Emerald Media, which was established as a pan-Asian media platform to focus on early to mid-level assets by private equity firm KKR, plans to deploy the entire $300 million it got by the end of next year, managing director Rajesh Kamat said in an interaction.
According to the firm, whose investments are primarily focused on India and Indonesia, the rapid convergence of media and technology has led to a lot of interest from PE firms. Kamat also acknowledged that increasingly, the Chinese duo of Alibaba and Tencent have become the driving forces behind importing large sums of capital and vast business experience into Southeast Asia’s most promising startups.
Are we seeing a trend where large PE funds often may not have the time and expertise to focus on a sector that interests them, and where deal sizes may not really move the needle for them, and therefore, they create VC arms, or small vehicles with dedicated teams to look at these verticals? Just like KKR has committed $300 million to back Emerald Media, we have several other examples in India – Everstone Capital supports Deepak Shahdadpuri’s DSG Consumer Partners. Quadria Capital has Healthquad for smaller deals. Verlinvest has followed this strategy in India and China. Northstar here in Singapore has NSI Ventures.
Yes, there are multiple examples of PE funds getting into sector specific platforms. A few examples that come to mind are Warburg Pincus, investing $300 million in Princeton Growth Ventures (PGV), to create a platform to acquire assets in the TMT infrastructure or KKR floating Mandala Energy, a Southeast Asia focused oil and gas exploration and production company. Similarly, Emerald Media, too, was established as a Pan Asian media platform to focus on early to mid-level assets with an investment size between $20-$75 million for KKR which otherwise primarily looks at large opportunities in excess of $100 million. These platforms are often led by industry veterans and are mostly created for sectors that need specific expertise. Early stage investments need a lot of management bandwidth and involvement from these sector experts, who have seen this journey before and can help them as they enter the growth stage to become organizations of scale. Their strategy is to provide the platform with the capital to invest in growth-sized deals to gain wide exposure to interesting opportunities.
Emerald Media’s portfolio is India heavy – is that an indicator of the lack of deal flows in ASEAN in the ticket sizes that you play in?
We had prioritized India and Indonesia, given the high growth rate and tailwinds in these markets. The typical deal flow in media, entertainment and allied tech, that we have seen in these markets, is between 30-50 million which is our sweet-spot. Southeast Asia is home to more than 600 million consumers, with six primary markets — Singapore, Indonesia, Thailand, Vietnam, Malaysia and the Philippines — that stand out due to their growing economies and a rising middle-class consumer. We are now in the process of broad-basing our footprint into these SEA markets. While these markets are seeing an aggressive deal flow in ecommerce and related pockets they also have a steady deal flow in media and related technology with a sweet spot between 15-25 million.
Big picture when it comes to new-age independent media, how bullish are you on India? Also, are sectors such as media-tech and ad-tech spaces that Indian startups can impress? Tech is and will continue to be a major factor that can propel and history media firms. Therefore, how big a factor is tech when you make your investments?
The Indian M&E industry is growing at 15% CAGR and is expected to double in size over the next 5 years. Technology today is disrupting the way media is consumed and it is important to invest in assets that are at the forefront of this disruption/convergence. Today rapid convergence of media, entertainment and technology is interlinking content creation, distribution and consumption experiences. In this environment, cloud-based services will drive content faster from creation to consumption and will re-define movement, management and distribution of content.
The reason is simple; it is far more flexible and effective. OTT too will soon become mainstream, driven by personalization of content, delivery and real-time access on multiple devices and platforms. Instant consumer analytics will become indispensable. Technology will continue to disrupt the traditional ways of buying and selling advertising as programmatic, geo-targeting, day-parting becomes the new normal. TV and digital measurement will get unified in due course as marketers look for cross-platform strategies. Sectors such as Immersive content (VR/AR), though still in its early days will play a big role in the future. Though no research studies can really estimate the potential of this for now, this will be larger than any other format in the years to come.
As our portfolio demonstrates we are very bullish on media and related tech in India. Our current assets in India, include Endemol Shine India the country’s largest independent IP led content company, Graphic India – a premium character entertainment company with 100+ existing IP properties, OML – a leading live entertainment company focusing on the youth market through festivals, concert tours and content creation, Fluence – India’s first and largest digital celebrity network producing exclusive celebrity-led content including video, voice and games, YuppTV – one of the world’s leading over-the-top (OTT) content player for South Asian content, live TV, video on demand, and on-demand movie solutions and Amagi – a next-generation media technology company providing cloud-based managed broadcast services and targeted advertising platforms to customers worldwide.
The $300 million commitment from KKR that you have, by when do you see Emerald Media utilising this corpus, and post that, what is the way ahead? Will you be raising a new vehicle, or will it be additional commitments from KKR to the existing $300 million pool that you have?
It has been 18 months since Emerald Media started deploying the capital. YuppTV and Amagi have been our first two transactions from this corpus. We have a healthy pipeline which should help deploy the entire amount by the end of next year. Our focus right now is to help grow the investee companies and create a robust portfolio of assets.
Apart from India, the other prominent country in your portfolio is Indonesia. Big picture — will Indonesia deliver for PE?
Indonesia is a very attractive market given its young and digitally connected population. The structural backdrop of Indonesia is very compelling, the GDP-per-capita is still increasing by 8.2% per annum (i.e., 2.5 times as fast as the U.S.), which represents a distinguishing feature in today’s times. Indeed, with half its population of 260 million under the age of 30, private consumption as a percentage of GDP already totals 58%, a figure that we think could increase another 5% – 7% during the next decade. Government funding for infrastructure projects too, have jumped by over 20% in the latest 2017 budget, and it now stands at 2.5 times of what was allocated just three years ago. Without question, these trends are constructive for investments in sectors like media, tech, healthcare, education, e-commerce, food safety, transportation, payments and housing/financial services.
Similar to what we have seen in other big emerging markets, we believe there is a clear opportunity for investors to use Private Equity to arbitrage the Public Equity markets. For example, in Indonesia, the Public Equity benchmark actually has a zero percent weightage to Technology, one of the areas we find most compelling in the region. So, if we are right about the growth trajectory of areas like e-commerce, mobile payments, and logistics, then large institutional investors will want to gain private exposure to areas of the economy that actually capture the bullish GDP story.
Private equity has been on the comeback in India over the past three years. We are seeing a lot more commitments to India from several global funds, and local funds have also launched new vehicles. Is this a reflection of the confidence in the Modi-led government, or are several other factors at play here?
We have always been believers in India and yes, the sentiment of the investment fraternity is definitely positive towards India. Clearly after decades of uncertainty, there is a government in power with a full mandate. A stable government with a growing GDP, ease in regulatory environment and some visible long-term measures being put in place, boosts investor confidence. And this confidence is reflected in the amount of capital being invested in India.
For PE, exits in India have always been a problem. Has that scenario changed?
In the early part of this decade for PE professionals, the narrative was how much money can we deploy. In recent times that has moved to “How much can we return to LPs”. This shows the story of an industry which is maturing and focusing on sustainable returns. An analysis showed that in recent years as returns have improved, average exit periods have reduced from 5.9 to 4.4 years. IPOs seem to be back as the preferred exit route in recent times, given the uptick in capital markets. Until recently most PE firms were skeptical about a public market exit given the past track record. The PE/VC industry which had struggled with exits since 2008, has seen two years of good exit momentum in 2015 and 2016. However specific to the Media & Entertainment sector and the ticket sizes and the scale of companies that we invest in, trade exits to strategic are more common than IPOs.
The media scene globally has seen PEs come in only when the deal sizes are large – why has that been the case, and why have PE firms not done much mid-market deals in this sector? Again, big picture, how big is media an opportunity for PE?
PE firms hesitate to come into mid-market deals before the business model is proven and the business assumes scale. To add to it, media is a complicated sector that has multiple variables and creative nuances which are not defined in the standard unit economics that PE’s look for. However, for a platform like ours run by functional experts who have been on the other side and have seen businesses grow from scratch, it is a slightly different scenario. That is where the thesis or ethos of setting up a platform run by professionals, who have been on the operational side comes in. The rapid convergence of media and technology is leading to a lot of interest from PE’s recently in this sector.
Big picture, for PE, how big a concern is valuations – be it India or Southeast Asia? Has heavy competition and a limited supply of high-quality targets inflated prices throughout the region? When it comes to Southeast Asia, what are the challenges for PE?
While we have seen big-ticket investments happening in Southeast Asia in the E-commerce space when it comes to media entertainment and related tech, the deal sizes seem to be between $15-30 million. Typically, in the early stages the promoter finds equity to be far more expensive compared to debt. The last couple of years have seen aggressive valuations for digital media and tech assets which are now slowly correcting themselves in line with global valuations. However, like other emerging markets, exit options remain limited.
How easy or difficult will it be to build new-age media companies in ASEAN that are not linked or independent from the traditionally strong media houses that most countries in this region have?
The Internet has democratized the way businesses are built. There are better chances today than ever before to build out new age businesses without the shackles of a traditional media business. Most legacy businesses that were traditionally operating in straight jacketed verticals are today being constantly challenged. In fact, most traditional media houses are struggling to reorient themselves to tackle the new age media companies for e.g. OTT platforms like Amazon and Netflix are shaking up the cable and broadcast business and satellite operations are being replaced by cloud. The lines between vertical businesses are blurring. Anyone with a good content idea today can directly reach out to the consumer by setting up a channel on YouTube or by creating an app and create a business model. This is a global truth, not only true to ASEAN.
What is Emerald Media’s investment thesis?
Emerald Media looks at multiple parameters while investing in any new asset, like current size & scale of the opportunity, market potential, competitive edge, exit scenarios and most importantly the promoter/senior management team. Since we invest in the growth stage, our goal is to find rapidly growing companies, riding on key M&E trends looking not just for financial capital but also operational support and strategic guidance. Given our backgrounds in M&E investing and operations, we see ourselves as adding value to help the company grow and achieve its full potential.
When it comes to the tech scene in Southeast Asia, Chinese internet giants have stolen a march over their Western competitors. Be it recent deals like Lazada, Grab, Tokopedia, among others, Chinese giants have a first mover advantage that is unassailable?
Yes, we must admit that increasingly Chinese duo, Alibaba and Tencent have become the driving forces behind importing large sums of capital and vast business experience into Southeast Asia’s most promising startups. Where global giants like Amazon, Google, Facebook and Microsoft have focused on increasing operations across Asia, Chinese companies have gone aggressive to make large ticket-size investments. Both Alibaba and Tencent are being perceived as big brothers helping the local company to scale faster with freedom to operate as entrepreneurs.
Media exits are hard to come by. It often has to be larger traditional media firms looking to expand who are the buyers for other media outlets, including venture or PE funded media startups. How do you therefore look at media exits? At some stage, you have to exit all your portfolio companies? Among your portfolio companies, which are the ones that you are most bullish on?
Yes, the opportunities for mergers and acquisitions in media are higher than an IPO. Global strategics are often seen looking at acquisitions to expand their footprint in media. Our hypothesis therefore is to invest into a company at an early stage, 2-3 years ahead of when a global strategic would be interested in investing, and help it grow to a certain scale and size that makes it ripe for an acquisition. We have around a 5-year horizon for exits on our portfolio companies. All our companies are doing fairly well in the pockets that they are operating in, and it would be unfair to say that we are bullish on one versus the other. Our investments are in growth pockets like OTT, ad tech, content and live events and we believe that each one of them has a tremendous growth potential.