• Fund I has made two investments to date; could make 2-3 more by year-end
• MRC exploring data center tailwinds, healthcare supply/demand imbalances with over USD 370m vehicle
• Targets sub-USD 20m EBITDA businesses, investing USD 15m-USD 60m per deal

Madison River Capital (MRC) is seeing plenty of opportunity to invest in the healthcare and industrials sectors, and could make two to three more platform investments by the year-end for its inaugural fund, David Wittels, managing partner and president, told Mergermarket in an interview.

Last month, MRC announced the close of the vehicle, raising more than USD 370m to put to work in the lower middle market. Within industrials, the sponsor is focused on opportunities tied to the growth of data centers, targeting businesses that feed their energy needs. Its interest in this space predates the ongoing emphasis on artificial intelligence and instead is tied to efficiency-based returns, said Wittels.

Embodying this approach, MRC made a platform investment into JDC Power Systems (JDC),  a provider of electrical infrastructure for data centers, last year, in a USD 190m recapitalization. In an interview with this news service last year, JDC co-founder Joe Mastromonaco said the company is interested in making acquisitions in areas where its offices are located or where data centers are situated.

As for healthcare, MRC prefers investing in sub-sectors where there are supply-demand gaps. This notably includes service providers catering to mental and developmental health, as well as seniors. Last year MRC purchased senior mental health services provider Senior Care Therapy (SCT), with plans to facilitate an expansion of SCT’s high-quality behavioral, psychiatric and medication management offerings to residents in long-term care facilities, according to a press release.

“Autism therapy or the [intellectual and developmental disabilities] population or geriatric mental health care are perfect examples of that where the demand far outstrips the supply, and our operating resources can help these companies grow organically,” said Mike Somma, a partner at MRC.

MRC, which in 2022 spun out from Jefferson River Capital (JRC), the family office of former Blackstone president and COO Tony James, broadened its LP base via the recent fundraise to include more single family offices – including many that had previously co-invested alongside JRC – as well as institutional investors. Though the pool is wider, James’ family office remains the anchor investor with more than USD 50m in capital committed, said Wittels.

In terms of deal flow for industrials and healthcare, MRC can draw on a network of operating partners to source transactions. For business services, it relies instead on the network it has built through its history of working with James and other pre-existing contacts.

MRC targets buyouts or growth capital investments with under USD 20m of EBITDA and typically writes checks of between USD 15m to USD 60m.

Family office roots, lower mid-market expertise

Far from a first inning, MRC’s inaugural fund marks the latest evolution of a strategy that Wittels and Somma have honed over roughly a decade of investing together. In 2013, Wittels and Somma joined Scopia Capital Management where they built the firm’s lower middle-market private equity strategy, focusing on control buyouts. James was an early investor in their deals, and later approached them to lead his family office. In 2016, JRC was established, with Wittels and Somma joined by Richard Dresdale, a co-founder of Fenway Partners.

Focusing on healthcare and industrials buyouts, before long JRC was doing deals that were growing bigger in size, outstripping the family office’s capacity to get them done. “Deals beget deals,” said Wittels. “In order to continue to pursue the transactions that we were seeing, we needed a bigger base of capital, and that’s when we decided to separate from the family office.”

MRC was born during a difficult period for many financial sponsors. After a post-pandemic deal binge that peaked in 2021, dealmaking plunged once the Federal Reserve began raising interest rates in 2022 to subdue inflation, cutting off the flow of cheap capital for acquisitions. Exit activity also slowed as sponsors fretted over fluctuating valuations for assets they scooped up when rates were low, stymying fundraising as investors waited longer to see their liquidity returned.

Despite this tumultuous backdrop, MRC did not experience a significant hit to deal flow, said Wittels. It helped that, unlike in the upper middle market, deals on the lower end that MRC concentrates on typically require less leverage. The sponsor’s deals typically use a leverage ratio of about 2.5x trailing EBITDA.

“Our family office heritage means we have a history of being patient investors, which has bled into our approach at MRC. That said, we are fortunate to have always had a strong deal pipeline in all market environments, which allows us to be disciplined when it comes to investment opportunities that we’re going to dedicate resources to,” said Wittels.