Why private equity firms keep buying ad tech companies - Business ... - Business Insider

[ad_1]

Private equity firms keep
gobbling up ad tech companies.

andrechinn/Flickr
CC

The number of ad tech firms being bought by private equity
companies has been steadily rising over the past three years and
the trend shows no sign of dissipating.

Notable recent deals include
Applovin's $1.4 billion sale to Chinese private equity firm
Orient Hontai Capital in September and
Vector Capital's acquisition of Sizmek for $122 million in
August.

Results International, a UK-based mergers and acquisitions
advisor, told Business Insider the number of private equity
company buyouts of ad tech companies over the past three years
has risen from four in 2014, to six in 2015, and to nine in
the first three quarters of 2016.

If you include "mar tech" companies — many of which also supply
ad-buying and other services to advertisers (like Marketo,
which was taken private by Vista in a $1.8 billion deal in
August)  — there have been 15 transactions in 2016 so
far, according to data supplied by investment bank Petsky
Prunier. In 2015, private equity firms were responsible for 20 ad
tech/mar tech transactions, according to the Petsky Prunier data.

(See the full list of 2016 transactions below.)

Why are private equity firms suddenly so hungry for ad tech?

For many early ad tech companies, the clear exit strategy used to
be building up your business so it was attractive enough to be
bought by digital media giant like Google or Yahoo. But those
kind of deals have become far less common in recent years.
Venture capital money is still flowing into the ad tech market,
but most of the rounds aren't as big as they used to be. And
while there was a
recent ad tech IPO, that was the first since March 2015 as
fewer ad tech firms opt to go public.

John Prunier, partner at Petsky Prunier, told Business Insider:
"Confronted by scant interest from the largest and highest-paying
strategic companies — Google most visibly — and a consequent
drying up of growth capital, ad tech companies were forced to
retool their products and business models."

Now, many ad tech firms have shifted to a software as a service
(Saas) model, which means regular recurring revenues from
clients, rather than having to rely on taking a margin from
marketers' fluctuating digital ad spend.

Prunier said: "While managed services still generate a majority
of ad tech revenue, most companies in the segment offer and are
rapidly commercializing software-based solutions. This generates
lower revenue, but it is the sort of revenue private equity has a
greater confidence in and values more highly."

Ad tech firms now are seen by some private equity companies as
less of a risk as they once were. Plus, because there is a large
supply of ad tech companies in the market, many ad tech
company valuations still remain attractively modest enough
for private equity firms to begin building their own ad tech
stacks.

Julie Langley, partner at Results Capital, told Business Insider:
"Many private equity firms pursue what’s called a ‘buy and
build’ strategy. This means bolting on complementary geographies
or technologies to a business they’ve acquired with the intention
of taking it to IPO or selling it to a strategic buyer. There are
large numbers of sub-scale ad tech businesses out there that
would be good targets for this approach."

The types of ad tech companies private equity firms are hungry
for

Private equity firms have been mostly leaning towards companies
with SaaS models — hence the large number of martech
acquisitions.

Langley said: "Traditional ad tech revenue models tend to be much
more transactional — and easier to turn off — so are less
predictable. Private equity much prefers enterprise software
because of its stickiness. In other words: It’s painful to rip
out and replace. A SaaS license model offers a degree of
assurance in terms of driving longer terms revenues. This means
private equity firms can feel more comfortable in putting
more debt into the business, this in turn helps to drive their
upside."

Drilling down into the financials, Prunier said private equity
firms tend to be looking to tick off this checklist
(although he stressed this is indicative only):

• A minimum $30 million in gross profit
  


• Marquee clients
  


• A developed sales strategy with demonstrable customer
  acquisition costs and lifetime value metrics
  


• Repeatable, if not wholly-recurring revenue
  


• Evidence that operating leverage or some other driver of
  EBITDA margin expansion will be attainable
  

Is private equity interest good for the ad tech market?

Private equity offers ad tech firms another liquidity option,
offering the companies the potential to grow, both
organically and alongside add-on acquisitions.

It's arguable that selling to a private equity firm isn't as sexy
as being bought by Google or taking your company to IPO. It's
probably reasonable to assume that data management platform

Krux, which sold to Salesforce for a reported $700 million
earlier this month, received a better price from selling
to a strategic investor like Salesforce than it would have done
had it gone down the private equity route. Should private equity
interest in the ad tech market be viewed as a good thing?

The fact that ad tech businesses now have the right cash flow,
profile, profitability, and business model for private equity
companies to show interest demonstrates the sector's maturity and
market acceptance, according to Joshua Wepman, a managing
director at investment bank GCA Global.

"The investment community has recognized this is an important
asset of the digital economy, so they are looking at ways to
benefit from this macro market trend towards digital," Wepman
said.

The interest from private equity firms adds to the growing number
of new entrants in the ad tech space — telecoms companies
like Verizon,
the growing raft of Chinese buyers, and cloud companies like
Salesforce and Oracle.

While some naysayers have been trying to write off the ad
tech market as dead (except for a small pocket of big
players), perhaps the uptick in private equity transactions
suggests the opposite: ad tech is still very much on stage, but
the ensemble of players has changed.

2016 Ad Tech and Mar Tech/Private Equity transactions (Source:
Petsky Prunier):

 

September
2016

AppLovin - Orient Hontai Capital

Group IMD - Inflexion Private Equity

August
2016

Sizmek - Vector Capital Corporation 

July
2016

Revenew - Marlin Equity Partners 

May
2016

TRANZACT - Clayton, Dubilier & Riicer

Marketo - Vista Equity Partners

Vertafore - Vista Equity Partners

April
2016

Cvent - Vista Equity Partners

Sitecore - EQT Holdings

March
2016

Clarus Commerce - Trivergance Acquisitions

Guestline - The Riverside Company

Mi9 Retail - Summit Partners

January
2016

Media Properties Holdings - Cannella Response
Television/ZMC/Palladium Equity Partners

Vision Media Management - CenterGate Capital

Fiverun - Vista Equity Partners

[ad_2]