Alternatives boost Morgan Stanley earnings

The bank reported gains of $431m in its merchant banking operations thanks in part to fund investments, which include private equity, real estate and infrastructure.

Morgan Stanley is starting to see gains from its alternative investments after suffering significant losses from some of its deals over the past two years.

In releasing its fourth quarter and 2010 earnings, the New York-based bank said its merchant banking division – which covers private equity, real estate and infrastructure investing – had seen gains of $431 million over the past year, with net revenue rising to $1.2 billion against losses of $194 million in 2009.

Morgan Stanley earnings have previously been dragged down thanks to property investments in Morgan Stanley’s series of property funds known as MSREF, as well as deals placed on the bank’s balance sheet. However, Morgan Stanley said in a statement today that the merchant banking gains were related to “principal investments held by certain consolidated real estate funds”. It also cited “higher gains on principal investments in the private equity business” as contributing to the turnaround.

The bank’s alternative investments did take a hit, though, with Morgan Stanley writing down its investment in hedge fund FrontPoint Partners by $126 million. The bank acquired FrontPoint in 2006 in a deal reportedly worth about $400 million, but said in October it would give up control of the unit retaining just a minority stake.

In its earnings report, Morgan Stanley said the $126 million loss was offset by a $96 million gain from selling FrontPoint shares to Invesco. Earlier this month, FrontPoint closed its first ever direct lending fund on more than $1 billion that will help finance mid-market private equity deals.

Earlier this week it was revealed Morgan Stanley Real Estate Investing (MSREI) veteran Jay Mantz was leaving the firm after almost 18 years. The vice chairman of MSREI was departing to “pursue other opportunities”, according to an internal memo sent to staff. He is set to leave by the end of the week, according to people familiar with the matter, but is expected to stay in the private equity real estate industry.

Morgan Stanley’s overall net income was $867 million in the fourth quarter against $460 million for the same period in 2009.