Despite certain regulatory and challenges, PE buyers will likely see more investment opportunities in the gaming industry.

By Neil Campbell, Greg Roussel, Mike Turner, Adam Czernikiewicz, David Walker, Tom Evans, and Catherine Campbell

The global gaming market reached a valuation of US$135.8 billion in 2020, accounting for a staggering 53.3% of the digital media industry. Further, global video game revenue in 2020 jumped by 20% to US$179.7 billion, making the sector larger than the film and North American sports industries combined.

PE firms have demonstrated their growing appetite for gaming deals, particularly those with successful online multiplayer titles and loyal followings. Notable recent examples include Carlyle’s acquisition of Jagex (Runescape and other titles) and Synova Capital’s sale of its position in Tonic Games (Fall Guys / Ultimate Knockout), both of which we advised on.

While the gaming sector has benefitted from COVID-19 precipitated changes to consumer behaviours, the uptick in gaming adoption is not merely a temporary spike; market forecasts project 10.2% annual growth through 2025, with sales rising across consoles, mobile games, and esports. As the gaming sector continues to boom, we believe that PE buyers will see more investment opportunities.

A Maturing Market

The gaming sector has developed significantly in the last five to 10 years, attracting more institutional investors, while also remaining fragmented with smaller players developing exciting titles and ideas. Venture capital firms have enjoyed success in the video game space, which we believe is likely to generate a strong pipeline of acquisition opportunities for PE buyers. We also anticipate significant scope for PE-sponsored buy and build activity across the industry.

Despite these developments, there is no shortage of exit opportunities for attractive gaming assets. SPACs and the public markets, particularly NASDAQ, offer viable exit routes to developers from around the world. Further, a growing number of well-capitalised developers are seeking acquisition opportunities of smaller players, with large- cap gaming companies prepared to pay high multiples for strong assets. Accordingly, PE dealmakers should expect competitive tension on attractive acquisitions.

Crafting the Best Deal in a Global Market

M&A activity in gaming is now truly global, with robust gaming industries taking root in markets ranging from Stockholm to Zagreb to Tel Aviv. However, the industry’s globalisation can bring challenges for dealmakers seeking to navigate complex and conflicting rules.

Dealmakers will need to verify key IP and software ownership issues, including use of open-source software, external developer risks, and securing trademark protections and other IP rights across key jurisdictions. Compliance is also critical. The huge increase in users is a key driver of many successful games, bringing privacy and child protection regulations into focus.

While the regulatory landscape has improved as global regulators clarify their stance on sector-specific issues (such as in-game purchases), challenges remain. European competition regulators have articulated ambitions to enhance consumer protection and have targeted cross-border selling restrictions of games. Further, loot box use (game features associated with gambling that allow access to a virtual box of items for in-game use, either acquired by gameplay, or purchased) has witnessed greater enforcement particularly in Europe; notably, a leading gaming company received a €10 million fine over loot boxes last year.

Firms looking to buy into the sector should also consider that video game developers often require a significant upfront and ongoing investment, particularly on marketing spend. Games can take several years to develop, especially in the console space. However, successful games can have a lifespan lasting more than a decade (in fact over 20 years in the case of Jagex’s Runescape), generating attractive returns for successive investors.