By Katie Deighton and Rod James

Private-equity firm Truelink Capital on Thursday announced an investment in Channel Factory, an advertising technology company that uses AI to improve brands' performance online.

The deal, terms of which weren't disclosed, is the latest in a series of incursions by private equity into advertising -- two industries that until recently had very little to do with each other. The shift is altering the topography of the advertising industry, offering some smaller agencies new resources to grow and compete with the larger holding companies, particularly in the race to capitalize on artificial intelligence.

In the past year Interpublic Group, one of the world's largest advertising holding companies, sold two of its buzziest agencies -- Huge and R/GA -- to private-equity firms. Insignia Capital Group bought audio-focused agencies Oxford Road and Veritone One, and Shamrock Capital Advisors invested in De-yan, an artsy experiential and design firm that has worked with Louis Vuitton and Versace.

Those followed several other deals completed since the pandemic, such as Falfurrias Management Partners' 2023 investment in digital media agency Brainlabs and private equity-backed Plus Company's acquisition of advertising agency Mekanism in 2022.

"Going back 10 years ago, an agency owner might have been a little repulsed by the concept of private equity, and I think private equity had similar sentiments that marketing services were too volatile, and not where they wanted to be," said Jeff Marino, vice president at digital marketing investment bank Palazzo. "There's been kind of a warming up from both private equity and marketers as to what they can do for each other."

For agencies, private equity offers to help fill a gap left when holding companies shifted their focus from snapping up traditional independent shops to buying data and technology companies. Bringing a financial backer on board meanwhile has become a more alluring prospect for some agency founders as shorter-term assignments increase at the expense of long-term contracts.

"The industry at large is moving a lot towards project-based, which makes it harder to predict when you're going to have a lot of work or when you're not," said Megan Lally, the chief executive officer of Chicago-based advertising agency Highdive, which has created ads for brands including Jeep and State Farm, and took investment from Svoboda Capital last year.

"Our business was growing in such a way that we felt some jet fuel, in a way, could help us," she said.

Private-equity firms at the same time have become more comfortable backing businesses that lack the predictable, contractually guaranteed cash flows that reduce the risk of their investments and act as good collateral to borrow against. And the potential to profit from the technological transformation of advertising and marketing in particular has proved increasingly tempting.

But advertising's new investors are putting their money into a crowded and merciless business. Older, larger holding companies may no longer be snapping up advertising firms, but smaller players such as Stagwell Group and Brandtech Group have in the past decade been building up their own portfolios. Competition among those groups is rife as they continually pitch and repitch for clients' budgets, often whittling down their costs to win business.

The sector also comes with relatively high price tags. The most sought-after advertising and marketing businesses -- typically those with a technological or data edge -- can cost in the high teens as a multiple of their earnings before interest, taxation, depreciation and amortization, said Amir Akhavan, co-founder and managing director of boutique investment bank BrightTower, which counts marketing among its four focus areas. That compares with an average of 11.9 times Ebitda across all segments of North American private equity in 2024, according to consulting firm Bain & Co.

Professional growth

Private-equity investors hope ad agencies with proprietary technology and consumer data will make up for high prices with high growth.

"A lot of the traditional companies haven't been built from the ground up with those tools and the type of talent that can navigate them," said Charles Welham, a partner with London-listed Bridgepoint Group, which in February increased its minority stake to a majority position in SAMY Alliance, a social media marketing company in Spain that specializes in influencer marketing.

Bridgepoint's strategy is to professionalize founder-owned advertising businesses and build them to a point where they become attractive to larger strategic buyers.

Private-equity firms see an opportunity to buy and merge businesses into large, geographically diverse companies that can cross-sell products spanning marketing, advertising, public relations and other offerings, says Geordie Pierson, a partner with Falfurrias.

The Charlotte, N.C., firm in 2022 merged six businesses spanning disciplines such as communications, customer analytics and brand and strategy consulting into a new entity called Penta, with the aim of providing a one-stop shop for chief marketing officers and other executives who focus on consumer behavior, Pierson said.

Truelink in March acquired Interpublic's R/GA, a creative agency known for being one of the first to understand and capitalize on brands' interest in the internet. The companies said the deal would let R/GA "return to independence" and get a jump on its competition in AI with a $50 million innovation fund cash injection provided by Truelink.

Truelink said its latest investment will help Channel Factory, the AI-infused ad tech company, grow, by partnering with more digital media platforms and selling into more markets.

The advertising industry at large presents an opportunity partly because smaller agencies have the opportunity to leapfrog larger, less nimble ones by using AI, according to co-founder and managing partner Luke Myers.

Agencies that have done private-equity deals say they prized backers who understood that advertising is a relationship business, and left them alone to make the ads.

There can still be an adjustment period. Highdive as part of the Svoboda deal introduced an independent board of directors and set up quarterly board meetings, said Lally, the Highdive CEO.

"We were a little bit of fish out of water, in terms of following what a more formal board meeting looks like" at the beginning of the partnership, she said. "We were like, 'Oh, OK, this is how we participate? Sounds good.'"

Write to Katie Deighton at katie.deighton@wsj.com and Rod James at rod.james@wsj.com

(END) Dow Jones Newswires

April 24, 2025 10:40 ET (14:40 GMT)

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