Morgan Stanley shifts FoF focus to distress

Just in time for the deteriorating credit markets, Morgan Stanley Alternative Investment Partners has raised a $500 million fund of funds to back distressed managers.

The last fund of funds Morgan Stanley AIP put together was in 2006 when it raised $1 billion for its Private Market Fund III. The fund was more of a generalist vehicle that backed distressed managers and private equity general partners.

This time, Morgan Stanley AIP will focus on managers specializing in turnarounds, debt-for-control deals and active trading in distressed securities. “As we looked at the distressed environment, there were a number of managers we saw coming to raise distressed funds,” says Tom Dorr, chief investment officer of New York-based Morgan Stanley AIP’s private equity fund of funds group. “We saw an opportunity to invest significantly more than we could out of the comprehensive program.”

About half of the fund has already been committed.

Dorr said the fund-raising could be especially well timed given the high volume of low-grade credit that’s been issued in the last five years. At least some of those debt deals will sour if the market continues on a downward trajectory.

The fund is run by Dorr and Cory Pulfrey, managing director and head of Morgan Stanley AIP, which now has about $6 billion under management. Morgan Stanley AIP plans to back about 15 managers, reserving 20% of the fund for co-investments.

Morgan Stanley AIP wouldn’t disclose the identity of any of the fund’s limited partners, although Dorr said the majority are institutional investors, with a healthy dose of high-net worth individuals. —Mark Cecil