Chief Financial Officer

Argyle Conversation: Jeffrey Stevenson, Managing Partner of media focused PE fund Veronis Suhler Stevenson shared his outlooks on the industry, and the developing role of Asian investors with David Snow, founder of Privcap.

Trends in private equity investment in the media and telecom industries was the topic of a July 28, 2011 Argyle Conversation between Jeffrey Stevenson, managing partner of Veronis Suhler Stevenson, and David Snow, founder and CEO of Privcap and editor-at-large of PEI Media.

DAVID SNOW: As business sectors that are undergoing great upheaval and change recently, have you found that there’s more or less enthusiasm about investing in telecom and media?

JEFFREY STEVENSON:  If you’re defining media as traditional media, such as print media, the answer would be “no.” There’s been no renewed or increased interest. Probably the opposite is true because these are cyclical businesses that are affected by an economic downturn. They’re undergoing secular, long-term changes and cyclical changes.

On the other hand, if you define media as information, education, marketing and data-enabled business service sectors, as we do, there’s definitely increasing interest. These are growing markets, fragmented markets, with cash flow and a lot of good success stories.  There’s also an upward trend in the software-as-a-service sector. That’s gaining a lot of traction, commanding decent multiples, and generating good returns.

Is change your friend, or does change make it harder for you and your investment partners to find good opportunities?

Compared to, say, a couple of decades ago, when the industries that we covered were fewer and more easily identified, the number of current opportunities out there have become much more fragmented and diffuse. There are many, many business models and types of businesses. Right now, it’s more difficult to comprehensively understand some of those businesses. From an investment point-of-view, that can be a barrier to entry.

What has been your investor base’s outlook on private equity, and how to allocate it, since the start of the economic downturn in 2008?

It’s mixed. There are some investors who are over-allocated and who are looking to get out of the markets or to trim managers. On the other hand, some who are new to the asset class are ramping up. Most of those investors look at private equity as a good alternative to investing in the public markets; they view it as a means of generating returns over the long-term. There’s no question that liquidity is an issue; but if you can manage that, then the returns are higher.

Have you found that investors are seeking much more information, almost on a real-time basis, about their risk exposure?

There’s no question that investors are getting into much more detail. Because we’ve always provided a substantial amount of detail in our quarterly operating reports, that rising demand for information hasn’t really changed the way we do business.

But, in the course of doing due diligence, there is a much deeper effort to understand what’s going on at the portfolio level, not only current performance but projected performance. Most of the funds that were raised in the last cycle were largely unrealized, which makes it harder for limited partnerships to evaluate performance. LPs have to drill down into the operating performance of the business—the earnings before interest, taxes, depreciation and amortization—and fully know what the balance sheet looks like before they can assess the valuations that the general partnerships are using.

Since the downturn, how differently—or in more nuanced ways—have GPs viewed the role that private equity plays in broader institutional portfolios?

I don’t think it’s materially different; it’s still roughly 10% of the total in terms of the allocation. It’s still looked at as illiquid. The one difference is that there are more types of private equity, more flavors. There’s more of a differentiation between lower-middle market, middle market and large cap; between distressed and secondary direct loan funds. Mezzanine has more of a multiplicity of private equity types, and we’re finding that investors distinguish more among them than they used to.

How satisfied or dissatisfied are investors with executive succession plans—your firm is one of a handful that’s addressed its succession issues—of the GPs where they’re invested?

Investors are asking a lot more questions about firm structure, ownership, succession and economics. They want to know that there are appropriate incentives for the people who are doing the work over the life of the fund, that five-year investment period and ten-year term. The founders of many private equity firms started two and three decades ago and are moving toward retirement. That’s becoming more and more of an issue.

Over the next twelve months, will private equity participation be concentrated on the portfolio level, or will there be some hesitation to make big commitments until employment rates hit a certain level?

Most of the money that goes into private equity is coming from pension plans, and most pension plans allocate a percentage off of their total assets. The markets drive total assets; the amount that’s invested in private equity is a derivative of that.

Investors are looking for their distributions to pick up, and that’s already happening. Investors are looking for strategies that will succeed over the next three to five years, despite economic uncertainty.

What do you project will happen in the area of liquidity over the next twelve to eighteen months, and will those trends trigger more exit opportunities?

Now that the federal debt-ceiling has been raised, we’re seeing a lot more liquidity and more exits. The lending market is improving. There’s a fair amount of discipline regarding equity.

From a debt perspective, we’re seeing a big difference between the large end of the market and the small end of the market, with the multiples not really recovered at the smaller end. However, at the larger end of the market, where companies are big enough to access the debt capital markets, it’s almost like 2007 again. That kind of liquidity is going to support more exits; people are a lot more confident that the economy’s in better shape, certainly relative to a couple of years ago. Nevertheless, because there is some lingering uncertainty, people are really evaluating the risks.

Can you give any additional specifics about how investors are interacting with the media and telecom sectors, in particular?

The emergence of investors from Asia is a major part of this. As an asset class, those investors are newer, whereas many American and European investor programs in private equity are more mature. I mean, there are still newcomers in that latter group but a lot of the major players have been in it for a while and are bumping up against their allocation percentages.

That being the case, the markets and the economy tend to drive the availability of funds. As a result, most investors are making smaller commitments and trimming the number of managers they’re investing in. Most investors are focused primarily on re-ups.

We’d like to be spending more time in Asia meeting with prospective investors. It’s something we need to be doing in the future.

Jeffrey Stevenson is the managing partner of Veronis Suhler Stevenson, a private equity fund with $2.5 billion of capital under management. VSS manages private equity and mezzanine funds dedicated to companies engaged in the media, communications and information industries. He joined the firm in 1982 shortly after its formation and has been the head of its private equity business since its first investment in 1989. Jeffrey serves as the president of each of the equity funds, approves all capital commitments, and directs the investment activities of the equity funds. Previously, Jeffrey was executive vice president in charge of corporate finance at VSS, a department he founded.

Jeffrey currently serves as a director of Xtreme Information, Access Intelligence, Infobase Publishing, User Friendly Phone Books, Market Strategies, ITN Networks, TMP Worldwide, Medizine, Cambium Learning and Southern Theatres. Previously, he served as a director of The Official Information Company, Centaur Communications, Birch Telecom, ITE Group, Pepcom, Yellow Book USA, Rifkin Acquisition Partners, Triax Midwest Associates, Broadcasting Partners Holdings, Spectrum Resources Towers, PJS Publications, Kansas Broadcasting Systems, B&B Merger Corporation, Cable Management Ireland, International Media Partners, Hughes Broadcasting Partners, Triax Southeast Associates, Canon Communications, Hanley Wood, De Telefoongids, Mediatel and Broadcasting Partners. Jeffrey holds a BA from Rutgers College.

David Snow has been covering the global private investment market as a journalist for 12 years. He is founder and CEO of Privcap, a media platform delivering high-quality content to investors in private partnerships. Privcap’s mission is to provide context around important private investment opportunities and practices. Until November 2010, David was editor in chief of PEI Media, the leading provider of news and information for the global alternative investment industry, with offices in London, New York, Singapore and Hong Kong. He remains editor at large of PEI. David played a key editorial role across PEI’s editorial products, events and business strategies, including the launch of news services for the private equity, real estate and infrastructure asset classes. Among PEI’s titles are Private Equity International, PERE and Infrastructure Investor. David began his financial-media career at what is now Thomson Reuters, where he was editor of Buyouts magazine. In 2000 he joined an affiliate of Guggenheim Partners to launch a news service for accredited investors. He has a master of international affairs from Columbia University and undergraduate degrees in political science and Chinese studies from the University of California at San Diego. He grew up in Honolulu, Hawaii. www.privcap.com www.peimedia.com

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