MSREI’s G9 fund: it almost never happened

When Morgan Stanley Real Estate Investing closed its eighth global opportunity real estate fund in 2015, senior executives at the investment bank unit told us the fundraising represented only the start of its comeback story. ‘Look at what we do with G9’ was the message.

The $2.73 billion regulation D filing registered with the US Securities and Exchange Commission just prior to the turn of 2018 represents the final closing of North Haven Real Estate Fund IX Global. And so G9, as it’s colloquially known, is now with us.

With it will come an inevitable slew of commentary and opinion: folks will debate whether a platform which raised a then-record $8 billion in 2007 for MSREF VI International, the sixth fund in its series, can claim a comeback until it matches similar amounts once again.

But few can dismiss the re-growth of a series that has been buffeted by serious headwinds during its 20 years-plus in existence.

“Few can dismiss the re-growth of a series that has been buffeted by serious headwinds during its 20 years-plus in existence.”

The amount filed with the SEC will likely be supplemented by an array of sidecar investment vehicles, as with G8, which attracted $1.7 billion from investors but was ultimately connected to an aggregate of deals representing way more equity. Estimates place the ultimate outlay of G8 to be closer to $3 billion. A proportionate fund-sidecar equity ratio for G9 would see MSREI with around $4 billion to deploy, closer in scale to the fund that ultimately determined the platform’s fate.

It was an investor vote for its G7 vehicle at the turn of 2013 that was pivotal for this once sector-defining series of higher risk and return funds.

With $2.7 billion of equity left to deploy, but little time after an industry-wide pause in the wake of the financial crisis, the likes of General Motors, Canada Pension Plan Investment Board and Government of Singapore Investment Corporation were asked to permit or deny an extension to the fund’s investment period. Their choice had stark implications: either green shoots would be allowed to grow or they would be stamped out along with prospects of the platform raising capital for the series again.

Their choice had stark implications: either green shoots would be allowed to grow or they would be stamped out along with prospects of the platform raising capital for the series again.

A compromise was ultimately struck that saw MSREI cancel about $700 million of the commitments. But the $2 billion remaining was enough for the unit’s management to capitalize on a recovering private real estate marketplace. It was too little, too late for some investors, and it is understood that extra conditions were in place for certain cornerstone backers of G8.

But they can now say their move was vindicated. Sources say G7 and G8’s performances are much closer to expectations (typically opportunistic funds target approximately 20 percent gross IRR and 2x equity) than the ill-fated G6. Indeed, we’ve heard that the projected gross IRR for G8 was 28 percent as of September.

And so G9’s total is significantly bigger. Perhaps more significantly, no conditions were set by investors this time around.

G9’s $2.7 billion is still significantly lower than the series’ zenith pre-crisis. But when you consider how close MSREI’s global opportunity fund series came to extinction, it is hard to deny its re-growth even if you stop short of declaring a complete comeback.