Private Equity Investing in Media and Entertainment
February 09, 2021
In this episode of Alternative Investments Spotlight, Elana Margulies-Snyderman, Senior Manager, Publications, EisnerAmper, speaks with Vania Schlogel, Managing Partner and Founder of Atwater Capital, a Los Angeles-based international private equity firm that invests in the media and entertainment space, about her views on private equity, the specific opportunities she sees, why she opened an office in South Korea, her experience being a woman in the industry and more.
EMS: Tell us a little about your firm.
VS: After having spent the majority of my career investing in the media sector, both at KKR and as Jay-Z's Chief Investment Officer, I founded Atwater in 2017 with the intention of creating a deeply sector verticalized fund in the media and entertainment industries. From my time working with Jay-Z, I had built up a unique Rolodex of industry executives and operators. So I wanted to leverage this Rolodex and strategic thinking into operational value creation. I also built up around me senior executives within Atwater who each brought a unique skill and relationship set to the firm, including people with both financial and operational backgrounds as well as those from the entertainment world. Atwater today manages approximately $140 million in assets under management with offices in Los Angeles and Seoul. And we are invested across the globe in some great portfolio companies in the media and entertainment space, including Epidemic Sound, Whip Productions, Leonine Studios and Freepik.
EMS: Vania, why do you feel private equity presents attractive opportunities currently?
VS: At a meta level, private equity is a great place to be right now, supported by a robust deal making and fundraising environment and low interest rates. On a more granular level, private equity provides the ideal context for operational value creation.
EMS:And Vania, more specifically, why do you feel the media and entertainment sectors present attractive investment opportunities today?
VS:Evolution and transformation are endemic to the media sector. There are companies and sectors like industrials that have barely changed their way of core operations in decades. Compare this to music which went from monetizing IP through sales of physical goods, i.e. vinyl records and CDs, to unbundling that IP to sell ownership through digital downloads via iTunes, to rebundling that IP to sell access via digital subscriptions with players like Spotify and Apple Music. And music IP monetization continues to evolve. Players like Tencent Music monetize fandom via in-app virtual good sales. All this to say that media especially is constantly reinventing itself. We endeavor to call those structural trends and to pose capital behind whom we believe are the winners from all this upheaval.
EMS:And Vania, are there any specific types of media or entertainment companies you're looking at that are expected to fare best? And if so, why?
VS:One example of a structural trend that we began investing in years ago was content, which has become such a buzzword in the investing landscape nowadays. But the way we approach content and how we deploy the capital had to fit our assessment of secular trends and our development of an investment theme. Firstly, how did we settle on content? From observing box office performance as a historical proxy for content consumption, we notice it's acyclical features, with box office up almost 9% year over year in 2009 in North America during a deep recession. Given the decade long upswing we had been experiencing, we wanted to find asset classes that weren't correlated to broader macro-economic and public equities' performance. From a forward-looking perspective, we saw increased spend in content by existing players like Netflix, as well as competitors like Apple poised to enter the space. Hence, we felt bullish about this digitization trend within content consumption.
We wanted to take it one step further in developing our investment theme, which was to hone in on the various methods for content monetization, which are funding via ads, transactions or subscriptions. Of these three similar to why tech investors love SAS businesses, we wanted to invest in content that would be predominantly monetized via the latter, subscriptions. Hence, we wanted to find content that would be in demand by subscription funded streaming platforms, benefiting from both digitization as well as the stability afforded to subscription businesses. Synthesizing all this, we decided to invest in two types of content creators that we felt would benefit from these structural trends. First, purveyors of premium episodic content, and second, local language content. If one delves into how OTT platforms are investing their CapEx, players who specialize in these types of content will continue to do very well. This is why we invested in companies like LA-based Whip Productions and Munich-based Leonine Studios.
EMS:Vania, I noticed your firm has a presence in Seoul, South Korea. What inspired you to open an office there?
VS: Our presence in Seoul is a direct tie to our mandate of being operational investors. Prior to Parasite, a South Korean film, winning the Oscar, many people in finance gave us odd looks when we said Atwater's Asia hub was in Seoul, as most funds based their Asia presence in financial centers like Hong Kong or Singapore. From a public understanding perspective, things shifted as soon as Parasite won. It was a sudden awakening to the enormous content and media trends being exported out of a relatively small country. We set up a presence in Seoul early on helmed by Joseph Lee because we noted several key factors. Firstly, South Korea is the only true democracy in East Asia. Secondly, it has the fastest internet speeds in the world, making it a hotbed of technological innovation. Third, it's population is well-educated and digitally savvy with high disposable income per capita. And finally, the country's legal protection of intellectual property ranks above that even of the UK.
The confluence of these factors means that despite Korea being a much smaller addressable market than, say, China, from a regulatory political and economic perspective, it feels much more native to our Western portfolio companies. Given that launching in Asia is often a major value creation tool, we set up this meaningful Korean presence in order to facilitate that process. From Korea, companies can then look to expand it to neighboring geographies of Southeast Asia, Japan, and China. Finally, we want one step further and three of Korea's largest media companies, including Kakao, which owns the Korean equivalent of WhatsApp, Spotify, Uber and PayPal, are Atwater LPs. This means that when our portfolio companies launch in Korea, they launch to a welcome mat from some of the most successful media players in Asia who are now incentivized towards their success.
EMS:And Vania, diversity inclusion has been a hot topic this year and even last year for the alternative investments industry. And being a woman-owned firm clearly fits the bill. I wanted to see if you would like to share a few words about your experience being a woman leader in the industry and what you were doing to encourage more women to go into private equity.
VS:To be very blunt, I have a few words of encouragement geared towards women in private equity because they're already performing at an incredibly high level. I would direct my words of encouragement towards men who are disproportionately represented within the private equity industry, especially in leadership roles. Now is the time to step up and be leaders. This entails proactively making space for women in senior roles. This entails allowing women and people of color and the LGBTQ community to shape work environments and culture so that the system actually changes, and diverse members feel comfortable and valued within these spaces. Approaching today's incredibly un-diverse PE environment by trying to force through some diversity hires or promotions while not addressing the culture of a firm is like trying to force a square peg into a round hole. There needs to be a wholesale commitment to cultural shift towards inclusion. At Atwater, three of our top five most senior executives are women. A majority of our senior advisors are people of color and women. This wasn't brought about by forced quotas or edicts, this is the natural consequence of a place where the culture values diversity.
EMS:Vania, You said a lot today and I really wanted to thank you for your invaluable insights. Are there any final thoughts you would like to share with us today?
VS:From a social perspective, we are witnessing unprecedented change and disruption from the technological revolution, it's path of creative destruction, to the rising populism that ushered Donald Trump and others like him into office and culminated in never before seen attacks tax on the Capitol of the United States. Investors sit in a unique perch where our mandate is to educate ourselves and develop deep understanding of how things connect, how a change in interest rates can affect housing prices or how automation can affect local jobs. This methodology for how we think paired with our control of capital places a heavy duty of responsibility on our shoulders. Now is an exciting time, but it is also a time of great sorrow for many. I encourage leaders within the finance sector to cultivate a culture of true consideration for all stakeholders, which includes the natural environment, marginalized groups, and those who have experienced the losing end of technological progress. We as investors collectively wield a great deal more power than perhaps we realize, it's time we act in accordance with that profound responsibility.
EMS:Thanks, Vania, for sharing your perspective with our listeners.
VS: Thanks for having me, Elana.
EMS: And thank you for listening to the EisnerAmper Podcast series. Visit eisneramper.com for more information on this and a host of other topics, and join us for our next EisnerAmper Podcast when we get down to business.