This week, money bought talent.
Private-equity outfits Thomas H. Lee Partners and Bain Capital bought into the Firm, the talent agency founded in 1997 by young Hollywood agent Jeff Kwatinetz. And private-equity firm Forstmann Little & Co. agreed to acquire IMG, the large, old-school sports/literary/etc. talent agency whose charismatic founder Mark McCormack died last year. A simple coincidence? Or part of a larger trend? Will the bespoke-clad bankers be taking meetings with Armani-clad agents? Is Henry Kravis set to ankle William Morris?
Those who specialize in managing other people's money and those who specialize in managing other people's talent may be made for each other. The agents want to become more corporate, and the private-equity moguls are looking for a little glamour.
Talent management agencies are, by their nature, pretty unstable businesses. The careers (and endorsement potential) of athletes and movie stars can be crippled by injury (Martina Hingis), arrest (Kobe Bryant), or a series of bad movies (Sharon Stone). Talent agencies possess two fundamentally unstable assets: 1) agents, who can quit anytime and take their valuable clients to another agency; and 2) star clients, who can fire agents on a whim or who can suffer career disaster. For example, the Firm—in Hollywood, "the Firm" passes for a literary allusion—received a huge boost in 1999 when agents Rick Yorn and his sister-in-law Julie Silverman-Yorn defected from Michael Ovitz's Artists Management Group with Leonardo DiCaprio and Cameron Diaz in tow. (A humbled Ovitz ultimately sold the remnants of AMG to the Firm in 2002.) There are no guarantees that the Firm's young hotshots won't take their up-and-coming stars and quit for somewhere else in a few years. As a result, the people who own talent agencies have difficulty cashing out. It's tough to sell shares to the public or get another company to buy you if half your business could disappear tomorrow.
Agents today want to be more than commission collectors and baby-sitters to pampered stars. They want to be real businessmen and businesswomen. IMG has already made some significant strides in this direction. Its bread and butter may be representing superstars—the stable includes James Brown, supermodel Gisele, Itzhak Perlman, Liv Tyler, and Tiger Woods—but the company, with 2,200 employees in 60 offices and close to $1 billion in annual revenues, bills itself as a "sports and lifestyle management and marketing firm." It produces and distributes sports programming, runs fitness academies, irons out broad licensing agreements, and advises countries. (This list of recent accomplishments offers a sense of IMG's scope.)
The Firm has diversified from mere representation. In 2001, it purchased the largely defunct Pony sneaker brand, and then urged its clients to wear the shoes. The Firm also owns half of the North American unit of Virgin Drinks, Richard Branson's cola venture, and has invested in Build-a-Bear Workshop. Earlier this year, the Firm merged with Integrated Entertainment Partners, a product placement company founded by former Disney TV executive Rich Frank.
To be sure, the fields into which IMG and the Firm are diversifying are related to their core expertise in sports and entertainment. But event promotion, TV production, and the beverage business are very different—and more difficult—than negotiating apparel deals for tennis players and box-office percentages for starlets. In order to succeed, the talent agencies need capital, connections, and, not least, management. The private equity firms can provide all three.
What's in it for the private equity folks? At first blush talent agencies wouldn't seem to offer what such investors most desire—hard assets and reliable cash flows. Nonetheless, they find the large and growing realms of television, media, and entertainment attractive. Because of the mismanagement that pervades the industry, restructuring opportunities abound. If you can figure out how to run an entertainment company efficiently, you can print money. And who wouldn't want to own a piece of Tiger Woods or Gwyneth Paltrow?
Private equity firms have done best with industrial and consumer buys—Forstmann's single best investment was jet-maker Gulfstream, and Thomas Lee made a fortune on Snapple. But when they tread on unfamiliar turf, things can go horribly wrong. Forstmann lost $2.5 billion on telecom investments made in the late 1990s. To a degree then, acquiring talent agencies are a way for the private equity firms to retain high-priced sherpas who can guide them through treacherous terrain.
Perhaps the private equity guys do have personal ulterior motives. By acquiring talent agencies, Thomas Lee and Teddy Forstmann (whose ego is not small) will have captive audiences to listen to and execute any pitches they might hatch. This is an age in which it's no longer enough for a mogul to amass piles of cash and make the cover of Fortune. He's got to have his own TV show, a best-selling book, and endorsement deals. Perhaps they are buying talent agencies to make themselves the talent.