05/20/2009

FrontPoint Eyes Break From Morgan Stanley

FrontPoint Partners, a hedge fund-incubation platform owned by Morgan Stanley, is exploring a management-led buyout.

FrontPoint's executives are considering their options for funding a buyout deal that would likely include a minority stake for Morgan Stanley. That would give FrontPoint continued access to the bank's network of investors.

It's unclear whether Morgan Stanley is nudging FrontPoint's management toward a buyout. A person close to Morgan Stanley said that the bank and FrontPoint haven't had any discussions about a deal.

The bank acquired the firm in December 2006 for $400 million. At the time, FrontPoint's hedge fund managers signed agreements to stay with the firm until the end of 2008. At least a few of those managers haven't had their contracts renewed, although FrontPoint maintains that all of the revenue-sharing agreements remain in place. Some managers have explored severing their ties to FrontPoint and either striking out on their own or joining another hedge fund operator.

FrontPoint has about $7.6 billion under management, supplying seed capital and infrastructure support to 15 hedge fund teams. Before being bought by Morgan Stanley, FrontPoint would offer fund managers an equity position in the firm. Morgan Stanley took 100% ownership of FrontPoint.

Under a typical seed deal, FrontPoint splits the combined management and performance fees with the fund manager on a 50/50 basis. The split moves toward 75/25, in favor of the fund manager, as a fund gains assets and becomes more profitable.

Among the vehicles supported by FrontPoint's platform are Steve Eisman's $1.1 billion long/short equity fund, called FrontPoint Financial Services Fund, and the $5.5 billion FrontPoint Multi-Strategy Fund.

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