03/04/2009

Morgan Stanley Falling Short of Equity Goal

Morgan Stanley will miss its $10 billion fund-raising goal by a wide margin when it wraps up marketing for its latest global real estate vehicle.

The bank lined up $6 billion of equity for Morgan Stanley Real Estate Fund 7 Global over the last 10 months. With only one month remaining before the scheduled final close, it appears the fund will fall shy of the goal by $3 billion or more.

Like most of its peers, Morgan Stanley has found it increasingly difficult to solicit capital since the stock and bond markets derailed in September. In fact, its in-house placement-agent unit has brought in less than $1 billion of commitments since then. It hasn't helped that the predecessor vehicle took heavy writedowns last year. The $8 billion Morgan Stanley Real Estate Fund 6 International, which launched in 2007 and became fully invested last month, took a 20.2% markdown in the second quarter. The third-quarter markdown is unavailable, but investors indicated it was of comparable size. The fourth-quarter tally will be reported to investors in about a month. Some of the vehicle's assets may turn out to be total losses - particularly in Asia, where about half its equity was placed.

Morgan Stanley operated separate U.S. and international funds before combining the strategies in the global fund, which seeks a roughly 17% return. The vehicle is scouring Europe, Asia and the U.S. for nonstrategic assets being offered by governments and corporations. It also is looking at distressed debt, recapitalizations of properties with troubled owners, privatizations and development projects in select markets that offer strong real estate fundamentals.

Since it's almost wrapped up, the capital-raising drive for Fund 7 shouldn't suffer much from recent personnel turmoil at Morgan Stanley. Global investment chief K.S. "Sonny" Kalsi was put on administrative leave for undisclosed reasons last month. That action was apparently unrelated to Morgan Stanley's disclosure that an unidentified employee in China, who worked in the bank's real estate fund unit, may have violated the Foreign Corrupt Practices Act, a U.S. law that targets bribery of foreign officials by U.S. corporations.

The fund series is now headed by Owen Thomas, chief executive of Morgan Stanley Real Estate Investing. Jay Mantz is president and chief investment officer.

The bank isn't alone in struggling to raise equity. More than 40 closed-end funds backed by U.S. investors have missed or reduced capital-raising targets during the credit crisis, and another 50 planned vehicles have been canceled or shelved, according to Real Estate Alert's fund database.

The shops that missed equity targets include several major fund operators that drummed up substantial amounts of equity for previous vehicles. For example, Cerberus Real Estate Capital raised $1.2 billion of equity for Cerberus Institutional Real Estate Partners 2 and Credit Suisse raised $1.1 billion for DLJ Real Estate Capital Partners 4. Each sponsor originally hoped to bring in $2 billion.

Meanwhile, Stockbridge Capital Partners lined up $1.15 billion for Stockbridge Real Estate Fund 3, falling short of its $2.5 billion equity target. And Goldman Sachs wound up with $2.1 billion for Whitehall Street International Real Estate Fund 2008, after it originally sought $3 billion to $3.5 billion.

Back Print