Arlington Capital’s Third Fund Comes Up 45% Short

Arlington Capital Partners picked a terrible time to raise its third fund, and it ended up falling well short of its goal.

The Chevy Chase, Md.-based PE firm revealed yesterday in an SEC filing that its third fund came in at $415.5 million. The total is about 45% less than what Arlington was seeking and smaller than its second fund, which raised $575 million in April 2006. Credit Suisse acted as placement agent for Fund III (UBS worked on Fund II).

Arlington, a middle market PE firm, is known for investing in aerospace/defense and federal and commercial IT.

Arlington Capital officially started raising its third fund in 2009. It was seeking $750 million and had collected $204.8 million by August 2009, according to an SEC filing. Arlington actually began marketing for fund III sometime in 2008 and was seeking a $1 billion hard cap, two sources say.

In hindsight, the firm might have been better off waiting, since it was trying to raise capital right after the global financial meltdown. Fundraising fell off a cliff in 2009. Just 146 U.S.-based buyout funds raised $67.4 billion in 2009, down from 251 funds that raised $215.7 billion the prior year, according to Thomson Reuters (publisher of peHUB). Fundraising has remained slow since then, with just $61 billion raised by 171 U.S.-based buyout funds last year.

It didn’t help that Arlington “tried to jam a first close” onto existing investors, one of the sources says. Another person said Arlington was sending the message that the fund was going to be oversubscribed, so LPs had better get in or risk losing out. Not surprisingly, the strategy “backfired,” one of the sources says.

An LP who is not an investor in Arlington said a firm’s success or failure at fundraising ultimately comes down to its track record. “The markets don’t lie,” the LP says. “If you have done well performance-wise, investors throw money at you.”

Officials for Arlington did not return calls for comment.