For ad tech companies, buyout by private equity is essentially IPO lite, as they can bypass the grueling IPO process and, depending on the terms, mature into their next phase of growth with minimal disruption.
By contrast, an IPO provides maximum disruption, as many splashy ad tech companies like Rocket Fuel and Yume discovered the hard way. Rocket Fuel’s former CEO, George John, recently noted to AdExchanger that once the company went public, it was faced with “a new set of requirements with a new set of constituencies.”
Namely: investors clamoring for profitability on a quarterly basis.
And many public ad tech companies – not just Rocket Fuel – struggled to deliver on these demands. Consequently, if Fresen’s theory is correct, it’s curious that so many private equity firms are interested in getting in on the ground floor.
“That is a new development,” he said. “Now the question is, given the downturn in the IPO market, is the appetite still there?”
It’s possible that investors, like the private equity firms buying ad tech companies, simply understand the industry better than they used to. The initial frothiness around ad tech dried up fast when it was revealed many of those ad tech companies were actually services-oriented and had to essentially buy ongoing business.
Investors now look for something more sustainable, like actual technology.
The industry has always been characterized by rapid technological disruption, Beregovsky explained, but the pace of that disruption has slowed. And as ad tech firms have matured, it’s become much easier for investors to identify the leading vendors and the most advanced technology – and invest accordingly.
“Private equity companies … are interested in buying a platform asset, meaning a company that has decent scale, a decent customer base, good technology and strong management teams,” said Brian Andersen of strategic advisory firm LUMA Partners in an interview with AdExchanger in February, adding that private equity firms are also chasing established industries where cash flows are growing. “There definitely could be more interest and more activity from private equity buyers.”
Beregovsky predicts the same.
“I think companies like ours, who have followed the ad tech space for so long, will continue to invest because there are opportunities available,” he said. “And the level of interest in finding private equity backers is growing because the availability of venture capital is less than it used to be.”
He anticipates more deals, though not a massive wave. “It will be a slow, gradual increase with a few opportunities that are very good private equity targets,” he said.
Once burned, investors are now better equipped to identify what type of ad tech businesses can actually grow – notably, investors are more interested in seeing who has actual technology.