PEs, lights, camera, action

George Soros might still be dithering over stitching up his pending deal with Reliance Big Entertainment, but others of his tribe are making a sure-footed entry into the media and entertainment space. According to Merger Market, an M&A database provider, 11 private equity deals aggregating to $714 million (Rs 3,284.4 crore) have taken place in these two sectors in the first eight months (January-August) of 2008, compared to the 23 deals totalling $826 million (Rs 3,800 crore at current rates) in 2007. PE firms have been picking larger stakes this year compared to the average 5-25 per cent earlier owing to fall in valuations. But what’s noteworthy is the manner in which investors are seeking to interpret this vast and varied space.

Balu Nayar, former IMG India chief, has, for example, set up the Morpheus India Fund in partnership with o3 Capital. His idea is to get media and other companies to participate in this fund as a kind of limited partnership. The fund’s objective is to invest in mid-sized “consumer-connected” companies and provide them with marketing and strategic advisory services necessary to create successful brands. The media owners will contribute advertising space in their media brands, which Morpheus will use to buy limited equity stakes in these mid-sized companies. “The Morpheus strategy is based on the strong media opportunity India currently offers and the branding trend that’s taking over as disposable incomes increase. Morpheus will provide investee companies with media inventory necessary to advertise their products and gain a national presence,” says Nayar, Founding Partner, Morpheus Media Fund. The objective, according to him, is to ensure that mid-sized firms that typically do not have the cash flows to invest in marketing and branding activities are funded with cash/ media inventory to fuel their growth.

Then, two cinema-centric funds have been set up—the ICICI Bankbacked Cinema Capital Venture Fund (CCVF) seeks to get into cinema funding and the Rs 200-crore Vistaar Religare Film Fund will fund projects with newcomers— new directors, actors and writers.

Both these funds have been spawned by the emerging opportunities in the entertainment space on the back of rapidly rising consumption preference for entertainment and digital technology. According to industry sources, box office revenues nearly doubled from Rs 264 crore to Rs 485 crore between 2004 and 2007. Till 2005, only two films had managed to gross revenues of over $4 million (Rs 18.4 crore) in the UK, one of the largest overseas markets for Indian films. In 2007, 16 films achieved that mark.

CCVF’s Managing Partner Sameer Gupta says his fund, which expects to raise Rs 500 crore by end-October, will invest only in quality projects such as those by privately-held film companies and independent film-makers. “We will invest in at least 6-8 ventures over the next 12-18 months,” he adds. While 70 per cent of CCVF’S investment will be in content companies, the remaining will be in related businesses. Also, the fund will not only look at the Hindi filmdom, but eye opportunities for investments in the southern, Bengali and Bhojpuri film industries.

“While there is a lot of interest in equity, we continuously look for new asset classes to invest in. We already have an art fund and Bollywood is next. Bollywood is a growing industry and we see an opportunity to invest here and get returns,” says Sunil Godhwani, CEO and Managing Director, Religare Enterprises, which holds 50 per cent in Vistaar Religare Film Fund.

Others are also looking to enter. Elara Capital, an investment bank with a presence in London, Mumbai and Singapore that is particularly active in the media and entertainment sector, is busy firming up plans. “We are speaking to a few international players to put together an India-centric media, entertainment and marketing services fund,” says Bhaskar Majumdar, MD, Elara Advisors.

While many of the investments so far have centered around media owners, newer segments are likely to pick up this year. Industry observers think investments will flow into the IPTV space and also in cable TV. According to Sanjay Bhattacharji, a key member of the CCVF management team, the sector is waiting to explode. “The growth in the media & entertainment space is going to be huge over the next 5-7 years and that’s what will create the opportunities.”

It’s not just money that venture capital funds will bring to the film industry; they are also expected to bring high standards of corporate governance—they are going to demand more accountability from producers and ensure that the projects are completed on schedule. Says Bhattacharji: “We will provide the capital and the management bandwidth to help companies scale up.”

But bankers like Karan Ahluwalia, Senior Vice President and Head, Media & Entertainment, YES Bank, sound a note of caution. “There is enough investor appetite within the media sector, but one needs to look at the right team, right projects and right valuations to invest in,” he says, adding: “One needs to adopt waitand-watch approach to raise funds at this point in time given the poor sentiment prevailing in the market.” Fair enough