• by Erik Sass , January 15, 2007

2006 was a blockbuster year for private equity--with big implications for media companies, which saw a flurry of acquisitions by venture capitalists and other investors. According to the Private Equity Analyst, a newsletter published by Dow Jones & Co., private-equity firms raised $215.4 billion spread out among 322 funds. That's 22% higher than the previous record, during the 2000 bubble, and 33% more than 2005.

For starters, major players, VNU, Reader's Digest, Primedia (now Prism Media), were all acquired in private-equity deals. And many speculate that the Tribune Co. or one of its key assets, the Los Angeles Times, will eventually fall into private hands.

"The robust fund-raising climate was buoyed by investors' willingness to plunge ever-larger sums into this asset class, Jennifer Rossa, managing editor of the Private Equity Analyst, was quoted as saying, "as well as buyout firms pursuing bigger acquisitions at a faster pace."

Moreover, the private-equity investors don't seem to be repeating the mistakes of 2000.

While the first round of fund-raising funneled cash into poorly planned and hastily constructed dot-com start-ups, a good part of the second wave is going to mergers and acquisitions of established companies with a proven business model.

At a conference in November, Toni Schneider, a venture partner in True Ventures, emphasized that the period in which investors poured money into new, untested start-ups is over. Instead, venture-capital managers are looking for companies that need "many small investments to tweak an organization that's already got it figured out," he said.

Companies that attract investment will be decentralized, using open-source technology and distributed workforces, according to Schneider. "We want entrepreneurs who are extremely efficient in the way they spend their money."

Jay MacDonald, a partner in digital media and technology for DeSilva + Phillips LLC, an investment-banking firm, spoke at the same conference, noting that traditional media companies pursuing "transformational strategies" have strong reasons to initiate or continue M&A and investment activity in 2007.

"They're not going to get that bump in their stock price showing 3% to 4% growth," he added. "They're going to have to make some acquisitions."