It has not been a good PR week for two of the biggest managers of opportunistic real estate funds.
On Wednesday, The Wall Street Journal splashed on Morgan Stanley facing a $5.4 billion loss on MSREF VI, an $8 billion vehicle raised in 2007.
Then today, The Financial Times reported how a $1.7 billion fund, Whitehall International 2005 managed by Goldman Sachs, is on course to lose 98 cents in the dollar. (It got worse when the SEC launched a civil fraud action against the bank in relation to allegedly failing to disclose conflicts of interest in selling mortgage investments, knocking its shares 10 percent.)
Such public humiliation for both firms is not great for them or an industry as a whole which is still navel gazing and grappling with fundamental questions such as the short term/long term prognosis for blind pool opportunistic funds.
It also comes at an extra tricky time for Wall Street houses as the Obama administration seeks to restrict investment banks’ participation in investing in private equity funds.
But that aside, the newspaper articles are unlikely to be lethal for either Morgan Stanley or Goldman Sachs or indeed the industry.
Both newspaper articles this week drew on details given by the firms to their LPs in periodic updates about the prospects of the funds they invested in. But the real damage was done long ago when both firms reported to their LPs gloomy performance forecasts. Indeed, PERENews.com reported back in January 2009 how investors in MSREF VI had been told they faced getting 0.7x of their money back.
Since then, both firms have been busy trying to manage out legacy assets as best they can and it should be remembered that though dire, the performance of these long terms vehicles may not end up a bad as currently projected.
But over and beyond that, both firms are also pushing ahead, tying to gear up for this current cycle.
This is particularly the case at Morgan Stanley, which recently appointed John Klopp head of Americas, while just this week PERE revealed Olivier de Poulpiquet was rejoining the bank he left in 2003 as head of Europe.
Goldman Sachs’ Real Estate Principal Investment Area, which manages the Whitehall series, has had a big clear out of staff and has reshuffled its remaining pack by parachuting key people into key markets.
But perhaps even more tellingly, both firms have been raising equity in recent times – even as bad news about their 2005 and 2007 funds was being fed to LPs.
Morgan Stanley, for instance, has raised about $6 billion for its next opportunity fund, MSREF Fund VII. Though shy of its initial $10 billion target (and the final close has been a long time in coming), it surely goes to show that not all LPs out there are turned off from Morgan Stanley.
Similarly, Goldman Sachs has been busy raising capital, though admittedly not for its Whitehall family. Last year it raised $2.63 billion for GS Real Estate Mezzanine Partners targeting assets in North America. It will deploy this fund at the same time as the dry powder in its latest Whitehall fund, which in 2008 closed on $2.3 billion of commitments.
These two organisations which raised mega funds in the 2005 and 2007 vintage have been bashed and are paying the price. But this week’s terrible PR for Morgan Stanley and Goldman Sachs is not necessarily the killer blow it might seem on the surface.