The interest a few private equity firms have shown in the sale of Grey Global Group draws attention to a sector usually absent from the PR business.With a few months of corporate thrusts and parries, the selling of Grey Global Group, the seventh largest marketing holding company, has developed from a drama dominated by a cast of regular characters to a show that could be stolen by one of a few surprising up-and-comers. When Grey put itself on the market, the initial action was dominated by massive multinational holding companies, like WPP, looking to add to their already considerable rosters of advertising and PR firms. But more recently, some private equity investors have entered the stage. Just last week, New York's Quadrangle was reportedly working on a bid with Havas, the sixth biggest holding company. Hellman & Friedman is said to be working with former Young & Rubicam chief Mike Dolan. Regardless of whether these players are able to muscle in on Grey, their mere presence is likely to throw a spotlight on private equity, a source of funding that's often been a stranger to most professional services, including PR and advertising - especially since the tech bust. But, even at the lower part of the market, it seems that these firms are doing a lot to call attention to themselves. Despite an economic recovery that's been slow at best, a number of agency owners and industry observers have noted of late an increased interest on the part of private equity firms in buying into the PR business. "There are many [private equity] firms that are surveying the market and looking for the right opportunities," says Abbott Jones, MD at the investment bank AdMedia Partners. "We've helped explain the [PR] category to some firms that have not previously invested in it, and whether they'll choose to do something is not clear." A few owners of high-profile, independent, midsize firms, too, have reported interest from a number of private equity firms, including Boston's Summit Partners. No deals, however, have been announced. Calls to several of these firms, including Summit, were not returned. Making investments Different from venture capital mainly in that it's used to invest in more mature companies, often for management buyouts or buy-ins, a private equity investment is usually a prelude to a fast expansion and a sale or some kind of liquidity event. The funding can lead to a period of heady growth, but it also entails all the risks that come with bringing in new shareholders in a business. "The change involved in selling to a private equity firm as a financial investor is going to differ tremendously from the change that comes from selling to one of the holding companies," says Jones. "There is always new responsibility for meeting earnings targets. The private equity investors typically look at what a company needs to grow and will work to make that investment, which may mean taking a little less money out initially but then expecting a higher return later as they move to some exit strategy. The exit strategy typically is to consolidate a group of businesses to the point that it's got enough mass to attract a strategic buyer." Jones says that this type of investor typically starts rather large by buying a business of suitable scale to act as a platform for smaller acquisitions. That often means that the platform business will have revenues of more than $10 million and often closer to $20 million. There aren't many independent PR firms in that range, and a few interviewed say they haven't been courted. Some smaller shops, however, have been. One is Peppercom, which reported just over $7 million in revenue for 2003, up 24% from the year before. Managing partner Ed Moed says the firm isn't interested in selling either in part or whole, especially given some of the risk of the outside investors just pulling support if returns aren't up to snuff. "The positive thing about WPP and Omnicom [is that] this is their livelihood, and that is never going to happen," he says. "If you go to something that's new, as much as you can be the first or the lead, I think it's very scary. You can be in the middle of an earnout potentially, and they can just pull the plug if they're not making enough money." Many are skeptical about the gossip, privately wondering whether PR's returns are big enough to warrant private equity investment. Others suspect these investors of trying to snatch up some deals, especially if the industry is somewhat devalued because of the overall state of the economy. Elliot Sloane, CEO of the 25-employee Sloane & Co., has met with potential investors and he, like Moed, says his firm is not on the market. "What you're seeing out there are very pedestrian multiples," he says. "I'd be surprised if any of the top-tier firms - and I'm going to be bold enough to put myself in that - will sell at the current multiples. They're not embarrassing numbers, but they're certainly not the numbers you want if you're best-in-class." Many of the larger deals in the industry of the past year or so have involved private equity. Last November, Lake Charles, a Chicago-based private equity firm, bought public affairs shop Dutko Group. A few months earlier, in one of the most important transactions in recent years, a management group from Financial Dynamics used private equity funding to buy the firm's independence from Cordiant, which at that time was in the process of being folded into WPP. Since then, FD's US operations have been on a tear of new client wins, staff expansion, and office openings. The firm, best known for financial communications and investor relations, has now expanded into the public affairs arena, with a new office in Washington, DC. Declan Kelly, FD's US CEO, declined comment for this article but, in other interviews, has been effusive about private equity as a source for growth, while at the same time not foreclosing against FD being eventually sold again to a holding company. Talks of other deals While a Grey deal could perhaps dwarf these and raise private equity's profile in the marketing services industry, it's not the only game in town. Most interviewed for this article report that there is much informal and wide-ranging discussion about the possibility of different kinds of deals. That gossip isn't the most reliable of barometers and it's far from suggestive of another round of industry consolidation, but it does suggest a level of activity that hasn't been seen in a while. A few names and companies routinely come up, including MDC Partners, the Toronto-based network of esteemed ad agencies led by Miles Nadal. Nadal recently hired Clark & Weinstock founder Harry Clark to search out PR investments in the US. There are also rumblings that a few former agency bigs, among them Don Middleberg, are seeking backing to make a move. (At press time, Middleberg did not return a call for comment.) Many see the holding companies as sleeping giants on the deal front. Art Stevens, managing partner at consultancy StevensGouldPartners, says there has been a flurry of talk recently. "The phone has been ringing off the hook," he says. But in addition to financial types, Stevens has found there are a number of midsize and larger agencies looking to snap up boutiques, especially in investor relations, consumer, and even the technology space. Whether or not any deals go down in the next few months, both the activity within the industry and the interest from outside it are a good sign. "With the economy coming back slowly, even outside, sophisticated investors see public relations as very sexy and very high-growth," says Moed, "and as it's beginning to come back, they're thinking they might be able to get some good deals and buy into these fast-growth firms and have some strategic relationships."