How two ex-Carlyle partners beat target on their debut fund

  • Stewart and Whiteman formerly ran Carlyle Strategic Partners
  • $870 mln fundraise exceeded $750 mln target
  • four deals done; investments to be reactive/situational

Michael Stewart and Ray Whiteman, former Carlyle Group partners, raised a debut fund of $870 million for Stellex Capital Management. According to Stewart, they did it with the mindset of experienced industry operators.

“We did not think of ourselves as a first-time fund,” Stewart told Buyouts, “since Ray and I had been investing together for such a long time.”

That status “did bifurcate the traditional LP universe,” Stewart said. On one side were investors who had experience working with first-time funds, and looked to new managers for novel ideas and outperformance.

On the other side were more conservative LPs who preferred funds without startup risk, where the attribution of past success was a non-issue. “We realized there were merits to both viewpoints,” Stewart said, ”and had to accept the challenges.”

“Due to the startup nature of the fund, we realized we had to work hard, but the final result was very satisfying to us.”

To establish a strong foundation with its first fundraise, Stellex sought to attract a diverse cross-section of LPs. Capital came from pension funds (state, local and corporate), funds-of-funds and wealthy individuals in North America and Europe. The Wall Street Journal reported that the firm used placement agents Sixpoint Partners in New York and BearTooth Advisors in London. The final close exceeded the $750 million target by 16 percent.

Stellex expects to make 10 to 15 platform investments out of the fund, Stewart said. Capital deployments will range between $25 million and $100 million, either up front or over time through add-on acquisitions.

Stewart and Whiteman were previously co-heads of Carlyle Strategic Partners, where they pursued special-situations and deep-value strategies. That approach will carry over into Stellex.

“Generally our investment focus and interest are completely situational,” Stewart explained. “Right now we want to partner with great operators that we know and trust to buy businesses that generate cash quickly, and especially to derisk investments.”

It’s a reactive method that responds to institutional dynamics, rather than privileging investment themes. Target companies will be those with clear paths to improvement, in industries not likely to undergo significant adverse change in the near term. “That may span a variety of different industry segments.”

“Historically, our strategy improves in effectiveness as markets weaken,” which Stewart expects to happen at some point, given the advanced stage of the credit and valuation cycles. “Right now the main challenge for us is to be patient and balance activity.”

Stellex has done four deals to date, enabling investors to preview its deployment of capital.

Two investments were completed during the fundraising process: MHI Ship Repair, a provider of maintenance services to Navy vessels primarily, and Morbark, a maker of wood-chipping equipment.

“It did help prospective LPs visualize exactly what we were about,” Stewart said, “and that was very helpful, to be able to talk about very concrete terms, as opposed to in the abstract.”

Fundraising took a little more than two years, with several interim closes. “For first-time funds, it can take longer,” Stewart observed. “We also had within the LP base a number of investors that just had longer processes that we obviously wanted to accommodate.”

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Photo of Michael Stewart courtesy of Stellex