adjusted return.
Q: Cottonwood’s platform is quite expansive—deploying capital across the entire capital stack, a large array of property types, and an open-end fund. How do you distill your value proposition to prospective investors? From an operational perspective, what are the keys to successfully managing an open-end fund?
Cottonwood’s value proposition is fund-specific. Most of our expertise and history is focused on the credit side, which makes up about 70-80% of our business. The other 20-30% is focused on equity, including select development deals. Having the in-house ability to fix a construction or operational problem, or take over construction or development of a building, is a differentiator that pure play debt funds in real estate don't typically have. That ability is unique and uncommon in the commercial real estate space, but more common in general private equity. Therefore, it's something investors can understand and appreciate coming out of an unstable market environment where we have seen a lot of stress and pressure on real estate.
Our previous fund is an open-ended fund, and it has a fairly short lock-up period, which provides investors with more flexibility. The challenge with that comes into play when an investor wants a redemption. You have to ask yourself–do I have enough liquidity to satisfy that? For that reason, we manage our cash on a month-to-month, quarter-to-quarter, and year-over-year basis. Our team spends more time, when compared with a closed-ended fund vehicle, trying to project those variables and understand our LP’s needs and overall financial situation. In a closed-end fund, managers don't need to worry about that issue as much. Due to the shorter lock-up period and the open-ended nature of our previous fund, we tend to check in with LPs regularly to be more receptive to what is happening in their portfolio and cash needs, as well as how our fund fits into their overall portfolio construction.
Q: Cottonwood offers a credit solution, which is probably one of the “hottest” strategies in private markets right now. Can you shed any light on when and why Cottonwood entered the credit market and what has made that solution successful to date?
When Cottonwood was formed in 2012, U.S. real estate credit was hard to come by, and private equity debt funds didn't do much real estate lending. Our founder and CEO, Alexander Shing, saw the opportunity to bring liquidity to the credit side of the U.S. real estate market. As a result, we have been lenders since the company’s inception. It has taken us time to grow from what started as a pure debt platform to a multi-strategy platform that today has development and operational capabilities. The success of our credit deployment is due to our focus on downside protection. With a multi-strategy platform, our team has a broader skillset built over the past 13 years that allows us to be diligent and truly understand downside risk and scenarios.
We also tend to be more conservative than many of our peers over time. Our philosophy is that it is okay to turn down or lose a deal, but it is not okay to lose money for our investors. That has been part of Cottonwood's DNA since the beginning.
Q: We’re proud to partner with you on both investor management software and fund administration solutions. What makes Juniper Square different?
Our team was looking for more holistic solutions. Juniper Square delivered because it allowed so many pieces of the fund management puzzle to fit together under one platform. Our team is also very happy with the level of service provided by Juniper Square, because you are committed to understanding our goals and objectives and partnering with us to achieve them.