OPINION: NEWS ANALYSIS: Venture capital ready to make its mark in UK PR - Venture capital backing for PR firms needs good management. But City support is evidence of an industry that is maturing, says Andy Allen

British businesses often look wistfully across the Atlantic and

envy their US counterparts' access to venture capital - and PR companies

have had more cause for jealousy than most.

Venture capital investment in the UK's economy is smaller than in the

US, which has steadily managed to inject four times as much investment

capital per dollar of GDP into its businesses than the UK. PR

specialists have rarely been able to count on more than a few crumbs

from the relatively small pie.

In recent weeks, however, there have been signs that this could be

changing and that increasing numbers of PROs might soon find themselves

recipients of venture capitalists' largesse.

As reported earlier this month, industry veteran Michael Murphy has

secured an initial pounds 20m to form a new company, Hatch, and finance

acquisitions across the UK and Europe (PRWeek, 1 June). The bulk of the

funding came from Bridgepoint Capital, a European private equity firm

with pounds 2bn under management.

A six-strong team bought Consolidated Communications from CEO and

founder Alastair Gornall this week, with funding from Close Brothers VCT

and Lloyds TSB bank. Close VCT Management took a pounds 2m stake in the


Venture Capital has made only occasional inroads into the industry


3i invested in the start-up of Shandwick nearly 30 years ago and has

made some small investments since - including backing Gornall's launch

of Consolidated.

But the scale of funding made available to Murphy has never been


The British Venture Capital Association estimates that the media and

photography sectors only accounted for four per cent of the pounds 6.4bn

private equity invested in the UK last year.

As far as Bridgepoint and Close Bros VCT were concerned, however, there

was no reason to steer clear of PR. Bridgepoint director James Murray is

cagey about discussing whether future forays into the PR industry will

occur, saying only that his priority is to identify potential

acquisitions for Hatch.

Although Bridgepoint has invested in other marketing services companies,

this was its first foray into PR.

'One element we look for is that the sector has certain growth

characteristics, because we typically take a three or five-year view on

the prospects for the company,' Murray says. 'We've identified PR as one

sector with particularly strong medium growth prospects - which we've

calculated in double digits.'

There is, of course, ominous talk of an economic downturn in the air,

but that did not appear to colour Bridgepoint's view. 'No company is

recession-proof,' says Murray. 'But if you look at what happened in the

past couple of recessions, PR fares better than advertising.

'We have anecdotal evidence that clients are less likely to cut PR

budget than ad budget when times are tough,' he adds.

Close VCT Management MD Patrick Reeve agrees. 'PR is taking a larger

slice of the cake,' he says. 'It's becoming a more mature industry.'

Like Bridgepoint, Close VCT had not previously invested in a PR company

and has no immediate plans to do so again. 'One's a good number at this

stage,' Reeve says. 'We want to watch it take off.

What attracted us about Consolidated was that they have a good client

base. Most importantly, they had a stake in the business - that

demonstrates the kind of commitment we want to see.'

PR is, after all, a 'people business', relying on intellectual


It is precisely this fact that causes some VCs to blanche at the thought

of investing in the sector. Jon Moulton, managing partner at leading

private equity company Alchemy Partners, put it most colourfully when he

told one newspaper: 'I have seen people trying to build up people

businesses - it is like trying to build a skyscraper out of eels.'

According to British Venture Capital Association chief executive John

Mackie, Moulton is unlikely to be alone in his views.

'It's this idea that at night your assets walk out of the building. They

might be tempted with higher offers, decide they don't want to work as

hard or go home,' he says. 'These types of business are difficult to

back because you're dependent on very mobile assets. Some houses will

invest because maybe they have a lot of confidence in the people running

the business, others won't.

'Perhaps larger agencies are more likely to attract investment because

then you're also buying into a brand - that way you have more

protection,' he adds.

Murray is adamant there is no reason to treat a PR firm any differently

from another business. 'When we invest in any company we're not just

making a judgement about the sector, we're making a judgement about the

people we're going to back,' he says. And he believes that other equity

houses may start to see things the same way.

'If this goes well, it might be the template for other private equity

firms to come in and do the same,' Murray says. 'There's certainly

enough corporate activity going on in the sector and the consolidation

that's going to take place in European PR will be particularly

attractive. When a sector decides to consolidate, you'll find private

equity houses aren't far behind.'

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