Morgan Stanley debuts $585m secondaries fund

The bank’s Alternative Investment Partners team sees opportunities from investors who are trimming portfolios and creating ‘deeper relationships' with fewer GPs.

Morgan Stanley’s Alternative Investment Partners has raised its first-ever fund dedicated to investments in the smaller end of the secondaries market, collecting $585 million.

The team has invested in secondaries for about 10 years, but always using capital from its global diversified private equity fund of funds, according to John Wolak, head of secondaries investing for AIP Private Equity Fund of Funds and lead portfolio manager for the AIP Global Secondary Opportunities Fund.

“We were seeing a large flow of opportunities, more than we could fit in our existing vehicles,” Wolak told PEO in an interview Monday. “There’s a pretty good flow of opportunities from investors who are in many cases looking to lighten up on a particular exposure. They’re not looking to get out totally but to reduce exposure or trim the portfolio around the edges.”

The secondaries market will continue to see large endowments and other institutional investors changing their portfolios to include “deeper, more meaningful relationships” with fewer GPs, Wolak said.

“They’ll be concentrating on a handful of managers and using the secondaries market to sell down non-core relationships,” he said.

The team has already completed about $130 million in transactions since it started fundraising around January

There's a pretty good flow of opportunities from investors who are in many cases looking to lighten up on a particular exposure. They're not looking to get out totally but to reduce exposure or trim the portfolio around the edges.

John Wolak

of last year. While larger deals were tough to complete last year, smaller deals could get done, Wolak said.

A lot of the Morgan Stanley team’s deal flow is coming from hedge funds that took limited partner stakes in private equity funds, Wolak said.

“They’re getting pressure from their LPs. They’re not desperate sellers, but they’re motivated to sell,” he said.

The team has a “strong bias” toward special situation funds, which Wolak said includes distressed debt, mezzanine, drug royalty funds, venture capital lending and energy.

The team is not too concerned with the proliferation of large funds raised in the last year for secondaries investments, Wolak said. Several firms, including JPMorgan, Pomona Capital and HarbourVest Partners, raised funds in the billions of dollars last year for secondaries.

“Competition is always a concern … $500 million to $600 million is the right number for us,” Wolak said. “A lot of players have migrated to $2 billion, $3 billion, $4 billion funds. We feel comfortable with $600 million. We don’t participate in the traditional auction. Our competition is either the sellers decide not to sell, or they might make two or three calls to others players.”

GSOF is the second fund dedicated to secondaries that Morgan Stanley has closed this year. In March, Morgan Stanley announced that it raised $370 million in commitments for Morgan Stanley AIP Phoenix Global Real Estate Secondaries 2009, surpassing its original target of $250 million.

Jenna Gottlieb contributed to this report.