This year is going to be a busy year for private equity investors: we expect to see high levels of deal activity as private equity firms continue to deploy the $714bn in dry powder raised last year¹. Following a dip in activity over 2020, 2021 saw private equity firms both deploying the capital which had sat untouched as well as executing unprecedented levels of fundraising. The effects of this will be felt across sectors in 2022 and will likely accelerate existing trends around technology enablement and digitisation.
In 2021, within the media space areas such information services and sports continued to attract investment interest. CVC remained dominant in the world of sports media and commercial rights, making their biggest sports deal yet - agreeing €1.9bn for a minority stake in the Spanish football league La Liga. Ligue 1 in France is now reported to be collecting second round bids for its media and commercial arm². There was also a rise in deal activity in other areas of the broader media landscape including marketing agencies and gaming, which is very likely to continue over the course of 2022.
Last year saw a boom in the acquisition of marketing agencies. There were twice the number of deals in the UK market compared to 2020 and 1.5 times the number in 2019³. There was a string of acquisitions made by mid cap private equity firms including an investment in IDHL by Bridgepoint Development Capital, Investis Digital by Investcorp, The Marketing Practice by Horizon Capital and The GOAT Agency by Inflexion, as well as the large cap investor CVC acquiring the international arm of Bluefocus Intelligent Communications. Some of these businesses are communications agencies serving a range of corporate clients whilst others are specialist digital agencies focused on consumer brands. Given the growth of the healthcare market, it is unsurprising that specialist healthcare communications agencies were acquired with Intermediate Capital Group investing in Lucid Group and NorthEdge Capital investing in Helios Medical.
Over the course of 2022, the private equity firms that acquired assets last year will start to execute their investment theses. This is likely to lead to significant management changes, investment in technology and bolt-on acquisitions as sponsors seek to transform people intensive marketing agencies into technology-enabled marketing services firms able to command higher multiples on exit. Through developing a proprietary technology platform that underpins the company’s services to clients, the business can create a proposition that integrates with the clients’ systems and processes leading to a “stickier” customer base and increased recurring revenues. Margin will also increase as more internal processes can be automated bringing down costs and the proposition can move up the value chain and become an end-to-end solution for clients. The technology needed can be developed or acquired and the space is perfect for a roll up with many smaller agencies that can be acquired to bring in new technology and talent or expand geographical footprint.
Information services has been a mainstay of private equity interest in the media space for many years. Last year, I talked about the reasons why and predicted 2021 would see private equity firms invest in carve outs from large corporates. Ascential’s Duncan Painter continued his plan to divest non-core assets and focus on the business’ digital commerce offering through the sale of Groundsure to the Australian legal technology business ATI Global, and De Havilland to Bridgepoint Capital, completing the divestment of the company’s Built Environment & Policy brands. The CMA mandated that IHS Markit and S&P Global make several divestments in order to approve the merger of the two power houses, although both the base chemicals and life sciences divisions have been trade sales (News Corp and GlobalData respectively). In December 2021, Informa also announced the intention to divest parts of the intelligence division.
This year is likely to see private equity investors continue their interest in information services companies that demonstrate strong potential for growth. Data providers focused on particular verticals, such as healthcare & life sciences or maritime, where the related industry is experiencing major digitisation will present the best opportunity to acquire a platform for growth. Hg Capital is in the midst of merging MMIT and Evaluate to create a commercial intelligence and predictive analytics provider for the pharmaceuticals industry that delivers insights across the entire drug life cycle. Informa has just announced the sale of its Pharma Intelligence division for £1.9bn to Warburg Pincus and Abu Dhabi sovereign wealth fund Mubadala Investment Company. So, we expect that other private equity firms will be keen to make further investments in the space.
The video games market is becoming increasingly attractive to private equity investors, and this will continue in 2022. The global video gaming market generated approximately $160bn in 2020 with projections for this to rise to $300bn by 2025⁴. The covid pandemic accelerated global consumer demand for interactive, online entertainment such as esports. New technologies such as cloud and virtual reality are expanding the capabilities of gaming businesses and major technology companies can see the opportunities this presents, as demonstrated by Microsoft’s recent acquisition of Activision Blizzard.
There are multiple factors at play in the video games market that will attract the attention of private equity investors. As the market grows, video game publishers and developers can expand both organically and through M&A by acquiring smaller studios. Previously, the success of video game companies was highly volatile with the release of new games signalling a sharp rise in revenue that then declines rapidly. This type of unreliable revenue steam would certainly have dissuaded many from investing in the space. Now, with subscription-based products becoming more common in the industry, private equity investors could achieve higher multiples on exit through transformation of the gaming company’s business model to create a loyal customer base with subscriptions to games. There are also related services such as localisation and translation the need for which will increase as video games companies experience strong international growth.
Product and technology hiring
Media companies need talent that can help transform technology, processes and culture as the businesses become more technology driven. Building out teams and bringing in the right leaders to establish effective technology and product functions will be a source of major competitive advantage for organisations. Hiring a Chief Technology Officer that understands how to transition a traditional content or service business into one differentiated by its technology platform will be critical. Ideally, these individuals will have previously been through a similar transformation and learnt from the successes and failures they experienced.
The role of Chief Product Officer is more prevalent than a few years ago, but the nature of the role is widely varied. Some view this role as an extension of the technology officer’s remit and many CTOs are broadening their expertise from the purely technical to also taking ownership of the strategic and commercial thinking behind the product development and future roadmap, essentially creating a CPTO role. On the other hand, there is merit in keeping these roles separate within the organisation. As companies strive to become more customer centric, hiring a separate Chief Product Officer with deep expertise around the voice of the customer and a more commercial rather than technical background can produce a healthy tension between the product and technology functions. However, this can be problematic unless there are clear channels of communication between the teams and a shared vision for the direction of the product. Private equity owners will need to assess the maturity of the existing technology and product capabilities within the business and how best to formulate the leadership team to drive forward the performance.
Private equity interest in the media industry tends to align with those factors that indicate strong, reliable growth: high market growth, subscription or recurring revenue-based business models and technology-enabled propositions.
2022 promises to be an exciting year for private equity investors involved in the media space. With plenty of capital to be deployed and many areas of the media industry experiencing growth, we expect to see high levels of activity from private equity firms. As investors acquire new businesses, finding the right talent and leadership to deliver the anticipated growth will be crucial.
¹ according to Preqin, November 2021
² Ligue 1 to collect second round bids for media arm in April | Unquote
³ according to Mergermarket
⁴ Video games market set to become a $300bn-plus industry by 2025 - GlobalData