Morgan Stanley's Direct Private-Equity Arm Stays Put--Sources

   By Shasha Dai 
   Of DOW JONES LBO WIRE 
 

Morgan Stanley Private Equity will stay within its Wall Street parent for now, said people familiar with the situation.

Morgan Stanley (MS) will continue to honor its capital commitment to the arm's most recent fund, Morgan Stanley Capital Partners V LP, which had a final closing late last year on a little more than $1 billion, the people said.

Nearly one-third of the commitment to the fund came from the parent and its employees, with the remainder from outside investors. Because Morgan Stanley's commitment was made before May 1, the bank is still able to fund the commitment as provided for by the Dodd-Frank law passed last month, the people said. Over time, however, Morgan Stanley will have to dilute its stake in the fund to within 3% as required by the law.

Morgan Stanley Private Equity is a slimmed-down version of itself from a few years ago. In early 2008, Morgan Stanley started raising Morgan Stanley Capital Partners V, with a target of $6 billion. The parent bank had committed up to $2 billion to the fund. A few months into fund-raising efforts, the financial market imploded, causing the fund to close far below the target.

Stephen Trevor, co-head of a division whose responsibilities included overseeing direct private equity and real estate investments, left the firm recently. Morgan Stanley Private Equity is led by Managing Director Alan Jones.

The arm recently did its first British deal, agreeing to acquire 60% of Zenith Vehicle Contracts Group Ltd., a provider of vehicle outsourcing and management services. Other investments include McKechnie Aerospace, a provider of components for the aerospace industry; supermarket chain Tops Markets LLC; child-care provider Learning Care Group; steel company Breitenfeld AG; and natural gas exploration and production company Triana Energy LLC.

In addition to the direct private-equity arm, Morgan Stanley has interests in other private-equity funds, as well as hedge funds and real estate funds, whose value stood at $4.5 billion as of June 30.

Under the Dodd-Frank law, those investments will be limited to 3% of the bank's Tier 1 capital. As of June 30, the bank posted Tier 1 capital of $53.5 billion, meaning its private fund holdings are capped at $1.6 billion.

Like other banks, Morgan Stanley has as long as 12 years to comply with the federal law.

(Dow Jones LBO Wire covers news about private equity.)

-By Shasha Dai, Dow Jones LBO Wire; 212-416-2037; [e-mail]