Within a week’s time, Morgan Stanley (MS) has become the second U.S. bank to declare the launch of a yuan-denominated private equity fund in China, following Goldman Sachs Group Inc.’s (GS) announcement of the same on May 12, 2011. Morgan Stanley intends to raise 1.5 billion yuan ($230 million) through its newly established private equity unit in China.
Morgan Stanley will launch the yuan fund through Morgan Stanley (China) Private Equity Investment Management Co., a joint venture (JV) formed with China-based Hangzhou Industrial & Commercial Trust Co. Morgan Stanley holds an 80% stake in the JV.
Morgan Stanley stated that the yuan-dominated fund would mainly focus on the investment opportunities across China, with its primary target being the assets in the prosperous eastern province of Zhejiang and its capital Hangzhou. The company also stated that the fund would invest in those Chinese companies that are getting restructured and facing various challenges.
Morgan Stanley had entered the Chinese market way back in 1993 and has been investing in the local companies through its Asia private equity unit. The company has developed diversified businesses in China including a mutual fund venture, a wholly owned commercial bank, and a trust venture.
Additionally, in January 2011, Morgan Stanley got the consent from the China Securities Regulatory Commission (CSRC) to form a JV with Huaxin Securities Co Ltd, better known as China Fortune Securities Co Ltd. The approval allows the company to underwrite stocks and bonds in the fastest-growing Chinese markets.
Last week, Goldman had announced the launch of a yuan-denominated fund, with an aim to raise 5 billion yuan ($769 million). The company has formed a JV with Beijing-based Capital Operation and Management Centre.
Apart from Morgan Stanley and Goldman, other U.S. companies, including Blackstone Group (BX), The Carlyle Group and TPG Capital, have also launched similar yuan-denominated funds in China. These three companies have announced to raise funds worth 20 billion yuan in total.
The Chinese capital market is hopeful that the entry of foreign players in the domestic market will likely boost its economic growth. These yuan-denominated funds allow the foreign companies to raise money directly from Chinese investors. Hence, Morgan Stanley will likely be able to invest in industries such as media, telecoms, steel and transport, where foreign investment is usually banned or restricted.
Morgan Stanley currently retains a Zacks #4 Rank, which translates into a short-term ‘Sell’ rating. Also, considering the fundamentals, we maintain a long-term “Underperform” recommendation on the stock.
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