The Capital Structure of #MRX – & Why You Should Care About It
June 19, 2017
I have been on the conference circuit recently talking about something that, up until now, has received precious little attention and, to be honest, sounds incredibly boring. My subject? The new capital structure of the market research and analytics industry. The results have been surprisingly gratifying with people coming up to me and saying things like “I’ve been waiting for that speech all my career” and “why haven’t we looked at this before?”.
The reason that this is important is that a firm’s capital structure inevitably informs and, in many cases, dictates its strategy – and that means your job. Yes, yours. The reason we have not talked about it much before now is boiling frog syndrome – capital change has been going on all around us but not yet so dramatically that we have thought about its implications for us personally.
That is, unless you have been in the middle of an acquisition in which the capital structure – or ownership – of your firm has changed overnight. Take, as an example, a private firm, owned by its management and perhaps a few lucky employees, that sells to a Private Equity firm. You sure as know it then! New management comes in, usually within a few months, procedures and processes change, priorities change and, very likely, people start to lose their jobs and new people are brought in to manage the priorities and processes now in place.
It’s not so long ago that the capital structure of the market research industry was really very simple. MR companies were either owned by bigger corporations (my alma mater, Research International, was founded and owned by Unilever, for example) or were spin-offs from the larger companies and were in private ownership. Even when corporate owners started to divest themselves of research companies, they usually sold them to ad agencies or media companies. Hence the concentration of MR in conglomerates such as WPP and Omnicom.
But then things began to change.
Starting about ten years ago, advances in technology made the application of data analytics to huge data sets more available to marketers. Transactional databases, loyalty card data, CRM interactions – all were available for analysis on a huge scale, yielding predictive power that marketers had hitherto only dreamed of. Under our noses, firms such as dunnhumby grew from nothing into huge players. Other new players started to emerge – for example, Radian6 and Crimson Hexagon in social media.
And they were noticed by a group of people who smelled big profits – venture capitalists. Starting seven years ago, capital started to pour into new marketing analytics (and some MR) firms at a rate we had never seen before.
Over $14 billion of new capital streamed into the industry and, although it tailed off after 2014, the landscape it engendered changed forever. Over 800 new companies received funding which, if the usual VC success rate holds, means that the industry will see some 80 viable new competitors.
Where Venture Capital sees new avenues of growth and profitability, it does not take long for Private Equity to see opportunities for consolidation and profit in both the new and the more established parts of an industry. So it has been for market research, with Private Equity now owning some of the largest and most mature parts of our ecosystem – GfK, SSI, Research Now, LRW and FocusVision being notable examples.
For both VCs and PE, there are defined outcomes that are desired from ownership of a particular corporate entity. Venture Capital – once a company has achieved maturity, mass and (perhaps) profitability – looks to reap its return on investment either through an IPO or from flipping the entity to Private Equity. PE looks to grow its investments through consolidation (acquisitions) and then take their prizes to market through an IPO (or, again, by flipping them to other PE firms). Either way, the objective is exit at the highest return. And there have been notable successes along the way, Nielsen being the prime poster child in this regard, having been taken private by PE and then returned to the public market in a series of public offerings.
What all of this means is that the ownership structure of the industry has changed forever.
There’s still a lot of corporate ownership (WPP) as well as a sizeable degree of public ownership (IPSOS, Nielsen). But these are now joined by very sizeable Venture Capital and Private Equity stakes in the Insights Industry that, to a large extent, are dictating its future. There are also still privately-owned firms as well, but note that these are the only ones in the framework for whom ease of access to capital does not exist.
If we overlay types of company across this framework, we get a very clear picture of the future dynamics of the market.
Why does this matter to you? Because the strategy that your firm follows from now on will be determined in no small part by its ownership. Corporately and publicly-owned companies will continue to consolidate and many will seek to innovate through acquisition. But if they start to falter, be aware that Private Equity will be waiting in the wings. PE-owned firms will likely be highly acquisitive as they seek to grow through consolidation such that they can then enter the public market. At the same time, costs will be strictly controlled so that margins appear healthy and multiples can be maximized. VC-owned firms will aggressively seek to grow the top line so that they can reach the supposedly safe high grounds of size before then being sold on to PE or through IPO.
And those in the middle? Those who are privately held? Without the access to capital of the others, they will need to resort to agility and partnerships to continue to innovate and grow, possibly merging like with like firms until they reach a size where someone shows an interest.
So, before you take that wonderful job offer, ask yourself one extra question: who owns this company and what are their priorities? Before you award that project to an agency, ask yourself “what am I to them?” – a road to growth or someone in whom they have a true partnership interest?
In ownership lies a lot of answers to questions that you may wish you had asked.