Morgan Stanley Credit closes $1bn debut fund

Morgan Stanley Credit Partners raised $956 million for its first-ever fund, a dedicated mezzanine vehicle.

The fund targets buyouts, refinancings and recapitalisations in North America and Europe. LPs in the fund include pensions, endowments, family offices and high net-worth individuals.

Morgan Stanley Credit Partners was established in 2009 within Morgan Stanley’s merchant banking division. The group is headed by managing director Hank D’ Alessandro.

The fund has already invested $160 million in five portfolio companies. Morgan Stanley Credit Partners targets investment sizes of $20 million to $50 million and may take direct equity positions and co-investments.

D’ Alessandro said when the fund was being formed in 2009, his team recognised structural imbalances in markets that persist in early 2011.

“In 2009, there was relatively low private equity deal flow, as we expected. That picked up in 2010 with increased LBO activity. And in 2011, we see that is likely to pick up again as private equity and refinancing accelerate, creating mezzanine and credit opportunities,” D’ Alessandro told PEO.

D’ Alessandro said pent-up demand remains in the market because loans and debt created during the credit bubble need to be refinanced.

“Middle-market companies have not benefited from recent rallies in the high-yield market that have helped larger borrowers. There is a structural imbalance that isn’t likely to go away and mezzanine and credit funds can help fill the gap,” he said.

“We think today the North American market is more attractive from a risk adjusted basis relative to Europe, because of the difference in the current coupon rates for high-yield. Of course, given time markets converge, but that is our current perspective,” he said.

Many firms in the industry are equally bullish and betting on a stronger mezzanine market for 2011. For instance, a study published in January by Switzerland’s Partners Group found that mezzanine financing would remain attractive on a risk adjusted basis as default rates remained modest. The study also showed that mezzanine had also remained resilient during the worst of the market downturn, between 2007 and 2009.

Other private equity groups have also expanded their presence in the mezzanine sector of late. The most recent addition came this week with the launch of the Carlyle Energy Mezzanine Opportunities fund, which specializes in power generation and oil and gas projects. In November, the Kayne Anderson Mezzanine Partners fund closed with $600 million closed. One of the more ambitious efforts in the sector has come from the Blackstone Group-owned GSO Capital Partners, which in December began raising its GSO Capital Opportunities II fund with a $3 billion target.

Morgan Stanley Private Equity, a separate investment division at the same firm, has completed $6 billion in private equity transactions since 1985.