Arsenal Drops Focus On Financial Services With New $875M Pool

Firm: Arsenal Capital Partners

Fund: Arsenal Capital Fund III LP

Target: $750 million

Final Close: $875 million

Placement Agent: Forbes Private Capital Group

Terrence “Terry” Mullen, co-founder and partner, told Buyouts that there have just been too many headwinds facing the financial services market, including continued deleveraging in the wake of the financial crisis, growing regulation, and a slowness in responding to changing business conditions. “We couldn’t convince ourselves the market for financial services would get better,” said Mullen.

Arsenal Capital, which has 29 professionals, had poured resources into financial services with its second fund, Arsenal Capital Partners II LP, a 2006-vintage pool of $500 million. Five of about a dozen Fund II portfolio companies operate in financial services, and while Mullen expects those five to produce investment multiples of 1.75x to 2x, he described as “mixed” the firm’s results in the sector. In its other two target markets, specialty industrial and health care, the firm has achieved returns of more than 3x in its first two funds, Mullen said.

To beef up its financial services practice Arsenal Capital had hired as a partner Carty Chock in 2007; Chock previously had been a principal at CCMP Capital Advisors, where he led investments in financial services, and before that a principal at JPMorgan Partners. Chock said he remains “actively engaged” as a board member of all five financial services portfolio companies, adding that he is “very incentivized” to see that they perform well. However, he is not a partner in the new fund. Mullen said he expected Chock to move on later this year; Chock said he has no defined time frame for leaving.

It took about a year for Arsenal Capital to wrap up its third fund, and it did it with particularly strong support from foundations and endowments, and nearly half of its capital coming from outside of the United States. Return investors included Harvard Management Company, PKA A/S, PPM America and The Regents of the University of California. Northwestern Mutual Life Insurance came into an Arsenal Capital fund for the first time. Other investors included Kirkbi, Northeast Utilities Service Company Retirement Plan, Purdue University, Storebrand, Unigestion, and funds advised by Bowmark Capital and Cheyenne Capital Fund.

Arsenal Capital got off to a famously bumpy start with its 2002 debut fund of $300 million, but it has since settled down to produce steady and solid returns. More than two-thirds of the firm’s exits have produced at least 3x investment multiples, said Mullen. One of its biggest returns came with the 2010 sale from Fund I of Genovique Specialties Corp., a chemicals company with an environmentally friendly approach; its sale to Eastman Chemicals produced a 12x return on the firm’s $7 million equity investment. According to backer University of California, as of June 30 Fund I had generated a 20.2 percent net IRR, while Fund II had generated a 22.5 percent net IRR.

More wins could be in the offing. Arsenal Capital, which has four portfolio companies in Fund III, expects to sell five or six more of its portfolio companies over the next 24 months, Mullen said.