Morgan Stanley PE Asia closes Fund IV at $1.7b

Two deals have already been completed from the fund - India's Janalakshmi Financial Services and Korean tissue paper manufacturer Monalisa - and at least five more are contracted. These include take-private deals for US-listed Chinese companies Sino Gas Holdings and Noah Education. They are likely to be MSPEA's fourth and fifth such deals, following the privatizations of dairy producer Feihe International and nutrients company Yongye International, as well as Singapore-listed Sihuan Pharmaceutical Holdings.

Chin Chou, CEO of MSPEA, sees take-privates as the most significant development in the firm's China business in the last 4-5 years. While he expects growth capital deals to remain dominant in the country, Chou sees take-privates as part of a wider variety of opportunities. Control transactions are part of this.

"In the past a number of the control deals in the market have been for export-oriented businesses and our preference has been on businesses catering to the domestic market," Chou told AVCJ. "Eighteen months ago we acquired control of Hi-24, Beijing's largest convenience store chain, and there will be more control-oriented deals in China in the new fund."

Fund IV follows a similar strategy to that of its predecessor, pursing a combination of minority and control investments in public and private mid-sized growth businesses. It primarily focuses on the consumer, financial services, industrial products sectors, as well as service-related businesses in general. China and Korea will account for 80% of the corpus - of the $1.1 billion in equity deployed in the last three years, 97% has gone to these two markets - with the rest deployed mainly in India and Taiwan.

Fund IV differed from Fund III in the level of participation from Morgan Stanley and its employees following the introduction of the Volcker Rule. Morgan Stanley Private Equity Asia III closed at $1.49 billion in October 2007, with the bank and employees said to have committed approximately $400 million. Now subject to a 3% cap, that constituency can account for no more than $50 million of Fund IV.

Capital from institutional third parties is therefore about 50% higher in dollar terms compared to Fund III. LPs include US state pension funds, sovereign wealth funds, financial institutions, fund-of-funds, endowments and high net worth individuals. Oregon Investment Council, Pennsylvania Public School Employees' Retirement System (PSERS) and the University of Michigan endowment are among those to have disclosed commitments to the fund.

Aside from the take-privates and Hi-24, MSPEA's recent China activities include the IPO of Tianhe Chemicals - a $300 million investment from Fund III - which raised $658 million in Hong Kong. The firm has also made two partial exits from Sihuan Pharma via block trades in the last year, most recently in April. An 8x return is expected on the investment.

In Korea, MSPEA made a partial exit from Hyundai Rotem as the company raised $585 million in the country's largest IPO in three years. There have been two disclosed investments in the past two years - Monalisa and restaurant chain Nolboo - while the acquisition of a construction materials business from local conglomerate Hanwha Group has been reported but not announced.

"We have done two buyouts in Korea in the last two years of companies facing succession planning issues and we expect these to continue," Chou said. "The large conglomerates in Korea also continue to streamline and focus their business objectives and that leads to deal flow involving non-core businesses."

According to the Municipal Fire & Police Retirement System of Iowa, which has exposure to Fund III via Siguler Guff, the vehicle had delivered a multiple of 1.14x as of December 2013. This compares favorably to the fourth funds of both CDH Investments and Hony Capital, which are of similar size and vintage, although they focus solely on China.

Baring Asia Private Equity Fund IV, a pan-regional vehicle that closed a few months after MSPEA's third fund on $1.52 billion, had delivered a 1.5x multiple as of year-end 2013, according to California Public Employees' Retirement System (CalPERS). The two funds do not have identical geographic remits.

Funds raised by MSPEA since its inception have together generated an IRR in excess of 20% and a multiple of at least 1.9x.

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• Topics
• Fundraising
• Greater China
• North Asia
• South Asia
• Fundraising
• Morgan Stanley Private Equity Asia
• buyout
• China
• South Korea
• India