Inside the Media C-Suite, Issue No. 45

Inside the Media C-Suite Issue No. 45 Feature Image

It’s Monday, the 25th of March, 2024.

Welcome back to the Media C-Suite‘s deeper dive into what drives executive action.

In our last issue of Inside the Media C-Suite we discussed that ever-elusive, and highly-coveted, unfair advantage.

For entrepreneurs and professional investors, it is the one thing that sets a company apart from the crowd. Most companies never really have one. Many of those that do either don’t recognise it themselves or loose it to poor planning.

That is something else we touched on: Planning. What professionals call strategy.

Companies that apply strategy often succeed without an unfair advantage, and sometimes without any inherent advantage at all. Achieving a strategic objective, such as profits, is often a simple matter of planning the work and working the plan. Hard work, to be sure. But when strategy is applied, nine times out of ten, hard work pays off.

Why We Try

Long-term value creation by corporate enterprise is the number one source of economic momentum globally and the number one source of wealth in the world. It is what creates value in land, natural resources and the intellectual output of highly creative people.

That result is why entrepreneurs try. It is the objective that motivates hard work and why professional investors exist.

Yet without corporate, capital and commercial strategy, a lot of hard work by a lot of highly motivated, knowledgeable people can result in insolvency. Hard work is quickly wasted by poor planning. Statistically, this is the outcome of the vast majority of small businesses, from startups to legacy family companies.

While the workers are paid to work, the senior-most executive in any company is there to plan. Whether this be the CEO of Disney or the principal founder in the next, great pre-vis startup venture. That executive’s primary role is devising strategy to achieve an objective and lead an effective team that can implement it.

Any company with highly motivated, knowledgeable people that applies a coherent strategy implemented by a cohesive team and led by someone with vision has already created an advantage out of thin air. It almost doesn’t matter what that company does. This is the signature of high-value opportunity. 

That signature is what professional investors, and the Media C-Suite, are always in search of.

Combine that signature with a unique proposition, the unfair advantage, and a high-value opportunity becomes a high-performance value investment.

In this issue, we dive into why such high-value opportunities are rare (and why they should not be).

Let’s Get Started

Several of us at the Media C-Suite have been working as professional investors for decades. From sitting on the boards of sovereign, State-owned investment companies to building private equity funds and private family offices, the experience has been enlightening.

One key takeaway from decades of experience is that it costs money to make money as a professional investor. As a rule of thumb, the average cost of due diligence, negotiation and closing of a professional investment deal is US$250,000. These are the out-of-pocket expenses paid to outside counsel, consultants and advisers to assist in securing the professional investors’ position. These typically don’t include the salaries and internal costs of the investor’s effort to manage the process.

According to a survey of 100 professional investors in the US and the UK by PrivateEquityWire in 2020, at the height of M&A transaction volume globally, deal costs were never below US$50,000 and never more than US$1 million.

Costs have not gone down in the last the five years.

Pressure

The deal costs spent on due diligence and negotiations by professional investors are all loss if the deal doesn’t go through. Most deals don’t.

Those losses add up quickly when in the business of investing private equity capital.

Professional investors are under pressure to put capital to work. The risk is that capital is lost on investments into companies that don’t perform as expected.

Prevailing wisdom is that such risk can be mitigated with two simple tactics. One is to diversify the portfolio of companies one invests into so that no single company can materially impact the capital performance of all of them.

This tactic increases the number of deals in pursuit and their corresponding deal costs.

The other tactic is to be highly selective in which company to invest capital.

Most professional investors combine these tactics.

But the real pressure is on the individual people employed by professional investment firms to make the decision on which company to spend money on even before the investment is made. Once a target company is identified as “interesting”, then these employees often put their jobs on the line to pursue that target as an opportunity for their employers.

Haystacks

The key to success as a professional investor is to find needles in haystacks. 

Each industry is its own version of a haystack, including the Media & Entertainment industry.

One can go through the haystack straw by straw. And some do. In fact, most of the “straws” are actively chasing professional investors to the point that walls begin to be built. It is difficult not to be overwhelmed by the volume of hay.

The alternative is to use a magnet that picks up on that unique signature of high value opportunity; the needle.

To be fair, few professional investors will refuse to have an initial conversation about a potential deal. The more senior they are, the more likely they are to listen to ideas from interesting people.

Remember, however, that ideas are not investment ready propositions.

Investing in an idea makes that investor a founder. Most professional investors don’t have the time to be founders. As interesting as any business might be, most professional investors want to be professional investors and to leave operations to the right management team.  

See:

Our Take

The Laws of Attraction

In physics, magnetism is a fundamental force of nature. In layman’s terms, opposites attract.

This is not the way capital investment works. Professional investors with a distinct disinterest in Media & Entertainment projects are not compelled to pursue them. No amount of flashy artwork and exciting language in a pitch deck will open a professional investor’s mind.

What will? Interest.

Professional investors make use of a wholly different force of human nature, the alignment of interests.

The one and only thing around which both companies and investors are aligned is capital appreciation.

Investors contribute capital to companies. The company’s management team then implements a strategy to generate revenues using the capital invested. Capital takes the form of debt or equity. Debt is repaid with interest out of revenues (or the sale of assets). What’s left over is profit or loss. If capital is invested into equity in the company, then both the management team and the investor benefit from the long-term growth in the value of that equity.

Professional investors are attracted to management teams with an interesting strategy to generate revenues. The more interesting the team, the more interested the investor. The more interesting the strategy, the more interested the investor.

Add an unfair advantage to the mix, and even a cynical, hard-core technology-focused private equity firm will dive head first into Media & Entertainment. Just look at Silver Lake Technology Partners and their multi-billion dollar capital investments into Endeavor Group.

For a deeper understanding of this alignment of interests (and how it can wrong), see the Media C-Suite‘s closer look at the capital issues facing both Silver Lake and Endeavor:

Ari Emanuel did not approach Silver Lake’s Egon Durban with a pitch deck. He approached Egon Durban with a plan and a proposition.

The executive power word for this issue is:  Alignment.

Just Catching Up?

We’ll help you get up to speed.

Know Your Audience

There are different types of professional investor out there. From sovereign wealth funds to private family offices, understanding what each has an interest in and how to connect provides the opportunity to align those interests with a management team’s strategy.

Its important for those seeking capital to do as much reading and research as professional investors do.

See:

What It Means

Not all money is created equal.

Just as an unfair advantage multiplies the strength of any strategy, smart money is worth more than the capital it provides.

Media executives and entrepreneurs seeking to align their interests with those of professional investors have a lot of homework to do. By doing the homework, professional investors who have an alignment of interests with the proposition being made are more likely to spend the money it takes to secure it.

See:

Looking Forward?      

Preparation is the Key.

Here are a few articles to get you moving in the right direction.

1 Comment

  1. It is important not to be blinded by the perceived value of your investment project. Any deal needs to be mutually beneficial to both parties. Put yourself in the place of the other party and try to identify the potential weaknesses of your proposal for an outside investor.
    Therefore I agree with the content of this article that when you are looking for investment make sure you approach those investors whose interests align with yours.

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