Private Equity Investment in the Information Industry: Customer Benefit or Concern?

Article excerpt

One mark of a maturing industry is its ownership infrastructure. Our own information industry is a case in point. Led by technology advances occurring over the past decade or more, the information management and software industries continue to undergo significant change and to gain prominence in business and scientific circles.

Financial investors noticing these advances are gaining major influence through their industry investments. The amount of money available in the form of "cheap debt," which enabled investment companies to make deals that often made headlines, had an impact on all industries, including ours. Over the past few years, there have been increased and significant investments by private equity firms in library systems companies, publishers, and others providing electronic tools and content.

You might be saying, "So what? Why should I care about this? Is this something that matters to my organization or to me?" The short answer is "yes-it should and it does." A key question: What impact does this funding have on the shortterm and long-term products and services needs of information managers and librarians? As customers of companies being funded through various kinds of investment strategies, particularly private equity, librarians and information managers should be aware of how such investments can affect their operations, budgets, and strategic planning. It can be a good thing, to be sure, but there are also cautions you should consider.

INTRODUCTION TO PRIVATE EQUITY

Two terms frequently appearing in news releases are "private equity" and, related to that, "venture capital." According to Private Equity Info ( www.privateequityinfo.com/private-equity-firms, php), private equity investors buy, improve upon, and sell businesses in an effort to make money from the cash flow the businesses produce and from the capital gains received upon the sale of those businesses.

Venture capital is a type of private equity, usually used to fund startup and very early stage companies. Many of the internet startup companies in the late 1990s were funded this way. Other types of private equity include leveraged buyouts, which are used to take over a company in whole or part, and mezzanine debt financing. [For a comprehensive overview of private equity from the researcher's perspective, see Janet Hartmann's article in this issue titled "Putting a Public Face on Private Equity," pp. 14. -Ed.]

IMPACT ON PUBLISHING AND THE INFORMATION MANAGEMENT INDUSTRY

A number of large private equity investments are being used to re-energize established businesses. Many publishing companies and library systems vendors, ones that have been around for years, fall into this category. Private equity funding focuses on significantly expanding product development, marketing and sales, and other aspects of a company. The expectation is that the company will, in turn, gain significant value and then be sold in a few years (typically 3 to 5 years) at a substantial profit.

Private equity companies have targeted a number of publishers integral to providing important content to libraries and their clients. Kate Worlock, a director at Outsell, Inc. (www.outsellinc.com), lists a number of private equity firms that have invested in publishers in her August 2007 report "The Impact of Private Equity on Information Markets." For example, Candover and Cinven made major investments in Springer in 2003, while more recently (May 2007), Apax Partners and Ontario Municipal Employees Retirement System (OMERS) Capital Partners bought Thomson Learning, now known as Cengage Learning.

Major acquisitions of library systems vendors by private equity companies occurred in 2006. Marshall Breeding notes in the April 1, 2007, issue of Library Journal ("Automation System Marketplace 2007: An Industry Redefined"; www.libraryjournal.com/article/CA6429251.html) that private equity investment and open source software support has created a redefinition of the library automation industry. …