Morgan Stanley targets $10bn ‘dislocation’ fund

The financial services giant’s private equity real estate arm has launched a $10 billion fundraising to take advantage of “distress and dislocation” caused by the credit crisis. Pennsylvania Public School Employees' Retirement System has committed up to $400 million to the vehicle.

Morgan Stanley Real Estate is on the road with a distressed real estate opportunities fund targeting $10 billion (€643 million).

The fund, called Morgan Stanley Real Estate Fund VII Global, is targeting global distressed investments, as well as development opportunities in the emerging markets, with typical investments between $20 million and $1 billion.

According to information released by the Pennsylvania Public School Employees' Retirement System – which has just approved commitments of to $400 million to the fund – MSREF VII will invest in the distressed real estate debt and equity of large corporations and government entities, as well as investing in China, India, and other emerging markets where “the demand for
quality real estate assets far outstrips supply.”

As of December 2007, the pension fund said, Morgan Stanley Real Estate funds had produced an aggregate gross IRR of 33 percent and 2.4x multiple.

Morgan Stanley closed its last real estate fund, MSREF VI International, on $8 billion last year. If MSREF VII surpasses its target it would catapult the financial services giant into the largest private equity real estate firm in the world – outstrip The Blackstone Group – according to new data from PERE.

The pension fund approved commitments totaling $1.88 billion at its recent board meeting, including up to $175 million in Paladin Realty Latin America Investors III, which is targeting $500 million, with a hard cap of $800 million and up to $100 million in Strategic Capital Partners Value Enhancement Fund II, which is targeting $500 million.

Paladin’s latest Latin American vehicle is focused on developing affordable housing in the region to take advantage of the growing middle classes. The firm is also investing in resort-residential, office, industrial, retail and hotel properties. According to PSERS, Paladin has invested in 66 individual projects in Latin America, as of the end of last year, with 27 projects sold for a realized gross IRR of 25 percent and a 1.8x multiple.

Strategic Capital Partners’ latest fund is focusing on value-add opportunities of up to $40 million in the tri-coastal US markets of California, Texas and New York. The Chicago-based firm’s previous fund, according to PSERS, has sold two projects for a gross IRR of 60 percent and a projected IRR for the remaining portfolio of 21 percent.

The pension also committed up to $175 million to RCG Longview real estate debt fund, which is targeting $700 million and up to $100 million in the REIT AvalonBay Value Added Fund II, a $500 million multifamily apartment fund.

PSERS also committed up to $500 million to Sankaty Credit Opportunities Fund IV, which is expecting to raise up to $5 billion; up to $200 million in Avenue Capital’s Europe Special Situations Fund; up to $175 million to RCG Longview debt fund; up to $150 million in Landmark Equity Partners XIV and up to $100 million in Evergreen Pacific Partners II, which is targeting $400 million with a hard cap of $550 million.