New Equity Fund to Cash In on Telecom Trends

By Jennifer Freer, Staff WriterWashington-based Arlington Capital Partners will announce its first two equity investment deals with telecommunications and information technology companies in the next two weeks, company officials said.Arlington Capital, whose initial fund is worth $450 million, will make up to six investments in telecom and information technology companies during 2000, said Ray Smith, the former chief executive officer of Bell Atlantic Corp., and a founding partner of the group. Approximately 25 percent of the fund will go toward investments in Europe and the remainder to companies in the Washington region, said Smith, who founded the 15-person group with Paul Stern in early 1999. Stern is former chairman and chief executive of Northern Telecom, now Nortel Networks.  One of the pending deals involves a management buyout, the other entails an independent company looking for growth capital, said Jeff Freed, a partner at Arlington Capital."The telecom and technology space is growing," said Freed. Indeed, one-third of all capital expenditures that any company makes "is spent on telecom or technology," he said.Arlington Capital will focus on companies that are well-positioned in the marketplace and have strong management teams. Their products and services likely will be tied to the Internet, wireless services, electronic commerce and the conversion of voice and data services, company officials said.  According to Arlington Capital, U.S. revenue generated by information products and services companies is approximately $1 trillion today and has grown 15 percent annually since 1993.  Arlington Capital's fund will finance management buyouts, recapitalization, corporate spinoffs and roll-ups. "We will provide growth capital in order to build out infrastructure and pay for sales and marketing teams," said Freed. "We team up with management to buy businesses from divisions of larger companies, or we'll help management teams buy private companies from current owners."It may be a new player, but Arlington Capital has not set its sights too high in the telecommunications and IT arena, industry experts said. And with first funds usually starting with about $50 million to $100 million, Arlington Capital's $450 million-plus fund is a good size, said Riyad Said, a senior analyst specializing in communications services with Friedman, Billings, Ramsey & Co. Inc., Arlington, Va. Arlington Capital's funding comes from institutional investors, current and former IT executives, endowments and wealthy individuals, Freed said. Bell Atlantic also is a major investor, according to industry sources, but company officials would not comment.A normal investment is usually between $10 million and $100 million, coming from the limited partners of the fund or partnering with other investment firms. Typically, Arlington Capital expects to realize investments in four to six years. Although many equity investment funds look to the commercial arena, industry sources said there also are advantages to taking a closer look at the government world. "The government is a big segment, with high spending and a demand for advanced technology," said Said. "[Government business] is an attractive element, but not [the] primary driver for a single investment. It's a good way to get customers early that have sizable requirements and then they become a good reference."The Carlyle Group, another Washington-based equity investment group whose financial purse exceeds $4 billion, has focused primarily on aerospace, defense, environmental services, health care and information technology deals.It owns Federal Data Corp., a Bethesda, Md.-based systems integrator that it picked up in 1995. More recently, the Carlyle Group acquired EG&G Inc. of Gaithersburg, Md., in August 1999.Golder, Thoma, Cressey and Rauner of Chicago owns systems integrator Vista Information Systems of Herndon, Va., which has been purchasing smaller niche IT players, as has SI International Inc., Vienna, Va., which is backed by Fontenac of Chicago.FBR's Said does not expect to see a large shift of investor focus toward the government IT business, but he acknowledged that the climate could change. "It comes down to size of the market opportunity and if companies could leverage the government market work into other segments," Said said. "Companies may not want to focus on serving the government customers, but it's a good way to build products and services, build a customer base and apply that knowledge to other areas." XXXSPLITXXX- A private equity fund with more than $450 million focusing on investments in communications, technology and information services industries Washington Ray Smith, Paul Stern 15 www.arlingtoncap.com