Media Coverage
Publication: Private Equity International - The Private Equity Fundraising Compendium 2008
November, 2008
Navigating the US Mid-Market
Twin Bridge Capital Partners focusses exclusively on mid-market leveraged buyout opportunities in North America. The Chicago-based private equity fund-of-funds manager has roughly $1 billion under management for fund investments and co-investments. Founder and Managing partner Brian Gallagher sat down to discuss the firm's strategy and outlook.
What is most appealing about the mid-market?
The mid-market has more companies and has more opportunities to improve operations because it's less efficient. We especially like funds with $250 million to $500 million because the lower you can go in the mid-market, there's that much more opportunity to affect change and get outsize returns.
What sector focusses are most attractive right now?
We like to build a generalist portfolio by investing in buyout funds that focus on one or, at most, a few industries. We've committed to some healthcare buyout funds which we think is more recession-resistant although not recession-proof. Believe it or not, we like financial services right now because things are so dislocated and there are so many issues in the financial services industry that there are going to be some interesting divestitures. Financial services is an enormous industry with a lot of companies in the niche sectors that over time will thrive. We still like energy-focussed funds. As high as oil prices went, and as dramatically as they have come down, the long-term trends in energy, domestically and abroad, are generally positive. We also like old economy, basic industrial businesses, as long as they have defensible positions.
What is your current view on first-time managers?
We're always looking for emerging managers. A big part of what we do is looking for the up-and-coming buyout groups. There's been a phenomenon in our industry over the last five to seven years where if leading emerging managers come out and do well, it's not very easy to get into their second fund.
However, groups are often formed where the founding partners haven't all worked together. They are coming together because they knew each other at different firms, like each other and have a common vision but are operating under the same roof for the first time. We don't like that dynamic. You have to have a track record as partners.
What do you consider when deciding whether or not to re-up with a manager?
Realized investments are straightforward. We spend an inordinate amount of time examining the unrealized portfolio. That's one of the most crucial parts of being a good fund of funds manager. We look at the unrealized portfolio for how that performance is tracking against what the company looked like when the buyout firm acquired it, and what it looks like relative to original projections and what it looks like relative to previous budgets. That's where you can discern who's doing well and who's not.
We're also very keyed in on whether the team has remained intact. We look at whether the vice presidents and principals are progressing and adding to the ability of that manager to source, structure and execute. Additionally, there's nothing worse than strategy drift. That will certainly impact anyone's re-up rate.
How bullish are you on continuing to deploy capital?
We're cautious but continue to invest and will continue to invest because tremendous fund managers should be underwritable in good times or bad. Long term, things will recover and we would have missed an opportunity if we turn down a phenomenal fund manager simply because it's a difficult economic time. Private equity is a 12-year asset class. If I back a manager today and they can't find a lot to do in the next couple of years, that's okay. I'll wait it out with them. You have to be patient in private equity.