Morgan Stanley mulls private credit fund bet with balance sheet

MORGAN Stanley is discussing allocating a portion of its balance sheet into a new private credit fund that would include capital from external investors, according to sources with knowledge of the matter.

The New York-based firm has held preliminary talks about injecting US$1 billion to US$2 billion of capital into the new vehicle, said the sources, who requested anonymity discussing confidential information. It is considering a structure that would entail raising US$4 billion to US$5 billion from so-called limited partners, the sources said.

Morgan Stanley is mulling making large senior-secured, performing unitranche loans to closely-held borrowers through the vehicle, according to the sources with knowledge of the matter. No final decisions have been made and terms, including the final size of the fund and its leadership, have not been determined.

A Morgan Stanley representative declined to comment.

The bank’s effort underscores the power shift underway in the lucrative business of providing debt financing to leveraged borrowers. Private lenders have increasingly offered competitive terms for buyout financing, seizing businesses away from banks that have traditionally dominated such lending, for example, by arranging and syndicating leveraged loans. In the process, Wall Street is missing out on fees.

Banks have sought to rebalance the equilibrium by setting up private credit strategies of their own. JPMorgan Chase & Co is engaged in direct lending using its balance sheet, and has been courting investors for capital. Firms including Wells Fargo & Co have inked private credit partnerships, while others such as Barclays and Citigroup are also mulling options. BLOOMBERG