Carlyle spinout Stellex targets $2.5bn for third special situations fund

Stellex was founded in 2014 by Ray Whiteman and Michael Stewart, who previously headed Carlyle Strategic Partners, a distressed and special situations platform.

Stellex Capital Management, led by former Carlyle distressed principals, is in the market with a third offering earmarked for complex deals.

The New York private equity firm is targeting $2.5 billion for Stellex Capital Partners III, according to Minnesota State Board of Investment documents. If successful, the fund would be 40 percent larger than its predecessor, closed in 2020 at $1.78 billion.

The bigger target may owe to fresh opportunities perceived in a market roiled by uncertainty and high interest rates, which have pummeled businesses – especially those that accumulated cheap debt in the years before 2022. As dislocation grows, so too will complex dealflow of interest to specialty funds.

Stellex was founded by managing partners Ray Whiteman and Michael Stewart, who previously headed Carlyle Strategic Partners, a distressed and special situations platform. The pair left Carlyle in late 2013 to create a new shop to build on their CSP track record, MSBI documents said.

Stellex makes control-oriented investments in North American and European companies experiencing some form of financial, operational or industry-driven underperformance, often as a result of cyclical change or mismanagement. Also in the mix are sound businesses with too much leverage.

Deal preferences include majority and minority recaps, carve-outs, turnarounds, structured financings and first-time institutional capital.

A key aspect of the strategy is its mid-market focus. Stellex views mid-market opportunities as attractive because companies “often lack the capability to prevent or contain threats…particularly those that arise from competing with larger, better-capitalized and better-resourced companies,” MSBI documents said.

Stellex investments, typically ranging from $75 million to $150 million, favor companies with values of $100 million to $500 million. Targets are in sectors like specialty manufacturing, industrial and business services, aerospace and defense, automotive, government services, transportation, logistics and food.

The portfolio holds 23 investments. Acquisitions this year include David Brown Santasalo, a mechanical power transmission solutions provider for industrial applications – bought from N4 Partners – and MSS, a critical electronic components manufacturer and supplier for the power industry.

In addition, Carlyle and Stellex in June sold Titan, a ship repair and specialty fabrication services provider to the US Navy and other clients, to Lone Star Funds. The business was established by Carlyle and Stellex following their 2019 acquisition of MHI and Vigor Industrial.

“We believe [Titan] is a national asset,” Stellex managing director David Waxman told PE Hub following the deal’s closing. “We take the stewardship of the company in this context very seriously, along with providing the best possible services for the Navy and those individuals who serve in the Navy.”

Stellex Capital Partners I was earning a 2x net multiple and a 24.7 percent net IRR as of June, according to MSBI documents. The newer Fund II was generating a 1.1x net multiple and a 9 percent net IRR.

Whiteman and Stewart oversee 44 employees, among them 34 investment professionals, MSBI documents said. Other senior team members are managing partner Mark Redman, formerly with OMERS Private Equity, and partner Karthik Achar, who joined from Wayzata Investment Partners.

A Stellex spokesperson declined to provide a comment on this story.