PE Panorama: Morgan Stanley surpasses US$1.5 billion target for Asia PE fund

14 July 2014   Category: News, Asia, China, Korea   By Paul Mackintosh

More welcome news for Asian private equity funds came last week in the shape of the closure of Morgan Stanley Private Equity Asia’s (MSPE Asia) latest vehicle, Morgan Stanley Private Equity Asia IV LP, at US$1.7 billion, well above its $1.5 billion target. This success still leaves MSPE Asia with a relatively small dry powder barrel compared to KKR Asia’s $6 billion fund or the recently closed $3.3 billion TPG Capital Asian vehicle. But it does reward one of Asian private equity’s longest-established franchises, as well as demonstrating that bank-related private equity funds can still raise and perform even under the new restrictions of the Volcker Rules.

As many industry insiders already know, MSPE Asia has a track record going far back into Asian private equity history, when it developed under the aegis of its parent and capitalised on Morgan Stanley’s existing relationships and brand name. The results have been steady and strong, if not spectacular. MSPE Asia was able to build special expertise in areas like China real estate and South Korea, where later entrants faced difficulties in establishing deal sourcing networks and gaining some visibility on their target markets. And although it never really broke into the multi-billion buyout category, MSPE Asia performed well enough in the mid-market that is supposed to house some of the best of Asia’s companies anyway.

That background helped build the net internal rate of return (IRR) of over 20% and gross returns of four times the money that MSPE Asia was able to deliver from its first three funds, according to Reuters. And MPSE Asia also pulled off a textbook exercise in fundraising under the new Volcker regime. Morgan Stanley put a fairly nominal $50 million into this fund, according to the Reuters statistics – an amount clearly in no danger of breaching the Volcker limit of 3% of Tier I regulatory capital – compared with $400 million into the same-size predecessor fund MSPE Asia III. The $1.65 billion of third-party money going into Fund IV indicates that limited partners (LPs), including SWFs, pension funds, and HNW individuals, found no problems whatsoever in committing to a bank-backed private equity fund, and no discomfort in navigating around the Volcker Rules. The Pennsylvania Public School Employees' Retirement System alone committed some $100 million, according to other reports.

MSPE Asia fund head Chin Chou already has enthused in the press about the entry prices he sees in the current China market – the best in a decade, apparently. If so, the new fund’s capital could be finding targets very soon.