Arlington Capital Partners, the Washington buyout group formed in 1999 by retired Bell Atlantic Corp. chief executive Raymond W. Smith and Paul G. Stern, a private equity veteran, recently began raising its second, $500 million buyout fund.

If it's successful, the fund will be among the largest of a number of buyout and venture capital fundraisings initiated by local firms in the past year. This is Arlington's second run at raising money and thus will be a key test of the investment strategy of the fund, whose other co-founders were Jeffrey H. Freed and Robert I. Knibb.

In general, the management fees received by private equity groups for running funds begin to diminish after about five years, so private equity firms tend to start raising money for a new fund about that time.

Arlington partner Perry W. Steiner said the firm's $450 million first fund is about 75 percent invested. In the past 12 months, it has wrapped up deals to buy two defense technology companies, a TV station and a slew of small-market radio stations. It has also sold two stations and one of its defense contractors.

The new fund will have the same investment strategy as the first: middle market companies worth between $50 million and $250 million. Arlington typically spends $25 million to $75 million of its money to buy a company and will borrow the rest. The firm has co-invested with other firms in the past, Steiner said, but prefers to be the sole investor.

One big change for this fund will be the Arlington partners running it.

Stern, 65, who was a partner at Forstmann Little and co-founded Thayer Capital Partners before helping launch Arlington, is on his way out of Arlington and won't be a partner in the second fund. He is transitioning to Claris Capital, a new "venture buyout" firm being formed by Net2000 Communications founder Charlie Thomas and J. Mitchell Reese, a former Carlyle Group managing director and one-time head of Carlyle's venture capital business. Steiner, 38, said Stern's coming departure is amicable; Stern will remain a partner in Arlington's first fund. Stern was on vacation last week and could not be reached for comment.

Smith, 65, will be chairman of the fund but not a partner, Steiner said.

Another change will be the investment bank used to raise money for the fund: UBS. Arlington's first fund was raised by the old private placement group at the erstwhile BT Alex. Brown, a group of bankers now cast to the wind.

The partners in the new fund are Freed, Knibb, Steiner and Peter M. Manos, who has been at Arlington for a few years.

If they can raise the money, Arlington's partners will establish the private equity shop, which got off to a somewhat rocky start after closing its first fund in 2000. In its first two deals, Arlington invested in a DSL provider and a regional e-commerce consultancy, which bombed in the tech bust and were total losses. Arlington came close to being a co-investor in a 2001 deal to buy Verizon's Midwest wireless communications infrastructure, but it never came to fruition because debt financing never came together. Indeed, when Arlington first started, many thought it would be a telecommunications investment shop.

"It quickly became apparent that telecom was not the place to be," Steiner said.

Today Arlington has no telecom investments, and its biggest bet so far has been in broadcast media.

Steiner came on board in 2001. A one-time venture capitalist for Wasserstein Perella Ventures with experience in electronic media investments, Steiner was chief executive of Minnesota-based Digital River before moving back to Washington.

The same month Steiner started at Arlington, the firm bought what would become its first big-return investment: the management-led buyout of SignalTree, a California technology services division of the now-defunct PSINet. A year later, Arlington sold SignalTree to Keane Inc. for $62 million, a deal that, roughly, tripled Arlington's initial investment. The other large exit was NLX Holding Corp., a Sterling maker of flight simulation systems. Rockwell Collins bought it last October for $125 million, seven months after Arlington Capital bought it for $31.5 million.

Arlington makes many of its investments through three companies it has created.

One is Apogen Technologies, a McLean defense and federal government information technology contractor, which is headed by former BDM International executives Philip A. Odeen, Todd A. Stottlemyer and Paul Leslie. Arlington has committed $75 million to Apogen to buy other defense technology companies. So far, Apogen has bought ITS Services Inc. in Springfield and Science and Engineering Associates in New Orleans.

A second Arlington investment vehicle is Cherry Creek Radio, based out of Denver and run by industry veteran Joe Schwartz. Soon after Steiner arrived in 2001 the post-Sept. 11 advertising slump hammered many small-market radio and television stations, and Arlington decided the time was ripe to buy media. Arlington committed $40 million to buy radio stations in rural markets, such as Lamar, Colo., and Williston, N.D. Cherry Creek Radio now owns 32 stations.

The third company, New Visions Group, an Atlanta company run by 25-year TV executive Jason Elkin, is backed by $75 million in Arlington money. It bought four stations in very small but demographically attractive markets in 2002 and 2003. Then, Steiner said, valuations of TV stations shot back up as the advertising market recovered. Its last purchase was the CBS station in Duluth, Minn., in December. In April, Arlington agreed to sell its Duluth and Fort Wayne, Ind., stations because the offer was too rich. When it closes, Arlington will realize about $25 million on its $6 million invested in the two stations, Steiner said.

Steiner said the fund still has the money committed and wants to buy more radio and TV properties, but right now prices are high and there are few sellers.

"We're not throwing in the towel yet on buying more," he said.

So for the rest of this year, Arlington will be looking elsewhere. Steiner said the firm wants to get into for-profit post-secondary education, and predicts the first deals will come soon, mostly for vocational training operations in the West. And Arlington is expected to announce the buyout of a business services firm any day, Steiner said. For now, he said he wants to get the second fund raised and is confident the $500 million goal can be reached. With the firm's record, he said Arlington can now attract critical investments from the public pension funds which should make the task easier.

Terence O'Hara's e-mail address is Dealmakers appears every other Monday in Washington Business.

Co-founder Raymond W. Smith will stay on as chairman of the new fund.