PUBLISHING AND THE INVESTMENT COMMUNITY

Introduction: what does the investment community want from publishing?

What types of players make up the investment community?

Private equity is the term used to cover the investment industry as a whole. Private equity houses are investment firms which generally make large scale investments in mature businesses. In addition, the term private equity covers two additional and significant sub-sections - venture capital firms and corporate investment arms.

Why are investors interested in publishing marketplaces?

The prime reason for investors? interest in publishing marketplaces is that publishing businesses generally exhibit strong cash flow, and this is the key way in which investors receive their returns. There is a potentially very high percentage of recurring revenues in publishing businesses, particularly in newspapers/periodicals and subscription operations. Other factors which investors look for in a potential investment include strong and defensible positions in market niches, and a good management team (although the latter can of course be replaced if the business meets other criteria).

Publishing companies? customers are becoming ever more demanding as new services are developed by publishers. As the level of intensity of development rises so the need for innovation goes up, and new technology or data services will need to be developed to serve these customer needs. There is therefore the possibility for investment capital to be used to create new business by harvesting content in ways which have not previously been possible. This creates a win-win situation for publishing companies (who are looking for investment in order to grow their business) and for investors, who are interested in investing in businesses with significant opportunity for growth.

What publishing market sectors have traditionally been of most interest?

Sometimes investors have focused on niche sectors within the publishing industry with the intention of using the market experience gained by investigating one potential investment to bring to bear on other businesses - Cinven and Candover, for example, bought both KAP and Springer in 2003, while Veronis Suhler Stevenson has made several investments in directory publishers. However, within investment as a whole this focus is often affected by the availability on investment opportunities - for example, many newspaper companies are now owned by private equity players and there are unlikely to be more significant opportunities for investment in this area.

The key however is really the quality of the investment rather than the sector.

What are the main types of investors?

Venture capital

Venture capital players fall into two camps: those which invest in mature businesses (and exit through management buy-outs or management buy-ins) and those which make relatively small seed corn investments in immature businesses. Seed investors who come in at the birth of a new business which is looking for funding to get off the ground tend to work to a longer timescale than private equity houses

Private equity

Private equity houses have a lot of capital to invest and therefore tend to make big plays with mature businesses. They ?leverage up? (as the asset does well they pay down their debt, in a similar way to which a homeowner can repay both the interest and the capital on a mortgage) and end up owning a large percentage of the business themselves. They often target unwanted divisions of corporations, family-owned businesses which the family now wants to sell on, and companies which are publicly quoted but which the investors feel is undervalued.

Investment funds

Investment funds come from many sources - the investor?s own equity, the syndication of debt to a number of banks, a pension fund or other investment groups. Rich private individuals will sometimes invest directly in a compa