Morgan Stanley Could Retain FrontPoint Stake In Spin-Off

Aug 6 2010 | 3:09am ET

Morgan Stanley is nearing a deal to spin-off FrontPoint Partners, the $7 billion hedge fund it bought four years ago, but plans to retain a significant stake in the independent firm.

The Wall Street giant and FrontPoint’s management have in recent days discussed an arrangement in which no cash would change hands. Instead, Morgan Stanley would get preferred equity in FrontPoint in exchange for giving up control of the Greenwich, Conn.-based firm, The Wall Street Journal reports. That would give the bank a big chunk of FrontPoint’s profits over the next five years as Morgan Stanley seeks to recoup the $400 million it paid for the hedge fund in 2006.

After the five years, Morgan Stanley could retain its minority stake of between 20% and 25%, or end its investment in FrontPoint entirely.

While the newly-enacted Volcker rule, which strictly limits the amount banks are allowed to invest in hedge funds, is a catalyst for the current talks, Morgan Stanley has mulled withdrawing from the business for some time. FrontPoint, it seems has not proven nearly as lucrative as Morgan Stanley hoped.

FrontPoint executives have been pushing for a spin-off for more than a year. But negotiations frequently broke down over the price; FrontPoint’s leaders offered $150 million, while Morgan Stanley believes the hedge fund to be worth about $350 million.

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