The Connected Games Investment Gap
Games investment bank Digi-Capital has published the Q1 2013 Update of its Global Games Investment Review.
Commenting on the Q1 2013 Update, Digi-Capital Managing Director Tim Merel said, “The top line is that there is a significant connected games investment gap, despite strong underlying growth, exits and returns. It’s something we’re looking at very closely.
As we anticipated, the games investment market showed clear signs of transition in Q1 2013. Connected games revenue continues to grow across mobile and online, with the highest growth in high engagement mobile/tablet games. The games investment market stabilised to levels similar to 2012 after last year’s dramatic decline, with mobile/tablet and enabling tech/gamification dominating. Games M&A was similarly robust compared to 2012’s record, with non-US acquirers accounting for 6 of the top 10 games M&As to date this year.
Our forecasts are that connected games across mobile and online could grow total video games market revenue (excluding hardware) to $83B and take >55% revenue share at $48B in 2016F (12.2% CAGR 12-16F).
Despite strong market growth, VC investment in Q1 2013 only stabilised to similar levels to 2012 (after 56% decline from 2011 following Facebook and Zynga IPOs). On a pro-rata basis to 2012, Q1 2013 investment grew 35% by value to $191M and declined 4% by volume to 40 transactions. By value, mobile/tablet (65%) and enabling tech/gamification (24%) dominated, with no other sector achieving more than 5% of total investment. The picture by volume was similar, with mobile/tablet at 38% and enabling tech/gamification at 35%. Average transaction size increased 35% to $7.3M.
After a record year for M&A (>$4B in 2012), on a pro-rata basis Q1 2013 M&A declined slightly by 7% in value to $973M, and grew 33% by volume to 28 transactions. By value, mobile/tablet dominated with 80% of value, followed by console/PC due in part to the auction of THQ’s assets. Console/PC, mobile/tablet and MMO dominated M&A transactions by volume, with average transaction size decreasing 30% to $34.7M.
The games IPO market has followed a roughly 2 year cycle since 2005, with the last high point for IPO activity in 2011. While it is hard to predict market appetite for games IPOs, leading connected games companies are delivering >100% annual revenue growth and/or >50% EBITDA margins at scale. We think this could lead to a fresh round of IPOs going into 2014, as leading companies in the connected games market continue to grow and the investment market moves to the next stage in the cycle.
In summary, we see a significant gap for investment in connected games companies as the market transitions.”