- Tech specialists wade in but don’t get overly wet
- Lofty valuations keep sponsors away
- Some deals include social media elements
To be sure, some sponsors have dabbled in the market. Silver Lake has taken small stakes in gaming site Zynga and online discount community Groupon. The tech specialist also recently made a debt investment, using its Silver Lake Waterman fund, in Foursquare, a site that helps friends find places to go, according to a person familiar with the firm.
ZM Capital’s $127 million acquisition in 2010 of Alloy, a provider of youth-focused marketing programs and media properties such as the TV show Gossip Girl, has evolved into a partial social media play. Alloy’s Mosh property, a channel on YouTube, ranks No. 2 as the most-subscribed and the third-most viewed, according to a person familiar with the company. All told, Mosh now counts about 28 million social media followers.
One of the most high-profile investors in social media has been Elevation Partners, which includes U2 rock star Bono on its roster of investment professionals. Elevation Partners sold 4.6 million shares of Facebook in its $38-a-share IPO on May 18, 2012, for gross proceeds of about $175 million, according to a public filing. The firm still owns some 35.5 million Facebook shares worth about $1.7 billion based on the company’s closing price of $47.49 a share on Sept. 20. Spokespeople for Elevation Partners did not return phone calls seeking comment.
With Facebook trading above its its IPO price since August and Twitter having filed its IPO confidentially with the Securities and Exchange Commission, social media has become a hot investment class from Silicon Valley to Wall Street.
Early Twitter investors poised to benefit from the company’s expected valuation of upwards of $16 billion include Charles River Ventures, Spark Capital, Benchmark Capital, Bezos Expeditions (the investment firm for Amazon.com founder Jeff Bezos), Union Square Ventures, Netscape founder Marc Andreessen and angel investors Ron Conway and Naval Ravikant, according to a Wall Street Journal report.
Others include Insight Venture Partners, Institutional Venture Partners, Kleiner Perkins Caufield & Byers, and even a couple of names known in the buyout space: BlackRock Private Equity Partners, which manages funds of funds, and institutional investor T. Rowe Price. Spokespeople for Black Rock and T. Rowe Price declined to comment.
But despite the promise of social media as an investment opportunity, sponsors for the most part have preferred to deploy their dry powder elsewhere, such as in less hyped-up tech names in the business-to-business sector.
“Obviously there’s been a huge amount of social media investing from the venture capital community, but the valuations are at sky-high levels,” said Dipanjan Deb, managing partner of Francisco Partners, a long-time technology investor. “Consumer-facing businesses are tough for buyouts because fads change quickly.”
An executive at a growth equity firm who declined to be named said LinkedIn, which went public in May 2011, based one of its pre-IPO fundraising rounds on a $1.5 billion valuation, even though at the time it wasn’t profitable and had trailing 12 month sales of no more than $20 million.
“Investing at that point is roulette, not private equity,” the executive said. He said that Goldman Sachs did make about five times its investment when LinkedIn went public, but the firm sold all its shares in the LinkedIn IPO. Spokespeople at Goldman Sachs and LinkedIn did not return emails seeking comment.
Indeed, while LinkedIn met success in the IPO aftermarket, others haven’t. Rupert Murdoch’s News Corp sold MySpace for $35 million in 2011 after paying $580 million for it in 2005 when MySpace still looked as though it would stay atop the social media world.
“The lack of private equity investment in social media companies has, up to now, been largely due to a lack of trusted relationships within the vertical,” said Ryan Cohn, a vice president at communications company Sachs Media who is writing a book on social media. “Elevation Partners succeeded with Facebook because of co-founder Marc Bodnick’s long-standing relationship with the social network. Their strategy of purchasing stock from employees, rather than directly from Facebook, was largely due to the trust Bodnick had built up through frequent visits to the company’s headquarters.”
Eventually buyout shops will move further into the sector as it grows to occupy a bigger piece of the overall technology business, Bodnick predicted. Added Francisco Partners’s Deb: “It’s not going to be a mad rush, but people get valuation envy and may start dabbling in it.” So far, Francisco Partners has not done any acquisitions of social media companies, he said.
Meanwhile, buyout executives appear to be skeptical that social media can play an important role in their fundraising and investment activities—an attitude that could be impeding their ability to pick up on the investment trend. As with investing in social media, there are some notable exceptions.
Robert Morris, founder of Olympus Partners, publishes a blog on his firm’s home page. Bain Capital Managing Director and Boston Celtics co-owner Stephen Pagliuca has about 2,200 followers on Twitter.
Blackstone Group’s Twitter feed has drawn more than 15,000 followers and includes links to executive interviews such as Senior Managing Director Peter Cohen’s recent talk with Bloomberg TV about monetizing sports franchises.
“We live in a world…where information is received in many different ways, and we want to take advantage of all media to reach our audience,” Blackstone Group spokesman Peter Rose told Buyouts. Blackstone Group has been tweeting for more than two years, he said.
HGGC CEO Rich Lawson, who has nearly 4,000 followers on Twitter, told Buyouts he gets responses from analysts, investment bankers, lenders and others from his tweets and LinkedIn updates. Those communications have helped him build relationships with executives at potential targets and generate ideas on how his portfolio company, MyWebGrocer, can compete with Amazon.com.
“I’ve scratched my head for years on why so many private equity firms don’t use social media,” Lawson said. “It was always shocking to me. If you look around there are hundreds if not thousands of venture capital guys talking up deal announcements and linking to interesting stories. They’re cheer-leading. They’re helping their business. Private equity firms should be no different.”
Sumeet Shah, who has nearly 5,000 Twitter followers for his handle @PE_Feeds, from which he sends out private equity news, said that rather than partake in social media on their own private equity executives tend to rely on outside communications firms or placement agents. “There is so much that can be done and it’s still only getting started,” said Shah, who is director of client relationships for Gist Digital, a mobile consulting and design shop.
Francisco Partners, for one, does not use blogs or Twitter to reach its investors. “We tend not to be very promotional,” Deb said. “We believe that ultimately, companies (and) executives will want to work with us because we can add value, employees want to work for us because we have a great culture and LPs want to invest in us because of great returns.”