REAL ESTATE PUBLIC NOTE PROGRAM SCORECARD
Name of Offering – Morgan Stanley NORTH HAVEN TACTICAL VALUE FUND LP. Confidential Offering Memorandum dated 05-08-2017 – First Supplement dated May 2017. Accredited Investors only (Rule 501/506(b) – Regulation D).
Size – $1,038,685,000* (Reg. D). The COM Supplement shows the amount actually contributed to be $1,400,358,799*. The Fund has been established for both U.S. and non-U.S. investors. The Fund is offering over 5600 limited partnership interests of $250,000 each (minimum investment). *Orig. $500M.
At any time and from time to time, the General Partner may require the Limited Partners to make Capital Contributions toward follow-on investments in accordance with Section 3.1(a) (i) of the Limited Partnership Agreement.(Limit 15% of aggregate contributions on those investments reserved by the G.P.) unlimited on one’s not reserved). Additional capital contributions may be required by the G.P. for L.P. Management Fees, Organizational and other Partnership expenses. The G.P. may exclude the capital commitment of any Limited Partner from participation in a Portfolio Investment in good faith it it determined that it would violate a law or governmental regulation.
Distributions of Temporary Income shall be distributed 90 days following the fiscal Quarter when such income exceeds $1 million. Distributions of current income from Portfolio Investments will be withheld until the aggregate amount of such undistributed current income exceeds $10 million.
Disposition proceeds will be distributed only when they exceed $15 million. Notwithstanding the foregoing, the G.P. may retain any of the foregoing amounts if in good faith it determines that such retention is appropriate in order to take advantage of market opportunities.
Investment Objective – To achieve attractive risk-adjusted returns by pursuing an opportunistic and flexible investment program to make investments across a wide range of industry sectors and asset classes globally. The Fund seeks to create a diversified portfolio of uncorrelated investments by capitalizing on dislocations in the funding markets for various industry sectors and asset classes utilizing Morgan Stanley’s deep reservoir of intellectual capital, deal sourcing capabilities and client relationships.
The Fund is currently comprised of:
- North Haven Tactical Value fund, LP, a Delaware limited partnership(the Main fund),
- North Haven TV Feeder Fund, LP, a Cayman Islands exempted limited partnership treated as a partnership for U.S. federal income tax purposes (the Cayman “Feeder Fund”) has been established as Feeder Fund investing in the Main Fund. Certain tax exempt and non-U.S. investors as well as certain other qualified clients may consider making their investment in the main fund through the Feeder Fund. (A Feeder Fund is a Limited Partner designated as such by the G.P. in its sole discretion),
Placement Agents – Certain affiliates of Morgan Stanley are serving as independent placement agents for limited partnership interests in the fund for select prospective investors. 1
No Placement Agent will have any involvement in, or responsibility for the operation or affairs of the Fund, the General Partner or the Manager..
Here is Morgan Stanley’s disclaimer regarding its involvement in the offering:
THIS MEMORANDUM WAS PREPARED BY REPRESENTATIVES OF THE FUND AND WAS NOT PREPARED, REVIEWED OR APPROVED BY MORGAN STANLEY. CERTAIN INFORMATION CONTAINED HEREIN (INCLUDING FINANCIAL INFORMATION AND INFORMATION RELATING TO INVESTMENTS IN COMPANIES) HAS BEEN OBTAINED FROM PUBLISHED AND NON-PUBLISHED SOURCES. IT HAS NOT BEEN INDEPENDENTLY VERIFIED BY THE FUND OR MORGAN STANLEY. NONE OF THE FUND OR MORGAN STANLEY GUARANTEES THE ACCURACY OF SUCH INFOR-
MATION, AND SUCH PERSONS HAVE NOT INDEPENDENTLY VERIFIED THE ASSUMPTIONS ON WHICH SUCH INFORMATION ARE BASED.
Morgan Stanley Commitment: Morgan Stanley, its affiliates, employees and the Investment Team together will make aggregate capital commitments to the Fund of at least 3% of total commitments at or prior to final closing. However, the M?S Capital Commitment may be decreased at any time to the extent determined by the G.P. to be necessary or appropriate to comply with applicable law or regulation. Any commitment made by the G.P. shall not bear Management Fees or be subject to Carried Interest. Per the Quarterly Report, M/S had contributed $26,420,000 or 2.6% as af December 31, 2020.
Initial closing Date – 2017 (Ltd. Partnership Agreement #1.
Final Closing Date – The date that is twelve (12) months after the Initial Closing Date, which date may be extended by the General Partner in it sole discretion for up to six (6) months, and which date may be further extended for a period in excess of six (6) months with the consent of the LP Advisory Committee.
Investment Period – 3 years from final closing, plus two consecutive additional one-year extensions at the General Partner’s discretion.
Term – 8 years from final closing, plus three additional one-year extensions at the General Partner’s discretion, provided that, in the case of the third one-year extension, the limited partner advisory committee does not object.
Preferred Return – Original investment back + 7% cumulative. Finally, catch-up 15% carried interest to General Partner, then 85% Limited Partners/15% to GP.
Diversification Limitations – Generally, no more than 20% of total commitments in a single investment and no “blind pool” investments without the consent of the limited partner advisory committee. Bridge Investments and Self-Liquidating Investments may not exceed 25% of the Aggregate Capital Commitments and the LP will not invest in any “blind pool” funds.
Sponsor – Morgan Stanley. General Partner – MS Tactical Value Fund GP, a Delaware LP (owned by Morgan Stanley together with its “Morgan Stanley” affiliates) and certain Morgan Stanley professionals, including the investment professionals dedicated to Fund (The Investment Team). Manager – MS Capital Partners Adviser Inc., a wholly-owned subsidiary of Morgan Stanley (Registered as an Investment Adviser under the U.S. Investment Advisers Act of 1940). 2
Description – The Offering is a blind pool and has certain investment parameters for acquisition into the Fund from within Morgan Stanley :
…… .Intellectual Property Opportunities (Pharmaceutical Royalty Modernization
…… Tax Receivable Agreements (IPO Spin-off Structure)
……. Index Dividend Swaps (European Bank Structured Products)
…… Synthetic Performing loan Securitizations (European bank Capital Raising.
…… Intarcia – (Alternative Private Equity) Growth Equity in biotech drug delivery
…… Alibaba – in discussions since 2012 (5 years) to take the Co. public.
(Another Alternative Private Equity)
The Fund will invest in derivative investments including forward and cross-currency swaps to hedge the effects of foreign currency exchange rate fluctuations. Investments in derivative contracts subject the Fund to off-balance-sheet market risk. The Fund also invests in commodity and energy investments.
The fund may consider the following for its Portfolio Investments in the U.S.: REITS, Leveraged Corporations, Non-U.S. Feeder Vehicles (debt to finance the purchase of debt investments or shares of a corporation that are not expected to generate income that is effectively connected with a U.S. trade or business or form an entity treated as a foreign corporation), Investments outside of the U.S., certain issues pertaining to Private foundations,
Upon exit from this program, the M/S Affiliate can pay investors back with “Restricted Stock” rather than in cash. Restricted stock normally has a 1 year or longer lock-up period from the date issued and further extends the illiquidity of this blind pool fund.
An Investment in the fund entails a high degree of risk and is suitable only for sophisticated investors who fully understand and are capable of bearing the risks of an investment in the Fund. Accordingly, an investment in the Fund should only be considered by investors who can afford a loss of their entire investment. This line is buried on page 39 of the COM and written in small print in the middle of the second risk paragraph of the Fund.”No Assurance of Investment Return”. It is unacceptable to not have this line in bold and shown in the beginning of the Confidential Offering Memorandum.
1.General Partner Experience – While Morgan Stanley itself has aprox. $417 billion under management, as an entity, MS Tactical Value GP has no prior experience whatsoever. There is, however experience noted for the LP’s Investment Team members, Thomas Cahill,Jr. and Pedro Teixeira. 3
Thomas Cahill, Jr. is Managing Director and until January 2017, was the Global Head of the Asset Finance Group, which consists of all credit based structured finance products within the Global Capital Markets platform. Previously, Mr. Cahill was the head of the Debt Products Group of CCM, and had responsibility
for Aircraft Finance, Equipment Finance, Liability Management, Structured Corporate and Private Placements. During his career, Mr. Cahill has focused on the area of Equipment Finance and is a recognized leader in the development, structuring and execution of secured debt transactions involving aircraft, locomotives, rolling stock, ships, power generation facilities, cell towers and real estate. Mr. Cahill was also the creator of PhaRMA, a product designed to monetize drug royalty streams, as well as the designer of the current industry standard platform of cell tower securitizations. He was a member of the Global Capital markets Management committee and the Investment Banking Division Management Committee. Mr. Cahill graduated with highest honors from Lehigh University in 1985 with a B.S. in Engineering Physics, with high honors with a B.A. in Mathematics in 1986 and was elected to Phi Beta Kappa and Tan Beta Pi honor societies. In 1990. Mr. Cahill received an MBA from the Institut Europeen d’Administration des Affaires (INSEAD). He is a member of the Advisory council of the Morgan Stanley Children’s Hospital. Mr. Cahill joined Morgan Stanley in 1990.
Pedro Teixeira is a Managing director and joined Morgan Stanley in 2017. Previously, Mr. Teixeira was a senior analyst and a founding member of Nokota Management LP in New York, a value driven, cross-asset class investment fund founded in 2011. Having started with $250 million in assets under management, Nokota Management currently has over $2 billion of assets under management. During his 5.5 years at Nokota, Mr. Teixeira focused on European credit and equity investments across sectors and on the financial sector globally. Prior to Nokota, he spent 2.5 years at TPG Axon in London focused on credit and equity investing across a number of European sectors. Mr. Teixeira started his career in 2001 at Goldman Sachs Incorporated in London, spending the bulk of his 8 year tenure within Goldman Sachs Principal strategies, a team with responsibility for a significant portion of Goldman’s balance sheet investments. He was a founding member of the department’s Principal Finance business in 2003, which sourced and managed non-control investments in private and public companies across the capital structure. In 2006, Mr. Teixeira became head of Principal Finance in Europe and served as the secretary of the Principal Investments Committee, a group consisting of the firm’s president, CEO and senior partners, responsible for reviewing and approving all meaningful balance sheet investments made by the firm. During his career, Mr. Teixeira has invested globally across sectors and asset classes, in both public and private companies. Mr. Teixeira graduated as valedictorian of the Economics Department of the Universidade Catolica Portuguesa in Lisbon in 2001. Score _______3_______
- Net Worth Consideration – Morgan Stanley is a global financial services firm that through its subsidiaries and affiliates, advises, and originates, trades manages and distributes capital for government and institutions. Morgan Stanley conducts its business from its headquarters in and around New York City, its regional offices and branches throughout the U.S. and its principal offices in London, Tokyo, Hong Kong and other world financial centers. As of 12-31-2-16,
Mortan Stanley had over 55,000 professionals worldwide. 4
The Placement Agents, the General Partner and other companies under the common control of Morgan Stanley engage in a broad spectrum of activities, including financial advisory services, investment management activities, lending, commercial banking, sponsoring and managing private investment funds, engaging in broker-dealer transactions and principal securities, commodities and foreign exchange transactions, research publication and other activities
Unfortunately, there is no financial information on the financial net worth of the General Partner MS Tactical Fund GP (an M/S affiliate) in this private placement. Further, it is not disclosed on the form Reg. D. This is below the standard of care, especially with the disclaimers noted on page one with respect to the Parent Co. Morgan Stanley’s de minimis role in this offering. However, Morgan Stanley’s logo and signature is affixed to the 55 page Quarterly Report.
3.Track Record – The General Partner has no prior track record, whatsoever. Disclosure Statements of Morgan Stanley: Under Rule 506(e) of Regulation D promulgated under the Securities Act, the Fund is required to furnish to each purchaser of Interests within a reasonable time prior to sale a description in writing of any matters that would have triggered disqualification under paragraph (d)(1) of Rule 506 but occurred before September 23, 2013, including as a result of such matters associated with a placement agent engaged by the Fund with respect to the offering of Interests. The following are descriptions of such matters provided by Morgan Stanley: June 2012 CFTC Order. In June 2012, Morgan Stanley & Co., LLC consented to and became the subject of an order by the CFTC that resolved administrative proceedings initiated by the CFTC. In the order, the CFTC found that from April 2008 through October 2009, Morgan Stanley & Co., LLC violated the Commodity Exchange Act and CFTC regulations by executing, processing and reporting numerous off-exchange futures trades to the Chicago Mercantile Exchange and Chicago Board of Trade as exchange for related positions (“EFRPs”) in violation of relevant rules because those trades lacked the related cash or other over-the-counter positions required to constitute a valid EFRP. The CFTC also found that Morgan Stanley & Co., LLC violated CFTC regulations by failing to supervise the handling of the trades at issue and failing to have adequate policies and procedures designed to detect and deter the foregoing violations. Without admitting or denying the underlying allegations and without adjudication of any issue of law or fact, Morgan Stanley & Co., LLC consented to a cease and desist order, a civil monetary penalty of $5.0 million and undertakings related to public statements and future cooperation.
On January 13, 2017, the Division of Corporation Finance of the U.S. Securities and Exchange Commission (the “SEC”), by delegated authority, granted Morgan Stanley Smith Barney LLC (“MSSB”) a waiver of the
disqualification provision in Rule 506(d)(1)(iv) of Regulation D promulgated under the Securities Act. Until all of the certifications detailed in the
order (the “Order”) entitled In the Matter of Morgan Stanley Smith Barney LLC, Administrative Proceeding File No. 3-17773 (January 13, 2017) have been provided to the SEC, each purchaser in a Rule 506 offering that would otherwise be subject to the disqualification under Rule 506(d)(1)as a result of the Order, shall be provided with the following description of the Order. 5
January 2017 SEC Order – On January 13, 2017, the SEC entered into the Order with MSSB settling an administrative action. The SEC found that from 2009 through 2015, MSSB inadvertently charged advisory fees in excess of what had been disclosed to, and agreed to by, its legacy Citigroup Global Markets Inc. clients, and, from 2002 to 2009 and from 2009 to 2016, Morgan Stanley & Co. and MSSB, respectively, inadvertently charged fees in excess of what was
disclosed to and agreed to by their clients. The SEC also found that MSSB failed to comply with requirements regarding annual surprise custody examinations for
the years 2011 and 2012, did not maintain certain client contracts, and failed to adopt and implement written compliance policies and procedures reasonably
designed to prevent violations of the Advisers Act. The SEC found that, in relation to the foregoing, MSSB willfully violated certain sections of the Advisers Act. In determining to accept the offer resulting in the Order, the SEC considered the remedial efforts promptly undertaken by MSSB. MSSB consented, without admitting or denying the findings, to a censure, to cease and desist from committing or causing future violations, to certain undertakings related to fee billing, books and records and client notices and to pay a civil penalty of $13,000,000. Score________3________
- Compensation – In the COM Supplement, there is a schedule with an Investor Servicing Fee Schedule as follows: 0.75% per annum for an investment of $250,000 – $4,000,000; 0.50% per annum for an investment of $5,000,000 to $9.999.999 and 0.00% per annum for investments of $10,000,000 and above. The annual Management Fee is charged (a) 1.25% for limited partners with aggregate Capital Commitments of less than $10 million and (b)1.00% for limited partners with Aggregate Capital Commitments equal to or greater than $10,000,000. The management fees are charged quarterly.
- Front-End Load Factors – In the 50+ years that I have been analyzing and evaluating limited partnerships, this is the first one that is formed without a “Use or Proceeds” section in the offering document. In reviewing the litany of fees and expenses that this offering asks for the reason is clear. The percentage of investor dollars that would actually go into investments in the Fund would be embarassingly low. The COM Supplement provides a schedule that charges an Upfront Placement Fee Schedule of 2.00% for an investment of $250,000 – $999.999; 1.00% for an investment of between $1,000,000 and $2,999,999’ 0.50% for an investment of between $3,000,000 and $9,999,999 and 0.00% for an investment of $10,000,000 and above. In addition, the Fund will bear all legal, accounting, filing and other expenses (including travel, meals, accommodations, entertainment, research and market data, and ancillary costs thereto, incurred in the formation of the Fund, and Parallel funds and any Feeder funds and in the offering of the Interests (other than any placement fees). 6
A few of the following partnership expenses are not front-end items but most clearly are, even though the General Partner advances the expenses but then they are fully reimbursed by the Fund. Even with this practice, these are still front end expenses as acquisition of investments are made.
The Fund will be “responsible” for all other fees, costs, expenses and liabilities that are incurred by. Arise out of or relate to the operation and activities of the Fund (“Find Expenses”) including the following:
- Organizational expenses
- Fees, costs and expenses (including travel, meals, accommodations, entertainment, research and market data, and ancillary costs thereto) incurred in connection with or related to conducting due diligence investigations into, evaluating, purchasing, acquiring, developing, negotiating, structuring, holding, monitoring, custody, hedging, financing, insuring and disposing of actual (or potential) Portfolio Investments, including property and asset management fees in connection therewith (to the extent such fees, costs and expenses are not subject to any reimbursement by entities in which the Fund invests or other third parties)
- Costs in connection and transactions not consummated, including reverse break-up fees and lost deposits.
- Fees and expenses of any external legal, financial, accounting, consulting, depositary and custodial services provided to the Fund or in respect of the Fund’s operations or activities;
- Printing and reporting-related expenses (including preparation of financial statements, tax returns, K-1’s and other communications or notices relating to the Fund’
- Fees, costs and expenses incurred by Morgan Stanley, MS Tactical Value Fund GP (the General Partner) or any of their respective affiliates for services rendered on an arms’ length basis in connection with the administration of the Fund and other services that. If provided by a third party, would constitute Fund Expenses;
- Costs of appraisal services (including obtaining an independent valuation of Portfolio Investments or other assets), valuation advisers,7
- engineering and environmental assessment services, accountants, auditors, legal counsel, tax advisers, tax compliance, professionals, consultants, administrators, trustees and other professionals.
- Any investment banking fee, placement fees, finders fees, debt servicing and arrangement fees, underwriting fees, other advisory fees, securities brokerage fees and commissions, prime brokerage fees, custodial fees and expenses , and other fees, costs and expenses incurred in connection with Portfolio Investments.
- Any insurance, indemnity or litigation expense;
- Any taxes, fees or other governmental charges levied against the Fund;
- Expenses incurred in connection with legal and regulatory compliance obligations under5 U.S. federal, state, local or non-U.S. or other laws and regulations (whether such compliance obligations are imposed on the Manager, the General Partner, their affiliates or the Fund), including without limitation, the preparation and filing of Form PF, filings under the U.S. Securities Exchange Act of 1934, as amended, filings required under the European Union’s Alternative Investment fund Managers Directive, the Swiss Collective Investment Scheme Act (“CSA”)TIC Form SLT filings, IRS filings under FATCA and EBAR reporting requirements applicable to the Fund, CFGC Form 413(a)(3), CPO-PQR, CTA PR and NFA Form PQE filings and any other forms or schedules or other filings with governmental and self-regulatory agencies directly related to the making, holding or disposing of Portfolio Investments by the Fund, together with all other costs and expenses in relation to maintaining or compliance with the tax or legal status of the fund to the General
- Principal, interest on and fees and expenses arising out of all existing or proposed indebtedness of the Fund or related to any Portfolio Investment.
- Expenses associated with portfolio and risk management including currency and interest rate hedging;
- Expenses of liquidating the Fund;
- Expenses incurred in connecting with any tax, audit or investigation of the Fund, the preparation of financial statements and tax returns, and any governmental inquiry, investigation or proceeding;
- Fees, costs and expenses related to the organization and maintenance of any entity u se to acquire, hold or dispose of Portfolio Investments or otherwise facilitating the Fund’s investment activities (each, a “Holding Vehicle”), including, without limitation, independent director sees, corporate secretary fees, audit, tax advice, tax filing and legal advice fees, air travel, and accommodation expenses related to such entity
and the salary and benefits of any personnel (including any personnel of Morgan Stanley or any of its Affiliates), reasonably necessary and/or advisable for the maintenance and operation of such entity, other overhead expenses in connection therewith, or any other fees, costs and expenses as described in subparagraphs (i) through (xix) applicable to such Holding Vehicle;
- Certain goods and services or other similar taxes to the extent that the Fund or any Holding Vehicle is required by applicable law to pay, withhold or deduct such amounts from any payment of the Management Fee, and
- Fees, costs and expenses incurred in conjunction with any amendments, restatements, or other modifications to, and compliance with, the Partnership Agreement, the investment management agreement between the Fund and the Manager, side letters with Limited Partners or any other constituent or related documents of the Fund.
The front end fees, I believe exceed 20% of the cash raised by investors. Score ______1_______
- Guarantees – Morgan Stanley or the General Partner provide no operational or other meaningful guarantees whatsoever. Further, there is no repurchase account to provide investors with some measure of liquidity in the event of a serious emergency. Score _______1_______
- Self-Dealing(Conflicts of Interest) – 1. Amendments. The terms governing the Partnership Agreement may be amended with the approval of the 9
G.P. and the required limited partners. Such amendments may include changes to the fund’s investment objectives, investment restrictions and other limitations. In addition, certain terms, including investment restrictions or affiliate transaction restrictions, may be waived with the approval of the Advisory Committee. Limited partner consent can be granted despite the objection of a large minority in interest of Limited Partners, and Advisory committee approvals may be granted despite the objection of members of the Advisory Committee or minority in interest of the investors. Any such amendment or waiver may be considered adverse by the Limited Partners who did not support the amendment or waiver. 2. Carried Interest of the G.P.. 3. Long term leverage or use of subscription facilities could eliminate the investors preferred return or increase the G.P. Carried interest. 4. Morgan Stanley Principal Activities. 5. Commodities and Global-Structured Products of Morgan Stanley will not be offered to investors of the Fund. 6. Morgan Stanley’s Restructuring Activities. 7. Morgan Stanley’s Loan Syndication Activities. 8. Morgan Stanley’s Principal Investments. 9. M/S Tac Value Strategy; Adjacent Vehicles. 10. Investments by Affiliated Investment funds, affiliated Investment Programs and Morgan Stanley Business. 11. Other M/S Affiliate Transactions. 12. Financial Interests of M/S personnel may Incentivize M/S Personnel to Promote the Sale of interests in the fund and the Feeder Fund. 13. Non-Public Information (confidential or material non-public information regarding Portfolio Investments) may become available to M/S. 14. M/S’s Investment Management Activities. 15. M/S’s Marketing Activities. 16. Conflicts with M/S Portfolio entities. 17. Transactions with M/S Portfolio companies or Affiliated Investment Funds are permitted but no sharing of fees or compensation. 18. Diverse Membership; Relationships with Limited Partners. 19. Side Letter Agreements with certain Limited Partners. 20. Public Disclosure Requirements. 21. Recycling; Reinvestment – The General Partner has the right to recall (or retain and reinvest) distributions made to the Limited Partners in respect of any Portfolio Investment prior to the termination of the Investment Period in an amount equal to the capital invested by the Fund in such Portfolio Investment and distributions made to the Partners in an amount equal to funded Capital Commitments used to pay Fund Expenses and organizational expenses as set form in Section VI. Accordingly, in such circumstances, a Limited Partner may be required to make aggregate contributions in excess of its Capital Commitment, and to the extent such recalled or retained amounts are reinvested, a Limited Partner will remain subject to investment and other risks. 22. Co-Investment in Parallel Funds. 23. Other Co-Investments. 24. Syndication of a Co-Invested Portfolio Investment. 25. Multi-Fund Investors/Strategic Partnerships – M/S may enter into strategic partnerships or other multi-strategy or multi-asset class arrangements or investment programs directly or indirectly with investors that commit significant capital to a range of products, investment ideas and asset classes sponsored by Morgan Stanley)including the M/S Tac Value Strategy) Such arrangements may include M/S granting certain preferential terms to such investors, including, without limitation, discounts on and/or reimbursement of management fees and/or carried interest applied to some or all of the relevant investment program and/or investment vehicles, secondment (job-rotation) or personnel from the investor to M/S (or vice-versa) as well as targeted amounts for co-investments alongside M/S funds. Such preferential terms are generally not subject to the “most favored nation”
provisions of the governing documents of a particular Limited Partner. 10
- Broken Deal and Other Expenses – including attorney’s fees and other professional fees shall be determined by the G.P. in its good faith discretion. The Fund will bear all these expenses. 27. Brokerage Activities – M/S will be authorized to act as Broker on both sides of the transaction. 28. Temporary Investments. 29. Management of the Fund by the M/S Investment Team. 30. Investments in Portfolio Investments of Other Funds Affiliated with the (M/S) Manager. 31. Credit Standing of the Fund – M/S credit standing will not be used. 32. Placement Fees – Paid to affiliates of Morgan Stanley. The Placement Agents, the General Partner and other companies under the common control of Morgan Stanley engage in a broad spectrum of activities, including financial advisory services, investment management activities, lending, commercial banking, sponsoring and managing private investment funds, engaging in broker-dealer transactions and principal securities, commodities and foreign exchange transactions, research publication and other activities. In the ordinary course of its business, the Placement Agents engage in activities where the interests of the Placement Agents or the interests of their clients may conflict with the interests of the investors, notwithstanding the Placement Agents’ affiliation with the General Partner. Neither the General Partner nor the Placement Agents can give any assurance that conflicts of interest will be resolved in favor of the investors, and, in fact, they may not be so
resolved. These placement fees are paid by the investor clients “in addition” to their Capital Contributions. 33. Valuation of Assets by M/S. 34. Counsel represents the G.P., Morgan Stanley and certain other M/S affiliates and not the investors in crafting the COM. Score _______2________
- Limited Partner’s Rights – The General Partner may require the clawback (return) of previously distributed amounts from limited partners. However this clawback shall not exceed 35% of all distributions received by such Limited Partner. Further, no Limited Partner shall be required to return a distribution after the third anniversary of the Final Distribution. The General Partner shall select and form an LP Advisory Committee which shall be a committee consisting of certain Limited Partners selected by General Partner. It’s purpose is to resolve certain conflicts of interest, but can only act when the G.P., at its sole discretion decides whether to present any particular potential conflict to the LP Advisory Committee. Approval would be a majority of the 5 members or three (3). A majority in interest of limited partners may call a special meeting of the Partnership. Without the consent of 66 2/3 in interest of all the Limited Partners, the General Partner shall not have the right to assign, pledge or otherwise transfer its interest as the general partner of the Partnership or withdraw from the Partnership. The same 2/3 vote would be needed to reconstitute the LP into any other form of entity i.e. corporation of otherwise by merger, consolidation, conversion or otherwise. Removal of the General Partner would require a vote of 75% of the limited partners and only upon a Cause Event. Page 5 of the Partnership Agreement defines a Cause Event as, “a finding by any U.S. court or governmental body of competent jurisdiction or an admission by the general partner or the Manager in a settlement of any lawsuit, that the General Partner or the Manager has committed a felony, has intentionally and materially violated U.S. federal securities laws or has engaged in conduct that constitutes fraud, gross negligence or willful misconduct in connection with the performance of their respective duties under the terms of this LP Agreement or the Advisory 11
Agreement, as the case may be, in each case, which has a material adverse effect on the business of the Partnership. If a limited partner defaults from making a required capital contribution he will be classified as a Defaulting Limited Partner. His pro rata share or limited partnership interest may be sold for the lesser of (a) 50% of such defaulting limited partner’s Capital Account or (b) 50% of the Fair Market Value of the defaulting limited partner’s interest. Then, the new limited partner would have to pay 100% of the capital contribution of the defaulting limited partner as determined by the General Partner at its sole discretion. The General Partner shall have the right to amend the LP agreement without the approval of any other Partner. Finally, dissolution of the Limited Partnership or the setting aside of the Advisory Agreement would require the affirmative vote of a majority in interest of all the Limited Partners.
Under the terms of the Partnership Agreement, the Fund has agreed to indemnify the General Partner, its officers, directors, employees, agents or any person who serves on behalf of the Funds from any loss, claim, damage, or liability which such person incurs by reason of their performance of activities of the Fund provided they acted in good faith. Score ______2_______
- Leverage – – The General Partner reserves the right to structure any indebtedness in any manner it deems appropriate. However, the General
Partner will not incur leverage to increase the aggregate pool of funds available for investments at any time beyond the aggregate amount of unpaid Capital Contributions On October 26, 2020, the Fund amended a revolving credit agreement with Pacific Western Bank to provide interim funding between capital calls (for limited partner reimbursement of LP expenses). The Fund is now permitted to borrow up to a maximum principal amount of $200,000,000 (the “Revolving Line”) of which $100,000,000 is cancelable. The Credit Facility matures on May 10, 2021 and is secured by limited partners’ capital commitments. During the year indeed December 31, 2020, the Fund borrowed an aggregate amount of $328,000,000 and made aggregate repayments of $450,451,782. On February 12, 2021, the Fund’s Credit Facility was terminated and the Fund entered into a new revolving credit facility with First Republic Bank for $200,000,000 maturing February 11, 2022. Score ______2_______
- Financing – Amounts borrowed under the Revolving Line bear interest at a rate per annum equal to the greater of (i) the prime rate and (ii) 4%. In addition, there is an unused facility fee of 0.25% per annum of the difference between the non-cancelable portion of the Revolving line and the average outstanding principal balance during the preceding quarter. The short term revolving line of credit matured May 19, 2021.
Subject to applicable laws, the Fund may lend to Portfolio Companies on a short term, unsecured basis or otherwise provide short-term financing to Portfolio companies in anticipation of a future issuance of equity or long-term debt securities or other refinancing or syndication. Such bridge financing will typically be convertible into more permanent long-term securities. Nevertheless, issuance of such long-term securities or other refinancing or syndication may fail for reasons beyond the control of the Fund, and therefore such bridge financing may remain outstanding. In such events, the interest rate on such financing or the terms of such bridge investments may not adequately reflect the risks in connection with the fund’s liabilities or investments. Score _______2_______ 12
- Valuation Ratio – General movements in prevailing market conditions could have a substantial impact on the value of the Portfolio Investments and investment opportunities generally. Certain securities and other assets in which the Fund may invest may not have a readily ascertainable market value and will be valued by the Manager in accordance with the Fund’s valuation principles. In addition the Manager may face a conflict of interest in valuing the securities or assets in the Portfolio that lack a readily ascertainable market value as the value of the assets held by the Fund will affect the timing of the payment of the General Partner’s Carried Interest. In calculation of the Carried Interest and making corresponding distributions, the General Partner may be required by the Partnership Agreement to value certain for the Fund’s unrealized Portfolio Investments. In addition, the General Partner will generally value any securities being distributed in-kind to investors in order to calculate the Carried Interest. Such valuations of the Fund’s investments will be determined by the General Partner. If the valuations by the General Partner are incorrect, the amount and the timing of payment of Carried Interest could be incorrect (in the General Partner’s favor). The Fund reviews its valuation of its investments quarterly. These valuations are in accordance with GAAP guidelines and are subject to annual audit by the auditor to the Fund.
To determine the current valuation of its investments, the Fund primarily relies on the following valuation methods: discounted cash flows, public market comparables and precedent transactions. All inputs and assumptions used to determine investment value are evaluated by the Fund in connection with various third-party experts, where appropriate. Macroeconomic data used in the models is based on external sources and includes inflation forecasts and interest rates. These factors are applied by the Fund in a manner consistent with other asset valuations performed by the Fund. Valuations are reviewed and approved by the Fund’s Valuation Committee. The Valuation Committee includes members from the Fund, Morgan Stanley Investment Management and various functions within Morgan Stanley including financial controllers and risk management. In addition, the quarterly valuations are subject to review by the Morgan Stanley Valuation Review Group. Score _______3_______
- Assumptions – Of critical importance is the material omission of any “Use of Proceeds” section in the Table of Contents and in the body of the Offering document. It is unconscionable not to provide the critical information describing how much of the investor’s dollars raised, actually go into the investment portfolio. Further, since this is a blind pool, there are far too few limitations. Effectively, this Fund could invest in almost anything anywhere in the world. That is far to nebulous and far reaching to form a reasonable investment portfolio.
The major accounting firm of Ernst and Young omits a material item on page 24 of its GAAP audit report for the Fund. The Fund’s net internal rate of return since inception of 7.2%. However, this % materially omits both Upfront Placement Fees and Investor Servicing Fees. These costs are omitted due to the fact that the Audit report does not factor them in because they differ based upon the size of the capital commitment. However, there is no disclaimer or explanation for this material omission by this major auditor. These fees should approximate 2.75% of the capital contributed assuming an average investment of between $250,000 and $999.999. As shown on the Reg D, the average is just investment is just about $1,000,000. That reduction would be 38% of the total 13
bringing the net internal rate of return to the limited partner investors down to 4.45%. Over the 3.5 years since inception, that equates to an annual average of 1.27$ per year. The 7.2% is grossly misleading without disclaimer in my opinion.
Another troublesome aspect of this blind pool offering is the fact that it does not have any policy that limits reinvestment by number of years. Any proceeds from sale or refinancing in this offering may be reinvested without limitation.
In my opinion, there should be some limitation which might be 4 – 5 years so that investors will know when the reinvestment period ends and the Fund becomes self liquidating.
Than, in all my years analyzing hundreds of limited partnerships, I have never seen the number and type of fees, costs and expenses that this Offering would have to bear to survive. Clearly, the litany of partnership expenses staggers the imagination. It differs and is more egregious than any of the over 1000 private limited partnerships I have reviewed since 1970.
Finally, an especially troublesome facet of private limited partnership investment program is the disclaimer by Morgan Stanley, whose name is heralded through the offering kit. Morgan Stanley has not reviewed, approved or verified the information in the COM. M/S doesn’t even guarantee the accuracy of the information contained in it or independently verified the assumptions on which the information is based.
Then it places an unknown affiliate to stand in as the General Partner with no prior experience or track record or financial strength to find comfort with.
This offering fails reasonable basis suitability in virtually all respects.
- Supply and Demand Considerations – The fund’s investments in portfolio entities will involve a high degree of business and financial risk. Portfolio entities may face intense market competition, including competition from companies with greater financial resources, more extensive development, manufacturing, marketing and other capabilities, and a larger number of qualified managerial and technical personnel. Some of the portfolio entities may be operating at a loss or have significant variations in operating results, may be engaged in a rapidly changing business with products subject to a substantial risk of obsolescence, may require substantial capital to support their operation, to finance expansion or to maintain the competitive position, may be in an early stage of development, may not have a proven operating history, or may otherwise have a weak financial condition that could result in insolvency, liquidation, dissolution, restructuring or bankruptcy of the relevant Portfolio Investment. Score ______2_______
- Consideration vs. Competition – 120%+ Score ______2_______
- Risk Factors (% of Normal Risk) 1. Blind Pool risk 2. Prior results not indicative of future performance; 3. No assurance of investment return; 4. Lack of operating history; 5. Reliance on the G.P. 6. Reliance on investment
professionals; 7. Tax risk; 8. Phantom income; 9. Late tax reporting; 10. Foreign Account Tax compliance Act withholding; 11. Certain proposed U.S. Federal Income tax legislation; 12. Partnership audit legislation; 13. UBTI; 14. Unspecified investment target; 15. Illiquidity of interests; 16. Turmoil in the U.S. and global financial markets 17. Inability to meet investment objectives or 14
investment strategy; 18. Target performance is unverified. 19. Lack of diversification; 20. Uncertain market conditions and opportunities; 21. Investments held longer that the term; 22. Defaulting partners; exclusion from investments in the Fund; 23. Absence of regulatory oversight; 24. Dilution by subsequent closings; 25. Investments in non-listed enterprises and securities; 26. Minority investments and co-investments with third parties; 27. Absence of recourse to G.P. and Manager; 28. Moral risk of professionals; 29. Controlling position or board seat; 30. Indemnification of control persons; 31. Risk of Morgan Stanley credit event; 32. Investments in less established companies; 33. Additional capital required; platform investments; 34. Risk of opportunistic investments generally 35. Risks of pre-closing investments; 36. Real estate investment risk; 37. Risk of acquiring real estate loans and participations; 38.
Distressed investments; workouts and restructurings; 39. Debt/Credit investments; 40. Mezzanine and other subordinated investments; 41. Secured loans priority; 42. CMBS; 43. CLO’s; 44. Undervalued investments; 45 Energy and related investments; 46. Media and entertainment investments; 47. Investment in sports industry; 48. Consumer and lifestyle investments; 49. Technology sector investments; 50. Healthcare sector investments; 51. Investments tied to royalties; 52. Transportation and shipping investments; 53. Commodity investments; 54. Growth capital investments; 55. Distressed and non-investment grade securities; 56. Risk of counterparty default; 57. Investments managed by third parties; 58. Registration under the U.S. Commodity Exchange; 59. Investments managed by third parties; 60. Derivitives; counterparty risk; 61. Expedited transactions; 62. Risk of non-U.S. investments; 63. U.S. political risk; 64. Risks associated with the European Union; 65. United Kingdom Exit from the European Union; 66. Risk of investing in non-OECD Countries; 67. Contingent liabilities on disposal of investments; 68. Distributions in-kind; 69. Compensation arrangements; 70. Valuation risk;
- Hedging transactions; 72. Leverage risk; 73. Bridge financing risk; 74. Subscription facilities risk; 75. Cross-guarantees and cross-collateralization risk; 76. Possible loss of limited liability; 77. Use of alternative investment vehicles; 78. Restrictions on transfer and withdrawal,; Compulsory withdrawal; 79. Protection of confidentiality by the limited partners; 80. Legal, tax and other regulatory risks; 81. Sanctions risk; 82. Regulation as a bank holding company; 83. Dodd-Frank act and Volker Rule disclosure; 84. Compliance with applicable rules and regulations; 85. Handling of mail; 86. Compliance with anti-money laundering requirements; 87. AIEMD; 88. Operating and financial risks of portfolio entities; 89. Regulatory approvals; 90. Public securities; 91. Reliance on management of operating companies; 92. Risk arising from provision of managerial assistance; 93. Uncertainty of financial projections; 94. Interest rate fluctuations; 95. Risks of contracts; 96. Environmental matters; 97. Natural disasters; 98. Terrorist activities; 99. Risks of failure of a funds brokers, counterparties and exchanges; 100. Risk arising from potential controlled group liability. Score _______2________
Total Score – 27 of 75 = 36%
Minimum Score Acceptable – 52 of 75 = 70%. A offering score of 27 is well below the minimum approval level (-25) and fails to meet the reasonable basis suitability test and this Private Limited Partnership should not even be placed into the due diligence process, not to mention being recommended to any accredited investors. A report similar to this Scorecard should be sent back to Morgan Stanley by any one of the independent placement agents indicating rejection of this private placement due to its inferior structure based upon many sub-standard deal points. It should be further stated that the offering most notably fails “reasonable basis” suitability and as currently structured, should not be recommended to any investor.
Mason A. Dinehart III, RFC
Securities Expert Witness
FINRA Arbitrator # A30388
July 1, 2021