Morgan Stanley private equity arm raises $1.7 bln Asia fund

Reuters

* Morgan Stanley Asia PE arm raises more money despite

Volcker restrictions

* Firm has made two investments from Fund IV, in S.Korea and

India

* MS Asia PE first 3 funds returning net IRR of over 20 pct

-source

(Adds details of fund strategy, performance, past deals)

By Stephen Aldred

HONG KONG, July 7 (Reuters) - Morgan Stanley said its

Asia private equity unit has raised $1.7 billion in its fourth

Asia fund as it seeks investment opportunities in China and

South Korea.

The fund, Morgan Stanley Private Equity Asia IV LP, has

already made two investments from the new fund, and raised more

capital than initially targeted, the Wall Street bank said in a

statement on Monday.

Morgan Stanley had originally targeted $1.5 billion with the

fund, the same as its third Asia fund.

One of the key focus areas for Fund IV will be China.

"The last two years in China, we have seen the most

attractive entry prices we have seen in the last 10 years," Chin

Chou, CEO of Morgan Stanley Private Equity Asia (MSPEA), told

Reuters.

Morgan Stanley's fund-raising comes as many banks spin off

their private equity arms due to the Volcker rule.

The post-2008 crisis regulation restricts U.S. banks from

trading on their own accounts and caps their investments in

risky businesses such as hedge funds and private equity to just

3 percent of Tier I regulatory capital.

Despite that restriction, Morgan Stanley Private Equity Asia

(MSPEA) has raised more money with Fund IV, its first fund since

the Volcker rule, and with more of it from third-party

investors.

The firm raised $1.65 billion from third-party investors for

Fund IV, compared to $1.1 billion for Fund III. Morgan Stanley

contributed $50 million, or 3 percent of the latest fund,

compared to $400 million, or 27 percent of the previous fund.

Chou told Reuters that the successful fund-raising was

partly because it was the firm's fourth fund, and because the

firm has a track record of strong performance.

Chou declined to comment on details of performance, but a

source with knowledge of the firm said its first three funds are

returning a net internal rate of return of over 20 percent, and

have returned more than four times money on a gross basis for

realised investments.

Making two to three times money is considered a very good

return in private equity circles.

MSPEA has invested around $2.5 billion in more than 50

investments in the region in the past 20 years.

The firm has already completed investments in Ssangyong C&B

Monalisa in South Korea and Janalakshmi Financial Services in

India from its fourth fund.

It is finalising two take-private deals for overseas listed

China companies, Noah Education Holdings Ltd and Sino

Gas International Holdings Inc.

Its past investments include Ping An Insurance Group

and Sihuan Pharmaceutical Holdings Group Ltd

, which is seen as a textbook case of the profits that

can be made by buying out overseas-listed China companies, then

relisting them closer to home.

MSPEA delisted Sihuan Pharma from Singapore in late 2009

before relisting the company in Hong Kong in November 2010. The

firm has not fully exited, but expects to make around 8 times

its initial investment when it does, said the source with

knowledge of the firm, who declined to be named as details of

the funds were private.

(Reporting by Stephen Aldred; Editing by Denny Thomas and Ryan

Woo)

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