After the one-time industry standard-bearer revealed losses from highly levered investments in its 2007-vintage global opportunity funds, investors began rescinding equity commitments. With US regulators capping financial institution principal investments to 3 percent, I’m betting quite a few of you.
It was an understandable call. Wall Street peers Citibank and Merrill Lynch had called time on their own operations, Goldman Sachs’ Real Estate Principal Investment Area was also firefighting and Lehman Brothers’ platform had become a wind-up job. To cap it off, leadership was leaving; heads Sonny Kalsi and John Carrafiell left around 2009, and within three years, all 13 original key men of the firm’s seventh fund, known as MSREF G7, were gone.
Our own judgment was suspended until we had learned: first, what Morgan Stanley wanted to do with the business in the face of the Dodd-Frank Act; and second, how the investors in the seventh fund wanted to vote when faced with a choice to extend its investment period. In 2012, with $2 billion of the vehicle’s original $4.7 billion equity corpus not invested, MSREI’s new-look management asked for more time to deploy the money. We felt those choices would be pivotal for MSREI’s prospects. Votes against would have seen us ring the knell, too.
We didn’t have to. Nods to continue the business and for more time for G7 laid the foundation for a comeback. We have stuck to our prediction of a proper recovery in performance and reputation, since. Today, MSREI is in increasingly good health. After a three-year absence, a $1.7 billion capital raise for G8 two years ago and a similar amount for the first closing of G9 this year has seen it storm back onto the PERE 50 ranking of the world’s biggest private equity real estate firms by capital raised to 22nd position.
It may be some time before it challenges Blackstone’s dominance as it once did, though perhaps not so GreenOak, the firm headed by Kalsi, Carrafiell and MSREI’s former Asia head, Fred Schmidt, which, ironically, made its ranking debut in the year MSREI fell off and took 12th place this time around.
In any event, it is a comeback worthy of acknowledgement.