Like skeptical parents mustering up the courage to check out Facebook, private equity firms are tentatively staking out their position in social media.
While some firms with a technology focus, such as
The phenomenon puts private equity firms, which tend to be a conservative lot, in an awkward position. Most prefer to back companies with cash flow-positive businesses and predictable revenues, whereas social media companies tend to be asset-light, with intangible—and potentially volatile—valuations that make it hard to predict performance and for banks to offer leverage. But firms could miss out on the investment opportunity of a lifetime if they wait too long.
“There are an increasing number of high-growth strategic companies in the social media space,” Amir Akhavan, a director of the media-focused investment bank The Jordan, Edmiston Group Inc. who specializes in social media, told Buyouts. “Private equity will want to participate in this market and not stay on the sidelines.”
Among the earliest social media deals have involved buyout firms taking minority stakes in big-name social media outlets. Most notably, perhaps, Silver Lake has taken stakes in online gaming group Zynga Inc., social commerce site Groupon, and owns Internet video communication provider Skype, which has social media characteristics. Elevation Partners, meantime, quietly bought $90 million in shares of Facebook Inc. on the secondary market in 2009, an investment that has since skyrocketed in value.
But the industry is also spawning businesses that could be targets of more conventional buyouts, said Akhavan of Jordan, Edmiston, who predicts the trend will accelerate in the next 12 to 24 months. “There are enough companies delivering services, technology and distribution at scale to global brands,” Akhavan said.
Two such niches are Social Media Management Systems companies, or SMMS companies, and social media agencies. SMMS companies offer a technology platform that helps companies manage their presence in the social web, such as by publishing onto various social channels and or gleaning insights about their products from how they’re discussed online.
SMMS companies offer technology licensing revenue, contract revenue with client companies, add-on acquisition opportunities, and the ability to launch additional products and services that can be cross-sold to clients. Some of the more mature SMMS companies generate about $3 million to $15 million of EBITDA, Akhavan said. That’s the type of performance that starts to catch the eye of growth equity and mid-market buyout shops.
Summit Partners is one growth equity firm that’s already noticed. Last year, the Boston-based shop invested an undisclosed amount in Wildfire Interactive, which provides technology that helps companies such as Target and Gatorade, as well as small business, create and distribute interactive social media campaigns.
Other, mostly venture capital-backed companies in the sector that could eventually create attractive buyout opportunities include Buddy Media Inc., which specializes in marketing on Facebook; Hootsuite, which allows customers to manage multiple Twitter, Facebook, LinkedIn and other social media profiles; and Sprinklr, which helps companies learn about customers, engage with them, and measure their interest in products.
Social media agencies, on the other hand, provide companies with social media strategy and creative services. Private equity shops are increasingly interested in these companies because of the revenue-generating services they offer, such as managing branded sites or creating marketing content, as well as software and distribution revenue.
In 2008, for example, venture capital and growth equity shop
And since 2006, media and information-focused buyout shop
Other social media agencies that could attract private equity interest include Big Fuel Communications LLC, whose clients have included Neutrogena and Fox Interactive Media; and Big Spaceship LLC, whose clients have included Sony Pictures and Nike.
Private equity firms have been slow to use social media to market themselves, in part because they have to be careful not to violate regulations by marketing themselves while raising funds. The have been faster to recognize the opportunity to help market their portfolio companies.
Buyouts could only find a handful of firms, including
Blackstone has tweeted only 40 times since launching its account in January. Riverside has tweeted only 84 times since October 2009. And Carlyle has yet to tweet because it’s trying to figure out the legal implications in light of its status as a registered investment adviser. (As things stand now, all private equity firms with $150 million or more in assets will eventually have to register as investment advisers under the Dodd-Frank financial reform law.)
And Buyouts could find only one buyout firm executive, Rich Lawson, co-founder of
“Through 2,000-plus connections on LinkedIn and Twitter, I’ve met or been introduced to numerous sources that have brought very innovative and interesting ideas around investment themes as well as CEOs who have come free and are looking for the next opportunity,” said Lawson, whose Twitter account, @Rich_Lawson, had close to 450 followers at deadline.
Carlyle and Riverside also operate YouTube channels, offering up short videos explaining firm strategy, profiles of portfolio companies and in Carlyle’s case, a promotional video on its partnerships with the Environmental Defense Fund and the Robert Toigo Foundation. Riverside, though, is unsure of the ultimate value of Tweeting and operating a YouTube channel. “At this point, we’re looking across each social media channel to see where the real value is and what the return on investment is,” Riverside’s marketing and communications manager Keith Davisson told Buyouts.
Private equity portfolio companies have been much more active with social media than their owners.
Some firms, such as Summit Partners and Veronis Suhler Stevenson, are actively involved in planning their companies’ social media campaigns. Tiny Prints, an e-commerce seller of cards, invitations and other stationary products that Summit and
“When we’re sitting around [the] board table talking about ways to engage with customers, social media is becoming much more important,” Greg Goldfarb, a principal with the equity shop, told Buyouts. “Now it’s the third leg of the stool along with off-line and traditional online marketing.”
Other firms, such as Carlyle, leave it to management, according to a source at the firm. Executives at Dunkin’ Brands, for example, backed by Carlyle,
Finally, some firms and their intermediaries are starting to use social media for due diligence.
“When a CEO gives you references, he’s likely giving you five good friends,” said David Teten, the CEO of Navon Partners, an investment bank that specializes in social media to find investment opportunities, such as by mining LinkedIn and related sites for clues that a company is ripe for a deal. “You can use these tools to find other people to give you more color on what these people are like.”