Arsenal Capital to Reload with Fund III

Arsenal Capital, the New York-based private equity firm, will begin marketing its third fund later this year, according to an individual familiar with its plans. After reeling in a pair of oversubscribed funds and boasting positive returns on both, it is expected that when Arsenal reloads, its third fund will be substantially larger than its most recent $500 million vehicle.

The private equity firm declined to comment for this story.

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.

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 $500 million fund. Already, Arsenal has made nine of 10 exits from its 2003 fund, six of which netted 3x multiples or greater on its cash investment.

The PE firm will begin marketing its next fund in summer or fall, according to the source. Dates for a first close have not yet been determined.

Although existing limited partners are expected to participate, the person said, 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 website.

According to published return information, its first fund’s stats include a 30% gross IRR and a 21% net IRR. With its current fund only 70% deployed, Arsenal is expecting a positive return on its 2006 vehicle, the source said.

The private equity firm was formed in 2000 by TH Lee vets Jeffrey Kovach and Terrence Mullen, Arsenal focuses on deals in the specialty industrial, healthcare and financial services industries. Existing investments include broker-dealer KGS-Alpha Capital Markets and FrontStream Payments, a pay processor.

Already this year, Arsenal has been deploying 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 JV and the PE firm also participated in a follow-on equity offering for KGS-Alpha Capital Markets that the Healthcare of Ontario Pension Plan led.