Family offices are increasingly embracing private equity as a core investment strategy, a trend that helped Madison River Capital raise a $370 million debut fund. Founder David Wittels discusses the firm’s spinout from a family office, the lower middle market and the immense amount of U.S. private wealth.
In the world of private equity, capital-raising is often as much about the connections you make as what you invest in.
Just ask Wittels, who leveraged longstanding relationships to raise Madison River’s debut fund at an especially tough time for emerging managers. LPs are increasingly prioritizing trusted partnerships over unknown entities, congregating around well-known megafunds.
Wittels led the spinout of Madison River from retired Blackstone (NYSE: BX) President Tony James’ family office in 2022. The New York firm announced on Feb. 18 that it had closed Fund I on $370 million for lower middle market investments.
James backed the fund with a $60 million commitment after Wittels says the family office delivered several years of strong returns.
“We did have to fight a natural aversion to first-time funds,” Wittels says. “But our LPs saw and appreciated our successful track record and the value we delivered for someone like Tony. Our success and his confidence in us provided us with a lot of credibility and helped us successfully tap our strong network of family offices.”
In 2016, James launched his Jefferson River Capital family office and recruited Wittels from Scopia Capital Management‘s lower middle market PE effort. James and Wittels first worked together in the 1980s at Donaldson, Lufkin & Jenrette, which Credit Suisse acquired in 2000.
James has a net worth of about $6 billion.
At Jefferson River, Wittels cobbled together other family offices as co-investors to close lower-middle-market deals. Several of those family office co-investors came in with James as Madison River LPs, attracted by their familiarity with Wittels and his team and the success of their co-investments.
“There is a consistency in our approach,” Wittels says. “We have the same team in place, pursuing the same approach.”
Madison River’s launch also coincides with family offices’ rising wealth and interest in PE. The wealth of ultra-rich families will likely swell to $9.5 trillion by 2030, according to estimates from consultancy Deloitte.
“The enormity of capital is astounding,” Wittels says. “People who are controlling family offices want exposure to PE.”
Wittels says Madison River’s focus on the lower middle market also helped woo LPs seeking to diversify beyond megafunds with upper middle market targets.
Madison River plans on acquiring and improving the operations of businesses in the healthcare, industrials and business services sectors. The firm in July completed a $190 million recapitalization of and $70 million equity investment in JDC Power Systems, an electrical systems integrator exclusively serving the data centers.
Madison River oversees about $1.6 billion in assets, which includes the value of investments it still manages for James, according to regulatory filings.
Wittels says better deals, and hence better returns, can be found by avoiding auctions in the lower middle market, which is often overlooked by larger funds due to the complexity and hands-on operational expertise required to scale smaller businesses. Wittels sees this as an advantage, believing its operational focus will allow it to drive significant value creation.
“We are swimming in a pool that is structurally inefficient,” he says. “While there is too much money chasing too few assets at the top of the market, in the lower middle market there’s less capital chasing a relatively larger pool of assets.”
Contact Wittels at [email protected].
