Morgan Stanley AIP: more co-investments in 2013

The co-head of Morgan Stanley AIP’s real estate fund of funds group says a lack of liquidity in the market is increasing the number of opportunities for co-investments in the US and the UK.

Morgan Stanley Alternative Investment Partners (AIP) expects to see a “significant increase” in co-investment opportunities in 2013, according to its co-head of real estate.

Paul Vosper, chief operating officer and co-head of Morgan Stanley AIP’s real estate fund of funds group, told PERE that the value-added and opportunistic investor is seeing the co-investment space, particularly in gateway markets in the US and the UK, as its current sweet spot, especially given the market’s liquidity problems.

“We’ve seen a significant increase in co-investment opportunities in 2012, which is a function of capitulation and a low leverage environment,” Vosper said. “With the limited amount of debt liquidity in the market, our partners need more capital for these investments and are seeking strategic partners with which to work.”

Indeed, debt liquidity remains extremely limited, particularly in the non-prime assets that Morgan Stanley AIP prefers to focus upon. Although the emergence of debt-focused funds have helped somewhat, they have “not yet provided sufficient capital to the market” to serve as a replacement to banks and other traditional lenders.

On the lack of liquidity paving the way for increased co-investments, Vosper added: “We see this trend continuing during what is likely to be a lengthy deleveraging process.”

The Morgan Stanley AIP executive noted that the firm has been particularly “overweight” to the US and UK markets, with some activity in Brazil and China, but it hasn’t made an investment in the Eurozone in nearly 18 months. Vosper explained that this is not only because underwriting is difficult for an illiquid investor, but also that “the lack of a significant capitulation in the market means that pricing has not been as attractive as other developed markets, where we are a price maker.”

Looking forward to 2013, Morgan Stanley AIP will continue to look towards the major gateway markets as attractive places in which to invest. If the firm sees a resolution to the Eurozone crisis and capitulation in those real estate markets, it may consider such European markets as Germany.

Meanwhile, Morgan Stanley AIP will continue with secondaries investments in the year ahead. “We will continue to grow and expand our secondaries programme,” added Vosper. “It has and should continue to provide an attractive liquidity premium.”