Asia private equity funds hurt Morgan Stanley's third-quarter profit

Tue Oct 20, 2015 2:47pm EDT
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By Denny Thomas and Lawrence White

HONG KONG (Reuters) - A dramatic fall in the value of Morgan Stanley's (MS.N: Quote) Asian private equity funds hit the bank's quarterly earnings, highlighting the risks of such investing at a time when rivals are scaling back to avoid losses and higher regulatory costs.

Morgan Stanley's investment portfolio suffered a $235 million loss during the July-September period, compared with a profit of $232 million in the previous quarter, Morgan Stanley CFO Jonathan Pruzan told analysts.

"Virtually all of that negative number can be attributed to the reversal of carry from our Asia PE business," Pruzan said.

Private equity firms make a standard 2 percent fee based on the assets they manage, and can earn additional 'carry', or share of the profits, on beating certain pre-determined performance goals.

Having performed strongly amid China's booming markets earlier this year, the funds saw that reverse amid China's stock market mayhem this summer, which at one point wiped out more than $3 trillion of investor wealth.

Morgan Stanley's Asia buyout funds manage more than $4.5 billion largely in Chinese and South Korean companies.

The funds are also stuck with at least three large stocks which have not traded for several months, making it harder for them to accurately value their portfolios or exit.

Those include Tianhe Chemicals Group (1619.HK: Quote), whose shares remain suspended following criticism by a short-selling research company. The Morgan Stanley private equity unit invested $300 million for a minority stake in Tianhe in 2012, its biggest equity investment in Asia.   Continued...

The corporate logo of financial firm Morgan Stanley is pictured on the company's world headquarters in the Manhattan borough of New York City, January 20, 2015.   REUTERS/Mike Segar