The LBO market may be all but shut down, but Morgan Stanley evidently has faith in its future. The firm, sources say, is planning to push into the lucrative business of helping private equity firms raise capital and is looking for a leader for the unit. A firm spokeswoman declined to comment.
Only a few investment banks actively raise funds for private equity shops. The business involves making connections between private equity fund managers, or general partners, and the institutions and wealthy individuals, or limited partners, eager to invest in them. The business is thought to have been pioneered by Merrill Lynch in the 1980s. Other banks didn’t get into the game until 1993, when a group from Merrill defected to Donaldson, Lufkin & Jenrette.
Banks typically are paid 2 percent of the capital they raise from new investors in new funds. Market leader Credit Suisse is estimated to have brought in revenues of at least $200 million last year. Just as important as the fees is building relationships with private equity firms, which can then lead to M&A mandates and IPO business.
Though Morgan Stanley would be new to this enterprise, its real estate group, which began by raising proprietary funds, branched out to build a successful business in third-party fundraising. Morgan Stanley is also a leader in raising capital for hedge funds. Under CEO John Mack the firm has ramped up its proprietary investment activity, which was curtailed under Mack’s predecessor, Phil Purcell. The push to raise third-party private equity funds follows the arrival of Credit Suisse veteran Chris Carter, who took over as head of Morgan Stanley’s global capital markets in May after joining the firm last year.
