Mezz Shop Plots $500M Fund III

Firm: Arrowhead Mezzanine

Fund: Arrowhead Mezzanine Fund III LP

Target: $500 million

Placement Agent: Park Hill Group

The fund would be the first since the firm spun out of investment banking firm Gleacher & Co. in March 2010.

The Greenwich, Conn.-based shop is seeking to raise $500 million for the fund, the source said. Park Hill Group, the placement agency owned by The Blackstone Group, is helping the firm raise the fund.

Arrowhead typically invests $10 million to $100 million in deals valued at $50 million to $500 million. The firm’s investments come in the form of subordinated date, preferred stock, and non-control common equity. Deals it has supported included Hoffmaster Group Inc., a maker of napkins, placemats and other tableware that Metalmark Capital LLC bought from Kohlberg & Co. in January, and Quest Specialty Chemicals Inc., a maker of paint for the automotive industry that Audax Group and Moelis Capital Partners bought in 2011.

The fundraise comes as sponsor use of subordinated debt is on the rise, and about 30 funds are in the market, as Buyouts previously reported in its June 4 edition. The Carlyle Group, for example, has raised close to $750 billion for energy-focused mezzanine funds, as sister Web site peHub recently reported.

Arrowhead has been steadily increasing its fund sizes. The Arrowhead team raised $300 million for its first fund in 2001, and in 2007 closed its second fund with $479 million in commitments.

The firm has about 10 professionals, led by Senior Managing Director Elliott Jones. Jones’s experience with mezzanine investing goes back to 1987, when he established a subordinated debt group at Chase Manhattan Bank. Jones declined to comment.