Inside Morgan Stanley’s $2.5bn single-asset haul

As the bank brings its latest GP-led fundraise to a close on $2.5bn, Nash Waterman, head of private equity secondaries, says the opportunities it sees in the sprawling mid-market are ‘enormous’.

The secondaries market is seeing a new kind of heavyweight, with chunky GP-led-focused funds reaching final closes having navigated 2022’s choppy fundraising waters.

Enter Morgan Stanley. The bank said this month it had held a $2.5 billion final close on its latest vehicle exclusively focused on single-asset continuation funds. The fund represents the third-largest vehicle dedicated to GP-led secondaries ever raised, according to Secondaries Investor’s calculations.

Ashbridge Transformational Secondaries Fund II, which was nearly four times larger than its 2018-vintage $675 million predecessor, came hot on the heels of the second-largest GP-led secondaries-focused raise – Blackstone’s $2.7 billion Strategic Partners GP Solutions – which closed just last month. ICG has raised the largest dedicated fund with its $5.3 billion Strategic Equity IV vehicle, according to Secondaries Investor data.

“There’s been a big reaction to the market around this from buyside groups that have been surprised by not raising money,” Nash Waterman, head of Morgan Stanley private equity secondaries told Secondaries Investor, adding that there has been work on the investor side to understand these vehicles as they are a relatively new phenomenon.

“We’ve been doing this exclusively since 2016, and so we have a much more developed track record than most players out there … we did these deals prior to that fund series as well,” he added.

To address the slight elephant in the room, Fund II closed short of the $3 billion target that a spokesperson for the firm shared with Secondaries Investor last year. Waterman said the fund had “great momentum” toward its target through to the end of June last year before the fundraising crunch over investors’ issues with the denominator effect. If that hadn’t occurred in the second half of last year, Waterman says he is “quite confident” the fund would have hit its target.

The vehicle will target investments from mid-market private equity funds – an area which Waterman views as giving it an edge over competitors.

First, the mid-market is “not at any level the most competitive market – it’s favourable to buyers”, according to Waterman. In the vast majority of its deals, it has a relationship with the managers it is working with. In Morgan Stanley’s experience, there has been very little or no competition over price. The key is pounding the pavement. “You have to be out there meeting [the GPs], building those relationships, because that’s what gets you into these deals and puts you in a lead position,” he said.

Secondly, the value creation plans for these companies are not easily replicable in the larger-cap space. Lower mid-market companies with buy and build strategies, for example, could see a number of businesses available at attractive entry multiples compared with significantly larger private equity investments. Such strategies also offer a good hedge across different economic periods. “They can build their business through organic growth in good times, and they can build their business through inorganic growth in bad times,” Waterman added.

A critical point for Ashbridge’s focus is one of alignment. “It can’t be overstated – you can get alignment with smaller GPs that simply isn’t possible when you’re talking about the most well-known major GPs out there,” Waterman said.

More than half of the transactions Morgan Stanley executed at the time of the deal involved the single biggest asset in the GP’s organisation, Waterman said.

“This factor is really important because it makes sure that these lower middle-market GPs have a high degree of focus on these deals. They’re highly aligned with us, and I think ultimately lead to greater results. Whereas if it’s just one deal among many, you don’t get the same attention.”