Gathering of gurus

The media and communications business is like any other business, only more so. While most businesses globally are undergoing an evolution, media and communications businesses are undergoing a revolution. Companies that deal in the transfer of information may be primed for explosive growth or doomed to excruciating atrophy, depending on which side of the digital no-man's land they are positioned.

Roaming this shifting battleground are dozens of large private equity firms with significant media and communications investment programmes. These well capitalised general partners are looking to act as catalysts for change as well as extractors of value. Where change is essential for a company's growth, the private equity option appears increasingly attractive to public-company CEOs, who know they will be punished for chasing growth under a quarter-by-quarter reporting regimen.

The €8.5 billion buyout of Dutch media group VNU and the $13.7 billion take-private of US-based Spanish-language broadcaster Univision are only two recent and large examples of private equity's appetite for media and communications deals.

To learn more about the trends behind the deals, Private Equity International in June organised a roundtable discussion among five general partners who have lately been prosyletising the private equity message to increasingly eager prospective converts. The conversation, held at the New York offices of Providence Equity Partners, revealed a market filled with managerial talent hungry for change, a dangerously seductive debt market, as well as a fondness for old-economy media assets – at the right price.

PRIVATE CHANGE
As with investment into any other industry, private equity sponsors today rely on management talent to execute carefully considered plans of action. Deals usually begin with painstakingly built relationships in chosen industries, and this was certainly the case with our table of media and communications GPs. The conversation began with a question about what is on the minds of CEOs in this space today.

Mark Colodny, a managing director in the New York office of Warburg Pincus, said the digital revolution is keeping many CEOs up at night. “The changes that media businesses are undergoing now are the most profound in a generation,” he said. “The quandary that these executives are struggling with is how to continue to participate in the traditional categories they're already in, and to simultaneously try to go after the internet organically, which is very difficult to do in a traditional company context. Or, if they acquire something, what do they buy?”

Colodny cited two sea changes in the media market, among many others: “The idea of watching linear television is becoming outdated,” he said. What's more, “it used to be that New York and LA determined what the rest of the country saw and heard and read. That is all being flipped onto its head, where the consumers control how they consume content.”

Matt Boyer, a managing director in the New York office of The Carlyle Group, agreed and noted the difficulties of leading a company through “profound change” while under the surveillance of public shareholders. “Everybody is eating everybody else's lunch,” Boyer said. “You've got telco TV, you've got cable telephony, you've got satellite coming into broadcast, and then online is wreaking havoc with all the print business models. CEOs look at their businesses and see profound threats. They have to figure out how to reposition themselves, and if they have to spend a couple hundred million dollars to move from one niche to another, that is very often a proposition that includes shareholders sitting there quarter to quarter and wondering why EPS didn't grow.”

Michael Angelakis, a managing director at Providence Equity Partners, confirmed this view: “A lot of media-focused businesses need investment, but many CEOs are concerned about the market's reaction to new investment versus their short-term quarter-to-quarter performance,” Angelakis said. “Clearly Sarbanes Oxley has created an issue where it's more difficult and complex being a public company executive today. The senior management team's time is being increasingly dedicated to complying with many of those regulations instead of managing their businesses.”

Media businesses, in particular, do not currently enjoy shareholder bases who embrace risk, the by product of the dotcom hangover, said Colodny. “As a result of the internet period, many public investors are too nervous about investing in businesses, too reluctant to endure losses for a period of time, and too focused on quarterly cash flow,” he said. “That's making CEOs' lives very difficult.”

As is the case with US publiccompany leaders in many other industries, media and communications CEOs have misgivings about running a public entity. They often voice these frustrations to their friends in the private equity market. Michael Chae, a senior managing director at The Blackstone Group, relayed a recent conversation he had along these lines: “A couple months ago, I went down to see a CEO in the South who I'd not previously met. Five years ago, you'd spend the first part of lunch describing private equity and making the case for it. But with this fellow, who didn't even know me personally, the first thing he said was, ‘being a public company…blank’ – a verb that suggests a lack of enjoyment.”

PAY CUTS
When presented with a private equity proposition, media and communications senior management teams are increasingly armed with knowledge, but also are eager to pursue serious wealth creation the old fashioned way – through straightforward equity ownership.

Joshua Steiner, a managing principal at Quadrangle Group, pointed out an historic progression among his CEO contacts. “Management teams are far more sophisticated now than they would have been five or 10 years ago,” Steiner said. “They have a much keener understanding of how companies and management teams interact with private equity. The days of management teams sitting back passively and being on the accepting ends of terms are well over. They have become fairly demanding about their expectations, about governance and about how they expect to be compensated.”

While all the roundtable participants agreed that in most cases the management teams of portfolio companies are offered salary and bonus structures that are competitive with the public markets, they stressed that today's managerial talent has a near-electric response to the prospect of significant equity ownership. And this is exactly what private equity sponsors want to see.

In some cases, management team members have been willing to prioritise their equity plans over salary. Noted Angelakis: “We saw two situations recently where our executives' salary and bonuses were lower than comparable situations in the public world. Their priority has been the equity plan, where they've received restricted stock or options. These are meaningful incentives for them, in terms of future wealth creation, and we believe this aligns them with us. In the discussions I've had with them, they've mentioned that they were willing to take lower cash compensation in exchange for the chance to invest a meaningful amount of their net worth into the transaction, and receive a generous equity incentive plan. They believe they can really drive the future performance of the business and generate tremendous value for both their incentive package and their cash investment. That's a very different mindset and approach than what you see in the public markets.”

In the discussions I've had with them, they've mentioned that they were willing to take lower cash compensation in exchange for the chance to invest a meaningful amount of their net worth into the transaction, and receive a generous equity incentive plan. They believe they can really drive the future performance of the business and generate tremendous value for both their incentive package and their cash investment. That's a very different mindset and approach than what you see in the public markets.”

A major advantage of private equity is that it allows for much clearer alignment of interests, said Steiner. “The frustration within the public market now is that there is this seeming disconnect between the way the stock is performing and the compensation that management is receiving,” he said. “Shareholders are frustrated that they have seen flat to declining share prices at times when management teams are making enormous amounts of money. The compensation plans that all of us put in place insure that if the private equity sponsors are doing well, management is doing well. If it turns out that the company is not particularly successful, while it won't crush management's lifestyles, it is unlikely that they will receive huge economic benefits.”

“A red flag for us is when a CEO is very focused on cash comp and does not want to invest much in a transaction, and doesn't place appropriate value on the incentives,” said Boyer. “To us that is a fundamental issue.”

All of the roundtable participants manage funds of more than $1 billion. One firm represented – Blackstone – is closing in on roughly $15 billion for a new fund, with media and communications commanding the largest allocation of dollars.

Chae highlighted that the size of funds wielded by him and his peers means the ability to attract truly world-class CEOs. “The types of assets that we can buy are getting larger and often better,” Chae said. “Because of where we are in the cycle, the deals in the last few years have often gone very well. Managers get rewarded when that happens. Consequently, there's an opportunity now more so than ever for great managers to run really big companies in a private equity format, have a good time and do well.”

OLD MEDIA
Our media gurus were not put off by the challenges facing traditional, hidebound media companies. Far from it – most said they were still attracted to newspapers and the like, provided the price was right.

“These aren't melting ice cubes,” said Boyer. “There is a declining-asset nature to them, but you just have to value that and take a view on ultimately what the growth rate or negative growth rate is. I can't think of a mature industry where I'd say, ‘I'm not going to touch that’.”

A discussion ensued about the fear that Craig's List – a free, local-community classified ad website in the US – is instilling in the hearts of newspaper executives worldwide. The GPs at the table weren't so afraid. “We actually still find newspaper businesses to be attractive assets,” said Angelakis. “We believe there are meaningful threats to the business, as readership will probably continue to decline and portions of advertising may move online. But, depending on the management, the market, and the value of that asset, we would seriously consider an investment in a newspaper company.”

Angelakis noted the investment by his firm and Blackstone in Freedom Communications, a California newspaper publisher. The company was “doing quite well”, said Angelakis. By contrast, Providence recently passed on the opportunity to buy newspaper assets from Knight-Ridder.

Chae put the group's unwillingness to flee newspapers in perspective: “Most of us are investing out of very large funds and so the opportunity set involves large companies and often mature ones,” said Chae. “It's a question of value. A number of the plays today, whether in newspapers or broadcasting, involve businesses and industries that are quite mature. Sometimes, they may even have a long tail to them. The plays are around valuing them correctly, applying a capital structure that maximises returns on equity, and often, operational opportunities. These are businesses that often have been under-managed for years and years and the opportunity is to create value through operating them more efficiently, or differently, as well as having an option on ultimately repurposing content in different media.”

CABLE GUYS
Much of the reason that media and communications investing has remained such a large component of diversified private equity firms has to do with cable television, with its vast, big-money infrastructures.

While cable isn't as mature as newspapers, it is beginning to take on a cyclicality that veteran private equity investors chart with wariness. At the same time, cable offers the hope of becoming the chief deliverer of all things digital.

“Domestically and in Europe, we are bullish on cable as a distributor and network,” says Angelakis. “We believe the triple play – with the addition of voice, the continued growth of high speed data, and the steady position of video – has made a difference in cable's profile and is attractive. We're also quite bullish on the content side in terms of investing in content that you can aggregate for distribution. Interestingly, public market values are quite attractive; however, private market values are a bit of a different story.”

Steiner said he likes cable, but looks for assets where the previous owner had done most of the spending in pursuit of the triple play. “Cable is one of these businesses where you really do need to look at the lifecycle,” he said. “People have been talking about the triple play in cable for a long time. It's only recently come into fruition. If you can buy at a point in time where you get the benefit of the acceleration in revenue without having to spend as much on cap ex to get there, it's almost an inflexion point.”

DEBT SEDUCTION
Asked to characterise the financial markets for media and communications deals, Boyer responded: “Liquidity, liquidity, liquidity.” A survey of the roundtable GPs revealed that all had, in the last several months, seen deals packaged with total debt multiples of more than ten times EBITDA.

Said Angelakis: “I've been in the business for over 20 years, and the current market is pretty much unprecedented in terms of the amounts of leverage that financial institutions are willing to lend companies.”

“When you are talking to people who are looking for double digit leverage loans, you need to be very disciplined and know when to say no,” continued Boyer. “There is an enormous amount of money out there on the high-yield side, and that has clearly been an enabler of our business, but it has created frothy auctions. You need to be cautious about how much you lever up these companies.”

Steiner drew a comparison between today's market and an earlier era of froth. “It's not just a question of multiples,” he said. “It's a question of debt-to-equity ratio. You're back down to levels that you saw in the 1980s in terms of the amount of equity that's being required in deals.”

“Sub-20 percent,” said Boyer.

“Sometimes well south of 20 percent,” continued Steiner. “The question is whether that accurately reflects the inherent risks of the business, because it doesn't provide the lender a lot of cushion in an environment where he's only above less than 20 percent of the enterprise value.”

“The question for all of us is how to plan for a credit environment that is less euphoric than the one we're in now,” warned Colodny. “You need to make sure the credit structure is resilient enough when the pendulum does swing back.”

Chae agreed, and suggested that the current downpour of liquidity also has meant a generosity among lenders when it comes to terms. “You have to have safe capital structures that are flexible and can endure volatility in the business over the long term,” said Chae. “That's a function of using the liquidity in your business to serve in your interests. You need a comfortable cushion relative to your covenants.”

To laughter, Chae added: “Or no covenants at all also works.”

The roundtable GPs nodded when asked whether they had seen deals completed recently that included covenant-free financing packages.

HITS AND MISSES
Asked what types of companies they would avoid at all costs, our roundtablers gave diverse answers. Chae said Blackstone considers investing in many different sectors, so long as the business in question is not a “developmental deal”, meaning bets on companies with products that are currently unprofitable and unproven. Chae noted the ghost of the competitive local exchange carrier (CLEC), a business model that in the early 2000s was responsible for the destruction of many private equity dollars. Those were developmental deals, said Chae.

Boyer agreed: “We're similar in that we're very reticent to fund negative cash flow for an extended period of time.”

Colodny said Warburg Pincus, which invests in venture situations all the way across the life-stage spectrum to buyout deals, is more willing to fund negative cash flow, “up to a point”. What Colodny's group does avoid, he said, are “hit-driven, vanity-type businesses. It would be unlikely that we would be involved in any of the recent film-financing deals.”

Colodny also expressed caution at the growing excitement around video aggregation websites, which present video clips posted by users. “There is no doubt that there will be interesting businesses created here,” he said. “But it feels a little bit like what the social networking space was a few years ago. There are probably dozens of video companies being funded right now, none of which have demonstrable traffic or brand names. The attraction is that it clearly is the way the internet is moving, but it's hard to see how more than a few of these companies are going to be successful. Only the exceptional few with unique approaches will thrive and most of the others will disappear. The trick for us is to find one of the few that will create the traffic and brand.”

Steiner also noted an aversion to attempting to pick winners. Quadrangle would rather let the market decide: “We're not technologists. If someone shows up and says, this box is better than that box, we don't have the ability to examine which one is superior. We can only go to the customers when the business is more mature and say, okay, you tell us which one is better.”

While noting that many of the larger video game companies trade at high multiples, large private equity firms have not yet “cracked the code” on video games, Chae said. Part of Blackstone's reluctance to get involved in this booming industry is not the technology involved, but the human capital. With a number of the video game production companies, “really what you're buying is a franchise of software developers,” Chae said. “And it's tricky to value those over the long term given that those people can get up and walk out the door.”

Chae also noted that some private equity firms might take issue with the content of some video games.

The GPs at the roundtable all know each other, like each other and frequently invest with each other. And they are fiercely competitive with each other. The conversation experienced a sudden radio silence when the participants were asked what new and interesting investment theses they were pursuing. A GP broke the pause by asking the others, archly, “what are your good ideas?” Roll laugh track.

Only one GP provided an answer to this, although Private Equity International is unable to verify its accuracy: “We really like Lithuanian CLECs.”

The media and communications business is like any other business, only more so. While most businesses globally are undergoing an evolution, media and communications businesses are undergoing a revolution. Companies that deal in the transfer of information may be primed for explosive growth or doomed to excruciating atrophy, depending on which side of the digital no-man's land they are positioned.

Roaming this shifting battleground are dozens of large private equity firms with significant media and communications investment programmes. These well capitalised general partners are looking to act as catalysts for change as well as extractors of value. Where change is essential for a company's growth, the private equity option appears increasingly attractive to public-company CEOs, who know they will be punished for chasing growth under a quarter-by-quarter reporting regimen.

The €8.5 billion buyout of Dutch media group VNU and the $13.7 billion take-private of US-based Spanish-language broadcaster Univision are only two recent and large examples of private equity's appetite for media and communications deals.

To learn more about the trends behind the deals, Private Equity International in June organised a roundtable discussion among five general partners who have lately been prosyletising the private equity message to increasingly eager prospective converts. The conversation, held at the New York offices of Providence Equity Partners, revealed a market filled with managerial talent hungry for change, a dangerously seductive debt market, as well as a fondness for old-economy media assets – at the right price.

PRIVATE CHANGE
As with investment into any other industry, private equity sponsors today rely on management talent to execute carefully considered plans of action. Deals usually begin with painstakingly built relationships in chosen industries, and this was certainly the case with our table of media and communications GPs. The conversation began with a question about what is on the minds of CEOs in this space today.

Mark Colodny, a managing director in the New York office of Warburg Pincus, said the digital revolution is keeping many CEOs up at night. “The changes that media businesses are undergoing now are the most profound in a generation,” he said. “The quandary that these executives are struggling with is how to continue to participate in the traditional categories they're already in, and to simultaneously try to go after the internet organically, which is very difficult to do in a traditional company context. Or, if they acquire something, what do they buy?”

Colodny cited two sea changes in the media market, among many others: “The idea of watching linear television is becoming outdated,” he said. What's more, “it used to be that New York and LA determined what the rest of the country saw and heard and read. That is all being flipped onto its head, where the consumers control how they consume content.”

Matt Boyer, a managing director in the New York office of The Carlyle Group, agreed and noted the difficulties of leading a company through “profound change” while under the surveillance of public shareholders. “Everybody is eating everybody else's lunch,” Boyer said. “You've got telco TV, you've got cable telephony, you've got satellite coming into broadcast, and then online is wreaking havoc with all the print business models. CEOs look at their businesses and see profound threats. They have to figure out how to reposition themselves, and if they have to spend a couple hundred million dollars to move from one niche to another, that is very often a proposition that includes shareholders sitting there quarter to quarter and wondering why EPS didn't grow.”

Michael Angelakis, a managing director at Providence Equity Partners, confirmed this view: “A lot of media-focused businesses need investment, but many CEOs are concerned about the market's reaction to new investment versus their short-term quarter-to-quarter performance,” Angelakis said. “Clearly Sarbanes Oxley has created an issue where it's more difficult and complex being a public company executive today. The senior management team's time is being increasingly dedicated to complying with many of those regulations instead of managing their businesses.”

Media businesses, in particular, do not currently enjoy shareholder bases who embrace risk, the by product of the dotcom hangover, said Colodny. “As a result of the internet period, many public investors are too nervous about investing in businesses, too reluctant to endure losses for a period of time, and too focused on quarterly cash flow,” he said. “That's making CEOs' lives very difficult.”

As is the case with US public-company leaders in many other industries, media and communications CEOs have misgivings about running a public entity. They often voice these frustrations to their friends in the private equity market. Michael Chae, a senior managing director at The Blackstone Group, relayed a recent conversation he had along these lines: “A couple months ago, I went down to see a CEO in the South who I'd not previously met. Five years ago, you'd spend the first part of lunch describing private equity and making the case for it. But with this fellow, who didn't even know me personally, the first thing he said was, ‘being a public company…blank’ – a verb that suggests a lack of enjoyment.”

PAY CUTS
When presented with a private equity proposition, media and communications senior management teams are increasingly armed with knowledge, but also are eager to pursue serious wealth creation the old fashioned way – through straightforward equity ownership.

Joshua Steiner, a managing principal at Quadrangle Group, pointed out an historic progression among his CEO contacts. “Management teams are far more sophisticated now than they would have been five or 10 years ago,” Steiner said. “They have a much keener understanding of how companies and management teams interact with private equity. The days of management teams sitting back passively and being on the accepting ends of terms are well over. They have become fairly demanding about their expectations, about governance and about how they expect to be compensated.”

While all the roundtable participants agreed that in most cases the management teams of portfolio companies are offered salary and bonus structures that are competitive with the public markets, they stressed that today's managerial talent has a near-electric response to the prospect of significant equity ownership. And this is exactly what private equity sponsors want to see.

In some cases, management team members have been willing to prioritise their equity plans over salary. Noted Angelakis: “We saw two situations recently where our executives' salary and bonuses were lower than comparable situations in the public world. Their priority has been the equity plan, where they've received restricted stock or options. These are meaningful incentives for them, in terms of future wealth creation, and we believe this aligns them with us. In the discussions I've had with them, they've mentioned that they were willing to take lower cash compensation in exchange for the chance to invest a meaningful amount of their net worth into the transaction, and receive a generous equity incentive plan. They believe they can really drive the future performance of the business and generate tremendous value for both their incentive package and their cash investment. That's a very different mindset and approach than what you see in the public markets.”

Boyer added: “The other element to it is that, generally, our time horizon is on average five years. CEOs that are smart understand that if they're successful, this isn't necessarily going to be a one-shot deal. We've had our best success with repeat CEOs. There may be two or three more opportunities to repeat this party.”

A major advantage of private equity is that it allows for much clearer alignment of interests, said Steiner. “The frustration within the public market now is that there is this seeming disconnect between the way the stock is performing and the compensation that management is receiving,” he said. “Shareholders are frustrated that they have seen flat to declining share prices at times when management teams are making enormous amounts of money. The compensation plans that all of us put in place insure that if the private equity sponsors are doing well, management is doing well. If it turns out that the company is not particularly successful, while it won't crush management's lifestyles, it is unlikely that they will receive huge economic benefits.”

“A red flag for us is when a CEO is very focused on cash comp and does not want to invest much in a transaction, and doesn't place appropriate value on the incentives,” said Boyer. “To us that is a fundamental issue.”

All of the roundtable participants manage funds of more than $1 billion. One firm represented – Blackstone – is closing in on roughly $15 billion for a new fund, with media and communications commanding the largest allocation of dollars.

Chae highlighted that the size of funds wielded by him and his peers means the ability to attract truly world-class CEOs. “The types of assets that we can buy are getting larger and often better,” Chae said. “Because of where we are in the cycle, the deals in the last few years have often gone very well. Managers get rewarded when that happens. Consequently, there's an opportunity now more so than ever for great managers to run really big companies in a private equity format, have a good time and do well.”

OLD MEDIA
Our media gurus were not put off by the challenges facing traditional, hidebound media companies. Far from it – most said they were still attracted to newspapers and the like, provided the price was right.

“These aren't melting ice cubes,” said Boyer. “There is a declining-asset nature to them, but you just have to value that and take a view on ultimately what the growth rate or negative growth rate is. I can't think of a mature industry where I'd say, ‘I'm not going to touch that’.”

A discussion ensued about the fear that Craig's List – a free, local-community classified ad website in the US – is instilling in the hearts of newspaper executives worldwide. The GPs at the table weren't so afraid. “We actually still find newspaper businesses to be attractive assets,” said Angelakis. “We believe there are meaningful threats to the business, as readership will probably continue to decline and portions of advertising may move online. But, depending on the management, the market, and the value of that asset, we would seriously consider an investment in a newspaper company.”

Angelakis noted the investment by his firm and Blackstone in Freedom Communications, a California newspaper publisher. The company was “doing quite well”, said Angelakis. By contrast, Providence recently passed on the opportunity to buy newspaper assets from Knight-Ridder.

Chae put the group's unwillingness to flee newspapers in perspective: “Most of us are investing out of very large funds and so the opportunity set involves large companies and often mature ones,” said Chae. “It's a question of value. A number of the plays today, whether in newspapers or broadcasting, involve businesses and industries that are quite mature. Sometimes, they may even have a long tail to them. The plays are around valuing them correctly, applying a capital structure that maximises returns on equity, and often, operational opportunities. These are businesses that often have been under-managed for years and years and the opportunity is to create value through operating them more efficiently, or differently, as well as having an option on ultimately repurposing content in different media.”

CABLE GUYS
Much of the reason that media and communications investing has remained such a large component of diversified private equity firms has to do with cable television, with its vast, big-money infrastructures.

While cable isn't as mature as newspapers, it is beginning to take on a cyclicality that veteran private equity investors chart with wariness. At the same time, cable offers the hope of becoming the chief deliverer of all things digital.

“Domestically and in Europe, we are bullish on cable as a distributor and network,” says Angelakis. “We believe the triple play – with the addition of voice, the continued growth of high speed data, and the steady position of video – has made a difference in cable's profile and is attractive. We're also quite bullish on the content side in terms of investing in content that you can aggregate for distribution. Interestingly, public market values are quite attractive; however, private market values are a bit of a different story.”

Steiner said he likes cable, but looks for assets where the previous owner had done most of the spending in pursuit of the triple play. “Cable is one of these businesses where you really do need to look at the lifecycle,” he said. “People have been talking about the triple play in cable for a long time. It's only recently come into fruition. If you can buy at a point in time where you get the benefit of the acceleration in revenue without having to spend as much on cap ex to get there, it's almost an inflexion point.”

DEBT SEDUCTION
Asked to characterise the financial markets for media and communications deals, Boyer responded: “Liquidity, liquidity, liquidity.” A survey of the roundtable GPs revealed that all had, in the last several months, seen deals packaged with total debt multiples of more than ten times EBITDA.

Said Angelakis: “I've been in the business for over 20 years, and the current market is pretty much unprecedented in terms of the amounts of leverage that financial institutions are willing to lend companies.”

“When you are talking to people who are looking for double digit leverage loans, you need to be very disciplined and know when to say no,” continued Boyer. “There is an enormous amount of money out there on the high-yield side, and that has clearly been an enabler of our business, but it has created frothy auctions. You need to be cautious about how much you lever up these companies.”

Steiner drew a comparison between today's market and an earlier era of froth. “It's not just a question of multiples,” he said. “It's a question of debt-to-equity ratio. You're back down to levels that you saw in the 1980s in terms of the amount of equity that's being required in deals.”

“Sub-20 percent,” said Boyer.

“Sometimes well south of 20 percent,” continued Steiner. “The question is whether that accurately reflects the inherent risks of the business, because it doesn't provide the lender a lot of cushion in an environment where he's only above less than 20 percent of the enterprise value.”

“The question for all of us is how to plan for a credit environment that is less euphoric than the one we're in now,” warned Colodny. “You need to make sure the credit structure is resilient enough when the pendulum does swing back.”

Chae agreed, and suggested that the current downpour of liquidity also has meant a generosity among lenders when it comes to terms. “You have to have safe capital structures that are flexible and can endure volatility in the business over the long term,” said Chae. “That's a function of using the liquidity in your business to serve in your interests. You need a comfortable cushion relative to your covenants.”

To laughter, Chae added: “Or no covenants at all also works.”

The roundtable GPs nodded when asked whether they had seen deals completed recently that included covenant-free financing packages.

HITS AND MISSES
Asked what types of companies they would avoid at all costs, our roundtablers gave diverse answers. Chae said Blackstone considers investing in many different sectors, so long as the business in question is not a “developmental deal”, meaning bets on companies with products that are currently unprofitable and unproven. Chae noted the ghost of the competitive local exchange carrier (CLEC), a business model that in the early 2000s was responsible for the destruction of many private equity dollars. Those were developmental deals, said Chae.

Boyer agreed: “We're similar in that we're very reticent to fund negative cash flow for an extended period of time.”

Colodny said Warburg Pincus, which invests in venture situations all the way across the life-stage spectrum to buyout deals, is more willing to fund negative cash flow, “up to a point”. What Colodny's group does avoid, he said, are “hit-driven, vanity-type businesses. It would be unlikely that we would be involved in any of the recent film-financing deals.”

Colodny also expressed caution at the growing excitement around video aggregation websites, which present video clips posted by users. “There is no doubt that there will be interesting businesses created here,” he said. “But it feels a little bit like what the social networking space was a few years ago. There are probably dozens of video companies being funded right now, none of which have demonstrable traffic or brand names. The attraction is that it clearly is the way the internet is moving, but it's hard to see how more than a few of these companies are going to be successful. Only the exceptional few with unique approaches will thrive and most of the others will disappear. The trick for us is to find one of the few that will create the traffic and brand.”

Steiner also noted an aversion to attempting to pick winners. Quadrangle would rather let the market decide: “We're not technologists. If someone shows up and says, this box is better than that box, we don't have the ability to examine which one is superior. We can only go to the customers when the business is more mature and say, okay, you tell us which one is better.”

While noting that many of the larger video game companies trade at high multiples, large private equity firms have not yet “cracked the code” on video games, Chae said. Part of Blackstone's reluctance to get involved in this booming industry is not the technology involved, but the human capital. With a number of the video game production companies, “really what you're buying is a franchise of software developers,” Chae said. “And it's tricky to value those over the long term given that those people can get up and walk out the door.”

Chae also noted that some private equity firms might take issue with the content of some video games.

The GPs at the roundtable all know each other, like each other and frequently invest with each other. And they are fiercely competitive with each other. The conversation experienced a sudden radio silence when the participants were asked what new and interesting investment theses they were pursuing. A GP broke the pause by asking the others, archly, “what are your good ideas?” Roll laugh track.

Only one GP provided an answer to this, although Private Equity International is unable to verify its accuracy: “We really like Lithuanian CLECs.”

MEDIA BUYERS
MICHAEL ANGELAKIS

Managing Director

Providence Equity Partners

Prior to joining Providence over eight years ago, Angelakis was president and chief executive officer of State Cable TV Corporation. Angelakis sits on the boards of Providence portfolio companies Bresnan Communications, YES Network, Metro-Goldwyn-Mayer and Northland Cable Networks. Providence, based in Providence, Rhode Island, with offices in New York and London, specialises in investments in media and entertainment, communications and information companies around the world. The firm has $9 billion under management and in the autumn of 2004 closed its fifth fund on $4.25 billion.

MATTHEW BOYER

Managing Director

The Carlyle Group

Boyer specialises in telecommunications buyouts for Carlyle. He was also heavily involved in Carlyle's Dex Media investment. Boyer joined the firm from Lehman Brothers, where he was one of the founding partners of an $800 million communications fund. Caryle's media/telecom industry group is the firm's most active, with roughly 30 percent of the global firm's capital being directed into such deals.

Michael Chae

Senior Managing Director

The Blackstone Group

Chae joined Blackstone in 1997. He previously worked at The Carlyle Group. As the partner sharing responsibility for Blackstone's media and communications investments in the US, Chae has been involved in many of Blackstone's communications and media deals, including Centennial Communications, Crowley Digital, iPCS, PaeTec Communications, Universo Online and VNU. He also helped establish the $2 billion Blackstone Communications Partners vehicle in 2000. Media and telecommunications remains Blackstone's largest sector for investment, accounting for approximately one quarter of its total activity.

MARK COLODNY

Managing Director

Warburg Pincus

Colodny began his career as a writer at Fortune magazine. He then headed the mergers and acquisitions group at Primedia before joining Warburg Pincus in 2001. At Warburg Pincus, Colodny focuses on media and information investments in the US, including venture capital and later-stage deals. He is a director of GlobalSpec, CAMP Systems International, Institutional Shareholder Services, OnTargetJobs and SDI Media. The global firm, based in New York, is currently investing from an $8 billion fund closed last year.

JOSHUA STEINER

Managing Principal

Quadrangle Group

Steiner was a founding partner of Quadrangle in 2000. Before that he was a managing director at Lazard Frères & Co. within the firm's media and communications group. Prior to joining Lazard, Steiner was the chief of staff for the US Department of the Treasury. New York-based Quadrangle has three products – a $1.8 billion media and communications fund, a $2 billion distressed debt fund, and a recently established long-short media and telecom public equity fund.

MEDIA BUYERS
MICHAEL ANGELAKIS

Managing Director

Providence Equity Partners

Prior to joining Providence over eight years ago, Angelakis was president and chief executive officer of State Cable TV Corporation. Angelakis sits on the boards of Providence portfolio companies Bresnan Communications, YES Network, Metro-Goldwyn-Mayer and Northland Cable Networks. Providence, based in Providence, Rhode Island, with offices in New York and London, specialises in investments in media and entertainment, communications and information companies around the world. The firm has $9 billion under management and in the autumn of 2004 closed its fifth fund on $4.25 billion.

MATTHEW BOYER

Managing Director

The Carlyle Group

Boyer specialises in telecommunications buyouts for Carlyle. He was also heavily involved in Carlyle's Dex Media investment. Boyer joined the firm from Lehman Brothers, where he was one of the founding partners of an $800 million communications fund. Caryle's media/telecom industry group is the firm's most active, with roughly 30 percent of the global firm's capital being directed into such deals.

Michael Chae

Senior Managing Director

The Blackstone Group

Chae joined Blackstone in 1997. He previously worked at The Carlyle Group. As the partner sharing responsibility for Blackstone's media and communications investments in the US, Chae has been involved in many of Blackstone's communications and media deals, including Centennial Communications, Crowley Digital, iPCS, PaeTec Communications, Universo Online and VNU. He also helped establish the $2 billion Blackstone Communications Partners vehicle in 2000. Media and telecommunications remains Blackstone's largest sector for investment, accounting for approximately one quarter of its total activity.

MARK COLODNY

Managing Director

Warburg Pincus

Colodny began his career as a writer at Fortune magazine. He then headed the mergers and acquisitions group at Primedia before joining Warburg Pincus in 2001. At Warburg Pincus, Colodny focuses on media and information investments in the US, including venture capital and later-stage deals. He is a director of GlobalSpec, CAMP Systems International, Institutional Shareholder Services, OnTargetJobs and SDI Media. The global firm, based in New York, is currently investing from an $8 billion fund closed last year.

JOSHUA STEINER

Managing Principal

Quadrangle Group

Steiner was a founding partner of Quadrangle in 2000. Before that he was a managing director at Lazard Frères & Co. within the firm's media and communications group. Prior to joining Lazard, Steiner was the chief of staff for the US Department of the Treasury. New York-based Quadrangle has three products – a $1.8 billion media and communications fund, a $2 billion distressed debt fund, and a recently established long-short media and telecom public equity fund.