Hedge fund strategy dawns on Morning Street

Secondary buyer Morning Street Capital has changed its fund-raising strategy and will seek to raise a stand-alone fund that’s outside the traditional secondary structure, PE Week has learned.

A source familiar with the firm’s efforts said that New York-based Morning Street would begin raising the stand-alone fund in the second quarter. The new vehicle will resemble more of a hedge fund, rather than a traditional direct secondary fund.

Morning Street will likely raise the fund with a three-year investment period and a broader range of capital structures, such as debt financing. The fund will have a target of between $100 million and $200 million.

Morning Street focuses on U.S. assets. It plans to partner with larger secondary buyers and other investors in larger deals.

The firm started fund-raising in the second quarter of 2004 and had planned to have a close on a secondary fund by the first half of 2005. Morning Street had stated it wanted to resemble W Capital Partners in its preference for direct secondaries. W Capital Partners closed on a $250 million secondary fund about two years ago.

Unlike W Capital Partners, which favors venture assets, Morning Street was seeking a more even balance between buyout and venture assets. It has since widened its focus to include debt and mezzanine deals.

So far, the firm has three transactions in the works. The firm focuses on deals between $500,000 and $30 million and has said it places an emphasis on operational management of assets.

Secondary buyers generally tend to view direct portfolios, particularly direct venture portfolios, as unwise investments featuring overvalued assets that are more difficult to price and problematic to manage. The larger secondary buyers that dominate the market prefer buyout assets, as buyout deals consume more capital quickly, are generally easier to price and are considered more stable overall.

Morning Street Partners was started by founding principals of Columbia Strategy, a secondary advisory firm. Columbia Strategy shut down at the end of 2004. Remaining Columbia partners transitioned to Morning Street.