NEW YORK, Sept 12 (Reuters) – Morgan Stanley Real Estate, a division of investment bank Morgan Stanley on Tuesday said its Special Situations Fund III has raised $2.24 billion of equity to invest primarily in real estate debt and equity securities around the world.
The buying power of the fund could double depending upon the level of debt the fund will use along with its equity, said John Carrafiell, managing director and global co-head of Morgan Stanley Real Estate.
The fund will invest predominately in public or private debt and equity securities that are based on the performance of real estate assets. However the fund is not precluded from acquiring minority interests in physical real estate assets, Carrafiell said.
The fund also could invest in real estate derivatives as a hedging device.
“In that sense, we will look at derivatives to protect our return,” he said.
Investors include institutional and Morgan Stanley Global Wealth Management investors from North America, Europe, the Middle East and Asia as well as Morgan Stanley, which invested 25 percent of the total initial equity raised.
“Special Situations targets investments in market-leading real estate companies in growth and developed markets with high barriers to entry where investors often find it difficult to access deal flow, including China, India, Russia and Central/Eastern Europe where we have already deployed significant capital,” Carrafiell said.
The fund will also invest in developed markets such as Japan, the United Kingdom, Western Europe, the United States, Hong Kong and Korea where corporate and financial restructuring opportunities exist and where the private markets value real estate higher than the public markets.
“We’re looking for above-average risk adjusted returns, based on the market, the transaction and the asset we’re investing in,” he said. “The interesting thing about this fund versus a pure opportunistic fund is that it does not have a single point-return target.”
In that way, the fund will offer investors more of a portfolio-like exposure to risk, as it includes various investments that not only carry differing degrees of risk, but also react differently and sometimes opposite to different market and economic conditions. This helps mitigate risk while boosting or protecting returns.
The fund is the third in a series of successful real estate funds. Special Situations I, which is fully liquidated, launched in 1997 and invested primarily in the United States and Asia. Special Situations II launched in 2000 and invested solely in Europe