Private equity firms keep gobbling up ad tech companies - and the trend shows no sign of slowing
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):