As Asian private equity funds multiply, the young industry is experiencing some growing pains that U.S.-based funds have mostly put behind them.

In the United States, many investment banks have split off their private equity units, fearing conflicts of interest. In Asia, however, some of those same investment banks are keeping their private equity funds in-house.

For example, Morgan Stanley last year shed its U.S. private equity operation, now called Metalmark Capital Partners. But Morgan Stanley Private Equity Asia is a unit of the main firm, which also runs the global investment banking operation.

The private equity division is close to launching its first Asia fund, with $500 million to be invested primarily in China, South Korea, Japan and India. Under terms negotiated with investors in the new Asia fund, Morgan Stanley's private equity unit will have the option of hiring Morgan Stanley's investment bank for advisory and underwriting business, people familiar with the fund say.

Some investors balk at such cozy arrangements. They worry that private equity funds -- funds that buy stakes in companies and hope to cash out later with profits -- will wind up paying higher fees to the in-house investment bank. They're also concerned that a private equity fund's strategy could leak to competitors via the investment bank, or that the investment banking division will try to influence the in-house private equity managers to direct the fund's capital to clients of the investment bank that may need cash.

Private equity managers often argue that the real issue is whether the fund has evaluated pitches from several investment banks in choosing its adviser on a particular deal. For instance, CVC Asia Pacific, a joint venture between Citigroup and CVC Capital Partners, can hire Citigroup as its investment banker but it must evaluate offers by rival banks.

Still, one of private equity's biggest investors, Ontario Teachers' Pension Plan, refuses to back bank-owned private equity funds and isn't investing in Morgan Stanley's new Asia fund. Jim Leech, senior vice president of private capital in Toronto, says Ontario Teachers thinks in-house funds are rife with potential conflicts that could put investors at a disadvantage.

People familiar with Morgan Stanley Private Equity Asia say some investors raised those concerns with the firm, but to no avail. Morgan Stanley declined to comment.

In the negotiations between investors and private equity managers prior to a fund's launch, investors typically have the upper hand only when a fund is having trouble attracting capital. That hasn't been the case recently.

Pension funds hunting for higher returns are flooding private equity funds with cash. In addition, China's galloping economy has pulled money into the region.

"There are some investors that generally avoid investment bank-sponsored funds. However, the investor base is now so broad that this isn't an issue for many funds," says one person familiar with Morgan Stanley's new fund.

"There are plenty of investors out there to target."

And it can be hard to argue with success. Morgan Stanley, for instance, has struck lucrative deals to invest in private Chinese companies, such as China Mengniu Dairy, in Mongolia, and Ping An Insurance, China's second-largest insurer. Both companies have since issued shares to the public, providing rich returns to Morgan Stanley and other early investors.

In recent years, private equity funds have been filling their coffers for an Asian binge. CVC Asia Pacific, J.P. Morgan Partners, Newbridge Capital and Carlyle Group all have closed or are raising Asia funds. Just last weekend, it emerged that Goldman Sachs Group's in-house private equity shop, GS Capital Partners, and German insurer Allianz were in early, joint talks to acquire a stake in state-owned Industrial & Commercial Bank of China, China's biggest bank by assets, for more than $1 billion.

Goldman is unusual in having split off neither its U.S. nor its Asian private equity operations from the main firm. It says its in-house private equity division makes decisions on behalf of the fund's shareholders, which include Goldman employees and the firm's clients. Goldman says the fund's investment decisions are entirely separate from the management of the investment bank.

Even when firms do shed their private equity units, investors often aren't the reason they act. Morgan Stanley's decision to split off its private equity unit in the United States was driven by the investment bank. The firm wanted to quell resentment by some investment banking clients, which occasionally have found themselves competing for acquisitions in the United States with the bank's private equity unit. Someone familiar with Morgan Stanley's thinking said Asia represents a less-competitive market, so investment banking clients aren't as likely to bump up against a rival bid from in-house private-equity funds.