Private Equity Funding for Minority Media Ownership

I. INTRODUCTION The private equity market is a major source of capital in the United States. In 1998, organized private equity firms raised over $85.3 billion.(1) These firms are very interested in media investing. For example, one private equity firm, Hicks, Muse, Tare & Furst, recently financed the $2.1 billion purchase of SFX Broadcasting and the $1.7 billion purchase of LIN Television.(2) Private equity financing is important to all sizes and types of media companies. Much of the rapid growth of the Internet has been financed by private equity. The two defining characteristics of the private equity market are in its name. First, it is structured as equity or near equity (e.g., subordinated debt with warrants) investment, not debt. The investor is at significant risk and is looking for long-term capital appreciation. Second, it is an investment in an unregistered (private) security that cannot be purchased or sold in the public market. Private equity is one of the most expensive forms of finance. Thus, companies that raise private equity tend to be those that are unable to raise funds in other markets such as the bank loan, private debt placement, or public equity markets. Many of these companies are simply too risky to be able to issue debt or need funds beyond prudent debt levels. Investment in these companies may also require a large amount of investigation on the part of potential investors because little public information is available, and there are unique risks involved. The companies may also need investor guidance and expertise in developing their business. The private equity market, where a large investor can take the time and effort to understand such risks and may exert some influence over management in return for its investment,(3) may be the only viable alternative. From the perspective of an entrepreneur or top manager, being part of a company financed by private equity is often far more attractive than being part of a subsidiary of a large company. The private equity investor allows them to have a significant economic stake in the business. They are co-owners, not just employees. In addition, private equity investors give them much more control over their company. Private equity investors generally try to stay removed from day-to-day operations. Private equity investors function like active board members, not like a chief executive officer and headquarters' staff.(4) While private equity investors :may have investments in several different companies, these companies are usually allowed to operate totally independent of each other. II. OVERVIEW OF THE PRIVATE EQUITY MARKET(5) Sometimes a private equity investment is made directly by an investor in a company issuing the stock. However the bulk of private equity comes through the organized private equity market. In this market, an intermediary organizes investors and makes investments on their behalf in the issuing company. Figure 1 presents an overview of the organized private equity market. [Figure 1 ILLUSTRATION OMITTED] A. Issuers Issuers in the private equity market vary widely in size and their reasons for raising capital, as well as in other ways. Issuers of traditional venture capital are young companies, often developing innovative technologies, projected to show very high growth rates. They may be early-stage companies still in the research and development stage or the earliest stages of commercialization, or later-stage companies that have several years of sales but are still trying to grow rapidly. Since the mid-1980s, nonventure private equity investment has outpaced venture investment. Middle-market companies, roughly defined as companies with annual sales of $25 million to $500 million, have become increasingly attractive to private equity investors. Public companies also are issuers in the private equity market. Public companies that go private issue a combination of debt and private equity to finance their buyout. …