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PE v the titans - who will grab gaming in 2022?

Hemal Shah Hemal Shah

From venture capital funding start-ups to the world’s largest buyout firms, PE firms of all sizes have been piling into the video gaming market. With deal activity and value at a dizzying height, Hemal Shah looks at the market trends driving this appetite.

According to trade association Ukie, the UK games market was valued at £7 billion in 2020. COVID-19 restricted consumers to their homes, accelerating growth and resulting in a year-on-year increase in total market value of 23.1%.

Continued market growth is expected over the next three years to 2024, with a forecast compound annual growth rate (CAGR) of 5.3% from 2020 to 2024. This is being underpinned by a rapid increase in gamer numbers, which is expected to increase by 1.3 billion in 2015 to a total of 3.3 billion gamers globally in 2024.

Investment in the gaming sector

The UK video games sector is thriving amid booming demand for fresh games content. In 2021, Mergermarket recorded 23 deals in the video game sector involving a UK entity, up from 13 in 2020. Of these 23 deals, eight of them had a private equity involvement, with three of the deals taking place in September alone. The total disclosed deal value for these transactions at £2 billion almost doubles that seen in 2020 and more than four times the disclosed deal value recorded for 2019.

Technology insights autumn 2021 and M&A outlook in 2022 Uncover the three trends affecting the market

Graph showing gaming deal value from Q1 2019 to Q4 2021

Figure 1: Graph showing gaming deal value from Q1 2019 to Q4 2021

The largest deal of 2021 was Electronic Arts’ (EA) acquisition of mobile games developer and creator of the Golf Clash franchise, Playdemic Ltd, for just over £1 billion in June. This progressed EA’s expansion in the sports gaming industry as it already produces the sports franchise games of Madden NFL and FIFA. EA had also spent £1 billion on the acquisition of racing developer Codemasters earlier in 2021 (reported by Mergermarket in Q4 2020 when it was announced). These transactions reflect the strong consumer appetite towards games in the sports genre.

From venture capital funding start-ups to the world’s largest buyout shops, private equity (PE) firms of all sizes have been piling into the video gaming market, which has been given a significant boost by COVID-19 lockdowns.

The largest PE-backed video game deal of the year came in January, when Carlyle Group bought Jagex, the creator of popular multiplayer online role-playing game RuneScape. The US private equity giant paid a reported USD 530 million for the UK developer and publisher of video games and media reports suggest it's mulling over a potential float of Jagex on the London Stock Exchange.

At the other end of the spectrum, a venture capital team made of gaming entrepreneurs, Hiro Capital, has been making post-seed investments in a string of international video game studios throughout the year, after raising EUR 100 million for a fund.

Between these two ends, UK mid-market private equity houses have been getting in on the action too. In September, Livingbridge invested in Venatus, an advertising technology platform connecting advertisers to video gaming audiences. A month earlier, EMK Capital bought a majority stake in children and family video games publisher Outright Games – developer of games based on popular children’s franchises including Paw Patrol and Peppa Pig-themed games. And the end of the year saw an acquisition by Brainlabs (backed by Livingbridge) of Consumer Acquisition, a social media advertising specialist which manages social advertising spend for numerous games companies including Roblox, Zynga and Rovia. Our corporate finance team were involved in all three transactions. We also acted as reporting accountant on the listings of Devolver and tinyBuild on the London Stock Exchange and on the sale of Codemasters to EA and advised Supermassive Games on securing investment from Nordisk Games.

What is driving growth?

As mentioned earlier, people have spent more time indoors over lockdowns. There has also been a rapid rise of multiplayer games as a convenient social interaction platform where it has become harder to travel to meet in person and particularly for the tech-savvy Generation Z whose lives revolve around connected devices.

Console gaming popularity is also fostering demand for higher performing devices as dedicated fanbases are always looking to upgrade. This was seen with Sony’s release of its Playstation 5, which sold out almost immediately on release in 2020. The limited supply in these sought-after devices was further exacerbated by the global semiconductor shortage.

Ever-increasing upgrades to mobile phones has also led to a surge of people playing on their mobiles – 2.8 billion of the world’s 3.0 billion gamers this year will play on a mobile device. This compares with 1.4 billion on PC and 0.9 billion on console, according to Newzoo’s Global Gaming report 2021. Games that can be played across multiple mobile platforms are particularly attractive to investors because of the room for growth globally in the mobile device market. GlobalData estimates that the global mobile telecoms market will expand at a CAGR of 3.8% between 2021 and 2026, citing the emergence of 5G as a key driver in stimulating demand for mobile data services.

What areas are PE investors interested in?

The main investment area for UK private equity this year, based on information in Mergermarket company descriptions, appears to be online games – virtual, mobile or online.

The gaming sector is now becoming an attractive investment for private equity as game developers also monetise their catalogues through emerging subscription-style models such as Microsoft’s Xbox Game Pass and Google’s cloud gaming service, Stadia. Previously, companies would release a game and see a surge of income for the first few months of release before it fell off significantly in terms of revenue. The subscription-style model allows companies to still release games and receive the immediate revenue but allows subscribers to access older games, which extends the games’ lifecycle and maintains gamer engagement. Firms that have comprehensive catalogues of games are attractive to investors as they offer additional income streams that drop straight to the bottom line.

Outside of the mainstream games there’s a big market for indie games developers as they move out of the start-up space into mid-market. The UK has been a successful development ground for indie developers and publishers with PE supporting investment in businesses like Catalis, Marmalade and Tonic Games, which delivered a significant return for Synova when Epic Games acquired the developer of the hit game Fall Guys.

This healthy market trend is set to continue in 2022 as a raft of new games are set to be released with Ubisoft’s Avatar: Frontiers of Pandora (based in the same universe as 2009’s Avatar), Santa Monica Studio’s God of War Ragnarök and Nintendo’s Breath of the Wild 2 to the games consoles. The mobile market continues to thrive as more games are to be released onto Apple’s Arcade Games and Android’s Google Play Pass as well as continued updates to existing stalwarts such as Pokémon Go, Candy Crush, and Angry Birds.

The deals market is also expected to remain buoyant in the next few years with the expected increase in gamers worldwide and the ever increasing demand for content. This month alone has seen the war for content heat up with the two mega-deals, Take-Two Interactive Software’s acquisition of Zynga for $12.7bn and Microsoft’s USD 68.7 billion acquisition of Activision Blizzard. The market is consolidating with corporates and private equity investing heavily in increasing and retaining gamer loyalty.

PE interest remains high in the gaming ecosystem and more deals will be fuelled by the underlying growth prospects, a fragmented indie developer market, and the growing services demanded by the games companies.

For more insight and guidance get in touch with Hemal Shah.