Monday, June 15, 2009

Morgan Stanley Real Estate Group: The Problem With Partners II

Morgan Stanley’s real estate partners are not happy.  Excerpts from Pensions & Investments:

Two investors — the $60.5 billion New Jersey State Investment Council and the $3.86 billion Contra Costa County Employees Retirement Association — backed out of their commitments to its latest closed-end fund, the approximately $5 billion Morgan Stanley Real Estate Fund VII. Contra Costa had committed $75 million; New Jersey, $150 million. (Fund VII is closed to further commitments but is technically open to tie up loose ends, according to sources close to Morgan Stanley.)

•Its $5 billion open-end core real estate fund, the Morgan Stanley Prime Property Fund, has a line of investors asking for a total of more than $500 million in redemptions as of year-end 2008. The fund returned -19.8% for the 12 months ended March 31, underperforming the NCREIF Property index but outperforming the NCREIF Open-End Diversified Core Equity index, according to fund information provided to investors.

This is not just a Morgan Stanley problem, of course; general partners in all types of private equity funds are worried about their limited partners performing on cash calls. From the Wall Street Journal:

How worried are private-equity-fund managers that their investors might not be able to meet capital calls? Very, if the results of a new survey by Private Equity Analyst are any indication.

The Sources of Capital survey asked fund managers, also known as general partners, to rank how important a variety of characteristics of investors, or limited Partners, are to them. Of respondents, 84.8% listed an ability to meet capital calls as extremely or very important, second only to their desire that investors be long-time participants in the asset class, at 88%.

The rapidity with which the inability to meet capital calls has emerged as a problem has been stunning. It wouldn’t even have occurred to us to ask this question a year ago. Now, as the response to the survey shows, there are fears that this is going to become a widespread phenomenon.

It’s almost inevitable that when one partner provides expertise and the other partners provide most of the money, there is going to be a falling out when performance declines (see my related post, The Problem with Partners).