By Georg Szalai
Select parts of the media and entertainment business will remain attractive investment targets despite economic and other challenges, private equity and venture capital executives said Tuesday at an Advertising Week panel. The discussion, titled "Show Me the Money," was held at the Paley Center, and concerned the role and influence of private equity and venture capital in the media business.
Bain Capital managing director Ian Loring, whose private-equity firm has stakes in media giants such as Clear Channel and The Weather Channel, said he expects to remain interested in cable networks, radio and outdoor, even though momentum on deals has nearly come to a halt over the past year amid recession, financial crisis and secular challenges to traditional media.
These factors have hurt cash flows and access to leverage, which are key to private-equity firms' returns. But some of the trends have improved, and the M&A market has shown signs of improvement. That, along with opportunities to cut costs further, are likely to bring back deals, the panelists suggested.
Amid reduced growth rates in many parts of the sector, media companies need to continue to shrink and cut costs while investing in the future, Loring said. For example, The Weather Channel has seen lower advertising revenue and costs, but has approximately doubled its programming investment to ensure viewer stability or growth, he said.
Rich Bressler, managing director at private-equity firm Thomas H. Lee Partners, said the economic downturn has highlighted the advantages of some business models. "One of the beauties of cable networks is the dual-revenue streams," which shields them from major contractions, he said.
Aileen Lee of VC firm Kleiner Perkins, meanwhile, said the financial crisis and recession have led to a shakeout in the venture space, which means fewer venture firms and fewer companies they invest in.
Asked whether social-media companies will remain key targets for VC players, she said: "We're just at the beginning of social media." She said commerce and small transactions would become increasingly important for those firms, in addition to making money via ads.
But "connecting socially is going to be a must-have" for all media, even traditional companies, she warned. A media site—be it for a TV show or anything else—without social functionality will see audiences leave, Lee said.
Bressler said digital has been the "biggest surprise on the upside at Clear Channel," which has made tens of millions of dollars in online profits, he said.
Will private-equity firms ever be interested in big ad conglomerates? "Longer term, maybe," suggested Loring. "They do represent relatively diverse ways of playing the ad cycle and the ad industry. It's certainly a possibility."
Lee also said there are signs that IPOs could make a comeback next year, allowing VC firms to exit investments. She said she hopes "some healthy public offerings in 2010 will spur some optimism."
Asked about ad trends, Bressler said, "It's getting a little bit better. We clearly are seeing the signs out there [for a recovery] … but we have a long ways to go."