Private equity has historically played a meaningful role as creator, owner and builder of information-oriented businesses engaged in the origination, aggregation and dissemination of content.
Investors have been attracted to the franchise value, proprietary intellectual property and customer utility, which for years have translated into growing and reliable cash flows.
However, technological innovation, combined with the most recent recession and its aftermath, has created a dichotomy of haves and have-nots in this sector, which, although creating some uncomfortable disruption, will undoubtedly lead to continued private equity activity and attractive investment opportunities well into the future.
The have-nots are mired in advertising and sponsorship-dominated business models with distribution platforms that lack user-centric interactivity, vertical market application and flexibility. However, the haves are distinguished as vertically market-focused providers that have been able to harness the benefit of significant advances in technology: from ubiquitous broadband access both at the desktop and mobile, to innovations in software and analytics, and on the horizon the rise of the iPad/tablet devices proliferating the market, which should provide enhanced integration into workflows.
Information businesses have always been driven by the end-markets they serve. However, increasingly, this is not enough and businesses that derive their revenue from the right end-markets, as well as having embraced a complete user-centric experience, will likely see the strongest growth over the coming years. We are particularly focused on these types of businesses serving the healthcare, human capital management, security, risk management, regulatory/compliance and technical markets.
Opportunities for information companies to thrive and grow should be enhanced through broadening offerings to include mobile applications. The role of 3G, the cloud and abundance of broadband WiFi networks have allowed for powerful computing power directed to smart phones and laptops. The iPad/tablet combined with the roll out of 4G will undoubtedly create a mobile information experience that will surpass that of the desktop allowing for new interactive real-time applications of information products and analytics.
Furthermore, information businesses typically have a measurable ROI associated with their use, allowing its user-base to defend their need and quantify their benefit. The efficiencies created through their embedded nature, quality of information, automation and analytics often lead to cost savings.
Not surprisingly, there has been a marked increase in M&A activity in the information sector in the last year. We foresee this increasing, driven by both well-established information providers seeking to consolidate their positions, as well as media companies seeking to diversify away from inflexible ad-supported models and reinvigorate their franchises by migrating to an information model.
This dynamic should create opportunity for private equity, especially at the smaller end of the mid-market, where a wealth of niche-oriented information businesses exists. Providing expansion capital to institute new services, further penetrate their clients’ workflow and upgrade to mobile interactive solutions should create significant growth opportunities. Furthermore, a focused buy-and-build programme can create economy of scale with these vertically oriented businesses making them attractive game changing acquisitions for the larger players as an attractive exit option.
Scott Troeller is a partner at Veronis Suhler Stevenson.