Independent PR firms are acquired every day. Overwhelmingly, though, their favoured destinations are marcomms holding groups - whether big players such as WPP or Omnicom Group, or smaller outfits like Next Fifteen or Engine.
One source of funding has been less apparent in the majority of these deals. Yet two recent transactions suggest that private equity firms may be overcoming their traditional aversion to the public relations world.
The most prominent example is Vitruvian Partners’ purchase of a majority stake in one of the UK’s biggest agencies last week. The deal valued fast-growing financial firm College Group at around £45m, and came after considerable interest in the UK firm from the usual holding group suspects.
“That did not appeal,” said College Group chairman Alex Sandberg of the traditional exit route to a publicly-listed marcomms group. “The trouble with the trade sale is you would lose the entrepreneurial drive. There’s a price you pay for accessing capital, and that’s clearly control, but with the private equity route you still have some skin in the game.”
The Vitruvian/College Group transaction follows Phoenix Equity Partners’ investment in advertising agency Karmarama, which also includes communications firm Kaper. Phoenix is led by Charles Watson, who previously oversaw the sale of City PR firm FD to private equity firm Advent International in 2003, a deal that helped double the agency’s revenues before Advent’s exit in 2006.
While there are numerous examples of private equity investment on the media and production side of the marketing equation, the deals begin to dry up where companies become more consultancy-led. US public affairs heavyweight Glover Park Group is half-owned by Svoboda Collins while Veronis Suhler Stevenson (VSS) holds a stake in Loewy, and Beringea has invested in i-level, Steak Media and Gyro Group. King Worldwide, meanwhile, holds interests in a number of financial-focused players, including M:Communications, Hallvarsson and Halvarsson, Broadgate and Taylor Rafferty. And Apco’s 2004 MBO was backed by WindRiver.
As far as Watson is concerned, the relative rarity of these investments can be explained in simple terms. “There just aren’t that many opportunities,” he notes. “Private equity will invest in a certain scale. Name the number of independent agencies that have sufficient scale and profitability to warrant doing it.”
Watson’s comments help explain why bigger advertising and digital players - such as Digitas, Young & Rubicam and AKQA - have proved more viable targets than their smaller PR peers. But as the PR sector grows, and independent firms look for alternatives to the holding company model, private equity opportunities are starting to appear more realistic.
“It’s a very good home for these types of businesses,” says Watson. “Where you have agencies that want to internationalise or broaden their service offering, they need to access capital to do that.”
Watson believes this kind of funding is not always forthcoming at listed holding groups that are, in his words, “enslaved to quarterly profits.”
“It also helps you empower your own people,” he adds. “They provide a great, flexible framework to pass equity down into the organisation.”
"Private equity works great if you have a series of partners or owners and a few want to retire, and you need the capital to buy them out," adds VSS partner Hal Greenberg. "They provide capital for the ongoing owner to build his company and buy out shareholders who are no longer active in the company."
Where PR firms are concerned, one explanation for private equity reticence is based on a consulting model that is often viewed as carrying too much risk. “In my experience, they have been quite nervous about pure talent businesses,” explains Charles Fallon, founding partner of M&A consultancy SI Partners. “They don’t really back consultancies. Having assets that go up and down the lift every day is slightly risky.”
Watson, though, is not convinced that this should be the case. “That’s no different from some technology businesses,” he points out. “Many businesses are exposed to a single risk factor.”
Still, it seems clear that risk is a key factor in these discussions. “You don’t often get businesses of our size, and they tend to be much smaller and higher risk and with a lot of bother.” says Sandberg. “Not all private equity likes people businesses.”
The growth ambitions of independent agencies are often limited by a lack of capital. In the financial sector, this has come into sharp focus as cross-border capabilities, and the concurrent need for global scale, become more important. The issue is further complicated by the need for an ownership strategy that keeps senior executives invested in the business. Brunswick Group, for example, recently decided to dilute ownership, with interest-free loans expected to inject as much as £16m into the business; WPP firms Robinson Lerer Montgomery and Finsbury, meanwhile, opted to merge to build a better geographic offering.
In these circumstances, it is not hard to understand why PR businesses are looking into alternative funding sources, despite the one obvious pressure that private equity investment can bring: the requirement for another ‘liquidity event’, whether by way of a sale or listing.
“Effectively, private equity is like a two-stage sale,” says Tony Langham, chief executive of UK independent Lansons. “You get some money now and then they are investing to grow the business value by more than 15 percent per year, and sell in five years’ time. They want to make sure that the key people running the business aren’t rich enough through the first sale to not need the second sale.”
The choice for agencies, then, comes down to the ambitions of the shareholders. Done right, a private equity deal provides funding without having to lose quite as much control over management, branding, expansion and strategy. To some, though, it can seem like an interim solution before the inevitable exit of the new investors occurs.
“The good thing is they are a people businesses themselves, so they understand the psychology,” adds Langham. “The bad thing is, by and large, they work for money. Even the greediest PR people don’t do it for money.”