Arsenal Preps Third Fund For Buyouts

Firm: Arsenal Capital

Fund: Arsenal Capital Partners III LP

Target: More than $500 million

New York-based Arsenal Capital is expected to begin marketing its third fund later this year.

After reeling in a pair of oversubscribed funds since its founding in 2000, and generating positive returns on both, Arsenal is likely to raise far more than the $500 million secured for its most recent vehicle.

Arsenal’s attempt to raise a third fund comes after two oversubscribed vehicles for the PE firm in the last decade: a 2003 $300 million fund and a 2006-vintage, $500 million fund, Arsenal Capital Partners II LP. Already, Arsenal has made nine of 10 exits from its 2003 fund, six of which netted 3x multiples or greater on its cash investment.

Arsenal just hired a new head of investor relations, William Farrell, who only recently retired from placement agent Farrell Marsh. Farrell had founded Farrell Marsh with Charles A. Marsh as an expansion of his Farrell Capital Corp.

The firm is likely to begin marketing its next fund in summer or fall. Dates for a first close have not yet been determined.

Although existing limited partners are expected to participate, more LPs will be brought into the fund when Arsenal and Farrell begin marketing later this year. Prior LPs include Adams Street Partners, LGT Capital Partners, National City Equity Partners LLC, PPM America, RCP Advisors, Oklahoma Police Pension and Retirement System, Northeast Utilities Service Company Retirement Plan, ATP Private Equity Partners, Grove Street Advisors, PKA, Skandia Liv and Swiss Re, according to Arsenal’s Web site.

According to published return information, Arsenal’s first fund generated a 30 percent gross IRR and a 21 percent net IRR. With its current fund only 70 percent deployed, Arsenal is expecting a positive return on it as well.

The firm was formed in 2000 by Thomas H. Lee Partners LP vets Jeffrey Kovach and Terrence Mullen. It focuses on deals in the specialty industrial, health care and financial services industries. Existing investments include broker-dealer KGS-Alpha Capital Markets and FrontStream Payments, a payment processor.

Already this year, Arsenal has been deploying capital from its second fund. In January, Arsenal’s Novolyte Technologies teamed with Foosung Co., the Korean battery maker, to produce lithium ion battery electrolytes in a joint venture. The firm also participated in a follow-on equity offering for KGS-Alpha Capital Markets that the Healthcare of Ontario Pension Plan led.