Mumbai: Ad for equity is a barter deal in which media houses buy stakes in companies and then promote the firms through advertising and other publicity deals.
The concept, also known as private treaties, was pioneered in India a few years ago by Bennett, Coleman and Co. Ltd, publisher of The Times of India and The Economic Times.
Lessons learnt: Capital18 Media Advisors’ Sarbvir Singh.
Other media houses, including HT Media Ltd, publisher of Mint and the Hindustan Times, Network18 Group, which runs news channels CNBC-TV18 and CNBC Awaaz, DB Corp. Ltd, publisher of the Dainik Bhaskar and the Daily News and Analysis, and New Delhi Television Ltd, broadcaster of NDTV 24X7 and NDTV Profit channels, adopted the model.
Ethical questions linger over whether such ad-for-equity transactions influence news reportage and disturb the line separating editorial and advertising departments in media companies. But the business model itself is now under a cloud. With equity valuations declining sharply since February 2008, it’s difficult for media houses to exit the investments they made when valuations were at their peak.
Sarbvir Singh, managing director of Capital18 Media Advisors Pvt. Ltd, the specialist venture and private equity arm of Network18 Group, plays an advisory role in ad-for-equity transactions of the group, though he clarifies that he spends “95% of his time on cash transactions”, or the group’s pure play venture capital/private equity business.
In an interview, Singh talks about lessons learnt from the ad-for-equity concept and the Chinese wall between Network18’s editorial and marketing divisions.
So far, his venture capital business has been fully funded by Network18, but now he wants to raise a fund from external sources. Edited excerpts:
Can you tell us the scale of the group’s ad-for-equity investments?
We have not done as many deals as some of the other groups, but I can neither disclose the names of our investee companies nor the amount invested, as the group is yet to make them public. So far, we have (invested in) four listed and three unlisted companies.
With the valuations going down, have media houses started questioning the concept of ad for equity?
Obviously, our (investment in) listed companies have taken a bath. They’re down to as much as 10-33% of the original investment. We’ve had our share of blow-ups, but we’ve been careful. What we’ve learnt from ad for equity over the last two years is that you’ve to use your brain. You can’t do it in a way where you invest in anything and everything. I would say that we have made our mistakes, and we’re more cognizant of that.
Also, such investments should be small in terms of equity stakes. You don’t want to confuse the two issues (ad for equity and traditional venture investing, which the group does, too). In venture capital or private equity, I am willing to be a large portion of the company. I am ready to take that risk. In ad for equity, you should own a small stake, and let the entrepreneur sweat.
Apart from the benefit of advertising on your channels, what are the other benefits that a firm enjoys from an ad-for-equity deal?
Neither have we promised nor provided them (with) any benefits from an editorial perspective. The only thing we have done for them is air their ads, help them create a marketing message, and in some cases, even produce an ad, if needed. The way Network18 is structured, even if someone (investee company) says “put me on some show”, I have no way of doing that.
I can’t call Shereen (Shereen Bhan, executive editor of CNBC-TV18) and say “please put so-and-so on Young Turks” (a show she hosts).
Being a journalist, Raghav (founder-promoter Raghav Bahl) does have a point of view on these things. He’s very clear that there’s no mix there.
At Network18, we’ve always been conscious of the regulatory angle, and that has served us well. We have never done pre-IPO (initial public offering) placements. By not doing pre-IPO placements, we don’t have to worry about what Udayan (Udayan Mukherjee, managing editor of CNBC-TV18) is going to say tomorrow morning. I can’t influence him in any way.
Secondly, we do such deals with financial sector companies. We don’t want to create any conflict with our existing customer base (dominantly from the financial sector).
What about the traditional venture capital business where you’ve invested $25 million?
The basic concept, when we started this two years ago, was to be a specialist venture capital and private equity fund. We envisaged it as a broad-spectrum fund investing in media and entertainment, the idea being that we have the expertise in understanding the real drivers of the ecosystem. Every private equity or venture capital firm claims to add value to a company. But beyond a point, you can’t add value. There’s only so much that can be done, especially in early stage.
To earn extra return, you have to take extra risk. And the only way to balance that risk is to use expertise.
We really haven’t done any private equity as it is classically understood. This is partly because venture capital was where we were getting most bang for our buck. By then (mid-2007 onwards) valuations, etc., for established companies had already become rich.
As Capital18, we’ve invested in deals ranging from $2 million to $10 million.
We have seven investments—four are in traditional media and three in new media. We expanded the scope of our focus to education because we felt that education is a large sector and it’s actually bigger than media or entertainment.
Network18, the parent, also invests (ad for equity is done by Network18). How do you differentiate between Capital18 and Network18?
At Capital18, we don’t make any investments from Network18’s balance sheet. So, Network18 is a sponsor and it has contributed to our fund. In turn, we have used that money to make investments, which are held solely by us. Network18 is free to make any investment that it so chooses to make from its own balance sheet. Except in HomeShop18 (online shopping portal), in which we also have a small stake, we haven’t invested with them.
Considering that many of Capital18’s deals were done in late 2007 and early 2008, when valuations were very high, where do your investments currently stand? Have you had to write off any?
Revenues of our portfolio companies are up anywhere between 67% to 161% year-on-year. We don’t have much valuation risk in our portfolio. The risk that we carry, in some cases, is the business model risk. For example, one of our education businesses, Greycells18 Media Pvt. Ltd, is a curriculum-based subscription-driven model on DTH (direct-to-home). The take-up is not as fast as we would like it to be. One thing we’re discovering is that DTH is not as prevalent as what one thinks it should be, even in metros or bigger cities.
Secondly, there’s a resistance to subscription. We’re working that out.
We’re certainly not writing off anything, yet. I am the last person to say that we expect a 100% success rate, but I am glad to know that by luck or by design or by accident, we’re not faced with a situation where we have to write off.
Are you looking to raise external funds? Network18 is your sole limited partner now.
We’d like to. Our initial goal was to show that we can manage money or a portfolio that is of some appeal, hopefully show one or two exits, and then raise money. In this environment, I feel venture capital has lost its appeal to investors.
I would rather spend the money that I have on later stage ventures. This is because I can get later stage ventures at much more realistic valuations now. Earlier, any later stage venture was trading at half a billion dollar valuation.
Raising a fund depends on the track record. Since you have not had any exits, there may not be much of a track record to show?
It’s just a tough environment to be in. We’re not spending a whole bunch of efforts on raising funds from external sources. Our current focus is on managing our current investments. We do look at investments from time to time. We’re not completely closed to making new investments. But certainly the bar is higher, and if possible, we would now like to move up rather than down.
Would you move away from the corporate venture investment model, and invest in companies beyond the media and entertainment sector?
At this point, yes, it’s corporate venture investing (beyond media and entertainment). We would certainly look at education, for instance. I already have a fairly decent early stage portfolio.
I would now like to move up the chain and do larger deals. The question is over the next 12-24 months, how much money can we raise externally and truly make this a private equity business.