Morning Street May Go Hedge Fund Route –

In a change of plans, secondary buyer Morning Street Capital has changed its fundraising strategy and will seek to raise a stand-alone fund outside the traditional secondary structure, Buyouts has learned. The secondary buyer may soon begin marketing a new vehicle in the second quarter that will more likely resemble a hedge fund than a fund in the vein of other secondary direct portfolio buyers, and would allow the firm to pursue a wider range of secondary deals.

Morning Street will likely seek to raise a hedge fund with a three-year investment period and a broader range of capital structures such as debt financing. The fund will still have a goal of between $100 million and $200 million.

Morning Street focuses on U.S. assets from any investor with illiquid or private investments. It plans to partner with larger secondary buyers and other investors to do larger deals. So far the firm has partnered with and received commitments from two large, established secondary backers as well as funds-of-funds and at least one family office.

Morning Street initially stated its intention of being similar to W Capital Partners in its preference for direct secondaries. W Capital Partners closed on a $250 million fund about two years ago. Unlike W Capital Partners, which favors venture assets, Morning Street seeks a more even balance between buyout and venture assets and has widened its focus even further to include debt and mezzanine deals.

So far the firm has three transactions in the works and has arranged funding on a one-off basis from its investors. The firm focuses on deals between $500,000 and $30 million in size and has said it places an emphasis on operational management of assets. The firm hasarranged funding on dealsfrom investorsandhas gotten commitments for deals totaling up to $300 million invalue.

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 have dominated the market have preferred 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, who spun Morning Street out. Columbia Strategy shut down at the end of 2004. Its remaining partners all transitioned to Morning Street to pursue secondary deals full time. Since the spinout, co-founder Hope Vaughn left to pursue an MBA.