Morgan Stanley’s private equity arm has raised about $1.7 billion for corporate investments mainly in China where it sees the best value in a decade.
Morgan Stanley’s fundraising comes hot on the heels of the much larger capital pools amassed by some of its competitors. KKR raised $6 billion last year for Asia's largest-ever fund, CVC Capital Partners’ closed a $3.5 billion fund, Affinity Equity Partners’ collected $3.8 billion and TPG raised $3.3 billion for its sixth Asia fund.
Morgan Stanley’s latest Asia fund is $200 million larger than its previous fund. The US firm hopes to repeat the success it previously had in China when it made eight times its money after investing in Sihuan Pharmaceutical and 14 times its money after investing in Ping An Insurance. It hopes to maintain its edge by focusing on investments of $50 million to $100 million while its competitors gravitate towards billion-dollar buyouts.
“In the 15 years I have been in Asian private equity there has been no shortage of wealth chasing deals: you have to differentiate yourself,” said Chin Chou, Morgan Stanley Private Equity Asia’s chief executive officer in an interview with FinanceAsia.
The fund, called Morgan Stanley Private Equity Asia IV, has already completed two small investments into South Korea’s Ssangyong C&B Monalisa and India’s Janalakshmi Financial Services. Other deals signed but not yet closed include the purchase of South Korea’s Hanwha L&C and two take-privates in China, Sino Gas International and Noah Education. There are two more deals in the offing, one in Korea and one in China.
Investors in Fund IV, so-called limited partners, are likely to have to stump up about a quarter of their total commitments by the end of the third fiscal quarter, with Morgan Stanley already readying transactions to put the money to work, according to a person familiar with the matter.
These investors include US state pension plans, sovereign wealth funds, financial institutions, fund of funds, endowments, and high net-worth individuals, as well as Morgan Stanley and the investment team. The institutional participation in the fund is approximately double the size by dollars compared with Fund III.
In the last three years Morgan Stanley has invested about $1.2 billion of equity and it will likely invest its fourth fund within three to four years across 15 to 20 mid-sized deals. It has a team of between 55 and 60 professionals on the ground, including 12 managing directors.
Morgan Stanley is sticking with its tried-and-tested strategy of deploying about 80% of its fund in China and to a lesser extent in Korea.
“China entry prices over the last two years have been the most attractive we’ve seen since 2002 to 2004,” said Chou.
There was an outbreak of SARS in southern China between 2002 and 2003, which weighed on stock prices. More recently global investors have pulled back from emerging markets including China as they have redeployed capital into the recovering US economy.
This pullback left many Chinese companies undervalued in the eyes of private equity firms. In 2009 Morgan Stanley took Sihuan Pharmaceutical, China’s third-biggest drugs firm in terms of hospital purchases, back into the private sector and relisted it in Hong Kong a year later, raising about four times what it paid. The stock currently trades at about 10 times its investment.
Morgan Stanley has sold roughly two thirds of its position in Sihuan Pharmaceutical and pocketed about eight times its money invested to date.
Only a few years ago private equity firms struggled to finance take-privates but nowadays more banks are backing deals.
“Local banks have successfully developed expertise in acquisition finance for take-privates. The banks have this product on their radar screen,” said Chou.
China sector picks
Morgan Stanley focused heavily on making minority investments in the consumer sector when China’s income per capita was expanding from $2,000 to $5,000 between the late 1990s and 2010. In the past five years the US firm has signed fewer deals in the basic consumer staples sector.
“Today most of the big consumer markets have already consolidated. There is not a lot of market share to take.” said Chou.
Instead it has sought out more services-oriented companies and high-end manufacturing firms, including one healthcare services investment and two pharmaceutical deals.
“We think pharmaceuticals is a growth sector in China particularly now that income per capita has grown to about $5,000 to $6,000,” said Chou.
Morgan Stanley also invested in Tianhe Chemicals about two years ago and did not sell shares into the firm’s recent initial public offering.
Morgan Stanley recently agreed to buy a subsidiary of Korean conglomerate Hanwha, called Hanwha L&C, tapping into a wider trend of restructuring chaebols.
“Domestic conglomerates are focusing more on core businesses and selling peripheral units,”
Morgan Stanley is also buying businesses from individuals – such as its acquisition of a stake in restaurant chain Nolboo from its founder. It is also looking at opportunistic deals where foreigners are selling businesses.
Its recent Korea deal, Ssangyong C&B Monalisa was acquired in a private transaction at a multiple of six times annual earnings.
“Local currency financing is reasonably liquid in a few key countries: [South] Korea, Taiwan, Singapore and Japan,” said Chou.