Nestle candy divest draws CVC, Onex ahead of refresh bids, sources say

Provided exclusively by Mergermarket, an Acuris Company

Nestle [VTX:NESN] has asked prospective buyers of its US confectionery business to put up refresh bids on 13 November, according to three sources briefed on the matter.

The company is in the midst of management presentations with potential suitors, said two of the sources.

CVC Capital Partners and Onex are among the financial sponsors still pursuing the asset, said the first and second sources. Strategics that remain in pursuit include Hershey [NYSE:HSY] and Italy’s Ferrero, said the same sources.

Mondelez International [NASDAQ:MDLZ] attended a management presentation for the Nestle divestiture, said the first source. It is unclear whether the Illinois-based snack company is still involved in the process.

Initial bids for the confectionery business, which drew more than a dozen sponsors, were due the week of 9 October, this news service reported.

To make it into the second round of the auction, prospective suitors were asked to submit offers at 10.5x to 11x the unit’s close to USD 200m EBITDA, said the second and third sources. Each of the sources said they did not expect the divestiture to be valued at much higher than USD 2.5bn.

Goldman Sachs is advising the Swiss food and beverage company on the sale.

Last month, Ferrero announced an agreement to buy Ferrara Candy from L Catterton at unspecified terms. The deal is projected to close in 4Q17. Ferrero subsequently announced the acquisition of Fannie May Confections Brands from [NASDAQ:FLWS].

Ferrero would see strong US synergies from a combination of Ferrera Candy and the Nestle business, said the third source. Onex also participated in the Ferrara Candy sale process, noted one of the sources.

In July, Reuters reported that Ferrara was preparing to participate in the auction for Nestle’s US candy business which includes such well-known brands as Crunch, Butterfinger and Baby Ruth.

Mondelez and Mars, another logical suitor for the Nestle business, could face antitrust resistance, said the second source. According to the source, Hershey is less likely to trigger significant antitrust concern.

Another of the sources noted that Hershey has recently been more oriented toward healthier snacks.

Nestle’s confectionery unit in the Americas, which also includes Canada, Latin America and the Caribbean, saw revenue dip from the period beginning 2015 through 2016 from CHF 3.45bn to CHF 3.34bn, with the company noting that “the performance of confectionery in the US was disappointing, impacted by the competitive environment and low growth in the mainstream chocolate market.”

Nestle, Hershey, CVC and Mondelez declined to comment. Mars, Ferrero and ONEX did not return calls for comment.

by Marlene Givant Star, Bhavna Kaul and Anthony Valentino 

As seen in the Mergermarket, an Acuris company, newsletter on 03/11/2017




Using the Voice of the Customer to Accelerate Post-Close Value Creation

The Third in a Series of Four Voice of the Customer Case Studies

By Anthony Bahr

Going into a deal, investors are commonly sold on the notion that value will be created via cost synergies associated with the integration of the buyer and the seller. However, it is well documented that only a small fraction (about 20%) of post-close value creation can be attributed to the synergistic effects associated with a deal.

Revenue growth, which accounts for roughly 60% of post-close value creation, is the true driver of new value. But unlike cost-cutting, growing revenue is usually a cost center – often rendering customer retention and expansion to be overlooked in many integration strategies built on improving margins.

In our previous article, we demonstrated how the Voice of the Customer (VOC) methodology can be used to conduct due diligence and mitigate the risk associated with customer concentration in B2B deals. Now, in this third in a series of four case studies, we’ll explain how the same methodology can be used to not only mitigate risk, but also accelerate post-close value creation.

The Challenge

Our client, a strategic acquirer that manufactures commercial paper products, had recently completed a bolt-on acquisition intended to expand its product portfolio to include corrugated boxing.

The integration strategy was primarily focused on reducing fixed costs by centralizing operations and distribution channels. While the integration plan did include strategies to expand the customer base and increase revenue, these tactics were year two initiatives which, in retrospect, our client admitted where “underdeveloped and underfunded.”

Three years after the acquisition, margins had improved; still, the combined financial results of the company fell considerably short of expectations. In response, our client commissioned a VOC engagement that was designed to kickstart revenue growth by addressing the following objectives:

  1. Improve market share by measuring and identifying opportunities to improve customer loyalty.
  2. Increase win rates by mapping the path to purchase in order to focus marketing and sales communications on the most compelling decision criteria.
  3. Stress test a potential price increase by benchmarking perceptions of the company’s prices against those of key competitors.

The Solution

 To generate the insights needed to address these objectives, 30 interviews were conducted among the company’s top customers (the 20% of customers which generated roughly 80% of revenue). All of these interviews were held over the phone and, on average, the conversations lasted 30 minutes.

In addition, a self-administered online survey was used to increase the overall sample size and secure responses for second- and third-tier customers.

As interviews were completed, transcripts of each conversation were provided to the client on an ongoing basis. Once all of the phone and online responses were collected, the data was aggregated, coded, and synthesized. Key themes and recommendations were outlined in a management report, which included an in-depth analysis of the findings in total, but also across a variety of segments (product line, sales region, customer tier, and legacy vs. acquired customers).

The Results

The VOC results uncovered that:

  • The company had a somewhat loyal customer base. It’s Net Promoter Score (NPS) – the industry standard metric for measuring customer loyalty – was +32. Such a score tends to be indicative of a company that is performing well on the fundamentals, but does not offer a best-in-class customer experience. Firms with a score of +32 tend to be maintaining, not growing, market share.
  • Contract administration was a major pain point. Customers said the process took significantly longer than competitors, and there were often errors in the paperwork which resulted in delayed delivery times.
  • One of the most important purchase criterion was having options available in the buyer’s preferred paper brightness. Our client happened to have a broad range of brightness options, but it was not promoting this differentiator in marketing and sales materials.
  • Sustainability, while not a primary purchase criterion, was considered a tie-breaker. Customers, when evaluating two similar bids, often selected the vendor which was perceived as having the more environmentally sustainable product.
  • The company received very strong scores on “price for the value”, which suggested that there was room to increase prices without diminishing the value proposition. Furthermore, the company’s prices were perceived to be lower than those of key competitors.

Based on these findings, we made the following recommendations:

  • Invest in an electronic contract management system to speed up the process and improve accuracy.
  • Revise marketing and sales materials to promote the company’s broad range of brightness options and sustainability initiatives.
  • Raise prices between 4% and 6%.

A year after these recommendations were implemented, topline revenue had grown 13% and gross profit margins had remained relatively stable. And, when we re-measured customer loyalty, the NPS had increased from +32 to +41 – a score indicative of a company that is gaining market share.

Look for our final VOC case study in the November 30th edition of the ACG NYC newsletter. In the meantime, feel free to contact Strategex if you have any questions about the process or the benefits of conducting a VOC for your organization.

Anthony Bahr ( is a Vice President in Strategex’s Voice of the Customer Strategic Practice. Through the VOC process, he provides deep insights into a customer’s level of satisfaction and loyalty, as well as competitive positioning, innovation pathways, pricing optimization, etc. Ultimately, his work enables clients to transform research findings into actionable growth strategies. Anthony holds a BBA from Loyola University Chicago and graduate degrees from the University of Oklahoma and University of Chicago.


5 IDEAS YOU MISSED: Family Office Update

Last week, we attended ACG New York’s ‘Family Office Luncheon’ event. Here are five of our top takeaways from the panel, which focused on ‘Best Practices on Deal Sourcing for Single Family Offices.’

Prepared by TresVista Financial Services

  1. Investment Philosophy: Family offices continue to emerge as a viable source of private investment for family and/or founder owned businesses given the nature of their patient capital and indefinite hold periods. Depending on the strategy, family offices typically target an investment range from $10 mm to $250 mm across a wide variety of industries. “We typically come-in with lower leverage than traditional private equity as we are not held to the same IRR threshold,” said Michael Landerer from Dorilton Capital. Family offices tend to invest in the business for the long term and offer numerous capabilities to help the business grow while being less focused than traditional Private Equity on short-term cash flow maximization and a 3-5 year exit horizon.
  2. Deal Sourcing: “At Freemark Partners, we spend an enormous amount of time and resources on building meaningful relationships with sell side intermediaries and we then complement these efforts by engaging with a handful of select buy-side firms to facilitate direct company outreach based on internally developed investment theses. We know that intermediaries and sellers have lots of options today and we pride ourselves on responding quickly, pursuing only a handful of promising deals each year, and offering permanent, patient capital.” said JJ Hearty, a Principal at Freemark Partners. A select group of family offices now rival traditional private equity firms when it comes to sourcing and execution as they continue to lure away top tier talent from private equity firms to manage the entire lifecycle of a deal. These efforts often include working with both traditional sell side and buy side intermediaries as well as participating in industry conferences and tracking specific companies. A continued focus on building relationships with professional advisors such as attorneys, accountants and wealth management teams as well as industry experts will also lead to differentiated and valuable deal flow.
  3. Investment Process: “At Freemark Partners, we run a focused diligence process to understand what makes a business tick and what sets it apart from its competitors. At a high level, we focus on analyzing the company’s differentiation, competitive positioning, gross margins and the return on capital employed,” said JJ Hearty.  At Waypoint Capital, “We engage a full team of third party advisors to support our due diligence and submit a memo with our findings to the investment committee,” said Philip Edmunds.
  4. To do, or not to do a Deal: “The only issue that would always cause us to walk from a deal is if the counter parties mislead us in the due diligence or negotiation process,” said Philip Edmunds from WayPoint Capital Partners. A subset of family offices also tend to shy away from deals where the seller is purely economically motivated and will have no vested interest in the company going forward.
  5. When to Exit a Deal: Family offices have a wide range of timelines for their investments. “Our ideal holding period is forever,” said JJ Hearty. For those Family Offices who are open to selling their investments, it is common practice to stay in close contact with sell side advisors and analyze market trends, precedent transactions and various other industry-specific metrics prior to selling a business.

ACG NY Member Highlight: Don Ritucci

acgny jon

ROLE/FIRM: Managing Director at Imperial Capital LLC

FOCUS: Investment Banking

  1. Quick basics – role/firm/focus?

I am a Managing Director at Imperial Capital LLC and lead up of our financial sponsors as well as our healthcare coverage effort. I have been with Imperial since 2011, and prior to that I was at UBS Securities for 13 years, spending most of my time in healthcare M&A. I have been a member of ACG New York since 2012, and have been on the Board since September 2016.

  1. What do you think are the biggest obstacles in the middle market today?

Well, depending on what side of the coin you are on, some of the biggest obstacles are valuations and quality of assets available for sale, which is probably not surprising to many folks. Lots of capital (both debt and equity), low interest rates and lofty public equity market values will do this. We are seeing many “B” or below-rated assets commanding “A+” prices in sale processes, a trend that has continued for a while now. So if you are on the sell side, that’s good news. For those on the buy side, it will be interesting to see how those investments pan out in the future.

  1. How has ACG helped you in your career?

ACG has clearly helped me expand my professional network. Whether it be private equity firms, other bankers, lenders, lawyers, accountants or other deal professionals, my network has absolutely exploded since becoming actively involved in ACG.

  1. Can you tell us about your greatest success story/ proudest achievement in association with ACG?

First thing that comes to mind is being the reigning champion for cornhole at the ACG New York Dealmaking on the Beach event, where I haven’t lost a match in two years. Other than that, I would say having re-built the dormant financial sponsor practice here at Imperial. Since I took over about 5 years ago, we have been involved in over 60 M&A advisory and debt financing transactions involving private equity firms.

  1. What changes do you foresee happening in the middle market in the next 3-5 years?

I wish I could tell you with some certainty what will happen over the next few weeks, never mind the next 3-5 years. That being said, trees do not grow to the sky, so I think its safe to say there will be some pull back and cooling off in that market during that time period.



ACG New York: Creating a Platform to Support Independent Sponsors and Family Offices

By David Acharya, Partner

AGI Partners, LLC

Both the efforts of independent sponsors and family offices are making more of an impression in today’s deal business than ever before. In addition to funded private equity firms working with independent sponsors to generate deal flow, family offices want to invest directly into companies with independent sponsors more often.

What makes independent sponsors attractive to family offices?

  1. It’s the accessibility of differentiated deals typically not seen by a family office or even a funded private equity firm. The independent sponsor may have relationships stemming from an industry or geographical expertise that exposes a family office to previously unrecognized investment opportunities — possibly to companies that are not even officially for sale. In addition, the independent sponsor is motivated to hunt for differentiated deal flow and/or limited auction situations.
  2. Independent sponsors can offer “day to day” operational expertise and/or industry expertise that many family offices find helpful, increasing the likelihood of market outperformance and an attractive exit. This can be of tremendous value in the case of a family office without people in-house to source, perform due diligence, complete the underwriting, and manage the post-closing of the investment. It is also a two-way street here: a family office with experience in those industries can act as “strategic LPs” (introducing portfolio companies to new customers, geographic markets, etc.) to independent sponsors.
  3. Family offices often avoid management fees from unused capital commitments that are waiting to be drawn down given the deal optionality structure – first sourcing and diligencing opportunities before offering them on a discretionary basis.
  4. The independent sponsors’ interests are generally highly aligned with LP interests because the independent sponsor’s profit participation typically derives from a much smaller portfolio than that of a typical fund manager, so that the value of mediocre performance or failure is unacceptably heavy.

Just how have independent sponsors grown in size? According to a respected private equity media publication , $22 billion of non-fund private equity investments were executed in 2015. A survey conducted with independent sponsors across the country stated that over 54% of participating firms have firm longevity of five years or more. The market has recognized its presence because it is here to stay.

ACG New York has recognized the growth of the independent sponsor community and has actively solicited independent sponsors as panelists as well as ensuring their participation at various deal-making conferences throughout the year involving funded private equity firms, family offices and investment bankers. The respect for the independent sponsor community is here in the ACG New York community!


David Acharya is the EVP of the ACG New York board and Partner at AGI Partners LLC (; a NYC based middle market private equity firm. He has completed platform investments and executed numerous add-ons as an Independent Sponsor.

ACG NY Member Highlight: Brad McGowan Brad

Brad McGowan is Director and Head of PE Coverage at SolomonEdwards and Managing Director at Pickwick Capital Partners. His focus is on investment banking, venture capital and PE. Brad has been a member of ACG for over 10 years and serves on the Board of Directors. Previously, Brad served on the Planning Committee and is currently the Chair of the Membership Committee. Every month, an active member of the ACG New York community is featured in a brief interview. Reflecting industry insight and personal perspective, this feature will introduce industry leaders and offer advice on the tools you need to succeed in the ever-changing middle market.

1. Quick basics first, what is your role, firm and focus?
I am a people person and as a result, remain very active and passionate about what I do. My focus is, and has always been,
on building solid relationships with leading PE firms across the country. I currently have two distinct opportunities: I serve
as the Director and Head of Private Equity Coverage at SolomonEdwards, a professional consulting firm. I also serve as
a Managing Director and lead the Financial Sponsors Coverage of PE firms at Pickwick Capital, a boutique investment
banking firm and fully-licensed broker-dealer. Both roles go “hand in hand” with one another, if you think about it. I sell
CFO and M&A services while representing SolomonEdwards in the marketplace, and I also am able to introduce actual
investment banking deal flow through Pickwick Capital into various PE firms, too. Security technologies/HLS/defense,
industrial/manufacturing, healthcare/life sciences, business services and even cannabis are key areas of focus for me.
2. What do you think are the biggest obstacles in the middle market today?
There are many obstacles in the middle market today. For example: the new president and his agenda; the overall economy
(will it continue to grow or will it slow its pace of growth?); the new and changing regulatory environment; cybersecurity
and cyberattacks on our networks; geopolitical risks around the world; having lots of dry powder and how to properly
deploy the cash at fair valuations in order to achieve profitable high returns; and a rising interest rate environment after
many years of historically low rates. I also see more and more intense due diligence conducted on new funds by investors,
3. How has ACG helped you in your career?
ACG has been invaluable to me throughout my career. I have not only built up my professional network, but I have also
made many personal friends along the way! ACG is a great association. I have enjoyed meeting many in the middle market
dealmaking community as a result of being a member of ACG. ACG has also kept me current on certain sectors and issues
that may affect PE firms. I have also attended hundreds of targeted industry events. For all these reasons, I believe you can
benefit greatly from getting involved with ACG.
4. Can you tell us about your greatest success story/ proudest achievement?
One great example of business success that comes to my mind within ACG stands out very clearly. I had attended the ACG
event “Deal Making on the Beach” held at the Jersey Shore, which involved all three local chapters of ACG New York, NJ,
and Philadelphia. It was a great networking event and a lot of fun for all in attendance. At this event I was fortunate to meet
up with Bob Fitzsimmons, who heads up High Road Capital, and we struck up a quick conversation. Weeks later, I followed
up with Bob and discussed more about what our firm does. Then SolomonEdwards hosted their own CFO/PE event at the
Union League Club in NYC, which Bob attended and listened to some of the examples of what our firm had participated in
from the some of the PE panelists. Bob later called me and I got my team involved and we listened to his exact needs and
what he was looking for. SolomonEdwards delivered and executed: We were able to find Bob the correct CFO candidate,
who he eventually hired. As an extension of that key hire, High Road Capital has since become a working client of the
firm and we have been hired to do work on two of their portfolio companies as a result. This is a true example of an ACG
success story, why it is important to participate, and how ACG is an efficient networking platform. This is a prime example
of how you can build upon relationships from ACG.
5. What changes do you foresee happening in the middle market in the next three to five years?
I see many PE firms and brokerage firms making changes and constantly adapting to change. Personally, I do see
the middle market implementing more cybersecurity and IT security services going forward as attacks increase, and
proprietary information is more and more at risk. I see more emphasis on sector/industry specialization, too. How does one
differentiate themselves from the rest of the pack? Specialization! Focus and expertise in the field, with more and more
emphasis falling on brokerage firms or middle-market PE firms to specialize in certain sectors.
Deep expertise is key to beating the competition. There is no more being “all things to everyone.” My own firms preach this
same specialization strategy. SolomonEdwards does not try to be all things to all customers. SEG has focused their services
and efforts to align our talent in order to specialize in certain key sectors such as healthcare, banking/financial, technology,
manufacturing, and energy. Pickwick Capital has developed key practice sector teams internally, too: security/defense,
infrastructure—project finance, healthcare/life sciences, media, cannabis, financial, real estate and energy. You can NOT be
ALL things to everyone anymore.
I see more pressure on the fees charged by funds themselves. I see more and more due diligence being conducted by
possible investors into PE funds. I see more transparency going forward. I also see more and more business development
positions developed at funds, as competition for deal flow remains in high demand, with more focus on lead generation
and building future pipeline.

Using the Voice of the Customer to Mitigate M&A Risk

The Second in a Series of Four Voice of the Customer Case Studies

By Anthony Bahr, Vice President, VOC Strategic Practice, Strategex

A recent Deloitte survey of M&A dealmakers found that “customer retention and expansion” is the most important factor in achieving a successful deal.

In B2B deals, the ability to retain and grow the customer base post-close is even more critical. This is because the typical B2B firm has a highly concentrated customer base – 20% of accounts tend to generate 80% or more of revenue.

Therefore, B2B firms with a high degree of customer concentration are very vulnerable to post-close customer attrition risk. If a single top account were to lower its spend post-close, there would be a material impact on the valuation and the long-term growth outlook for the company.

If we know the primary risk associated with B2B M&A deals is customer attrition, then why are acquirers not allocating more resources to mitigating this risk by conducting customer due diligence?

Perhaps the answer is because many customer due diligence programs are poorly designed and add little value. They are often done internally, treated as cursory reference checks, and use methodologies which only generate topical findings.

Fortunately, there is a better way. Customer due diligence programs which are built on the Voice of the Customer (VOC) methodology are much more likely to generate insights and recommendations to help mitigate customer-related risks.

In this second article in a four-part series, we will present a case study that demonstrates how the VOC methodology can be used to conduct rigorous customer due diligence that ultimately provides insights to offset the risks associated with customer concentration.

The Challenge

Our client, a private equity firm, was evaluating the purchase of a manufacturer of plastic assemblies and components.

The target company had a highly concentrated customer base. Its top 15 customers accounted for 86% of revenue. More concerning, its top two customers accounted for just over half (53%) of revenue, and its top customer accounted for one-third (35%) of revenue.

When our private equity client inquired about the stability of these 15 critical accounts, the target company’s management claimed they were secure. As proof, management pointed to the long tenure – 13 years on average – of these customer relationships. In addition, management cited the high switching costs associated with any potential supplier changeover scenario as a deterrent for customer attrition.

Still, with the success of the deal so dependent on the continued revenue of a handful of customers, the private equity firm commissioned Strategex to conduct in-depth customer due diligence built on the VOC methodology.

Strategex and the private equity firm collaborated to develop a customer due diligence program that was designed to:

  1. Assess the strength and stability of key accounts
  2. Identify at-risk accounts and understand what steps would have to be taken post-close to retain these customers
  3. Estimate the future growth outlook among key accounts

The Solution

To generate the insights needed to address these objectives, Strategex conducted 15 customer interviews across 9 of the company’s top accounts. All of the interviews were conducted over the phone and, on average, lasted 20 minutes.

The engagement was funded by the private equity firm but sponsored by the target company. This approach allowed Strategex executive interviewers to position the survey as a customer satisfaction interview. Thus, they never had to disclose that a deal was under consideration.

The researchers conducting the interviews followed an objective-based discussion guide that was prepared in collaboration with our client.

As interviews were completed, transcripts of each conversation were provided to the client on an ongoing basis. Once all of the data was collected, the results were aggregated, coded, and synthesized. Key themes and recommendations were outlined in a management report, which included an in-depth analysis of the data and customer commentary in total, but also across a variety of segments.

The Results

The results of Strategex’s due diligence revealed that the state of customer relationships was in a precarious position.

The target company had a Net Promoter Score® (NPS®) of +22, which is indicative of a company that is performing adequately on the fundamentals, but with plenty of opportunity for improvement. Consequently, firms with a NPS® in the +10 to +35 range tend to be losing or maintaining market share, which was certainly the case with the target company (its revenue had only increased 0.5% over a three-year period).

Furthermore, most customers were categorized as “Passives.” Passive customers are those who are satisfied but not necessarily loyal. These customers tend to be actively evaluating competitors, often push for price concessions, and are generally more expensive to service over the lifecycle of the customer relationship.

The findings were even more concerning when analyzed at an account level. It was revealed that the top customer (the one that accounted for 35% of revenue) was:

  • A Passive customer
  • Actively vetting two competitive suppliers
  • Not planning to renew their contract with the target company, which was coming up for review
  • Planning to exclude the target company from future RFPs
  • Forecasting lower spend with the target company in the coming years

To sum things up in the words of this number one customer by revenue:

 “There isn’t anything I like about them (the target company). Our current plan is that, in two years, our volume with (target company) is going to start going down.”

A well-designed customer due diligence program does more than diagnose issues, it also provides prescriptions. As such, Strategex’s work identified precise actions that would have to be taken in order to retain this account post-close, including:

  • Remedy product quality and consistency issues
  • Decrease the rate of staff turnover
  • Update technology and manufacturing capabilities

In response to these findings, our private equity client lowered their offer for the company. The target company’s management walked away from the table, and at the end of the process, our client told us:

“You saved me $400 million and a lot of headaches.”

Customer due diligence is just one of many objectives that can be addressed in a VOC. Look for another VOC case study in the November 9th edition of the ACG NYC newsletter. In the meantime, feel free to contact Strategex if you have any questions about the process or the benefits of conducting a VOC for your organization.

Anthony Bahr ( is a Vice President in Strategex’s Voice of the Customer Strategic Practice. Through the VOC process, he provides deep insights into a customer’s level of satisfaction and loyalty, as well as competitive positioning, innovation pathways, pricing optimization, etc. Ultimately, his work enables clients to transform research findings into actionable growth strategies. Anthony holds a BBA from Loyola University Chicago and graduate degrees from the University of Oklahoma and University of Chicago.



Spotify secondary market climb expected to push direct listing into 2018

Provided exclusively by Mergermarket, an Acuris Company

Spotify’s share price is climbing so high in the private market that its direct listing is likely to be pushed back into 2018, according to two people briefed on the company’s plans and a sector advisor.

The listing is now expected in the first or second quarter of 2018, they said, or about a quarter later than anticipated. Earlier press reports, including one from this news service on 22 May, had pegged Spotify’s public market debut to occur either this quarter or in the first quarter of 2018. Spotify declined to comment.

The Stockholm, Sweden-based music streaming company’s stock recently traded at USD 3,800 per share in the private markets, up from USD 3,600 per share earlier in the summer, the two people said.

The price per share is so steep that there will likely be a stock split in the lead up to Spotify’s listing on the New York Stock Exchange to make it more accessible to public investors, the first person noted.

Secondary trades are taking some pressure off of Spotify by providing liquidity for employees who need to finance important life events and investors who are looking to close their funds, the first person said.

The trades have also provided the company with additional time to negotiate licensing agreements with music labels and grow its paid subscription base, which have in turn boosted its valuation, he said.

“The private market is doing exactly what management wants,” the second person added.

The company’s valuation recently approached USD 16bn in private secondary trades, or roughly 40% higher than it was trading several months ago, the first person said. Spotify’s valuation has fluctuated throughout the year. An offering made to employees in the spring pegged it at about USD 13bn.

Market sentiment in the private market is at its highest level since January 2016, the first person said. Spotify’s performance is in the top quartile of companies trading on secondary exchanges, he noted.

Stocks trending up in the private market have historically fared “pretty well” on the public exchanges, the person said. But the participants and volume of trades are dramatically different so Spotify’s performance in the private markets isn’t predictive to how it will perform publicly, he cautioned.

Spotify’s valuation should continue to rise, said the sector advisor, especially if it reaches an agreement with TPG Capital about the terms of the buyout group’s USD 1bn in convertible debt it issued last year.

New royalty agreements and impressive subscriber growth are underpinning the sunny outlook for the music streaming company, the advisor said. Spotify announced in July that it reached 60m paying users.

GP Bullhound, a London-based investment bank that backs the Swedish firm, issued a report this week that predicted Spotify’s valuation could hit USD 20bn by the time it goes public and USD 55bn by 2020.

Since it was founded in 2006, Spotify has raised more than USD 1.5bn in total equity from backers such as Goldman Sachs, GSV Capital, Halcyon Asset Management, Kleiner Perkins Caufield & Byers, Northzone, Senvest Capital, Technology Crossover Ventures, and Wellington Partners.

Morgan Stanley, Goldman Sachs and Allen & Company are advising Spotify on its direct listing.

by Troy Hooper in San Francisco and Tim Leemaster in New York

As seen in the Mergermarket, an Acuris company, newsletter on 24/10/2017

In seeking higher returns, family offices take the “direct” approach

As family offices grow in size and power, the more progressive ones are
using a direct investment strategy to earn higher returns.
Wealthy families that once hired asset managers to handle their investments are now acting more like PE firms themselves.
To plan for future growth—and future generations—family offices are directly investing, or co-investing, in their own deals
rather than participating as limited partners.
There are several reasons for this:
1. Family offices want to reduce the fees associated with private fund managers. These fees typically include a 2%
management fee and the 20% carry where the managers take a fifth of the investment’s profits.
2. Family offices want more control. They’re abandoning the practice of black-box investing where they turn their money
over to an investment management company and let the firm conduct all dealmaking.
3. Family office goals can be substantially different than those of a traditional investment management firm. PE and venture
capital firms, for example, typically want a shorter timeframe from sourcing a deal to execution to exit. This compressed
timeframe is often misaligned with the longer-term wealth-building objective of family offices. Family offices tend to see
investment as a way to build capital over the years via a dividend or income strategy.
For these and other reasons, more and more family offices are going their own way. Last year, the Family Office Exchange
surveyed 80 family offices and found that 70% were engaged in direct investing and, interestingly, outperforming buyout
firms by a sizable margin. The family offices reported that their direct deals returned an average of 15% in 2015, more than
double the returns of PE firms that year.
Going It Alone Takes Planning and Process
Designing an effective direct investment program is job one for a family office. One of the first steps should be
implementing a policy statement that is agreed upon by all family participants. The policy statement outlines what the
family wants to achieve from its investment program such as increasing wealth for the next generation or diversifying into
new lines of businesses.
Once the policy statement is designed, the planning process can begin in earnest. This next phase includes determining
the types of investment the family office wants to pursue, the size of those deals, the industries the family wants to operate
in, and the desired holding period. A family office may decide it only wants to support socially responsible companies or
invest in a specific industry where it currently has unique expertise. Typically, this will be the industry in which the family
amassed its wealth in the first place.
Another critical element of successful direct investment program is the internal staffing and infrastructure the family
office must put in place to execute on its deals. Many family offices are not sufficiently equipped from both a people and
technology perspective to do direct investments. Many underestimate the work that a PE manager must do to create value.
As family offices compete directly for quality deals, they will need to up their game to contend with the PE and investment
managers they relied on in the past. The years ahead will be especially challenging for family offices in an already complex
and dynamic market.
Jeremy Swan is a principal and leader of the Private Equity Industry practice at CohnReznick LLP. He can be reached at Access CohnReznick’s full four-part series, The Role of Family Offices in Private Equity.


Here are five of our top takeaways from the panel, which focused on the Tech, Media and Telecom sector. Prepared by TresVista Financial Services

1 Convergence of Tech, Media and Telecom: The discussion started on whether ‘Netflix’ is a technology company or a media company. Dating back to December 2012, Netflix had a market cap of $5bn. Post this the company made an investment of $100m in February 2013, which led to the greenlight of two new shows namely, ‘Orange Is The New Black’ and ‘House Of Cards.’ In December 2013, the market cap rose to a staggering $22bn. During this short period of one year, there were only 10m new subscribers that joined the Netflix family; this did not lead to the surge in the market cap. “The 4x increase in market cap had nothing to do with the fact that they had increased subscribers, it was squarely the fact that Netflix had truly converged. They entered into the content creation business in a meaningful way and they began to blur the lines between being a technology company and a media company”, said Martez Moore of Moore Freres and company.
2 Multiple choices for the consumers: There are a lot of facilities available these days targeting some specific groups of entertainment. Netflix gives a plethora of series to watch, but it does not have the provision for watching sports; Amazon Prime, on the other hand, has its own perks but does not cover the news channels; whereas FuboTV covers all of the above genres but does not provide NBC shows. The real struggle is when it comes to deciding whether to subscribe for all of the above and get their respective services or subscribe for On Demand TV like Spectrum and get everything under one roof. The need of the hour is to get everything the consumers need, under an À La Carte, so that they can get want they want. Christine Frank of Waller Capital Partners says, “There is a little bit of confusion in the market right now but I think it’s going to really get to a point where there’s going to be scale players that allow the consumer to do what they want to do, when they want to watch what they want to watch and pay for what they are watching”
3 Power of video in the hands of the consumer: There is a new wave of user-generated content and people are creating businesses out of their own content which they upload on “YouTube.” The expansion of the same can be seen in the other businesses and enterprises, thus making professional video creation a lot more accessible. There is a kind of democratization of being able to make money. The content that few had access, now Facebook, Google and other platforms has enabled people to make and furthermore run their own respective businesses. The issue that these platforms face is whether they monitor these businesses. If they don’t, what happens if the content is not acceptable and they end up putting an advertisement on that platform? Christine Frank concludes by saying “There is a lot of balancing act and a lot of lessons that people are trying to learn along the way.”
4 Engagement matters as much as reach: In the engagement business, the job is to deliver as many eyeballs to advertisers as possible. This is majorly done through television, but it is also done by using the brand in other ways, via the experiences or through digital and social platforms. Michael Armstrong said “Reach is super important, I don’t want to downplay the importance of reach, it will always be important but how you engage your customer to pay attention. Our job is to go from attention to intention whether it is an intention to buy, an intention to spend more time with our products for our partners.”
5 Gaming companies are the new media companies: Applications and console games have monetization models and media models. Twitch is a business model of watching people play video games and its content about video games, not even the actual video games. Andrew Rosen emphasized saying, “Looking ahead, I think gaming companies may infact be the business model for media companies in the future just because they have a better sales conversion funnel.” The video leads to an app download, which leads to a player, the player may lead to converting it into downloadable content or add-ons. It is a powerful funnel if done right and can lead to a wide range of other applications which will then bear fruition.