Stellex targets $1.25bn for new fund as covid crisis has “increased the opportunity set”

Stellex was founded in 2014 by two Carlyle veterans and focuses on investments in "underperforming or mismanaged lower and middle-market businesses."

Unlike many emerging managers, Stellex Capital Management appears well-positioned to raise its second fund amid the ongoing market volatility due to the coronavirus crisis.

Stellex Capital Partners II is targeting $1.25 billion, according to documents presented to New Jersey Division of Investment‘s State Investment Council on Wednesday. The fund has a $1.75 billion hard-cap and will focus on “middle-market turnaround investments in the manufacturing and industrial sectors.”

“The Fund will identify underperforming or mismanaged lower and middle-market businesses, targeting opportunities for restructurings, corporate carve-outs, debt-for-control and buyouts transactions,” the New Jersey documents said.

The fund’s fee structure is the industry standard, according to the New Jersey documents: management fees are 1.75 percent, carried interest is 20 percent and the preferred return is 8 percent. A source with knowledge of Stellex said the management fee was 2 percent. It is not clear whether New Jersey negotiated a discount.

The fund will target 15 to 20 “control-oriented investments” in companies with enterprise values of less than $500 million. Eighty-five percent of the portfolio will be focused on North America, with the rest in Western Europe.

New Jersey staff said the timing was good for Stellex, as turnaround strategies are expected to outperform in periods of market distress.

“Stellex operates in an attractive segment of the middle market where valuations have remained suppressed compared to the larger market and the recent market downturn has increased the opportunity set for the firm,” said New Jersey investment analyst Karl Schwing.

The firm hopes to wrap up fundraising by the late summer and begin investing soon after.

One of Stellex’s selling points is its experience. The firm was founded in 2014 by Ray Whiteman and Mike Stewart. Both previously co-ran Carlyle Group‘s special situations arm, Carlyle Strategic Partners.

Another is the strong performance of its debut fund. As of September 30, the 2015-vintage Stellex Capital Partners had a 32.1 percent net internal rate of return and a 1.59x total value to capital paid-in multiple. That fund closed on $870 million in 2017, as Buyouts reported. It was oversubscribed from its $750 million target.

“Historically, our strategy improves in effectiveness as markets weaken,” Stewart told Buyouts in 2017, soon after the first fund closed.

New Jersey committed $125 million to the fund.

Action Item: read Stellex’s form ADV here.