Digi-Capital’s new Games Investment Report Q3 2019 shows that after a record $5.8 billion games investment in 2018, VC and strategic games investors poured another $3.8 billion into games companies in the first half of 2019. This makes the last 18 months games fundraising equal to the previous five years’ games investments combined at $9.6 billion.
If games investors continue at a similar rate for the rest of the year, they could take combined 2018 and 2019 games fundraising higher than all investments from the previous eight years combined. Yet at the same time games company M&As and IPOs dropped to 2010 levels at only $1.1 billion for the first half of the year. This dynamic might have created a significant financial overhang for games investors.
Games revenue forecast (software/hardware combined) could hit over $200 billion by 2023 driven largely by mobile and PC games, making it highly attractive for major operators. Yet games are inherently hit driven, as well as being consolidated around major franchises with the top 10 companies driving 3/4 of public company revenue and over 4/5 of public company market cap globally. Lean indie games developers can do spectacularly well if they develop one or more hits (e.g. King $5.9 billion, Supercell $8.6 billion), but even they acknowledge that this is hard to predict.
The games market drove $22.4 billion M&A in 2018 at the second highest level ever recorded, in contrast to games M&A dropping to $1 billion in the first half of 2019. Mobile games (at 66 per cent) and PC games (particularly MMO/MOBA at 18 per cent) drove the bulk of games M&A over the last 5 years, but in 2019 fell to levels not seen since 2010/2011. This decline has not been made up by other sectors.
The games IPO market has followed a recurring 3 year pattern over the last decade, with one big year followed by two quiet ones. This pattern appears to be repeating, with a slow 2018 followed by an even quieter first half of 2019. Yet it looks like the delayed DouYu IPO could break the drought for games IPOs.
Combining games M&As and IPOs for total exits shows the market has been at or near record levels for the last 3 years, but dropped back towards 2010 levels in 2019. The largest pools of recently unrealized capital (i.e. last 18 months’ games investment compared to games M&A in the first half of 2019) are in eSports at 292x, games tech/other (games engines, games streaming etc.) at 31x, mobile games at 29x and MMO/MOBA games at 20x. While there could be significant exits for specific games companies in these and other sectors in coming years, a broader catalyst might be needed for all this money to deliver a return.
The games market is now largely consolidated, apart from a few, early stage growth sectors like AR/VR and eSports. Public games companies buying cash flow and growth drove record M&A over the last 5 years, but the lack of exit activity in the first half 2019 (as well as the recent cancellation of the Nexon sale process) might signal a slowdown.
Strategic games investors operate with long term commercial returns in mind, but VCs are more geared towards a 10x return on investment and shorter investment horizons. VCs have also been historically wary of games investment because of their hit driven nature. So while games investors have become braver in the last 18 months, their enthusiasm could have unintentionally created a financial overhang in the context of the current games exit market. As always, only time will tell.