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ANALYSIS
March 2, 2009
Sagging Index no longer reflects what’s going on in the market, some say, Replacements? Google it, to start.
March 2, 2009
Downward price spiral will actually boost the cost of capital for most companies. CFOS, take note.
March 2, 2009
The latest bailout at AIG could be a preview of how the president will deal with Wall Street.
March 2, 2009
No corporate defaults. Big debt offerings. Percolating CP issuance. Things may be looking up in the capital markets.
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July 23, 2007 12:01 AM ET
No longer content to miss out on the action in private equity, Morgan Stanley is belatedly returning to its old aggressive ways. But is now the best time for the investment bank to regain its former appetite for risk? After spinning off its buyout business, Metalmark Capital, in 2004 under the guidance of then-CEO and chairman Philip Purcell, Morgan Stanley had a change of heart last September about the asset class. Its current and apparently far less risk-averse CEO, John Mack, brought private equity back as part of his strategy to put more of Morgan’s $1.2 trillion balance sheet in play. The firm is now in full hiring mode for the new unit and on the verge of starting to raise capital for its first buyout fund, further demonstrating the aggressiveness of a bank that was flailing just a few years ago. The switch from Mr. Purcell, who took the helm after a power struggle with Mr. Mack in 1997, when Morgan Stanley merged with Dean Witter Reynolds, has had a profound cultural effect at the bank. “The attitude went from ‘If you want to take risks, it better work,’ to ‘You better take risks. We want it to work, but it’s your job to take risks,’” said Jeffery Harte, a banking analyst with Sandler O’Neill & Partners. Part of that new—or renewed—willingness to put its own capital at risk has Morgan Stanley posting record earnings. In the second quarter, the bank had its best quarter ever, earning $2.6 billion. During the quarter, its average trading value at risk, or the most it could theoretically lose in one day of trading, jumped almost 30% from a year earlier, to $81 million. The push into private equity is another sign of Morgan Stanley’s willingness to make its own bets on the market. Though the unit hasn’t yet started raising capital from outside sources, Morgan Stanley has already backed it on its first investment, McKechnie Aerospace, which the bank, along with private equity firm JLL Partners, agreed to buy in March from British investment company Melrose PLC, for $850 million. Twenty years ago, Morgan Stanley was one of the biggest players in an albeit far smaller private equity universe, along with Kohlberg Kravis Roberts and Forstmann Little. But now, with plans to raise between $5 billion and $6 billion for its fund starting in the fourth quarter of this year, of which Morgan Stanley will provide an estimated $2 billion, the bank is playing catch-up with investment banking rivals Goldman Sachs and Lehman Brothers, which had over $38 billion and nearly $6 billion in capital under management at the end of 2006, respectively, according to Thomson Financial. Of course there is the question of whether it is too little, too late as the private equity market is showing signs of nearing a peak. “I’d certainly prefer to have had them in [private equity] years ago,” said Mr. Harte. Leading the effort to stake a claim in the buyout world are Morgan Stanley veteran Alan Jones, the former head of its financial sponsors group, and Stephen Trevor, who joined in April after being poached from Goldman Sachs. The group will employ 40 investment professionals, split evenly between the U.S. and Europe, with senior positions filled mostly by external hires, with internal candidates taking the junior positions. Half the hires have been made thus far, and expectations are to have two-thirds of the positions filled within a month. The group isn’t starting entirely from scratch, since Morgan Stanley maintained a private equity group of 30 bankers in Asia even after Metalmark was spun off. Morgan Stanley wasn’t the only investment bank to abandon its private equity business in recent years. In 2004, the private equity units of J.P. Morgan and Credit Suisse made waves by trumping an agreement that a consortium of private equity powerhouses Bain Capital, Carlyle Group and Thomas H. Lee Partners had in place to buy British pharmaceutical company Warner Chilcott. Faced with the prospect of losing the lucrative investment banking business from buyout shops in retribution for perceived conflicts of interest, several firms have either spun off, unwound or changed the strategy of their PE units so that they would no longer be competing for the biggest prizes. Observers have wondered whether Goldman Sachs was left out of the underwriting for Blackstone Group’s initial public offering earlier this year because the investment bank has such a large private equity business, a claim Goldman Sachs has repeatedly dismissed. But investment banks, because margins are being squeezed in other businesses like trading, retail brokerage and investment management, have been forced to put more capital at risk. “Instead of being an agency firm—handling transactions for others—the industry has had to become an investor,” said Richard X. Bove, an analyst with Punk Ziegel & Co. And for a firm like Morgan Stanley, with an army of 2,500 investment bankers full of ideas for putting capital to work, ultimately the allure of the private equity boom was likely too much to resist. “If you span the globe in M&A like Morgan Stanley, you’re going to have a lot of opportunities, and it’s silly not to take advantage of them,” said Mr. Harte. FW
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