As more middle market GPs embrace the secondaries market, most LPs still opt to exit rather than roll over when presented with a continuation vehicle (CV).

While LP rollover rates have gradually inched up, the average was still 15% last year, according to Jefferies. For Twin Bridge Capital Partners, this dynamic is creating an opportunity to capitalize on what it sees as a buyer’s market.

“The smart money is buying these, not selling,” Zach Schneider, a partner at Twin Bridge, told Mergermarket.

Schneider

The Chicago-based firm is targeting single-asset CVs for businesses with up to around USD 1bn in enterprise value (EV), typically committing USD 15m-USD 30m per investment. Through its Amplify strategy, Twin Bridge is targeting 25–35 direct investments, with around 75% of deal flow in single-asset CVs and 25% in equity co-investments, according to Schneider.

As it advances the strategy, Twin Bridge can lean on a significant footprint within its small and lower middle market sweet spot. Since inception in 2005, the firm has committed over USD 3bn to more than 150 fund investments.

Twin Bridge was established 21 years ago after teaming up with a mutual insurance company to build out a private equity portfolio. The insurer remained its sole investor until 2017, when it began broadening its LP base to include investors such as endowments and pension funds. Overall, Twin Bridge has raised over USD 5.4bn and deployed approximately USD 4.7bn across fund investments, co-investments and GP-led secondaries.

“We’re not an asset gatherer,” Schneider said. “We think that gives us an edge.”

Lanigan

Today, Twin Bridge has 23 employees, mainly focused on investments, alongside a dedicated fundraising team. Staff come from operational, banking and investing backgrounds, a mix that has helped shape its approach. “Not everyone comes from the traditional two years in investment banking,” said Patrick Lanigan, a partner at the firm.

Both Lanigan and Schneider come from engineering backgrounds, which the former believes has brought added rigor into the organization. “Coming from an engineering background helped bring that discipline into our processes to help encourage success,” he said.

Strategies

Last month Twin Bridge closed its sixth lower middle market-focused vehicle – Pacific Street VI – on more than USD 855m, exceeding its initial USD 800m target. That fund will invest USD 25-35m in top-performing funds targeting over USD 750m, writing checks of USD 10m-USD 20m for co-investments, according to a press release.

A third strategy – Narrow Gate – focuses on both emerging and established GPs with fund sizes of USD 100m-USD 750m, with USD 20m-USD 25m in commitment sizes and USD 10m-USD 15m for co-investments.

Across both the Pacific Street and Narrow Gate strategies, Twin Bridge typically makes 18-20 investments per fund and 15-20 co-invests, according to Schneider. Under a sponsor-centric model, Twin Bridge co-invests with managers it already backs. Sector-wise, it is diversified but does not invest in energy. The firm typically re-ups with around 65% of managers, with everything re-underwritten at each new investment decision point.

Operating chops

As the middle market landscape evolves, the firm is placing greater emphasis on managers that can demonstrate proven operational credentials. Preferred GPs must demonstrate strong operating expertise or differentiated networks.

“True operational value creation capabilities are becoming more and more important,” Schneider explained “The days of the levered beta approach relying on everything moving up and to the right are over.”

Lanigan sees this as evidence of a broader market shift. “We’re entering a new phase of private equity,” he said. “In the 1990s it was all about having a Rolodex to get access, then in the 2000s it was about optimization. Now it’s about transformation.”

Many middle market firms have appointed operating leads, full time artificial intelligence (AI) specialists, or have people embedded in portfolio companies to drive change.

As a result, operational experts are becoming increasingly valuable. “We recently saw a deal where the operators got 25% of the economics,” Lanigan said.

This points to where the market may be headed. Still, while operating credentials are more important than ever, relationship-building remains central to Twin Bridge’s approach when it comes to manager selection. “We’re built on relationships,” Lanigan added. “It’s important to ask things like, ‘how did they treat me and is that how they’d treat a client? … how did they behave in the boardroom?’”

Often, it is when things aren’t going to plan for managers that these questions are best answered.

“You learn more from what they’ve done and how they’ve behaved when a deal has not gone well,” Schneider added.