pNew York, Mar 9:  Nearly three years after exiting the private equity business, M

New York, Mar 9: Nearly three years after exiting the private equity business, Morgan Stanley expects to begin pursuing corporate buyouts later this month with as much as $2 billion in hand, people familiar with the bank's plans said.

Morgan Stanley in September named veteran banker Alan Jones and hired Goldman Sachs Group executive Stephen Trevor to be co-heads of a new New York-based private equity investment unit after spinning off a similar fund group to its managers in 2004.

Trevor's contract with Goldman won't let him start work until March 26, and the bank won't begin raising funds from outside investors until the Goldman banker arrives.

Still, Morgan has taken steps to start pursuing deals in just a few weeks, people familiar with the bank's plans said.

Morgan Stanley intends to raise a $6 billion buyout fund over the course of the coming year, of which $2 billion will come from the bank, so the group can get started right away, the sources said.

Private equity firms raise money from institutional investors such as pension funds and use the cash to buy or invest in companies.

The bank is jumping back into the business at a time when top-tier private equity investors are earning 25 percent-plus returns and raising huge amounts of capital.

When John Mack replaced Philip Purcell in June 2005 to become chief executive at Morgan Stanley, it was widely expected that Mack would quickly move to form U.S. and European private equity units.

Morgan Stanley kept its Hong Kong-based private equity team, which is also on the fund-raising trail and is expected to close on a $1 billion Asia buyout fund in the next few weeks, sources said.

The bank also plans to raise a $2.5 billion infrastructure investment fund, sources say.

Morgan Stanley declined to comment.

Back In The Saddle

Morgan shed its private equity activities in September 2004 after a number of leveraged buyout shops complained that bankers were crowding in on deals. Morgan, led then by Purcell, spun off Morgan Stanley Capital Partners as MetalMark Capital.

That proved to be an ill-timed move as leveraged buyout activity exploded and rival Goldman Sachs reaped billions in profit. Goldman is now in the market to raise a fund of as much as $19 billion, keeping it among the top tier of leveraged buyout players.

John Mack, who took over as CEO in June 2005, wants Morgan Stanley to take more principal risks, including a return to private equity. Morgan earlier created a principal investments arm with up to $2.5 billion to spend.

At the same time, the move back into direct corporate investments may also put the bank into conflict with some of its biggest clients, private equity shops that pay Wall Street billions to arrange financing and advise on deals.

Morgan Stanley will co-invest along with clients, but it is expected to aggressively pursue deals, the sources said.

Despite its global presence and long history, Morgan must build a new track record from scratch.

Initially the group will have seven to eight partners, then increase over time to comprise as many as 35 investment professionals in the United States and Europe, the sources said.

Because most institutional investors have already made their commitments for the year, Morgan probably will not complete outside fund-raising until the end of 2007. And while Morgan Stanley is targeting $6 billion, people familiar with its plans said the fund could be much bigger if market demand proves strong.

In a related development, the bank on Wednesday told employees that real estate investor Jay Mantz and Trevor would be co-heads of direct investing, including real estate, infrastructure and private equity deals.

Jones and Trevor, according to the memo describing a number of moves, will co-lead the private equity component of the direct investing group.

Reuters