Category: Insights

As The Metaverse adoption continues apace, there will be an unprecedented wall of expertise required to service demand

Author: Jonathan Davis, Partner, EMEA

For all the recent publicity, “The Metaverse” remains a relatively opaque concept. Perhaps the simplest way to think about it is as the potential cyberspace functionality provided by Web 3.0 (the name that signifies the third generation of the Internet).

Based upon principles of decentralization, open protocols, greater user interaction and enhanced levels of certified digital ownership, Web 3.0 leans heavily into technologies such as Blockchain (digitally distributed, decentralized data ledgers), smart contracts and digital financial instruments (such as crypto-currencies and NFTs).

These foundational technologies offer end-users greater rights and participation in financial transactions, more interactive retail, gaming and entertainment experiences, and social media platforms that blend virtual and physical environments in a more intuitive and seamless way. The ecosystem that is the nexus of these experiences is increasingly referred to as “The Metaverse”. 

Though still nascent, far from cohesive and with some of its impacts possibly over-stated, The Metaverse and Web 3.0 could still be a significant inflection point in internet utility, enabling disruptive new online business models.

Inflection point in internet utility or “just” a massive M&A market? 

The question of whether The Metaverse will represent an inflection point in internet utility is up for debate. Many major retailers and brands are trying to size up the opportunities Web 3.0 affords and how to respond to them strategically; creating new modes of customer engagement, partnering with gaming and entertainment companies to create offerings in potential new virtual market-places, which require new marketing and advertising tech capabilities.

Inflection point or not, the market is already material and attracting significant investment. According to a recent study by Precedence Research, the size of this market could be in the region of $1.3tn by 2030.¹

If the prospect of The Metaverse is bringing the worlds of entertainment, gaming and retail into a new paradigm, then 3D/CGI content creation will be a serious enabler. Companies whose tech platforms and pipelines incorporate these capabilities will increasingly be of interest to brands, entertainment and games companies while also rapidly becoming a significant driver of competition and differentiation amongst agencies, VFX and CGI studios.

Although the necessary standardization required to make 3D interoperable across the web isn’t available yet, providers of game engine software, real-time rendering, IT hardware and cloud computing are all vying to establish a plan for Metaverse 3D graphics ubiquity. One example of this is the Khronos Group (a consortium of leading companies in the world of 3D graphics) with members such as AMD, Epic Games, Autodesk, Meta and Microsoft among many others and who’s motto is “Render Everything Everywhere”.

Significant investment followed by a prolonged period of M&A

Assuming that Metaverse adoption continues apace, there will be an unprecedented wall of expertise required to service demand. Brands, entertainment companies as well as advertisers all need to have the ability to create and deploy content in Web 3.0.

Skills in virtual world creation will have increasing value in the supply chain, making tech-focused creative companies a prime target for acquisition and portfolio growth. To that end, services companies such as Accenture, WPP and DEPT are all placing significant bets on its success.  

Accenture has already launched Metaverse Continuum Group, an 800 person (and growing) strong division helping clients in areas such as extended reality, blockchain, digital twins and edge computing.   

WPP’s specialist creative content production company, The Metaverse Foundry, through Hogarth, develops brand experiences in The Metaverse delivered by a global team of over 700. In parallel they announced a technology partnership with Epic Games, training employees in technologies such as Unreal Engine for 3D creation and virtual production.  

Global Digital Services group DEPT, who JEGI CLARITY raised capital for from Carlyle Group in 2020, launched their 300-person Web3/DEPT offering dedicated to The Metaverse, blockchain technology and NFT services, with a stated intention to derive 20% of group revenues and growing divisional headcount to 1,200 people by 2025.  

With all this investment there is no doubt that acquisitions will follow, and we are already witnessing the start of a wave of M&A, with TechMonitor estimating well over $100bn of related M&A in the last two years alone: 

• Match Group paid $1.7bn for Hyperconnect, a South Korean social discovery and video tech company with whom it is developing “Single Town” a virtual space where singles can meet.

• Unity Technology acquired Weta Digital’s technology division (engineering division, artist pipeline and tools) for $1.6bn, to enable “a new generation of creators to build, transform, and distribute stunning RT3D content.”

• Epic Games raised $2 billion for Metaverse Endeavor from Sony Group Corporation and Kirkbi (family behind LEGO) in a deal that values the Fortnite creator at $31.5bn,to help fund the kid-focused metaverse content in partnership with LEGO.

• Tencent raised its stake in games developer Ubisoft, valuing the business at $10bn, with funds used to leverage existing IP in the metaverse; and probably the largest metaverse-related investment to date.  

• Microsoft’s government contested acquisition of Activision Blizzard for $69bn as their own “building block for The Metaverse.”
• Growth Catalyst Partners is building out a design agency focused on the Metaverse through bolt-on acquisitions for their platform Journey. In 2022, they acquired leading agencies in digital and physical experiences (Squint/Opera and ICRAVE), voice (Skilled Creative) and metaverse/gaming/Web3 (Future Intelligence Group and TheDevHouse Agency).

Ones to watch 

Conclusion  

Although no unifying definition of The Metaverse yet exists, signals clearly show that building or acquiring capabilities in this space is of increasing strategic importance as market opportunities evolve. As a result, we expect to see a material increase of investment from both industry participants e.g. marketing groups, content producers and consultancies, as well as from financial investors looking to ride positive sector tailwinds and build the next generation of Web 3.0 related products and services. 

Equally, there will be increasing demand and expectations made of the technology platforms that this content will sit on. Current early movers such as Decentraland, The Sandbox, Epic and Meta are likely to be challenged as demands for real time rendering across devices become the expected standard.  

Once again, expect more investment and M&A as the larger players try to keep up with technological advances.  

If you would like to receive copies of our Insights and Reports please click here

Author: Adam Gross, Managing Director at JEGI CLARITY

Many private equity funds that traditionally lead leveraged buy-out (LBO) transactions for majority control of companies are creating “Special Opportunity” or “Structured Capital” funds to provide middle-market companies with flexible financing solutions, offering founders and CEOs with an opportunity to raise capital quickly to solve financing needs. These investments are typically structured as minority investments, and the capital can be used by founders/CEOs to solve short-term financing needs, invest in growth initiatives, and/or invest in operations.

Many times, these financing solutions can address situational complexity, from companies seeking capital to pay down debt, to businesses experiencing difficulty securing capital from their usual sources. Furthermore, these solutions can aid founders/CEOs who are seeking to opportunistically invest to support growth in their businesses, without having to give up control of their companies.

One interesting solution for middle-market companies is “Structured Preferred Equity”, an innovative way for companies to raise capital without diluting their ownership stake as much as they would with traditional debt or equity financing. This can be especially beneficial for founders/CEOs who want to maintain control of their companies, while raising capital in a relatively short time – typically within four weeks. For investors, this type of equity investment can provide more robust protection than traditional common equity, which enables investors to move faster in providing the financing, given the lower risk profile.

Here are the general terms and types of structured preferred equity a founder/CEO should expect:

Interest – preferred equity offers the investor an interest payment typically paid as Paid-in-Kind (PIK) interest, which accrues over time and is paid at a later date; this enables the company to conserve cash and utilize that cash for operational investments and growth initiatives; current market rate is in the low double-digit percentage range

Liquidation Preference – preferred equity may provide downside protection to the investor by guaranteeing a certain level of return, before the common equity is paid; for example, a 1.25x liquidation preference guarantees the investor a 1.25x return on their investment before the common shareholders receive any payment

Participating Preferred – typically, this type of preferred equity provides downside protection via a liquidation preference, while also offering the investor the opportunity to participate in the common equity value of the company; as such, once the preferred equity investor receives its interest payments and guaranteed return, it then participates in the common equity waterfall, enabling it to partake in the company’s upside

Convertible Preferred – in this type of preferred equity, the investor chooses either the preferred value of the security or the converted value of the common shares; basically, the investor chooses between the greater of the two calculated values, providing the investor with downside protection, as the minimum value is the preferred value, while offering the investor the option to participate in the company’s upside via the common equity

A few things to consider, structured preferred equity can be more expensive than traditional debt or equity financing, as investors typically demand a higher rate of return for this type of investment.  Structured preferred equity can also limit the flexibility of the company, as the terms of the preferred stock may include certain restrictions on the company’s operations or decision-making.

Another important aspect to consider is that structured preferred equity is typically not for companies that are in very early stages of development.  It’s more suitable for companies that have a track record of generating revenue and profitability and are looking to expand/invest in growth.

In Conclusion  

Structured preferred equity can be a highly flexible, fast and effective way for companies to raise capital.  It’s important to understand the pros and cons before deciding, and experienced investment banking professionals will help you understand this financing option and opportunity better, can introduce an array of firms that offer this type of financing solution and will help companies and founders align with the best partner at the best terms. 

If you would like to discuss further please click here

As we look forward to 2023, we expect it to be a year of resetting and cost cutting; a time where CEOs will be asked to do more with less.  Set against these macro-conditions, however, there are reasons for optimism.  

Authors: Chris Karl, Chief Business Development Officer, North America & San Datta, Partner, EMEA

The post-pandemic period of exuberance for much of the Media, Information and Technology sectors which saw sky high valuations, record private equity investment and highly leveraged growth has definitely retreated through the second half of 2022 due to an array of factors from macro to micro.  Whether you chalk it up to supply chain disruption, political turmoil, challenging capital markets, tightening monetary policy or the war in Ukraine, the second half of 2022 saw a dramatic fall of 33% in global M&A activity compared to the first half, resulting in total 2022 M&A volumes being down 37% on 2021.

As we look forward to 2023, we expect it to be a year of resetting and cost cutting; a time where CEOs will be asked to do more with less.  Set against these macro-conditions, however, there are reasons for optimism.  

Across our sectors, we continue to see revenue growth and profitability coming from companies that integrate tech-enabled services and expand offerings to drive positive outcomes for customers.  These powerful underlying drivers, coupled with robust corporate balance sheets, will continue to drive both growth and M&A appetite from strategic acquirers through 2023 and beyond. 

From a private equity perspective, an estimated US$2Tn of dry powder in the hands of global private equity funds¹ and a rapidly evolving media and technology marketplace provides the foundation for more investor-led M&A and capital deployment in the coming year.  

While the exact timing is uncertain, we are confident that M&A in the mid-market will return to robust levels of activity as debt markets ease and the wave of digital transformation continues to roll across industries. 

So, what are some specific areas of growth and opportunity for 2023?  

 Digital Services: consolidation continues 

Digital services growth, both geographic and through the marketing stack, will continue to thrive and, with a market of over $100Bn in North America and the UK alone, the market opportunity remains huge for the winners. The increasingly long list of private equity backed digital platform plays such as Dept, Bounteous, Material+, Wpromote, Valtech and Tinuiti will continue to scale through acquisition and reach further into adjacent markets bringing the CMO closer to the CTO and CIO.    

Events: face-to-face is back… and it matters 

At the epicentre of B2B lives the Events space, a sector that saw an unprecedented post-pandemic bounce-back during 2022. With the North American market forecast back at 97% of 2019 levels in 2023, and Europe at 96%, momentum has returned, and M&A is back on the agenda.  The physical channel remains attractive to business, the interweaving of in real live (IRL) and digital to create a drop-in, drop-out hybrid world has paved the way forward for the industry, and we expect to see buyers focusing on companies which enable this proposition, for example Clarion’s acquisition of Quartz or Brunico’s acquisition of NAPTE.  

 Content Creation: a new revolution?  

Technology has transformed the nature of dissemination of content via a rapidly expanding universe of service providers that help media owners and brands capture, curate, distribute, and monetize their content assets, in turn driving a wealth of M&A and investment. Be it strategic, such as Unity’s $1.6Bn acquisition of Weta Digital’s tech division, or from private equity, such as Bridgepoint’s investment in multi-channel content platform, ITG, or PSG Equity’s investments into Backlight, we anticipate that new technologies will transform the way content is produced, automating much of what was historically done in studios, on production sets and on location. We are already beginning to see AI driven content creation technologies delivered through high-end animation and more sophisticated visual effects. 

These capabilities will bring down the cost of production which is a welcome trend in these inflationary times. 

The Metaverse: one for all or all for fun?  

Although we are not at a mass adoption point for Web 3.0 or VR/AR, demand for connected communication, gaming, eSports and content will play into the metaverse becoming more than just a concept for many.  Indeed, we anticipate more investment and M&A activity in the core technologies that drive Web 3.0, in service providers and technology tools that help B2B users and in connected consumer content.

Witness for example, Microsoft’s government contested $69Bn acquisition of games publisher Activision or, on a smaller scale, Arogo Capital’s $665Mn acquisition of EON Reality, a provider of AR/VR solutions for virtual offices. 

 CTV: a new advertising battleground

The “Future of TV” is here as the connected TV (CTV) market is the fastest growing media channel at over 23% in 2022 and forecasted growth will continue in the coming year as Netflix introduces an ad supported tier.  Advanced formats will be introduced, and M&A will follow, with deals like LionTree’s acquisition of Transmit.Live to start the year.  Demand for content will drive innovations that serve individual homes with customized streams supported by dynamically inserted relevant ads and CTV moves into “must buy” status with media buyers.  

 ROI: making it count 

Over the last couple of years, we have seen a real acceleration in ROI-driven sales and marketing solutions powered by content, data and technology which are increasingly taking budget from traditional advertising and marketing spending. The economic slowdown will only make these businesses more attractive to brands and corporates as every marketing dollar gets more scrutiny. Whether this is the “tip-of-spear” +$25Bn sales acceleration market populated by the likes of ZoomInfo and Cognism, or further up the funnel, the $10Bn content-led affiliate marketing world, expect to see large scale integrators looking to acquire ROI-focused capabilities.

Other catch phrases and technology we predict you’ll hear a lot more about in the coming months include Chat GTP, Applied AI, ESG, Sustainability, Staff Augmentation and Cloud Migration. 

You will also want to pay attention to Google and Facebook’s waning hold on advertising budgets, TikTok’s issues with their ownership structure in China, and Musk’s progress with remaking Twitter.  As these leading digital platforms face headwinds there is potential for upstarts, challengers, and the “others” to grow revenue even in a down year.  That’s good news for many companies.        

In Conclusion  

Contemplating what to watch out for in 2023, we are reminded that even in the face of macro headwinds, the digital and technology revolution charges on.   

Entrepreneurs and founders always find a way and often it’s on the back of technology that makes it all possible.  2023 will be a year where resilience breeds a new collection of winners, solidifies new and efficient use cases for hyped technologies, and the beginning of a new economic cycle of prosperity begins.     

 ¹ S&P Global Market Intelligence

If you would like to receive copies of our Insights and Reports please click here

The New Paradigm for Insights

Introducing our latest Power of 5 series. We ask 5 industry leaders 5 questions in 5 minutes to gain insight on how they are succeeding in today’s market.

In this series we examine the research, insights, and measurement sector, how that sector has evolved over the last 18 to 24 months, and what that means for M&A.

Over 5 weeks we interviewed 5 selected executives from leading corporations. Topics of discussion included current challenges facing clients, learnings from the last two years, and M&A criteria going forward.

Full Interviews Below

Key Takeaways

Highly attractive business models ripe for investment

• Gaming and esports businesses have high growth potential and scalable operations
• High-quality assets are at the critical inflection point of achieving profitability and generating cash flows
• All stakeholders are looking for partnerships to scale the business to the next level – find the business within the science project

The Power of the Network: Evolution of the Engagement Model Series

Introducing our latest Power of 5 series. We ask 5 industry leaders 5 questions in 5 minutes to gain insight on how they are succeeding in today’s market.

In this series we explore the evolution of engagement and networking models across the Business Information ecosystem in driving business decision making and how M&A is playing a part in that evolution.

Over 5 weeks we interviewed 5 select executives from leading corporations. Topics of discussion included current challenges facing clients, learnings from 2021, and M&A criteria going forward.

Full Interviews Below

Key Takeaways

Total equity market value down by 2% since July 2021

Following strong growth through early 2021, the Media, Marketing, Information & Technology equity markets encountered some turbulence towards the end of Q3, leading to a drop in value over the period of 2%, in line with benchmark indices which have fallen by 1-3% over the same period.

2021 revenue growth of 17% across all sectors

2021 forecast revenue growth remains robust across all sectors at 17% vs. 2020, led by +28% growth across e-commerce and digital media, and in particular verticalized e-commerce and publishers & lead generation.

2021 EBITDA growth of 36% across all sectors

Strong outlook for 2021 EBITDA growth continues, with virtually every sector expecting double-digit growth vs. 2020, other than for specific sub-sectors which continue to experience fall-out from Covid-19 (e.g. Events).

The total market value of the Media, Marketing, Information and Technology Sectors has decreased by 2% since July 2021

Key Takeaways

Total equity market value up by 7% since April 2021

The Media, Marketing, Information & Technology public equity markets continue to prosper, with the total equity market value up by 7% since April 2021.

2021 revenue growth of 17% across all sectors

Led by +28% growth across the eCommerce and digital media sectors, 2021 forecasted revenue growth remains strong across all sectors at 17% vs 2020. Notably, the Marketing Technology sector is also forecasting strong year on year revenue growth of +20%.

2021 EBITDA growth of 17% across all sectors

Favorable outlook for 2021 EBITDA, with nearly all sectors expecting double digit growth vs. 2020. Very positive outlook for Digital Media vs. 2020 with several sub-sectors including search and social media expecting +30% year on year EBITDA growth.

---

The total market value of the Media, Marketing, Information and Technology Sectors has increased by 7% since April 2021

AdTech and MarTech emerge as leaders of TMV growth in Q2 2022

• The main drag on TMV growth through Q2 2021 has been eCommerce. While the growth outlook for these sectors remain positive, the sector was able to withstand the decline in Price Comparison and Consumer Verticals and saw TMV growth of 4% in Q2
• Investor demand for businesses exposed digital transformation solutions and best-in-class CX is similarly reflected in TMV growth in both Tech & Consulting Services (up 7%) and Insights, Data, Analytics (up 12%)
• The Digital Media sector, led by companies such as Facebook, Snap and Google, also continues to perform, up 7% ($4,015bn of TMV) over the period. The sector benefits from powerful tailwinds, including strong and growing demand  for performance marketing

Forecast 2021 revenue growth of +10% for many sectors

• Strong 2021 revenue growth is projected by current market forecasts for nearly all sectors. The growth is driven by powerful tailwinds across many sub-sectors and a “bounce-back” in revenues in those sectors most impacted in 2020
• Total revenue growth is forecast at c.17% from 2020 to 2021, signifying an aggregate increase in revenues across all sectors of close to $455bn, with double-digit percentage growth expected across many sub-sectors

Driving double-digit EBITDA growth for 2021

• eCommerce is expected to have the strongest revenue growth, increasing by 28% to $997B, showing a limited correlation with the change in TMV
• With Publishers & Lead Generation being the key sub-sector of growth and benefitting from demand from the eCommerce vertical, the Digital Media sector is forecast as a high performer with growth of 28%

Key Takeaways

Marketplace winners will optimize core market research while positioning for success in digital and data

Companies that can provide business leaders with agile, data-backed market analysis across media platforms are expected to be the most successful.

---

M&A playing an active role

Large scale consolidation is reshaping the landscape as digital agencies, consultancies and SaaS vendors encroach on market research budgets.

Recent sector transactions

---

The existing sector landscape is evolving as market players focus on new opportunities

Large scale consolidation reshaping the landscape

• Firms looking to return to growth through scale as well as bridging the current gap between research, insights, and marketing.
• Service set expansion pursued as a way to increase mind and wallet share.

Large cap Private Equity active in the sector

• Private Equity are being attracted by the sizable, fragmented, and disrupted market.
• They understand the value of research and are recapitalizing to help re-define the market for a digital era.

Key Highlights

Cash and investments held by US corporations rose 30% to $2.5T in the first half of 2020

34% of divestitures had a Private Equity buyer in 2020

9.7% annual shareholder return for companies with focused divestitures and M&A programs

Companies with active M&A programs continue to outperform inactive companies

---

Corporate Divestitures Remain a Robust Part of the M&A Market; Trending Back up Post the Pandemic

Organizations tend to review their portfolios and go through corporate divestitures more aggressively post economic crises, as evidenced by strong divestiture activity post the financial crisis during 2008-2009. Given a heightened sense of risk and a desire to focus on growing core parts of their organizations, corporations are already evaluating noncore assets in order to free up cash to pay down debt, leading to uptick in the corporate divestiture activity in Q4 2020 and Q1 2021. 

Companies With Active M&A Programs Outperform Inactives

Based on total shareholder returns generated over comparable periods, companies with focused divestitures and M&A programs tend to outperform organizations that have stayed relatively inactive.

Growing role of Private Equity Players as Buyers

Private Equity firms will continue to play a substantial role in divestitures as they accounted for a record 34% of buyers in 2020. The number of private equity firms focused on carve outs and “complex” deals continues to rise.

Perils Of Holding On To Non-Core Assets For Too Long

In Summary

With Private Equity continuing to be a driving force we anticipate the market for corporate divestment activity to remain buoyant. Equally as we are still in the process of emerging from the pandemic companies will continue to need to assess how they service debt requirements. M&A should be an important part of the discussion around board tables.