The appeal of sector-focused holding companies

AlpInvest Partners’ deal to acquire stakes in 17 digital marketing companies could be the tip of a very large iceberg.

On Tuesday, AlpInvest Partners announced it had invested $260 million in a digital-marketing group launched by former Microsoft executive and political strategist Mark Penn. The deal involved stakes in 17 marketing, communications and research companies held in a fund managed by Stagwell Group.

Secondaries market participants could be forgiven for not having heard of Stagwell. The Washington DC-headquartered firm is not a private equity shop per se, but it does manage a private equity-like fund that it uses to acquire assets. The firm is essentially a small holding company – a common structure in the advertising and media world, where consolidation has led to vertical conglomerates that comprise a number of different brand agencies.

Penn raised his fund in 2015 with the help of former Microsoft chief executive Steve Ballmer. The pair were the only two investors when the fund closed on $250 million, according to media reports at the time, suggesting they were the two investors who benefitted from the transaction with AlpInvest (the Carlyle unit has become the first outside investor in Stagwell, according to Tuesday’s press release).

According to a source familiar with the deal, Stagwell’s main backers remain invested, which means Penn and Ballmer sold partial stakes to AlpInvest.

Industry sources are being particularly tight-lipped about this deal. We’re not exactly sure why this is – could it be because Penn, a former advisor to Bill and Hillary Clinton, holds a certain clout around Capitol Hill? Or is it because the deal involved high-net-worth individuals sensitive to being linked to a liquidity process? What is clear is that this is the latest example of a GP-led process being run on a non-traditional private equity fund.

Part of Stagwell’s appeal is that it is understood to be the only digital marketing-focused fund around, so the opportunity for investment in the space appears significant. “Given the number of entrepreneurs creating businesses in the space, there are plenty more companies for Stagwell Group to pursue,” says Alan Pardee, managing partner and co-founder at Mercury Capital Advisors, which advised Stagwell. “The number of companies involved in the Stagwell portfolio are still the tip of the iceberg.”

Digital overtook traditional television last year to become the world’s biggest advertising medium, according to research by Zenith. The market intelligence firm estimates global adspend for mobile and internet to grow by almost $73 billion by 2020. In a growing sector where companies like Stagwell will continue to make acquisitions, it’s inevitable that investors will eventually seek some sort of liquidity and/or fresh capital for new investments. Dealflow-hungry secondaries buyers better be ready to pounce.

How big is the opportunity for holding company secondaries? Let us know: or @adamtuyenle