China asset owners pile into Morgan Stanley Infrastructure fund

Morgan Stanley Infrastructure highlights a big rise in demand from Asian institutions – particularly from China – for its second global fund, which is targeting Australian resource assets.
China asset owners pile into Morgan Stanley Infrastructure fund

Morgan Stanley Infrastructure (MSI) is targeting deals in Australia’s struggling resources sector, after raising its second global fund, which attracted almost double the proportion of Asian investors compared to the first strategy, notably from China.

North Haven Infrastructure Partners II closed in February with $3.6 billion in assets, with another $2.2 billion allocated for a separate co-investment pool. This came after the first close in June 2014.

Asia-Pacific asset owners accounted for 37% of investment into the strategy, compared to 21% for Fund I. There has been a rise in demand from Chinese asset owners in particular, noted McLean, with sophisticated mainland investors, such as insurance firms, now accounting for several of MSI’s largest LPs.

This is perhaps not surprising, given that since late 2012 Chinese authorities have have been liberalising the rules to allow insurance firms to invest more offshore and into a wider range of asset classes. For instance, China Life and Ping An – the two biggest mainland life insurers, with $341 billion and $227 billion under management, respectively – have been steadily building their offshore exposure.

Unlike the first strategy, MSI’s second fund focuses purely on OECD countries, which in Asia means Australia, New Zealand, Japan and South Korea. This is because the firm’s investor base wanted separate pools for OECD and non-OECD investing, said Mark McLean joined MSI as head of Asia Pacific.

“Of those four countries, Australia is the most likely to provide attractive opportunities, which is why I’m based in Melbourne,” he told AsianInvestor

“In Australia, we focus more on resources infrastructure than other parts of the world,” said McLean. “It’s been a very difficult environment for mining companies over the last few years, with the decline in commodity prices.

“Many of them are looking for ways to free up capital to pursue their core business. So we are having some very interesting discussions with parties about buying some of these assets.”

Asked whether MSI would consider raising a dedicated Asia-Pacific fund, McLean declined to comment apart from to say that Fund I had made investments in India and China, and that the firm was constantly looking at opportunities globally.

Reflecting a rising trend, MSI has seen growing interest in co- and direct investments, he added, with investors increasingly looking for pre-specified assets rather than blind pools. 

“The $2.2 billion co-investment pool was set up so that LPs can invest in specific assets alongside us,” said McLean. “This is a big focus for our limited partners.”

In Fund II many more LPs are prepared to co-invest than in the first strategy, said McLean. LPs are being much more active than they used to be and are asking more rigorous questions, he added.

Early in the life of Fund I, LPs often weren’t ready to make co-investments, he noted. “You’ve got to have a team on board who can do due diligence on assets, come to conclusions on deals and go through very complicated processes.”

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