Private equity fund Capitol Meridian began in 2021 to bet on defense. Suddenly, it’s the hottest sector around

“No one was in the office. The world was closed,” Palmer said.

Sitting around a table in Palmer’s dining room, he and Cobain talked about possible investors, employees, advisors and plans to build a private equity company. Although they still didn’t have a name, the company invests in companies and products that protect both male and female US and its military personnel. Luckily, it was calm outside so they left the windows open.

“It was difficult and scary, it was rejuvenating,” Palmer said. luck.

It took about a year, but eventually a company called Capitol Meridian Partner acquired the office. In March 2022, the PE company opened its doors on K Street in downtown Washington, DC. About 10 people, including Palmer and Cobain, previously worked for the Carlisle Group at some point in their careers.

Capitol Meridian is part of the PE company’s focused variety Specific sectorsDevelop deep expertise and networks to understand the unique challenges and opportunities faced by these industries. Sector experts often have an advantage over generalist companies. Capitol targets defense and government services. The company invests in the companies that provide hardware, software and services for national security, as well as the aerospace market. The timing won’t improve. Public aerospace and defense companies have outperformed the wider markets in the first quarter from the past three years. data From the investment bank Greenwich Capital Group. Aerospace suppliers recorded a three-year performance return of 108.7% as of March 31, with defense suppliers increasing by 32.8%. This is the S&P 500, which won 23.9% in the same period. Nasdaq An increase of 22.4%.

The changes in emotions, much of which are due to geopolitical issues, such as the 2022 and recent Russian Ukraine invasions. Our attack Iran’s nuclear sites benefit defense companies and their investors. Much larger companies like Veritas Capital, which target aerospace, defense and national security as one of its sectors, have been extremely successful. Veritas collection More than $13 billion against the ninth fund earlier this year. “There are investors who are more interested in defending today than I remember,” Palmer said.

However, Capitol Meridian has not invested in products such as handguns that could lead to high school involvement. “That’s not where we focus,” Palmer said.

Instead, Capitol Meridian is “betting on the nation and the fighter jets, or the companies that support the US military and women,” Palmer said. He has never been in the army, but his father was a Vietnamese reserve and his grandfather served in World War II.

In 2024, Capitol Meridian shrugged from the difficult funding market increase Co-investment of $300 million in the first pool, in addition to $900 million. Palmer and Cobain are the third largest investors in the pool. Capitol Meridian has invested in stakes in six portfolio companies in addition to 20 add-on transactions. He hasn’t got an exit yet, Palmer said. He said the company is still early in its lifecycle, with its oldest investments triple-turns.

As it shifts government spending priorities, defense is not usually a sector that is beneficial to newcomers and generalist investors, said Matt Autley, a partner at Adams Street Partners, an investor in Capitol Meridian’s first fund. “Adam and the Capitol Meridian team have been able to successfully invest in the defense sector due to their specialized expertise and networks in the space,” Autry said in an email.

I was hired during breakfast

Palmer has a long history of defense and aerospace investments over 25 years. In the mid-1990s, he was a financial analyst at Lehman Brothers, working on several deals at Carlisle, and at the time was a Washington, DC private equity company known for its political connections. (George W. Bush sat on the board of one of the portfolio companies).

Bill Conway, one of Carlisle’s co-founders, recruited Palmer to join the company at the breakfast party. He received a one-paragraph offer letter a few days later. Palmer was only 22 years old. “It was a different world back then,” he said.

Palmer’s first PE deal at Carlisle was the company’s $750 million Get In 1997, United Defense Industry, a manufacturer of combat vehicles, naval guns and missile launchers. Profit. United Defense is widely regarded as one of Carlisle’s best and most notable early investments. The deal also crystallized Palmer’s ambitions. He found it extremely rewarding to invest in companies that “support military and women in the country and the US.”

Other victories include Carlisle’s acquisition of the acquisition of the Navy ship repair company Titan in 2019. In 2000, Carlisle scooped up the Vought aircraft and sold it 10 years later, earning a five-fold return. Palmer’s deal-making was so remarkable that in 2010 he luck”Less than 40,Where insiders predicted he might one day lead Carlisle. The following year, Palmer It has been named Co-head of Carlisle’s Global Aerospace and Defense Sector Team.

PE or alternative asset manager?

Despite Palmer’s achievements, things were changing for Carlisle. In the 1990s, Carlisle was a middle market company recognized for defence transactions. Carlisle, like many pioneering PE companies, grew with every success. I went public I uploaded it in 2012 The largest fund ever ($18.5 billion) In 2018, we began investing in sectors other than private equity. They also began to be called “alternative asset managers.”

In the 2000s, Carlisle began investing in consumers, healthcare, industry and technology, focusing on more than defense. Palmer and Cobain, who were appointed as deputy CIOs for their actual assets in 2018, did not bother Carlisle’s “elephant hunting” style of investment.

In early 2021, Palmer and Coburn learned that Carlisle had not raised another mid-market fund and had chosen to leave. They decided to launch a new, smaller company, rather than a Carlisle clone. Palmer defines the middle market as a transaction that falls below $1 billion. “The best return opportunities in this sector, defense and national security lie in the middle market,” Palmer said.

Geopolitical tensions remain high, but Capitol Meridian is expected to return to the fundraising market soon for the second pool. Approximately 60% of the initial fund is invested. (PE companies usually start marketing when the fund is about 70% invested.)

Funding is still difficult. Some large PE companies struggle to raise funds. Carlyle Closed It was the eighth flagship of $14.8 billion in 2023, and was well below its $22 billion target. Acquisition. TPG They are seeking $13 billion for their latest flagship. Wall Street Journal It has been reported In May. Black Stone It was expected to put together the latest flagships in mid-2023, but the pool was not closed until the beginning of this year. $21 billionwell below that first one A $30 billion target.

Capitol Meridian is expected to seek more than $1 billion from the next pool, said someone familiar with the situation. Palmer declined to comment.

Palmer still has a dining room table where Capitol Meridian began several years ago, stowed in the company’s office. His goal for Capitol remains simple. “We want to be the best little PE partnership to support our services,” he said.