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o3 Capital Launches $300 Mn Media Equity Fund; First Close In 3 Months

18 August, 2008

Investment bank o3 Capital Advisors is launching a $300 million media equity fund which will pick up stakes in growth stage companies in exchange for advertising space in newspapers, radio, television, outdoor and internet owned by the leading media companies. o3 has launched the initiative in partnership with Balu Nayar (in the picture), former head of sport marketing group IMG in India.

Nayar told VC Circle that the fund – named Morpheus Media Fund – is expected to make its first close at $100 million in the next three months.

The final closure is expected in a year’s time. Morpheus will be run like any other fund with similar economics (usually funds take 2 per cent management fee and 20 per cent of the carry). The tenure of the fund is five years, which can be extended by another two years.

The media companies will be the limited partners in the fund whose equity will come in the form of media space. According to Nayar, several top notch media houses have experessed interest in the model. “We are looking at leaders in every segment of the media (national and regional, Hindi, English and vernacular languages cutting across print, radio, TV, outdoor and internet) to join the pool,” Nayar said.

Morpheus will pick up anywhere from 2-20 per cent stake in companies who are looking to grow and have products and services that need branding and advertising support. For instance, medium sized FMCG companies, retail chains, and car rental services are some of the examples of companies where they can pick up stake. In return, these companies will get media space (so the currency is media space). The idea behind such a fund is that consumption focused companies need to spend big money on advertising.

The total Indian ad market is about Rs. 20,000 crore ($5 billion). The typical ad budgets vary from 2 per cent to 10 per cent of turnover, depending primarily on the growth stage of the business. “The Morpheus media-equity transactions will typically be worked out on a 3-5 year span, i.e., the ad expenditure involved over that period, and the values cumulated accordingly,” says Nayar.

The fund works somewhat like Bennett, Coleman & Company’s Times Private Treaties Division, which has been making investments in companies in exchange for advertising space in its various media products like The Economic Times, The Times of India and Navbharat Times.

In the case of Morpheus, the companies will have access to media properties across the country cutting across languages, delivery modes and technologies. When asked if this will not compete with Times Private Treaty, Nayar said it is not a competing fund but will be complementary to what Times is doing. In fact, after seeing the sucess of Times Private Treaties which has so far funded some 175 companies, several other media houses like HT Media, Dainik Bhaskar Group and NDTV have formed equity-for-ad divisions.

The advantage of Morpheus is that they are a third party fund managed by professionals and they aggregate media space across the country. From an investee company’s perspective, they get access to media properties across languages, verticals and regions in exchange for a small equity of the company.

Nayar said that the fund – since it’s managed by a third party – will also help maintain the strict distinction between editorial and advertising. In fact, one criticism against Times Private Treaties is that there is a blurring distinction between editorial and advertising (and subtle branding through editorial coverage), which Times has always denied.

Says Deepesh Garg, Executive Director, o3 Capital, “We will have an arm’s length relationship between editorial and the fund’s investee companies.” He also added that the opportunity for such a fund exists since investors typically shy away from deflecting their capital to adspending. They like to see the companies creating hard assets.” In this case, the companies who are starved of capital to spend on advertising and branding can part with a small part of equity to a fund like Morpheus.

Nayar said the fund will look at exiting the investee companies via IPOs/strategic sale or secondary sale to another investor.

 


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o3 Capital Launches $300 Mn Media Equity Fund; First Close In 3 Months

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