The past few months have seen some major private equity (PE) investments in marcoms: LDC securing a minority stake in communications consultancy Headland, CVC joining with CDPQ to acquire a majority position in BlueFocus – including We Are Social – and most recently MediaSense selling a significant stake to private equity firm Apiary Capital, and Bounteous securing investment from New Mountain Capital, US-side.
Compare that with 20 years ago. You’d have seen smallish IPOs and a stock market that hadn’t been massively kind to this sector, not at the upper end of the scale and certainly not on the smaller businesses with limited liquidity. There was also very little appetite from private equity firms to invest in a sector that was still largely perceived as a support service and heavily reliant on assets that go up and down in the lift each day.
One of the first transactions I was involved in as part of my M&A role at Omnicom was in 2001 buying Wolff Olins back from LDC; Wolff Olins being the kind of business that didn’t really belong in the PE world at all in the eyes of most investors back then.
Although it was a standout business, its model absolutely typified the reason PEs weren’t investing in the sector: an IP-light eponymous consultancy driven by outstanding people kept together by kindred spirit and corporate culture. And yet, it was a rousing success for all stakeholders.
What’s happened since then is twofold. Firstly, the role of marcoms has evolved significantly and is now a critical element of the boardroom discussion. Secondly, and with the greatest respect, a perfectly understandable herd mentality. People want to see evidence that others have been successful before they put their own money in.
Now there are probably about a dozen private equity houses in the US that get this space really well and have developed a proven base of success. Other investors are trying to emulate their success. And it’s a similar dynamic in the UK. Those who have led the way (companies like Mountaingate Capital, Waterland, LDC and Bridgepoint) now have multiple successful exits under their belts demonstrating the sector’s ability to deliver impressive investor returns. If you can keep on doing that on a sustained basis, it shows the market is there.
Access to capital has been at an all-time high in recent years and many investors have been looking to the high growth areas of marcoms to deploy these funds. Ten years ago, WPP, Publicis and Omnicom would most likely bid against each other in auctions. PE firms are now in much the same mode, bidding against each other and chasing each other’s money. This is good for sellers, if not so great for buyers, but will settle into an equilibrium as investors (including company management teams co-investing with the PE fund as they always do) ultimately need to exit with returns that justify their initial investment.
There are also other critical factors at play. First, there are so many ambitious business owners who, in the same way as PE firms, have seen each other investing successfully. These are people who would traditionally see M&A as a destination play, ie. you sell your business to a network and then have a three- to four-year earn-out. M&A was the destination.
Now, it’s often not a destination, but rather a stepping stone to international expansion or management succession. It wouldn’t be surprising if 20-30% of last year’s M&A was privately funded in some form, either from someone’s organic balance sheet or PE-funded, as opposed to via the public markets.
While marcoms in the mid-2000s was a fairly safe, 10% growth, 15% margin industry, that’s not the model anymore. The marketing services world is going in all kinds of different directions and there are all types and breeds of opportunities. Of course, there will be some losers, but there will also be lots of winners. What investors need is change to create the opportunity for success. They will all accept that occasionally they might back a loser, but if they have done their due diligence and invested in a class-leading business, there is a more than good chance that they will be successful.
It’s a powerful mix. When you have ambition, access to capital and fundamental market change, combined with large global corporations trying to reach consumers in very disrupted complex channels, it leads to a continued appetite in investment and PE houses are well aware of that.
With that in mind, don’t be surprised to see PE as quite possibly the dominant force (whether direct or via their portfolio companies) in marcoms M&A for the next five years. It has grown from being barely involved to being a big influencer, and now it’s set to build a major power play.
Jim Houghton is a partner at Waypoint Partners