Private equity will continue to transform the agency landscape

Private equity (PE) investment in marketing services agencies has become increasingly commonplace over the last decade or so. The media and performance space is no exception.

There is a significant cohort of PE-backed media and performance businesses — we have identified 22% of agencies among the most significant players — with different shareholder imperatives compared with their quoted rivals. Because of the scale and reputation of some of these challenger businesses, the moment when their current PE investors move on will inevitably change the dynamics of the sector.

That said, it’s important to remember that the networks — and the big global agencies they own — essentially created and defined the media industry as we know it, using their sheer scale as the predominant driver for client success and to drive volume-pricing efficiencies. They make up around a third of the agencies on our media and performance list and of course handle the bulk of global media spend.

While the PE-backed challengers might not represent the market as a whole in terms of absolute share, they are arguably where the most disruptive change is happening in the market and therefore deserve our attention.

What PE investors look for

The creative industry is packed with incredible talent and amazing companies, but it is changing at very different paces and evolving in very different ways across its various categories.

For PE investors to deliver against their model of doubling or trebling shareholder value in a relatively short time through growth, upward revaluation of profits and the cautious use of debt, they have to look not just for fantastic top-tier agencies, but wider verticals or disciplines that are undergoing transformational change. This change does represent risk, but it offers the best chance of compounded growth if the investment is placed in a best-in-class business within a disrupted and rapidly evolving sector.

In terms of overall PE exposure, the market research and insights industry sits in the lead, with 40% of the most influential companies held by PE investors. Healthcare is next at 38%, followed by social and influencer at 30%, then PR/comms and media/performance neck and neck at 22%. Bringing up the rear is branding and creative at 4%.

Some points of note:

• Media’s network-ownership legacy will always skew the ownership percentages, but private capital continues to flow into this sector because the industry is evolving at such a rapid rate.
• We’ve also witnessed a similar pace of disruption and innovation in the social and influencer industries and this explains the heavy presence of PE money there.
• The research and insights sector was a pioneer in applying machine-learning to huge sources of insight and now finds itself ahead of the game in deploying AI to make sense of messy, unstructured datasets.
• By contrast, the creative/advertising/branding segment has also changed, but it has seen much less of the fundamental disruption and tech enablement that has taken grip of media over the last 20-plus years. Less private capital has been deployed due to the relative stability of the sector, hence PE is barely a factor here at a global level.

What to expect from influential challenger businesses

In our analysis of the media and performance sector, we identify close to 100 globally influential agencies that we believe are significant.

Although our focus here is on the PE cohort, because that’s where the dynamism mainly lies, that’s not to say there aren’t wholly privately owned businesses doing hugely interesting things. PMG (owned by Momentum) is a great example. Mother and Wieden & Kennedy in the creative space are similarly exciting.

But back to PE. Given a typical PE investment period averaging four years, it wouldn’t be surprising to see a handful of the more influential PE-backed media and performance companies going through a change of ownership in the next 18 months. These might include disruptive and progressive players such as Croud (2019 investment), Tinuiti (2020) and Labelium (2021).

As the exit process can take anywhere from nine to 12 months, these firms may be switching into exit mode relatively soon, slowing or ceasing their own M&A programmes and concentrating on integration and income maximisation.

This small cohort represents more than 5,000 staff globally. The big question is whether the call of the holding companies will be irresistible or will continued autonomy out of the quarterly gaze of the public markets prove more attractive for another three- to five-year cycle? The initial public offering (IPO) market has been all but dead for the last year or so and it’s very hard to see that being a route that shareholders of these businesses would currently be considering.

Conversely, we’d expect firms that have recently taken investment capital — such as Wpromote, Dept and MiQ, which all received funding in 2022, or Incubeta and Brainlabs, which undertook their most recent funding rounds only last year — to be in full foot-down growth mode, both organically and through their own M&A for the next two years.

Looking further out

Most PE investors have well-established biases and modi operandi, and agencies that take their funding choose them on this basis. Their past behaviour is a useful indicator of future actions and, while there’s no guarantee, we would expect these PE-backed firms with recent investment to be some of the most significant transactors in M&A over the next three years.

Media and performance, together with social and influencer, are likely to be the two sectors that will continue to be just as heavily invested in by PE over the next five years.

Although there will be exits and we’ll see more transactions like WPP buying Goat, new PE funds entering these sectors might well outpace the rate at which strategic buyers take them out of PE ownership. That will simply be a reflection of the pace of change in media that is unlikely to relent over the next five to 10 years.

Given their scale, it would not be a stretch to imagine some of the largest PE-backed media and performance players finding their “exit” through an IPO and becoming public companies themselves rather than subsidiaries of existing public groups — a tipping point that we’ve named: “When the music stops!”

While the global IPO markets have been extremely quiet recently, these cycles change and the timing of the reopening of the IPO markets in New York and London may well coincide with the exit of these and other media and performance agencies.

The big structural changes that PE is capable of driving in the sector might not happen in 2024, but 2025 could be the year when it all comes together. However you read the facts, it’s only a question of time.