Private equity firms are increasingly funding Spanish-language media, particularly in emerging U.S. Hispanic markets  - June 01, 2005

Report by Kevin Downey from Media Ventures

When peter davidson began buying media companies that targeted Hispanics back in the late 1980s, raising money for the ventures began with family and friends — and it didn't get much further than that.

Fast forward 16 years and Davidson, 45, has owned, managed and sold several media companies that target Latinos, including New York Spanish-language daily newspaper El Diario La Prensa and ethnic market research firm Cultural Access Group, which he sold earlier this year to Phoenix Marketing Group.

"Through that time, I've gone through the whole range of fund-raising, from friends and family, to interested experts, to begging for money from private equity funds, to being showered with money from private equity funds," he says.

Today, Davidson's most recent venture, the year-old Davidson Media Group (DMG), is an acquirer of radio broadcast properties and is funded in part by large private equity firms such as Cap Street Group and Citigroup Venture Capital International. As of last month, DMG owned 20 radio stations in markets with relatively new and fast-growing Hispanic populations such as Winston-Salem, N.C.; Springfield, Mass.; Richmond, Va.; and Huntsville, Ark.

"What is driving interest in the U.S. Hispanic market is that it's a fast-growing segment of the population, but you get emerging market growth rates without emerging market political or currency risks," Davidson says. "There is no political risk, and there is no currency risk because it is the United States."

DMG is one of a growing number of Hispanic-targeted media properties that are attracting the interest — and large cash reserves — of private equity firms. Besides DMG, two other radio properties were founded in the past 18 months with capital infusions from private equity.

In September, Houston-based Border Media Partners LLC received an $85 million capital commitment from an investor group led by Vestar Capital Partners, a leading investment firm that manages funds of approximately $4 billion with the ability to invest as much as $500 million in any one transaction.

In the same month, Sacramento, Calif.-based Bustos Media LLC secured $100 million from Providence Equity Partners, Alta Communications and Opportunity Capital Partners, which have a strong focus in investing in media, communications and technology.

The $100 million operation became the highest amount raised by any Sacramento-based company, in any kind of business.

John S. Bustos, chief operating officer and co-founder of Bustos Media, along with his brother, Amador, acknowledges a growing interest in private equity in Hispanic media. However, he cautions that the track record and experience of the people putting together these media groups are crucial to attracting capital.

The Bustos had started a radio company in 1992, with a private equity investment of $10 million. That company was eventually sold to Entravision in 2000 for about $425 million. "[Attracting private equity] was much easier now because we had a success story to tell," says John Bustos, the youngest of seven siblings and the only one who was born in the United States. (His family is from Michoacán, Mexico.)

Today, Bustos Media LLC owns and operates 20 Spanish-language radio stations in several markets with significant growth rates in Hispanic populations, such as Portland, Ore.; Salt Lake City; and Modesto-Stockton, Calif. In May, he announced the acquisition of its second FM station, KXCL-FM 103.9, serving the Sacramento market.

Although radio has been the recent buzz word in the private equity world targeting Hispanic media properties, there are some indications that money could be flowing to other areas.

As Marketing y Medios went to press, the San Antonio-based Spanish-language newspaper chain Rumbo was close to announcing a deal with a new private equity firm, after Madrid-based Recoletos Grupo de Comunicación in April said that it would no longer fund Rumbo's publisher, Meximerica Media. Recoletos committed a total of $16.5 million to fund the venture.

Media: driving the growth

Also indicative of the changing trends is the emergence in the past couple of years of new private equity firms. New York City-based Palladium Equity Partners and Chicago-based Hispania Capital Partners, which, along with Fontis Ventures and smaller firms, are managing hundreds of millions of dollars to help grow companies that are owned or managed by Hispanics, or that primarily target Hispanics with products, services or Spanish-language media. Hispania — which launched in 2003 with $70 million in private equity — was in charge of the sale of Chicago newspaper La Raza to New York-based ImpreMedia.

Although current estimates are hard to come by, Pilar Avila, vice president of marketing at Palladium, says Latino-owned firms are now managing close to $1 billion. "There is at least twice as much than there was a few years ago," she says. Palladium says it now has about $650 million under management.

In the late '90s, many investors were tied up in the dot-coms, says Victor Maruri, cofounder and principal of Hispania Capital Partners. Hispania has bought into firms such as Samy Cos., a Miami hair-care products company co-founded by celebrity Hispanic TV stylist Samy Suarez, and the Hispanic Yellow Pages of America Inc. "This probably would have happened earlier," he says, "[but] everybody in private equity was focusing on the dot-coms, so this got deferred. It was inevitable."

While private equity funds earmarked for the Latino market are emerging, only a relatively small amount of money is being put into Hispanic-targeted companies, according to Moctesuma Esparza, CEO of Maya Cinemas, a chain of movie theatres opening its first location in Salinas, Calif., this summer.

Esparza also helped secure financing for the English-language cable channel Sí TV, where he, too, became an investor. "There are two brand-new private equity funds that did not exist two years ago, and there is a third fund called Fontis, which is not limited to the Latino market but has an emphasis on the Latino market," Esparza says. "But to say we've gone from none to three [funds] is very little. There are maybe a thousand private equity firms out there." Indeed, most private equity firms targeting businesses that cater to Hispanics only got off the ground in the past few years, and their overall performance is yet to be established.

Changes in the demographic makeup of the Latino population have convinced investors that there is money to be made as never before.

The sheer size of the exploding Latino population is the driving force, but the growing affluence of Hispanics also plays a part. Investors wanting to make a significant return on their investments are taking note of emerging Hispanic markets such as Raleigh, N.C., that haven't been saturated with Spanish-language media.

Private investors seem to be jumping into local media like radio and newspapers, particularly in underdeveloped markets. The thinking is that Spanish-language television is already crowded with Univision and NBC Universal's Telemundo. Moreover, about 70 cable channels have popped up in the past few years, though most are tiny and often rebroadcasts of Latin American stations.

Radio represents a good opportunity, says Davidson. And the evolution of his investments point to that direction. In 1989, he secured a couple of million dollars from private investors to buy New York's El Diario La Prensa from Gannett Co. Inc. That company was then renamed in 1994 to Latin Communications Group (LCG), which, under Davidson's leadership, raised additional money and ended up buying 20 radio stations and three Univision affiliates.

LCG was then sold in 2000 to Entravision, the publicly traded media conglomerate that, among other things, owns 22 Univision affiliates. Entravision then sold El Diario La Prensa to a group of investors in 2003, which turned out to be ImpreMedia.

"Where you can play in the Hispanic market in scale is media," says Hispania Capital Partners' Maruri.

A large part of the appeal of media companies is the rapid growth in advertising revenue. In short, there is great potential for venture capitalists to see a return on their investments. Ad tracking firm TNS Media Intelligence, for example, is forecasting that advertising spending on Spanish-language television will grow 9.4 percent this year, compared with an average 5.1 percent for all media. Last year, advertising expenditures on Spanish-language media approached $3.9 billion, comparable in size to syndicated TV and outpacing national newspapers and outdoor advertising.

Moreover, the results of the 2000 census go a long way to explain the sudden interest. The Hispanic population grew 58 percent between 1990 and 2000. In 2004, there were an estimated 38 million Hispanics living in the Unites States. The Hispanic population is expected to surpass 60 million by 2020, according to a Pew Hispanic Center study released this year.

Of greater interest to investors is that Hispanics are starting to become more affluent, although still lagging behind the non-Hispanic population in terms of net worth and education. For instance, about 84 percent of native-born Hispanics, ages 25-29, have graduated high school. That compares to roughly 94 percent of non-Hispanic whites in the same age group. About 70 percent of native-born Hispanics who graduate high school go onto college, up from 50 percent in the early 1970s.

"The most impressive thing here is not [these] demographics, but the buying power of the Hispanic community, which is expected to approach $1 trillion by 2008 or 2009," says Sam Ramirez, managing director of securities firm Samuel A. Ramirez & Co., based in New York City. "Companies that are gaining market share in the Hispanic community are going to outperform their rivals."

Ramirez & Co.'s Hispanic Index, which tracks 10 publicly owned companies that are primarily owned by Hispanics or target Hispanics, grew 25 percent in 2004. That compares to a 3 percent increase for the Dow Jones Industrial Average in the same year.

looking for new markets

There is also a shift in the Hispanic population that is opening up opportunities for investors putting money into local markets.

While Hispanic markets such as Los Angeles and Miami are well established, particularly in terms of being saturated with Spanish-language media, new growth areas such as North Carolina, Virginia, Massachusetts, Nevada and the Pacific Northwest are far less so. Each of these areas added more than 200,000 Hispanic residents between 1980 and 2000, while other states like Kansas and Nebraska posted increases of more than 200 percent in that time frame.

Moreover, neighborhoods in markets not typically thought of as Latino hotbeds are also experiencing significant growth.

Simply, the potential growth of the Hispanic market is what has prompted investors to start putting money into companies and media outlets targeting Latinos. And while this is a relatively new development, the pace at which investors are targeting the Hispanic market is picking up, Maruri says.

"[Private equity investment] in the Hispanic market is just starting," he says. "People could argue that there is too much concentration in one area, like maybe radio. But the biggest problem is that there is an awful lot of talk but so far very little action."