Recession Resistant Investing in Media & Entertainment

What if M&E encounters recession?

No industry is recession-proof, but some offer Professional Investors clear opportunity to build immunity for the difficult cycles to come.

Professional investors across both public and private markets are measured by how well they build investment portfolios that achieve long-term growth as measured by aggregate capital valuation over time and through difficult economic cycles.  Portfolio Management Theory dictates diversification, disciplined capital allocation and an objective eye on economics.

That latter maxim places emphasis on the macro-economic terrain upon which all investors do battle.  The larger the investor, the more emphasis on macro-economics.  This is a matter of scale, of course, where the cost-benefit analysis on each transaction dictates the required size of deals in pursuit.  This also influences the risk tolerance of asset managers globally.  As capital allocation across asset classes increases in the quantitative, less attention is available for the qualitative. 

As a general rule, the larger the investor, the more “conservative” their allocations become, with trends towards convergence with other large allocators who share their lack of qualitative capacity.  As pressure to manage larger capital allocations mount, asset managers tend to move from active to passive management. 

Larry Fink
Larry Fink, CEO of BlackRock, an asset manager with US$8.6 trillion in assets under management. Image credit: Ben Baker.

From a macro-economic perspective, this places a lot of risk on passive investors that rely on bulk allocations to index strategies targeting public equities, bond markets, leveraged real estate and any other assets sensitive to increasing interest rates.

Few asset managers are more conservative than banks, sovereign wealth funds and public pension boards.  Preservation of large capital reserves drive investment strategy toward leverage.  By borrowing against existing asset value, additional capital is generated in a process known as securitisation. That capital can be used for proprietary investment or to pay cash out to depositors, citizens or pensioners. 

During the recent decades of fiscal policy by national governments known as “quantitative easing”, which effectively delivered free money to anyone with large capital reserves, this strategy makes perfect sense.  Until it doesn’t.

Those days are over.

Consider the abrupt fate of Silicon Valley Bank, which directly influenced the economics of the entire US tech sector, and beyond.  The bank, now infamous as “SVB”, accepted large deposits sourced from venture capital-supported tech companies across the US (and to a lesser degree, the UK and Europe).  As a regulated institution, those deposits were managed through prudential, conservative rules of asset management with allocations heavily weighted toward holding interest rate-sensitive assets.  The value of those assets were then leveraged, providing cashflow for depositor needs.

Interest rates rose.  SVB properly sought additional shareholder capital to cover potential balance sheet issues.  SBV’s banking customers, both venture capital managers and financially adept tech companies, panicked.  The result was a run on the bank.

Now consider the abrupt fate of Credit Suisse, the resulting burden on UBS and the influence these two systemic global banks have on the economy of Switzerland, if not the world.

The balance sheet assets of these banks each comfortably fluctuated around US$1 trillion until low to no interest rates became unsustainable and rate rises became inevitable. 

Recession May Be the Best Case Scenario              

The largest public pension fund in the United States is the California Public Employees’ Retirement System (or “CalPERS”) with an estimated US$500 billion in assets under management.  Consider the economic effect of its exposure to interest-rate sensitive assets.

Now consider the fact that these model conservative asset managers are a fraction of the size of the most influential actors on the global economy, the top five of which manage over US$23.2 trillion in aggregate portfolio value.  The top 100 asset managers ranked by assets under management (AUM) hold an estimated US$56.7 trillion.


The World’s 5 Largest Asset Managers by AUM

RankProfileAUM
No. 1BlackRockUS$8.6 trillion
No. 2VanguardUS$8.1 trillion
No. 3FidelityUS$3.9 trillion
No. 4The Capital GroupUS$2.2 trillion
No. 5AmundiUS$2.0 trillion
Source: The Sovereign Wealth Fund Institute

The fiscal policies of central bankers offer some comfort to news media economists that global economic recession can be avoided.  But there are few economists or financial analysts who viably predict that interests rates will do anything but rise.

With those rising interest rates come an increasing risk that the highly “conservative” asset management practices of the world’s largest, most influential asset managers will suffer the same fates as SVB and Credit Suisse.

Some of these “conservative” investors are hedging their bets by actively managing investment capital into sectors of the global economy that benefit most from needs and wants driven by human population growth and which, theoretically, will suffer least from economic downturns. 

Bread and Circus

When growing populations and economic downturns combined to threaten the prosperity of Rome, the Roman elite invested in the two most important factors effecting social and political stability:  food and entertainment. 

The infrastructure for both offered considerable economic value and put people to work.  But keeping a restless population’s leisure time occupied was critical to maintaining the conditions necessary for problem solving other aspects of economic life.  So long as populations increased, so too did the need for ever more entertainment.

Sound familiar?                                                          

Photo of Stephen Schwarzman
Stephen Schwarzman, CEO of BlackStone, an asset manager with US$780 billion in assets under management. Image credit: David “Dee” Delgado/Bloomberg.

Today, investment opportunities within resource management, agriculture and food security are growing.  Professional Investors are already congregating around funds and asset managers who specialise in the deal flow from these sectors.  But few sectors are receiving as much capital from the largest asset managers as Media & Entertainment.

According to filings made to the US Securities and Exchange Commission (“SEC”) for the end of 2022, nearly all of the publicly listed media companies count the top five largest asset managers as recent shareholders with stakes of 5% or more. 

Vanguard increased its stake in Nexstar (which acquired the CW in the autumn) from 8.93% to 9.17% and BlackRock moved into Nexstar for the first time, taking 8.9% of the company according to Nexstar’s 2022 13G filing with the SEC.

Targeting the core commercial asset within the sector, intellectual property rights, or “IP”, the much smaller asset manager, BlackStone (~US$800 billion in AUM) has already deployed hundreds of billions into companies such as Candle Media, which in turn is investing heavily into production companies with deep pools of IP underpinning film and television libraries. 


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Why is Private Equity Betting Big on Film Libraries and Music Catalogues?

Private Equity giants such as BlackStone and Apollo have inked headline grabbing deals and are pumping billions into celebrity performers.


Warrant Buffett’s Berkshire Hathaway increased its stake in Apple to 5.8% and acquired a 6.7% stake in Activision Blizzard in 2022.

If these figures do not impress, consider that Microsoft is in the process of convincing regulators around the world to approve its US$68.7 billion outright acquisition of Activision Blizzard.


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Saudi Arabia's Crown Prince Mohammed bin Salman.

Saudi’s New Investment Strategy in Media & Entertainment

Saudi Arabia’s investment activities point to a determined strategy to make use of the Media & Entertainment industry.


The key takeaway is this:

In an era of economic uncertainty (to say the least), the world’s largest, most conservative asset managers are actively buying into the Media & Entertainment industry as quickly as they can.

Either the world’s largest asset managers view the Media & Entertainment industry as offering a hedge against recession and the impact this would have on their wider portfolios, or they see a distinctly compelling long-term growth opportunity in an industry often viewed as too risky for conservative investors. Perhaps, both.

As active investors, Private Family Offices, Private Equity fund managers and advisers to High Net Worth Individuals, the opportunity to find and acquire stakes in the Media & Entertainment industry could not be better.

From emerging producers and management companies with deep pools of IP to production services companies deploying modern tech solutions to growing delivery channels such as FAST operators and short-form pop-culture platforms, the number of Media & Entertainment entrepreneurs has never been greater.

And if, just if, one or two of these portfolio holdings are not acquired by the larger asset managers out there, providing capital gains, Professional Investors may have enough recession resistance to weather the storms to come.

3 Comments

  1. Recession is the biggest issue in our office. SVB was terrifying, and would have been painful without taxpayers covering. Credit Suisse is even more worrying. tax payers cannot cover the top 2 on this list of asset managers, much less the top 5, or the 100. This article puts that risk in context. Don’t know about bread and circus as an investment strategy, but if the big boys are buying up media companies, then I want to be in media companies.

  2. I imagine Black Stone receives very well crafted proposals from well-advised media companies. For those of us with slightly less than a trillion dollars the pitches are bordering on amateur hour. If this website can do anything about making the pitches more professional, then so much more money would flow into media. There are far more investors like me, than investors like Black Stone.

  3. interesting article and makes great point about the recession-proof value of content / content companies. SVB went bust because of they neglected to hedge their interest rate bond investments, though – a pretty basic management failure. Only after this became public knowledge was there a run on deposits.

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