Morgan Stanley in Mesa West takeover

What began as a search to replace a minority owner resulted in the Los Angeles-based real estate debt fund manager being sold in its entirety.

Morgan Stanley Investment Management is expanding into the debt space with the acquisition of Los Angeles-based real estate debt fund manager Mesa West Capital.

The investment bank has agreed to buy 100 percent of Mesa West, according to a person familiar with the deal. The transaction, the terms of which were not disclosed, is expected to close in the fourth quarter.

Mesa West will retain its brand and operate as a new and separate business unit within the company’s real assets group, which currently manages $47 billion of assets and encompasses a private equity real estate business, Morgan Stanley Real Estate Investing; a private infrastructure business; and a listed real assets business. PERE understands that real estate equity and real estate debt were considered to be distinct enough strategies to warrant two different platforms at Morgan Stanley.

Mesa West’s senior management, led by co-founders Jeff Friedman and Mark Zytko, will continue to oversee the company on a day-to-day basis. They will report directly to John Klopp, global head of real assets. 

Friedman and Zytko are currently the majority owners in Mesa West, according to a filing with the Securities and Exchange Commission. In 2012, Columbia Pacific Advisors, a Seattle-based alternative investment manager, made a preferred equity investment through its open-ended Columbia Pacific Opportunity Fund, ultimately giving it a 25 percent stake in the firm, according to documents from the City of Los Angeles Department of Water and Power at the time.

Columbia Pacific’s investment helped Mesa West to finance the management buyout of the firm's previous part-owners – an affiliate of Walton Street Capital and the Royal Bank of Scotland – along with a bank loan. Walton Street and the Royal Bank of Scotland had jointly held a 50 percent third-party ownership stake in the firm.

Mesa West is understood to have begun talks about a year ago to find a party to buy Columbia Pacific’s stake. Some of the bidders, however, were said to have only been interested in buying majority or full stakes in Mesa West.

Meanwhile, in replacing Columbia Pacific as a part owner, the Los Angeles-based firm was seeking a new partner or firm that would offer scalability and help it to become more competitive in an increasingly crowded real estate debt space, where large private equity firms such as Blackstone have become dominant players.

Founded in 2004, Mesa West provides non-recourse first mortgages for core, core-plus, value-add and transitional properties in the US. The firm currently has $5.5 billion of equity under management with offices in Los Angeles, Chicago and New York. Earlier this year, it held a final close of $900 million in equity on its largest closed-ended real estate debt fund, Mesa West Real Estate Income Fund IV, beating its target of $750 million.

Ted Gooden and Drew Murphy of Berkshire Capital Securities represented Mesa West on the deal.