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PE Shops Cautiously Eye Social Media

Like skeptical parents mustering up the courage to check out “The Facebook,” private equity firms are tentatively looking for ways to invest in social media.

While some firms with a technology focus, such as Silver Lake Partners and Elevation Partners, have taken stakes in major social media companies, growth equity-focused firms such as Summit Partners are honing in on emerging ancillary businesses with predictable revenues and growth potential.

Two sectors of interest are Social Media Management Systems companies and social media agencies. SMMS companies offer a technology platform that helps companies manage their presence in the social web, while social media agencies provide companies with social media strategy and creative services.

Unlike the often intangible value of many social media companies, these ancillary businesses can offer technology licensing revenue, contract revenue with client companies, add-on acquisition opportunities and the ability to launch new products that can be sold to clients. Many are generating upwards of $15 million of EBITDA–the type of numbers that draw the interest of mid-market shops, Amir Akhavan, a director of the media-focused investment bank The Jordan, Edmiston Group Inc. who specializes in social media, told Buyouts.

Summit Partners, for example, invested an undisclosed amount last year in Wildfire Interactive, which provides technology that helps companies create and distribute interactive social media campaigns. Also last year, Dachis Group, a social media agency that VC and PE shop Austin Ventures backed in 2008 with the intent on building through acquisitions, went on a buying spree, completing at least six deals.

The social media phenomenon puts private equity firms, which tend to be a conservative lot, in an awkward position. Most prefer to back companies with cash flow-positive businesses and predictable revenues, whereas social media companies tend to be asset-light, with potentially volatile valuations that make it hard to predict performance and for banks to offer leverage. But firms could miss out on the investment opportunity of a lifetime if they wait too long.

Akhavan of Jordan, Edmiston said private equity investments in the sector will accelerate in the next 12 to 24 months. “There are enough companies delivering services, technology and distribution at scale to global brands,” Akhavan said.

For more on private equity’s interest in social media–both as investors and participants–check out my feature here.