Middle market private equity firm Brightstar Capital Partners recently closed its inaugural fund at $710 million. New York-based Brightstar, which invests up to $250 million in businesses, has already invested in two portfolio companies: logistics technology provider Global Resale and water supplier Texas Water Supply Co. We asked managing partner Andrew Weinberg to tell us more about the firm’s investment thesis and the opportunities he sees for M&A this year.

Why is now a good time to launch a new PE firm?
Brightstar Capital Partners was founded in 2015, and we recently closed on more than $710 million for our inaugural private equity fund program. T­he timing of our close takes place against the backdrop of what will most likely be the greatest generational transfer of wealth ever seen to date. Estimates for this wealth transfer in the U.S. alone range from $10 trillion over the next decade to $25-30 trillion in the next 25-30 years. As family and closely-held businesses navigate this wealth transfer they will be faced with challenges arising from an ever-changing operating environment, pressures to maintain sustainable growth and their competitive positions, not to mention the inherent issues associated to the ownership group.

There are roughly 200,000 companies in the U.S. with revenues from $10 million to $1 billion, most of which are closely held or family controlled. Within the middle-market universe, there are 32,000 businesses with revenues between $50 million and $1 billion, and these companies are vital to the U.S. economy, representing 16 times the number of public companies with the same revenue profile.

We believe that there is a significant opportunity for a PE firm, such as Brightstar, to serve as a partner to selected companies that fall within this latter range and that have exceptional potential for growth and significant value creation. Our ability to realize this opportunity comes not only from the capital that we provide but also from the talent and strategies that we bring to the table with the exceptional team at Brightstar.

Tell us about the background of the team members.
We have assembled a team of 20 investment professionals, many of whom I’ve worked with for over a decade. Collectively, we have more than $25 billion of transaction experience across multiple sectors, with both family/privately controlled and publicly traded companies as investors, operators and in many cases, both. Our partners and managing directors have extensive private equity and C-level experience at major companies including Dell, Motorola, Waste Management, Carlson Companies and URS. The combination of the investing and operational backgrounds is integral to our proprietary investment sourcing and active role in the value creation of the portfolio companies post-investment.

We were delighted with the success of our inaugural raise, which we attribute both to our strategy and to the talent that we have gathered. We have secured commitments from a diverse set of institutional investors, including university endowments, high net worth investors, pension funds, private foundations, family offices and insurance companies.

What is your investment thesis?
We focus on control-oriented North American middle-market investment opportunities, with an emphasis on closely-held or family-owned businesses. The years of investing and operating experience brought together by our firm’s professionals provide us an understanding of the complexities in the types of investments we evaluate. Our experience allows us to help existing management teams to take their companies to the next level of growth, resulting in significant value creation. By partnering with the owners and/or management teams of our portfolio companies, Brightstar becomes the catalyst for improvements in operations, sourcing, marketing, and capital planning and allocation. In addition, we actively engage with management in developing and executing growth-oriented strategies in such areas as geographic, channel or product expansion; partnerships and joint ventures; and M&A.

Which sectors are attractive?
While our first investments were made in logistics and water infrastructure businesses, we are actively looking at opportunities across a broader range of sectors. More important than sector is the potential for our portfolio companies to benefit from the collective investing and operating experience of our firm to scale and build value through identified strategic initiatives. Brightstar typically partners with closely-held businesses that may face generational ownership transitions or that may require capital to “rise to the next level” for organic or inorganic growth. Thanks to our network, we have seen over 100 proprietary deals since our inception and have a robust pipeline that we’re currently working on. We plan to invest between $50 million and $250 million of equity into each portfolio company between initial investment and opportunities for follow on investment thereafter.

What are the biggest challenges PE firms face today?
There are many challenges for general partners and limited partners alike. As capital continues to be available in abundance, valuations will continue to be one of the most significant challenges. Without clearly differentiated strategies for value creation, GPs will likely be challenged to secure the right opportunities. Auctions will continue to drive valuations to ever higher levels, impacting the returns that GPs are able to deliver to their LPs. Brightstar is well positioned to address this challenge, as we maintain a well developed and tested strategy, which is complemented by our propriety approach to sourcing opportunities from select family and closely-held businesses.

What is your outlook for M&A in 2018?
M&A will likely continue apace into 2018, assuming no major macro disruption, and all indications are that we may well see new record levels of activity as PE firms deploy their well-subscribed funds. However, there is a chance that we may start to see early indicators of longer term M&A activity beyond 2018/19 cooling, as higher volatility reenters the market and investors reconsider their asset allocation given the potential for higher yields from mainstream investments. Should this develop, it will be the PE firms with the right strategy, talent, track record and execution that will be sought out by both LPs and businesses alike for their ability to deliver more than just capital alone.

Advisors on Brightstar’s fund included Eaton Partners as placement agent, while Simpson Thacher & Bartlett LLP provided legal counsel. Kirkland & Ellis LLP served as legal advisor to Brightstar on the investment in Texas Water Supply Co.