Morgan Stanley pulls plug on €852m German fund

Morgan Stanley is liquidating its €852 million German open ended fund, P2 Value – two years after stopping investor redemptions around the time of the collapse of Lehman Brothers.

The firm has taken the decision in the face of further expected redemptions by investors that would have been able to withdraw funds once the suspension lifts on 30 October.

As a result of the shut-down, the firm will sell 34 assets in the US, Asia and Europe between now and 30 September 2013.
Morgan Stanley PS2 said that the value of the assets in the fund was currently €852 million. That figure represents a big decline for a five-year-old fund that once had assets valued at around €2 billion.

In a statement, Morgan Stanley said discussions had been held with investors over recent weeks and months and that it had become clear that redemptions would be highly likely to threaten the vehicle’s liquidity.

It is another dent in the German open-ended real estate fund industry, which has seen widespread redemptions that resulted in moratoriums on further withdrawals on many vehicles.

The systemic mismatch between investors being able to withdraw money and the illiquid nature of the underlying assets has called into question the very model of open-ended funds.

Changes to the German Investment Act due to come in 2011 could put off more institutional investors from investing in them because of new rules requiring minimum holding periods of 24 months for all new investors, while redemptions in the third and fourth year will carry a 10 percent and 5 percent penalty, respectively. 

There is already momentum in the country towards investing in spezialfonds instead, which are seen as more appropriate for institutional investors.

P2 Value is not the first open-ended fund to close. Earlier this year, KanAM US Grundinvest took the decision to liquidate, followed by Degi Europa managed by Aberdeen Asset Management.

Nevertheless, the decision by Morgan Stanley does come after comments in September by Walter Klug, head of the fund, who said he was optimistic investors would stay in. “Independent researchers see a possible recovery in real estate values in the markets in which the fund is active,” he insisted. 

The issue for private equity funds is that a big squeeze on this traditionally active counterparty in real estate will reduce global opportunities to buy assets or indeed sell assets, as German open-ended funds have often been regarded as an exit route for higher risk vehicles.