Adam Palmer remembers the days in March 2021 when he and Brooke Coburn would interview potential investors from his home just outside Washington D.C. They had just done the unthinkable. Palmer and Coburn had left the security and success of Carlyle Group to launch their own private equity firm right in the middle of Covid-19, when employees for most companies were still working from home.
“No one was in the office. The world was shut down,” Palmer said.
Sitting around Palmer’s dining room table, he and Coburn would talk to possible investors, employees and advisors about their plans to build a private equity firm. They didn’t have a name yet, but the firm would invest in companies and products that protect the U.S. and its military personnel, both men and women. Luckily, it was mild outside, so they kept the windows open.
“It was daunting, and scary, but also rejuvenating,” Palmer told Fortune.
It took about a year but the firm that would eventually call itself Capitol Meridian Partners did get an office. In March 2022, the PE firm opened its doors on K Street in downtown Washington D.C. Capitol Meridian now has 14 employees. About 10 of them, including Palmer and Coburn, previously worked at Carlyle Group during some point in their careers.
Capitol Meridian is part of a breed of PE firms that focus on specific sectors, developing deep expertise and networks to understand the unique challenges and opportunities these industries face. Sector specialists often have an edge over generalist firms. Capitol targets defense and government services. The firm invests in companies that provide hardware, software and services for national security, as well as the aerospace market. The timing couldn’t be better. Public aerospace and defense companies have outperformed the broad market over the past three years and into the first quarter, according to data from investment bank Greenwich Capital Group. Aerospace suppliers posted a three-year performance return of 108.7% as of March 31, while defense suppliers were up 32.8%. This compares to the S&P 500 which gained 23.9% for the same period and the Nasdaq which increased 22.4%.
A shift in sentiment, much of that due to geopolitical issues like Russia’s invasion of Ukraine in 2022 and the recent U.S. attack on Iran’s nuclear sites, is benefiting defense companies and their investors. Much bigger PE firms like Veritas Capital, which targets aerospace and defense and national security as one of its sectors, have been very successful. Veritas collected over $13 billion for its ninth fund earlier this year. “More investors are interested in defense today than have been in my memory,” Palmer said.
Capitol Meridian, however, doesn’t invest in products, such as handguns, that could wind up in a high school. “That’s not where we focus,” Palmer said.
Instead, Capitol Meridian bets on businesses that “support the nation and the warfighters, or U.S. servicemen and women,” said Palmer. Though he has never been in the military, his father was a reservist in Vietnam while his grandfather served in World War II.
In 2024, Capitol Meridian shrugged off a difficult fundraising market to raise $900 million for its first pool plus $300 million in co-investments. Palmer and Coburn are the third largest investors of the pool. Capitol Meridian has so far taken stakes in six portfolio companies along with 20 add-on deals. It has yet to clinch an exit, Palmer said. The firm is still early in its life cycle with its oldest investment turning three, he said.
Defense is typically not a sector that is favorable to new entrants or generalist investors, due to shifting priorities in government spending, said Matt Autrey, a partner at Adams Street Partners, an investor of Capitol Meridian’s first fund. “Adam and the Capitol Meridian team have been able to succeed investing in the defense sector due to the specialized expertise and networks they possess in the space,” Autrey said in an email.
Hired over breakfast
Palmer has a long history, more than 25 years, in defense and aerospace investing. In the mid-1990s, he was a Lehman Brothers financial analyst working on some deals for Carlyle, which was then a Washington D.C. private equity firm known for its political connections. (George W. Bush sat on the board of one of its portfolio companies).
Bill Conway, one of the Carlyle cofounders, recruited Palmer to join the firm over a breakfast meeting. He received a one-paragraph offer letter days later. Palmer was just 22. “It was a different world back then,” he said.
Palmer’s first PE deal at Carlyle was the firm’s $750 million acquisition of United Defense Industries, maker of combat vehicles, naval guns and missile launchers, in 1997. Carlyle took United Defense public in 2001 and fully exited in 2004, making more than $1 billion in profit. United Defense is widely regarded as one of Carlyle’s best and most notable early investments. The deal also crystallized Palmer’s ambitions. He found that investing in businesses that “support the nation and U.S. servicemen and women” was very rewarding.
Other triumphs include Carlyle’s acquisition of naval ship repair firm Titan Acquisition in 2019, which it sold four years later, for a near four-fold return on invested capital. In 2000, Carlyle scooped up Vought Aircraft, and sold it a decade later, earning a five-fold return. Palmer’s dealmaking was so noteworthy that in 2010 he was featured in Fortune’s “40 under 40,” where insiders predicted he might one day lead Carlyle. The next year, Palmer was named co-head of Carlyle’s global aerospace and defense sector team.
PE or alternative asset manager?
Despite Palmer’s accomplishments, things at Carlyle were changing. In the 1990s, Carlyle was a middle-market firm recognized for its defense deals. Carlyle, like many pioneering PE firms, grew with each success. It went public in 2012, raised its largest fund ever ($18.5 billion) in 2018, and began investing in sectors outside of private equity. It also started calling itself an “alternative asset manager.”
Carlyle, in the 2000s, began focusing on more than defense, investing in consumer, healthcare, industrial and technology. Palmer and Coburn, who was named deputy CIO for real assets in 2018, didn’t care for Carlyle’s “elephant hunting” style of investing where it sought fewer, larger deals.
In early 2021, Palmer and Coburn learned Carlyle wouldn’t be raising another middle-market fund and opted to leave. They decided to launch a new, smaller firm—not a Carlyle clone—that would return them to their middle-market roots. Palmer defines the middle market as deals below $1 billion. “The opportunity for the best returns in this sector, defense and national security, is in the middle market,” Palmer said.
While geopolitical tensions remain high, Capitol Meridian is expected to return soon to the fundraising market for its second pool. Roughly 60% of its first fund is invested. (PE firms generally start marketing when a fund is about 70% invested.)
Fundraising is still difficult. Several large PE firms have struggled to raise funds. Carlyle closed its eighth flagship at $14.8 billion in 2023, significantly below its $22 billion target, according to Buyouts. TPG is seeking $13 billion for its latest flagship, below what it sought for its prior fund, the Wall Street Journal reported in May. Blackstone was expected to wrap up its latest flagship in mid-2023 but didn’t close the pool until earlier this year at a little over $21 billion, far below its initial $30 billion target.
Capitol Meridian is anticipated to seek over $1 billion for its next pool, a person familiar with the situation said. Palmer declined to comment.
Palmer still has the dining room table, where Capitol Meridian started several years ago, stowed away in the firm’s office. His goals for Capitol remain simple. “We want to be the best small PE partnership that helps U.S. servicepeople,” he said.
