It has been a summer of love for the private equity real estate sector, with institutional investors backing one fund strategy after another. From generalist mega-funds to funds dedicated to niche property types like car parks, strategies are being capitalized left, right and center, reminiscent of the years leading up to the financial crisis. Increasingly, funds even are becoming oversubscribed –compelling stuff for sure.
Within this plethora of fundraising triumphs, however, you would be hard pressed to identify a tale more compelling than that of Morgan Stanley Real Estate Investing (MSREI), widely regarded as one of the crisis’ biggest victims. The raising of $1 billion in a first closing for its eighth global opportunity fund – Morgan Stanley Real Estate Fund (MSREF) VIII Global, or G8 as it is known – might seem small fry when considering other capital raisings to have occurred this summer. It might even seem paltry when compared to the firm’s own fundraising track record, which extends to more than $25 billion since its formation in 1991 and had looked better and better until the global financial crisis struck. Still, when you consider how far MSREI has come since the poor performance of investments made on behalf of its 2007 vintage funds almost irrevocably marred its reputation, this first opportunistic capital haul in more than four years takes on a special significance.
For one, the new fundraising offers evidence that MSREI has returned to producing strong enough returns for its investors that a number of them will forgive its ill-timed, 2007 vintage funds and commit more capital to the series. PERE understands that MSREF VII Global – which attracted $4.7 billion in 2010, the same year that its current leadership took charge – currently is generating returns of more than 20 percent IRR. Furthermore, approximately $1.6 billion already has been returned.
Secondly, and arguably more importantly, the new fundraising offers vindication for all parties related to the platform that decided to press on despite its prior woes. Reeling from the performance of G6, hierarchical changes internally and volatile property markets generally, MSREI invested little equity from G7 early on. With some six months to go before its investment period expired, the platform required a vote from its investors to continue deploying as much as $2.7 billion of uncommitted capital. That was a pivotal time for both the fund and the platform alike as a negative vote could have spelled the end of a long-dating series whose brand had become synonymous with the platform itself.
Consequently, the investors that approved a 12-month extension for the fund’s investment period will feel vindicated they made the right decision. And, as a 10 percent investor in the fund, Morgan Stanley itself will no doubt share in that sentiment. It too could have walked away from the platform, just as many of its investment banking peers did from theirs.
Executing a strategy focused on opportunistic situations with a high degree of income protection has been the order of the day for G7 and, given the chance by the bank and its investors, it has proven to have worked effectively. The same strategy will be deployed for its successor.
G8 is not expected to extend beyond $3 billion at final closing. Still, given the storm from which MSREI has emerged, a final closing at that volume would crystallize what really has been one of the industry’s greatest comeback stories to date. So, while the summer of ’14 might be producing a heap of fundraises throughout the private real estate sector, it may well be the comeback capital haul by one of its former greats that will stand out the most.