The current recession is making life difficult for private equity funds targeting b-to-b media.
As the recession hits advertising-supported media hard, some private equity funds that have invested in b-to-b media over the past few years are watching the EBITDA of their portfolio companies dwindle. These media companies now risk running awry of loan covenants with banks.
Meanwhile, the credit crisis is preventing newly formed private equity funds from securing bank loans to complete deals.
“In many ways, it's a perfect storm,” said Mike Parker, managing director of media investment bank AdMedia Partners. “Nobody that I have talked to has experienced the kind of times that we are experiencing right now. The way that private equity has been doing its business in the last few years is going to dramatically change.”
For new funds, the credit crisis has called into question the basic premise of private equity investing: the leveraged buyout. To generate a high internal rate of return, a private equity company seeks to put as little money down as possible. But banks are refusing to loan at traditional multiples, which makes it difficult for private equity funds to generate the internal rate of return they're used to.
“Leverage is a) hard to obtain and b) out of fashion,” Jeffrey Stevenson, managing partner of media merchant bank Veronis Suhler Stevenson, said in an online video interview with American Business Media.
In this environment, VSS just launched a $400 million mezzanine investment fund. An advantage of mezzanine investments is that they don't necessarily rely on bank loans. “We can just write a check,” said Hal Greenberg, a managing director of VSS.
It's almost impossible for an outsider to tell how private equity-owned companies are doing in the current environment. But there are “ticking time bombs” out there, according to one industry observer, who spoke on condition of anonymity. A look at hard-hit industry sectors, such as financial services and construction, offers clues to which b-to-b media companies may also be struggling.
“A lot of this is market-related,” Greenberg said. “When you look at Source Media or Hanley Wood, you find companies with great management teams and great assets. When you look now in 2008 and 2009, you still have the same great management teams and same great assets, but you see the stress in the underlying served market. I'm sure they're having their issues.”
Private equity investor Investcorp acquired Source Media, publisher of American Banker, for $350 million in 2004. JPMorgan Partners acquired Hanley Wood, publisher of Builder, for $618 million in 2005.
Despite the current environment, Investcorp continues to invest in Source Media, acquiring a London-based financial data company in February. Source Media did not respond to requests for comment for this article.
Standard & Poor's placed Hanley Wood on CreditWatch with negative implications in February. “The CreditWatch listing is based on the company's rising debt leverage,” said S&P credit analyst Jeanne Mathewson, “and our concern that operating performance and liquidity will be undermined in the near-to-intermediate term by persisting weakness in the residential housing market.”
“Things are not going as planned,” said Frank Anton, CEO of Hanley Wood. “The success of these [private equity] deals is predicated on growth, rapid growth, over a relatively short period of time. When you have the collapse of the economy that we have now, virtually every company that is owned by private equity is headed in the wrong direction.”
Anton added: “The key thing now is to sustain the business through the downturn and keep it intact.”
Hanley Wood has been through downturns before. “The difference for us is that in previous downturns we didn't have debt, so we, in effect, had all the time in the world,” Anton said.
“You have to revise your expectations about what the return is going to be on a private equity deal. That's not to say that the original expectations couldn't be met, but you have to have a lot of things go right and almost nothing go wrong when the recovery comes.” M