ImpactAlpha, February 7 – “Democracy dies in darkness,” the Washington Post’s Super Bowl ad warned. Independent media shines a light, especially in emerging markets where a free press is under pressure.
High-quality journalism in such markets, where rising middle classes are demanding reliable news, can also be an attractive investment. That’s the thesis of a new private equity fund from Media Development Investment Fund, a long-time manager of independent media funds.
“In all of these markets, the competitive advantage of the companies we’re working with is trust,” MDIF’s Harlan Mandel told ImpactAlpha. Reliable news businesses in politically risky and economically distorted environments, he says, are undervalued by investors.
MDIF has raised a nearly $13 million Emerging Media Opportunity Fund I to back digital news and information outfits in Latin America, Asia and sub-Saharan Africa where the free press faces continuing threats and restrictive business conditions. Companies willing and able to challenge limitations on press freedom are an opportunity. Investing in them can be high-risk, says Mandel, but says MDIF is “comfortable identifying companies and managers that know how to manage those risks.”
MDIF already has invested $5 million in five media ventures in Indonesia, India, Brazil and Peru. The capital will help the businesses build infrastructure and attract talent to grow robust, revenue-generating media businesses able to disseminate high-quality journalism – and hold governments accountable.
Indonesia and India, for example, fall into the “not free” press category, according to Reporters Without Borders’ press freedom index. Brazil and Peru are “partly free.”
It took MDIF about two and half years to raise Emerging Media Opportunity Fund I, the firm’s first private equity fund. Mandel acknowledges the challenges of overcoming investor skepticism of a first-time equity fund manager (MDIF managed an earlier grant-capitalized early stage equity fund whose results Mandel says mirrored that of a typical VC). He says the new fund’s pipeline is robust and plans to be fully invested by year’s end.
Dutch foundation DOEN anchored the fund with $5 million. The Soros Economic Development Fund added $5 million, including $1 million in first-loss capital. Denmark’s Investment Fund for Developing Countries and Danish media company JP Politiken Hus also are limited partners. MDIF also contributed capital.
Among the fund’s early investments are one of India’s leading digital news publisher Scroll.in, Indonesia’s Katadata, a data-driven business and finance news publisher, and Colab, a platform in Brazil that helps citizens hold local governments accountable. The firms’ business models include web-based and native ads, membership programs, software-as-a-service and video licensing.
“Everywhere in the world, good, objective journalism is important,” Stichting DOEN’s Idriss Nor told ImpactAlpha. “Even if people believe we’re in post-fact world, we believe that facts matter.” Nor says emerging middle classes in Latin America, South Asia and sub-Saharan Africa understand the value of fact-based media. It’s not just political media, he says. “Entrepreneurs need to know what’s going on” as well.
The fund is a milestone for MDIF, which launched in 1995 to finance independent media in countries emerging from communism in Europe after the collapse of the Soviet Union. Today it invests in news businesses all over the developing world in countries where press freedom is under threat. Though it has made equity investments as far back as 1998, its primary financing instrument has been debt. All told, it has provided $171 million in debt, equity and grant financing to 114 clients in 39 countries.
MDIF’s clients reached 93.7 million people with news and information in 2017, according to the firm’s most recent impact report. Nearly all of that audience lives in countries where the press is not free or only partly free.
Stichting DOEN, the fund’s anchor LP, challenged MDIF to think differently about its accountability to impact.
MDIF has structured the new fund to make the impact performance of investees a key component of its compensation as the fund’s manager. The investment firm’s share of the profits, known as carried interest, or carry, is contingent on meeting a range of impact metrics. Those metrics include the level of media freedom in the country at the time of the investment, actual impact of the investee’s journalism, and the ability to exit responsibly.
Pegging carry to impact, as well as financial performance, is a no-brainer if a fund manager claims to be pursuing both goals, says Andrea Armeni of Transform Finance, which produced a brief on fund managers that have adopted the practice. Armeni told ImpactAlpha he believes more impact-driven limited partners should push their managers to tie their compensation to impact outcomes.
“It’s a good way to separate the ones that mean it from the ones that don’t.”
Disclosure: ImpactAlpha’s Dennis Price is a former research consultant for Media Development Investment Fund.