Morgan Stanley grows private credit arm, adding senior debt

Morgan Stanley is raising its debut fund targeting credit investments at the top of the capital stack, according to documents filed with the US Securities and Exchange Commission.

The New York-based investment bank is raising North Haven Senior Loan Fund, which comes after the firm has closed several other private funds this year. Regulatory filings did not specify a target for the debt fund, which has not yet reached a first close. Morgan Stanley declined to comment.

The firm's private credit strategy to date has embraced mezzanine investing in mid-market companies, as it raised Morgan Stanley Credit Partners I and II. The 2010-vintage Fund I brought in $956 million, while 2013-vintage Fund II closed in January 2015 on $1 billion. Its mezzanine group invests in companies with more than $15 million of EBITDA and typically deploys $15 million-$65 million per deal.

Morgan Stanley’s credit investing platform also includes North Haven Expansion Credit, a vehicle that lends to late-stage growth companies. The fund debuted in October 2016, according to SEC filings. So far, its investments have included Mojo Networks, a Mountain View, California-based specialised WiFi provider, for which Morgan Stanley participated in a $30 million debt and equity round of funding.

To comply with the Volcker Rule, a federal US statute governing investment banks’ activities with private equity-style funds, Morgan Stanley had to change the name of its private funds practice. The firm put the North Haven label on its closed-end vehicles, named for North Haven, Maine, where the firm’s founders met in the 1930s, the firm said.

Morgan Stanley has also raised several other closed-end vehicles this year, closing its latest mid-market private equity fund, North Haven Capital Partners VI, on $1.5 billion in January and its latest real estate fund, North Haven Real Estate Fund IX, on $2.01 billion in June, according to SEC filings.

The investment bank is the latest established firm to embrace the senior loan strategy. Oaktree Capital Management announced earlier this year it would be raising its first senior-focused vehicle, which comes after more than 15 years of focusing on mezzanine lending. Similarly, Hancock Capital Management launched a senior debt business last year when it hired Devon Russell to head up the new strategy.

Morgan Stanley enters the senior debt space as it has become increasingly competitive, as much of the money being raised is targeting investments that are first in line in the repayment pecking order. Vehicles targeting senior loans raised 38 percent, or $23.4 billion, of the $61.59 billion raised in the first half of 2017.

Notable senior debt fund closes in recent months include the $2.3 billion raised by Angelo Gordon direct lending arm Twin Brook Capital Partners across its commingled AG Direct Lending II and multiple separately managed accounts as well as the $1.3 billion Barings Global Private Loan Fund II. Both firms held final closes on the fund series’ initial vehicles last year.