When private equity firms hire a fund placement agent, they typically pay a fee based on the dollar amount of capital commitments secured by said agent. In other words, a commission.
There have been all sorts of placement agent shenanigans over the past decade, but this basic arrangement is entirely fair. Well, so long as it only goes one way.
It seems that Morgan Stanley (MS), however, is collecting commissions on the way in and the way out. Here’s how it works, according to fund offering documents obtained by Fortune:
Morgan Stanley raises a variety of private equity funds through its Morgan Stanley Alternative Investment Partners (AIP) group. Mostly funds-of-funds that also feature secondary and co-investment flexibility. Morgan Stanley also serves as placement agent on its AIP funds, and receives a small fee/commission on the capital raised from the general partner (yes, basically moving money from one part of the firm to another). So far, so good.
Now here’s where it gets icky: Morgan Stanley raises some of the capital for its funds from the bank’s own global wealth management group. If one of those rich clients chooses to invest, they are required to pay a placement fee for the privilege. For example, one fund focused on the emerging markets required clients to pay a 2% fee on any fund commitment under $2 million (there was a $500k minimum for individual investors) and a 1% fee for any commitment between $2 million and $5 million. Anything above $5 million was charged 0.75%, but that was paid by AIP (up to $150k).
Amazingly, these inbound fees only apply to money raised from Morgan Stanley global wealth management clients. If you’re an outside pension fund or other such third-party investor, you pay nothing for access.
I asked Morgan Stanley why it seems to be screwing over its own clients, and a spokeswoman only would say that the practice is “industry standard.” I asked for an example of others firms that do such things, but she could not provide me with any. How she knew it was industry standard, therefore, is beyond me.
This obviously isn’t any issue that comes up for most firms, since they don’t have wealth management groups. But many firms do raise sidecars from portfolio company CEOs and the like, without charging them extra.
Maybe it’s just a bank thing, since some sources suggest that similar practices occur elsewhere on Wall Street (I’d name the firms, but not without documentation). But that’s doesn’t make it right. It’s akin to a residential real estate broker charging both the seller and the buyer.
This is an abusive practice that Morgan Stanley and its peers should stop. Immediately.