Morgan Stanley has reached a final close on its North Haven Infrastructure Partners II (NHIP II) fund on $3.6 billion, the US firm announced yesterday.
Markus Hottenrott, chief investment officer of Morgan Stanley Infrastructure (MSI), told Infrastructure Investor that about 40 investors have committed to the vehicle. Pension funds accounted for about two-thirds of all limited partners, he said, while insurance companies, sovereign wealth funds and others comprised the remainder. North America, Europe and Asia-Pacific were all strongly represented among the fund's investors, he added.
Sources with knowledge of the matter said the vehicle's backers includes several insurance companies from China as well as a handful of large US pension funds and investors from Australia.
A spokesperson confirmed that the minimum commitment required to participate in the fund was $5 million, adding that some of the larger investors committed more than $300 million.
The $3.6 billion fundraise falls short of outside predictions that the firm would seek a $4 billion final close. However, it comes alongisde news that a core group of investors in the vehicle have committed up to $2.2 billion more through a co-investment club.
“We have some of the largest and most sophisticated investors in infrastructure in our investor base and some of them have appetite to co-invest. They have formally indicated additional amounts that they could be interested in investing,” Hottenrott said. “That gives the fund, our platform, the ability to write larger cheques. It will benefit from stronger governance associated with bigger equity stakes. This is important for our investment strategy, which is focused on operational improvements where governance is key.”
Equity cheque sizes for investments from NHIP II will range between $200 million and $400 million, Hottenrott said, though he noted that with the additional capital available through the co-investment club much larger equity cheques are possible. He added that the firm would “continue to pursue a strategy of prudent application of debt” to its deals.
Mark McLean, head of Asia Pacific at MSI, told Infrastructure Investor that the team aims to make 10 to 12 deals with NHIP II, having already secured two assets since the fund's first close in June 2014. Around half of NHIP II will be allocated to North America and about 35 percent to Europe, with the remaining to be spent in Asia Pacific.
While Hottenrott would not discuss return targets, he did say that the firm typically seeks investments that fall into the “middle of the spectrum” of what investors typically seek from their infrastructure commitments. He labelled the fund's positioning as core-plus. Such strategies typically achieve returns of 12 to 15 percent.
The fund targets assets in the energy, utilities and transportation sectors that show signs of potential for value enhancement through operational improvements, according to an MSI statement. Hottenrott identified the gas sector – NHIP II already owns a stake in a regulated gas distribution utility in Northern Italy – and the water sector as areas of particular interest for the fund, as well as those within the seaport and airport space.
McLean commented that market conditions have been challenging in the past few years, with assets tagged at very high prices. But he said a flow of opportunities has been building in recent months in sectors that are under pressure from low commodity prices, in particular the US' hydrocarbon and mining industries.
NHIP was formed in response to the Volcker Rule requirement of the Dodd-Frank Wall Street Reform and Consumer Protection Act that banks' private investment funds not operate under their brand monikers. The new vehicle's name references Morgan Stanley's roots in North Haven, Maine, where the original partners met and founded the firm nearly 80 years ago.
Fundraising for NHIP II was launched in 2013 under the name Morgan Stanley Infrastructure Partners II (MSIP II), and reached a first close of $1.5 billion in June 2014. The firm reported reaching $1.95 billion in August 2015 .
MSI has committed $4.9 billion in gross capital across 22 investments to date. It operates from six offices located in New York, London, Melbourne, Hong Kong, Amsterdam and Mumbai.
Nia Tam contributed reporting to this story.