A changing perspective

Private equity investment has spread to the marketing services sector. But how compatible is it with the objectives of marketing entrepreneurs? asks Bob Willott.

While most of the business community has been preoccupied with private equity deals in the retail sector, the recent sale of a controlling stake in AKQA to General Atlantic Partners has brought into sharp relief the increasing involvement of private equity houses as investors in the marketing services sector.

A decade ago agency start-ups needed relatively little cash and were usually funded by a friendly bank. Management buyouts (MBO) were rare because walk-outs were easier and cheaper. The idea of raising a few million pounds from a private equity house was virtually unheard of.

Now things are different. Walk-outs have become tricky as legal constraints become more effective. Formerly acquisitive groups like Cordiant (now part of WPP) and Havas have been eagerly offloading some of their acquisitions to relieve balance sheets over-burdened with debt. And the arrival of private equity houses with suitcases of dosh has led to an environment in which agency entrepreneurs and equity houses have collaborated to make buyouts more common.

Bounty Group was bought out from Havas for £19m with help from ECI Partners. Financial Dynamics bought itself out from Cordiant for £26m with help from US outfit Advent International. ISIS Equity Partners headed the syndicate of private equity investors that funded the £55m MBO of research group MORI.

Private equity has not only facilitated MBOs, it has also become a more popular source of finance for any company aspiring to greatness whose founders wish to realise a little of their investment along the way and for ownership transition arrangements with existing managers.

Beringea led a team that took an 18% stake in ILG Digital – parent company of fast-growing digital agency i-Level – so that its founders Charlie Dobres and Andrew Walmsley could make a partial realisation of the value they had created. It also led a syndicate that provided £3m to fund management succession at Gyro Group, while ISIS helped RLA Group fund the ownership transition from Roland Long to a team lead by Simon Dodd.

So, has the arrival of private equity in the sector benefited businesses and owners alike? Are private equity investors’ objectives truly compatible with those of marketing entrepreneurs? Do these investors have any ambition other than short-term wealth creation? Have they injected so much extra cash into the acquisition market that prices are over-heating?ECI Partners’ Sean Whelan says they make their objectives clear at the outset, namely: “To grow the business over a threeto five-year-period and thereafter look to realise our investment.” But does such a strategy and timescale cause the management team to reduce the scale of their commitment to the company beyond the sell-by date? Will the integrity and cultural characteristics of the agency be secondary to short-term gain?Whelan says the management team has stayed in place at both of the two marketing services companies ECI has already exited – Clarity Blue and MM Group. Nevertheless he also acknowledges the need to attract future senior managers by offering some share participation for them, even if it means suffering some dilution.

Beringea’s Trevor Hope acknowledges the inflow of funds available to private equity houses has encouraged them to expand into marketing and digital agencies, but equally he sees better growth prospects in the sector. He concedes that the extra competition among potential buyers is boosting selling prices: “Lots of deals are being done at present because founders feel the cycle may end soon and it would be good to pocket some of the value they have created before the next downturn.”

Hope sees scope for sequential transactions with the same company – helping founders reduce their dependence on the business they have created, but later providing further help when the next management layer is ready to run the business and take a bigger stake. Nevertheless, the desire for an exit opportunity such as an onward sale – or just possibly an IPO – will remain.

Most companies seem content with their investment partners so far. “There’s more risk and more opportunity,” says Bounty’s Simon Williamson. “It’s good for good people and our experience has been very positive.”

Bob Willott is editor of Marketing Services Financial Intelligence