Arsenal Plans Fund Close, Signs Deal –

Armed with what it believes to be a differentiated private equity strategy, recently formed Arsenal Capital Partners plans on closing its debut fund, Arsenal Capital Partners L.P., this spring. Meanwhile, the firm acquired its first company, Interdynamics Inc., for $50 million.

Terry Mullen, one of three co-founders of Arsenal and a managing director at the New York firm, said it is seeking $250 million for the new fund, and has raised $70 million to date.

“We have four major institutions we’re currently in due diligence with who we are looking to be cornerstone investors in the fund,” said Mullen, adding that they are major state or municipal pension funds. “We’ve been approved and are on the calendar or soon to be on the calendar with final approval with a number of these committees. These four together would garner $100 million to $125 million,” he said.

Arsenal has retained Bill Farrell as its placement agent. Farrell heads up Farrell Marsh, a boutique firm in Greenwich, Conn. He raised Hicks, Muse, Tate & Furst’s first couple of funds, and more recently advised on Credit Suisse First Boston’s $2.7 billion fund.

Arsenal’s focus will be on traditional buyout opportunities, but with two key differentiators, according to Mullen: a combination of financial and operating professionals that form the firm’s senior management, as well as the employment of an investment strategy that only considers growth companies.

The idea came out of Mullen’s background as a former principal at Thomas H. Lee Co., where he focused on “finding good businesses that could grow at high rates on the top line.” He worked on deals including Rayovac Corp., First Alert, Snapple and General Nutrition Centers, he said.

“The approach and results are surprisingly repeatable and reliable,” said Mullen.

Also important to Mullen was to bring together operating experts, people who had run businesses in the sectors in which Arsenal will invest, with buyout professionals. The sectors are capital goods, or components and diversified applications, like gaskets, pumps and valves in industries such as aerospace and defense, automotives, specialty chemicals and health care or services related to the pharmaceutical sector.

“Control is important. We created the firm to marry investment and operating teams. We’re reviewing these deals together,” said Mullen.

Mullen left Thomas H. Lee in September 2000 to form Arsenal with Barry Siadat, a chemical engineering expert, formerly chief growth officer at AlliedSignal, and Mark Diker, a former general partner at Geocapital Partners. Mullen and Diker are old friends from Harvard Business School. The three are co-founders and managing directors. Jim Marden is also a managing director, and Arsenal has hired three operating partners, Lee Brown, Tim Kelly and Mark Hoffman.

Mullen said he and the Arsenal team knew that the timing would be difficult given market conditions. “We probably were a year and half too early,” he said, but that the strategy of combining buyout and operating professionals was right. Although hiring people with operating expertise has been a popular strategy lately, he said “in many cases, those people are going in to fix portfolio companies that have gone flat or run into trouble.”

Mullen expects to make 11 investments out of the first fund, or to invest $10 million to $30 million in equity per deal.

Getting Started

Arsenal’s first deal, Interdynamics, is one that Mullen describes as an old-fashioned buyout in a basic manufacturing business.

The transaction was 45% equity, 55% debt, and Capital Source came in as a minority investor to purchase the automotive aftermarket manufacturer founded 30 years ago by three brothers from Brooklyn, N.Y.

“Everyone says your first deal has to be your best deal, because it defines who you are. This one really does,” he said, for several reasons: it’s in the firm’s target industry, and in a large, growing, and non-cyclical market, which is worth billions.

Mullin said Interdynamics is a strong manufacturing business, with good growth and nice margins (with $64 million annual net revenue), but importantly, it’s also a business where the owners and Arsenal have identified opportunities to upgrade operations and to improve productivity.

Arsenal has brought in Douglas A. Negrin as president and CEO of the company. He was previously president of Medo Industries, a division of Pennzoil-Quaker State Corp.

“Doug is a very talented merchandising and marketing expert, and knows his customers very well. He also knows how to put in strong merchandising programs, which customers [such as] Wal-mart are looking for more and more,” said Mullen, adding that the family will retain their previous senior management positions.

In terms of expansion plans, Mullen said Interdynamics is a business that is already growing at high double-digit rates on the top-line, “which is what led us to acquire the company.”

Arsenal has identified as many as 15 firms it believes would provide a strategic exit when the time is right several years from now.