Developments in the adtech sector within the last few weeks have shone the spotlight on possible exit strategies for investors, and identified trends which may have a significant effect on the future of the market.
On 21 September 2016, The Trade Desk (TTD) began trading publicly on Nasdaq. The demand side platform, which provides ad agencies with a programmatic platform for digital ads, saw its share price rocket to above $30 per share at points on the opening day, a 60 per cent increase from its initial pricing.
A few days later, mobile marketing tech firm AppLovin announced the sale of a majority stake to private equity firm Orient Hontai Capital for an estimated $1.42 billion. This follows a string of other high-value ad tech buyouts by Chinese companies; in August, a group of investors spent $900 million acquiring Media.net, a firm based in New York and Dubai that provides the tech for the contextual ads on Yahoo and Bing, and firms such as Smaato and NativeX have also been snapped up within the last year.
The success of TTD’s IPO and the notable upturn in Chinese investment will be food for thought for ad tech companies with one eye on the exit. In many ways, TTD’s success bucks the trend of the public markets being a notoriously difficult place for ad tech. Recent high-profile cases include Rubicon Project, which saw its value fall $200m earlier in the summer, and Rocket Fuel, which has seen its stock steadily drop from a high of over $66 per share two years ago. TTD’s IPO may therefore prove a watershed moment, giving cautious optimism to other investors that similar success may be possible in the future.
However, it’s unlikely that we will witness a tidal wave of ad tech firms going public in the wake of TTD’s IPO. First, TTD had cash and was obviously profitable, giving it an immediate leg-up when compared with many other recent ad tech IPOs. Secondly, the question remains as to whether TTD’s initial success will be sustainable, now that it has opened itself to the scrutiny of the markets. Some commentators have opined that TTD may struggle to remain innovative having gone public. Although we may see more IPOs in the near future, adtech’s rocky start in this space will doubtless weigh heavily on backers’ minds.
What then are the current exit opportunities open to Western ad tech companies? The traditional step has been to sell to a major industry player such as Yahoo, but acquisitions of this kind have been slowing recently. Although markets may be warming up to the potential of IPOs, with TTD leading the way, such moves may prove to be the exception rather than the norm. Chinese investment is therefore looking more and more like the most attractive solution.
Given recent developments, investment from Chinese backers is certainly a prevailing trend. In fact, some commentators think an ad tech investment spree has barely begun. Many wealthy Chinese investors face restrictions on property ownership in China and so have turned to the international markets as an investment opportunity, searching for undervalued Western assets and attempting to circumvent the country’s more challenging economic features. These investors are willing and able to spend big in order to fuel digital and mobile growth.
However, for ad tech companies an acquisition by a Chinese company is a far from straightforward move. The Chinese market is opaque and difficult to navigate, governed by an uncertain regulatory regime. From a Western perspective the motivations of investors are often unclear, and concerns abound that the Chinese government is artificially propping up the yuan, having spent hundreds of billions of dollars in foreign exchange reserves. These uncertainties carry risk, and it is unclear how things will play out in the longer term. That being said, it may be advisable for potential suitors in the ad tech sector not to dither for too long, as many believe that the Chinese currency will weaken in the next few years.
These concerns aside, a rapid inflow of Chinese investment has the potential to kick-start a new era for ad tech, acting as a spur to innovation and opening up new opportunities for global expansion. We may find it becomes the primary exit strategy for a while at least.