The speculation can stop for now.
Morgan Stanley Real Estate Investing, the private equity real estate business of Morgan Stanley, will be operating a global opportunity fund business for the next 18 months at least.
The ‘will they-won’t they’ conjecture flying about after news emerged at the turn of December that the investors in its Morgan Stanley Real Estate Fund VII Global fund (also called G7) were to vote on whether to extend its investment period was rife to put it mildly.
They did, albeit with certain conditions: 18 months more time was requested by MSREI and 12 months was granted; and $700 million of equity commitments were cancelled bringing the fund’s original pot down from $4.7 billion to $4 billion. It was a compromise.
Understandably a green light from MSREI’s investors, including the likes of General Motors, Government of Singapore Investment Corporation, Canada Pension Plan Investment Board and China Investment Corporation, was a huge deal for the platform and for those reading the tea leaves for its future. Whatever its circumstances, the more than 90 percent approval from those groups was massively meaningful
The furore from outside of the Wall Street bank’s real estate unit was unremittingly pointed at what a favourable decision from the fund’s investors would mean for the future viability of MSREI. Curiously, little was made of just how vital it was that Morgan Stanley itself approved MSREI’s plan for going for the extension in the first place.
Perhaps Goldman Sachs’ Real Estate Principal Investment Area aside, every other investment bank-sponsored private equity real estate platform has, in one shape or another, deserted the industry in the years following the start of the global financial crisis. The inception of the Dodd-Frank act and, particularly Section 613, or the ‘Volcker Ruling’, which stands to restrict co-investment by such entities to just 3 percent, among other regulatory blockades, played its part in putting them off.
Evidently not so Morgan Stanley at the moment. As a 10 percent co-investor in its MSREF funds, including G7, it could have walked away from its own investment, understood to be currently $200 million of uncommitted capital. If MSREI is celebrating the extension of the investment period of the fund, and it should be, it would be more than reasonable to suggest it is because of the backing from its parent as well as its investors.
Looking forward, a performance that meets with expectations could well see further funds launched and, in compliance with Volcker, with 3 percent co-investment from MSREI, not 10 percent. That’s in line with the rest of the industry anyway and those investors who don’t like it, don’t have to back it.
MSREI’s outlook for G7 is supposedly currently 20 percent IRR. If they finish the fund that way, the likelihood is there will be takers for new fund units when the time comes anyway. In the meantime, MSREI should enjoy this double nod from those parties that count the most today but without resting on its laurels, of course.
From the transaction headlines appearing almost as frequently as those of Blackstone these days, it appears that it is not scoffing at this second lease of life at all. Over the past couple of months the firm has made or agreed investments in Australia, China, India and Russia, among other places, bringing the current amount of equity uncommitted to deals to nearer the $1.5 billion mark, PERE understands.
So there’s the best part of 18 months still to either invest wisely or blow a lot of dry powder. For sure, the war rages on even if this particular battle is won.