The IPO markets may still be flagging, but with valuations in private equity trending downwards and competition from other suppliers of capital dwindling, Morgan Stanley believes vintage years lie ahead for private equity investment.

Cory Pulfrey, a US based managing director of Morgan StanleyÆs alternative investment division, is currently visiting Asia to meet with funds that might be candidates for investment. Of particular interest during this visit are buyout managers in Southeast Asia.

ôPE looks under-allocated in Asia,ö says Pulfrey. ôIt tends to be the last alternative class that investors look at after funds of hedge funds, and property û including Reits.ö

But what of those who fall into the bottom quartile. What does the future hold for private equity managers who got their sums and timing wrong?

ôThere might be a shakeout in the private equity sector,ö he adds. ôThe symptoms being that underperforming managers may lose personnel, may have to slowly shed portfolios and find it hard to raise follow-up funds.ö

With moves towards market-style valuations and a more rigorous approach to marking investments, the private equity market is slowly falling into line with accounting standards in other alternative assets. When Cory Pulfrey started out in private equity, portfolios would be held at cost, meaning that investors found it hard to know where they stood.

Morgan Stanley believes the credit crisis will have less impact on Asian private equity markets than on those elsewhere in the world, on account of the fact that leverage was never such a predominant feature of AsiaÆs deals.

"Asia has not had the same excesses in leverage for buyout deals as in US and Europe, and the buyouts here have in general been more equitised," says Jie Gong, vice-president of Morgan Stanley Alternative Investment Partners in Hong Kong. ôWe believe that the next several years will be vintage years for private equity investing, with attractive valuations across investment strategies. In addition, areas such as distressed and secondaries are well positioned to profit from this market cycle."

There are about a dozen major players in the secondary trading market for private equity investment. The market provides an element of liquidity for this traditionally illiquid asset class and acts as an ATM for distressed sellers who need to realise cash.

Morgan StanleyÆs Alternative Investment Partners private equity fund of funds team manages $6.7 billion across a full spectrum of private equity strategies. It operates out of Pennsylvania, New York, London and has recently opened an office in Hong Kong.