The past year has seen numerous private equity firms buy ad tech companies. Although there has been slight uptick in the overall volume of transactions and investment bankers predict more of these types of deals on the horizon, they are divided on what’s piquing the growth and timing of PE investor interest.
These include Rockbridge Growth Equity buying digital agency Triad Retail Media for an undisclosed sum last year, Cathay Capital buying Paris-based ad platform Smart AdServer for $42.1 million in February, Vector Capital buying Triton Digital for an undisclosed sum in March and Audax Group buying OOH ad platform AllOver Media last week.
Certainly, this is not a new practice. For instance, Hellman & Friedman acquired DoubleClick in 2005 for $1.1 billion and sold it to Google two years later for $3.1 billion.
Investment bank Petsky Prunier provided AdExchanger with a list of recorded ad tech acquisitions by private equity firms over a four-year period. The data shows one exit in 2012, six in 2013 and eight in 2014. So far in 2015, Petsky Prunier counts three.
While these types of deals have accelerated, Phillip Fresen, managing director at investment banking firm Garros Group, wouldn’t call it a trend. “There have been a couple,” he said, “but they’re still rare.”
Fresen feels many of these investors are trying to get into private ad tech firms in anticipation of an IPO.
“Now that a couple of companies have gone public in the space, [traditional investors] feel they’re down the learning curve and are making investments prior to the IPO,” he said. “They’re not waiting until companies go public.”
Another motivation for private equity firms’ interest could be that other tech firms are too expensive.
“With many PE firms being priced out of SaaS and other software and technology deals, they are looking at other types of technology deals including ad tech,” said Sanjay Chadda, partner and managing director at Petsky Prunier.
“Many ad tech companies today have profitable models which is typically a prerequisite for buyout focused private equity firms to be interested,” he said. “Given the number of ad tech companies getting scale and significant profitability and fewer other exit opportunities for them in the short term, private equity is a good interim liquidity option for scaled ad tech companies.”
Alex Beregovsky, managing director at Vector Capital and a member of Vector’s private equity investment team, agreed with Fresen that these types of deals are intermittent.
“There is some uptick in private equity activity,” Beregovsky told AdExchanger, “although they are still very pointed and specific opportunities.”
But Beregovsky said Vector Capital doesn’t always anticipate IPOs when making acquisitions, including the decisions behind its recent Triton buy.
“Some private equity firms are willing to pay extremely high prices for companies if they know that IPO is just around the corner,” Beregovsky said. “Our mandate is different, as we seek to invest in a business on a five-year horizon and add real value during that time. While we believe that IPO is a viable option for many of our investments, including Triton Digital, we don’t expect it to take place in the near term.”
What’s In It For The Ad Tech Firms?
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.
