Author: Kelsey Kovachik

The U.S. digital marketing services industry faced challenges in 2023, but it has seen a return to optimism in 2024. Agencies are pursuing M&A, building integrated capabilities, and leveraging AI and data analytics to drive growth and benefit from underlying market tailwinds.

JEGI CLARITY and CIL have conducted a survey of leading independent businesses across the U.S. digital services market to understand their outlook for 2024-25 and what opportunities they see for the year ahead.

The survey focused on three areas:

• Market conditions: How demand for services has changed in H2 2023 and H1 2024, and likely areas for growth into 2025.
• Industry trends: Specific initiatives digital marketing agencies are taking to drive top-line and bottom-line growth and benefit from market tailwinds.
• M&A outlook: Which areas are going to be the focus for investment and the outlook for M&A.

If you would like an in depth discussion on this topic please contact us. If you have any issues receiving the report, please contact Kelsey Kovachik at kkovachik@jegiclarity-us.com.

Author: Scott Mozarsky (Managing Director, US)

At JEGI CLARITY, we have observed strong growth across the majority of subsegments of the legal sector, including litigation support; the market segment for our two latest deals, the sale of litigation support services provider First Legal to Aurora Capital Partners and the sale of Counsel Press to Align Capital Partners. The litigation subsegments of the Legal Tech and tech-enabled services market have an aggregate TAM of over $50B which includes eDiscovery, litigation support, legal research, legal practice management software and litigation workflow platforms.

The Legal Tech market’s growth is driven by technological disruption, increased access to capital and the emergence of alternative business models. These factors are creating a fertile environment for investors and expanding deal opportunities in the market.

Market Drivers

2023 marked a year of solid growth for Artificial Intelligence (AI), with Generative AI becoming more mainstream. While 2023 focused on theoretical advancements and proofs of concept, 2024 has seen the emergence of tangible AI applications and their integration into organizational operations. Although AI’s impact on the legal industry will be profound, it is still early. AI is maturing and evolving every day.

As AI adoption has increased, several companies and financial sponsors have focused on leveraging AI to differentiate tech-enabled service offerings, which in some instances is enhancing value and profit margins in what historically were commoditized markets.

AI has served as a catalyst for technological innovation in the sector. This innovation includes AI generated transcriptions for court reporting and depositions and workflow improvements relating to document automation. AI is also being used to highlight inconsistencies in testimony in real-time during hearings and depositions for attorneys to enable them to better serve their clients. Another area that is gaining momentum is law firms leveraging AI for predictive analytics relating to likelihood of winning cases and size of potential settlements and damages awards.

The alternative legal services provider market segment continues to exhibit solid consistent growth driven by increased adoption by law firms and in-house groups. Investments in legal operations, technology as well as Legal Process Outsourcing (LPO) and Business Process Outsourcing (BPO) providers have generated strong momentum over recent years.

The recent loosening of restrictions on nonlawyer ownership of law firms under Rule 5.4 in Arizona and Utah has also stimulated activity and served as a catalyst for financial sponsors to come into the market. Some financial sponsors are deploying capital into law firms through managed services organizations similar to the patterns we have seen in the medical, dental, and tax & accounting verticals.

M&A Overview

Despite a choppy M&A market in 2023, the legal market was highly active for tech-enabled services deals, particularly in litigation support. Notable deals included the sale of JEGI CLARITY-advised Counsel Press to Align Capital Partners with the shared vision of building a diversified litigation support platform, as well as Gridiron Capital acquiring Esquire Deposition Solutions, Veritext acquiring Litigation Services and GCP Capital Partners acquiring KCC. Other legal market tech-enabled services sub-segments were also quite active including legal process outsourcing led by Consilio’s acquisition of Lawyers On Demand, and business process outsourcing led by Renovus Capital continuing to create a market-leading global platform at Harbor Global.

Legal software market deal activity was less consistent in 2023. That said, several marquee businesses were acquired at strong valuations including, among others, Casetext, Fastcase, Aosphere, Elite, Litify and Cipher. While the broader software market has not come back to the same consistent levels of activity and high valuations that we saw in 2021, quality businesses in the legal market are trading for strong valuation multiples.

We anticipate this trend to continue into 2024 and beyond.

2024 has seen multiple subsectors experiencing heightened M&A activity including litigation support, claims administration, alternative dispute resolution, legal process outsourcing, eDiscovery, and IP management. A consistent theme in the deals that have closed and the other deals in market is a focus on leveraging technology and AI in particular to drive better results and efficiencies.

JEGI CLARITY’s 20th Annual Media & Technology Conference in New York City brought together senior executives and investors from across the global media, marketing, information, and technology sectors.

At the conference, Philipp Mueller, Chief Analyst & Product Officer of Outsell moderated a panel titled, “Value Creation with AI – Productivity vs. Growth.” 

The panel featured Sejal Amin, Chief Technology Officer of Shutterstock, Nikesh Kalra, Chief Operating Officer of DeepMedia, and Ilya Meyzin, SVP, Head of Data Science at Dun & Bradstreet.

The discussion kicked off with Philipp reminding the audience that ChatGPT was only launched 15 months ago. While there has been time to understand what real value creation with AI can look like, achieving it still remains elusive for a lot of companies. He continued by sharing findings from a survey conducted by Outsell in Q3 2023 that revealed that over 80% of senior executives were experimenting with Gen AI, with a third feeling very confident that it would drive productivity improvements in their enterprises. However, nearly half of the respondents lacked confidence in the ROI of their AI investments, with only 10% anticipating revenue and growth.

The Impact of Generative AI on Productivity

Gen AI’s impact on productivity was the first area of discussion with the panelists.

Sejal Amin elaborated on Shutterstock’s utilization of Gen AI to enhance productivity across their operations by improving customer experience through actionable insights to their customer and sales teams, optimizing developer workflows, and bolstering infrastructure security.

Ilya Meyzin, added that Dun & Bradstreet had been employing LLMS for several years (large language models) to improve data quality, ingest data, and generate new types of insights.

The Issue of Trust and Safety with Gen AI

As Gen AI adoption increases, concerns regarding trust and safety become more acute.

Nikesh Kalra from DeepMedia discussed AI’s role in helping trust & safety teams combat nefarious content, which he quoted is now a $20bn market. 

Adopting Gen AI solutions from the third quarter of last year, Ilya from Dun & Bradstreet, emphasized the importance of addressing biases and hallucinations in AI, implementing rigorous data governance practices, and most importantly, using trusted and validated data.

Shutterstock has been using AI well before Gen AI became the norm, explained Sejal, to understand the users and meet their needs through personalized search, recommendation engines and content discovery tools. With the growth of AI usage within their business, they had increased their trust and ethics practices.

Nikesh Kalra reminded the audience that generated content was not just gathered from social media, but also from Zoom calls and across other platforms. With even the larger news and information services now turning to user generated content from sources like TikTok, he spoke about a move towards greater investment in the authentication of the data supply chain.

Licensing and Growth resulting from Generative AI

The conversation shifted to the potential to drive revenue and growth through Gen AI.

Dun & Bradstreet is navigating the delicate balance between licensing proprietary data and protecting market competitiveness, carefully weighing the revenue upside with strategic threats. Meanwhile, Shutterstock capitalized on its immense repository of assets through partnerships with Gen AI hyperscalers, resulting in their first deal with OpenAI in 2022. Sejal Amin, however, noted a shift in demand towards tailoring smaller data sets for more conversive models.

What’s in store for Generative AI in 2024? 

Finally, the panelists speculated on what the biggest development in AI would be in 2024.

For Nikesh Kalra it was the weaponizing of AI during the perfect storm of global elections, virality of social media, and the adoption of AI on a massive scale. Both Ilya Meyzin and Sejal Amin envisioned that the “rubber will hit the road” on Gen AI with worldwide enterprise adoption of it. Ilya also highlighted that in 2024 the emphasis on guardrails – LLM safety controls and protocols – will become increasingly important.

In conclusion, the discussion emphasized the potential of Gen AI to drive value, productivity, and growth, alongside the imperative of addressing the challenges of risk and governance for all.

For more information about our conference please click here.

JEGI CLARITY’s 20th Annual Media & Technology Conference in New York City brought together senior executives and investors from across the global media, marketing, information, and technology sectors.

The Conference finished on a high with a captivating session featuring Wilma Jordan, Founder and CEO, North America of JEGI CLARITY, in conversation with Duncan Painter, Chief Executive Officer of Flywheel, in a session titled, Flywheel: The Global Vision for E-commerce.

Stellar track record of build and sell

Wilma began by introducing Duncan, highlighting his stellar track record of building and selling businesses with achievements including a $848m deal for WGSN with private equity Apax Partners and the sale of Flywheel Digital to Omnicom for $835m. Duncan shared insights from his career, from founding consumer intelligence provider ClarityBlue, to navigating the challenges of transforming Emap from a company with zero market value through an IPO, generating a 1.5x return.

Omnicom’s purchase of Flywheel

Transitioning to Duncan’s current role within Omnicom, the conversation turned towards retail marketplaces as a pivotable force shaping the digital landscape, and the impact they will have on the consumer orientated purchase industry. Duncan highlighted the seismic changes looming and cited John Wren, Omnicom’s Group CEO, for his foresight in positioning the organization at the forefront of change with the purchase of Flywheel.

Future of E-commerce

The discussion naturally progressed to Duncan’s perspectives on the evolving landscape of e-commerce and the future of retail.

Duncan emphasized the dynamic nature of retail markets, comparing them to the stock market. He highlighted that the role of first party data is one part of the change but emphasized that the most significant element will be the provision, for the first time ever, of direct-to-consumer capabilities at mass scale with a real time view of trading across all environments. He quoted staggering statistics demonstrating Flywheel’s influence across global marketplaces with ownership of 50% of the top consumer packaged goods (CPG), 6,000 clients that use their platforms across 29 countries globally.

He continued by explaining that when they started to build Flywheel in 2015, they realized that they had to be inside the walled gardens of the marketplaces, building and leveraging capability for their brands. This approach not only allows the manufacturer to meet, and sell to their customers directly, but to know how every single US$ spent performs, allowing for pure retail optimization.

The future of bricks and mortar retail

With this retail trajectory, Duncan predicted that there will still be physical stores in 20-30 years, however they will be transformed into warehouses for collection rather than for customer facing retail space. With online retail sales expected to meet 40% of market share by next year and grow to 60-70% in the next five years, Duncan stressed the importance of a digital first approach, particularly as Generation Alpha had already reached 97% digital engagement.

The role of humans in future retail

Wilma inquired about the impact of digital retail on the retail workforce in the next 10 years with Duncan explaining a shift towards a more dynamic approach, where retailers would need to be “hedge fund managers rather than portfolio managers”. He explained that last year 70% of net growth on marketplaces within Amazon in the US came from direct brands from China trading directly, selling to the US population. He warned that Western retailers need to rethink their sales strategies to remain competitive against East Asian retailers whose P&Ls don’t include high salaried product, sales, and marketing directors, and therefore having the ability to invest in optimizing their products on retail marketplaces.

The rise of retail media

With the retail media market growing 100% year on year, even before optimization is realized, Duncan believed it will become the largest retail platform, boasting unparalleled attribution capabilities, “for the first time ever attribution is pure.” He underscored its transformative potential in advertising effectiveness and revenue generation, particularly evident in Amazon’s revenue streams.

For more information about our conference please click here.

A view on North America by Wilma Jordan

From a North America market perspective, I am optimistic that M&A activity will increase in 2024. Three factors contribute to this outlook.

Firstly, the accumulated dry powder among private equity firms in the US has surged from $2.39tn to a record $2.59tn over the past 12 months and many private equity clients are actively speaking to us about how they can deploy this both in traditional processes, and more creatively. Expect to see funds focusing more than ever on carve-out opportunities and asset combinations where they can create opportunities to invest outside of banker-led processes.

Secondly, given the challenging M&A market over the last 12 months, many U.S. private equity firms have portfolio companies that have exceeded their optimal holding period. In other terms, companies lingering in private equity portfolios for more than 5 years will need to be sold, as the time value of money diminishes with each passing year and pressure grows from LPs to return funds.

Lastly, assuming that the Fed is on track to start lowering interest rates in 2024, the cost of capital will decline with these reduced rates and the markets are currently pricing in a reduction of 50 – 100bps. We expect this to motivate buyers to adopt a more assertive approach in acquisitions as well as give sellers the confidence they need to take their companies to market at attractive values.

The US economy has remained stronger than many European economies, and US strategic buyers remain focused on acquiring growth both domestically and internationally. We predict that European based private equity owned companies will increasingly look to the US for buyers and investors, both as tuck-ins to existing platforms or as potential platforms in their own right.

All these dynamics will make for a more stable M&A environment that will engender confidence for buyers and sellers.

A view on the UK by Richard Vaughan

From a UK market perspective, I feel far more upbeat going into 2024 than I did going into 2023. While the outlook for the UK economy for 2024 is mixed, we are entering a period of greater certainty in the markets which, absent any new shocks, will drive opportunity for dealmakers.

Several of the key economic indicators look better than they have at any point in the last 12 months, with headline inflation down from over 10% to under 4% today and forecast to return to more “normal” levels by the end of the year. The markets are pricing in a reduction in interest rates of over 100bps and importantly consumer sentiment appears to have turned a corner as real income levels begin to improve.

This macro-sentiment reflects what we are hearing from companies across our sectors – 2023 was hard work for the majority and really a question of managing through, 2024 is about a return to growth.

From an M&A perspective we are seeing a growing pipeline of opportunities which should come to market during the year, across both private equity and founder owned businesses. Pitch activity was higher in Q4 than at any other point last year albeit in terms of timing, it feels like most businesses will be waiting to see how 2023 closed out, and what visibility looks like on 2024 before they push the button on going to market. Everyone is aware that 2024 won’t be 2021, the bar is higher and hence every transaction will get an increased level of scrutiny from buyers and investors alike, so vendors and their advisors will be keen to ensure that all boxes are ticked – financial, commercial, and strategic – in advance of engaging in a process.

Despite the challenges of the last 12 to 18 months, the UK digital economy and ecosystem is as strong and vital as ever – continuing to grow, innovate and evolve at an exciting pace and constantly creating new ideas and opportunities, which in turn should make for a return of a vibrant M&A market in due course.

A view on Private Equity by Marcus Anselm

2023 was clearly a challenging year for private equity across EMEA: a difficult economic environment combining high inflation, high interest rates and recessionary worries; broader macro concerns around geo-political instability and the impact of Gen AI; a dearth of top quartile assets choosing to come to market; and mis-matched buyer and seller price expectations. Given all this, it was no surprise that the number of European private equity deals across our sectors fell by 32% versus 2022, with the more leverage-reliant mid and upper market feeling the squeeze in particular.

Looking into 2024, we’d certainly hope that private equity related M&A will pick up.

On the sell-side, buy-out groups globally have a record $2.8tn in unsold investments, and GPs are under increasing pressure to start returning a flow of capital to LPs, not least in the context of a tough fundraising environment. Funds need to find a way to start exiting old investments over 2024 and they will likely become more creative about how they do this where needed. We are increasingly hearing more about private equity funds being open to structured transactions including deferred components and reinvestments to get deals closed in a way that they would not have contemplated in 2021.

On the buy-side, while everyone has talked about dry-powder for years now, it remains incredibly relevant. European private equity firms are sitting on a record €350bn of cash reserves, and although some of this can and has been deployed into existing companies or through continuation funds, ultimately both LPs and GPs need to see this being invested into new platforms. The broader economic and M&A environment should help achieve this in 2024 – inflation has dropped sharply across the region, interest rates are expected to fall through 2024, recessionary concerns are easing at an IC level and buyer-seller pricing expectations are beginning to align.

Of course, timing on this is hard to call but we would hope that these factors will drive markedly higher private equity related M&A by the end of Q2.

A view on Venture Capital by San Datta

Many in the start-up and venture capital community will be glad to see the back of 2023.

While some companies across our sectors continued to deliver truly impressive growth and/or profitability, for many it was a hard year with founders and entrepreneurs needing to focus much more on scalability, unit economics, GTM efficiency and cash break-even vs. topline growth, with the difficult cost-restructuring decisions that often came along with this.

Similarly, many investors were left looking hard at their in-prices and capital structures vs current asset valuations.

Looking forward, it feels like 2024 is going to be a year of re-alignment.

From an operational perspective, a lot of the really hard work has been delivered so companies are better aligned for the current environment. That may not mean a return to the 2021 and 2022 growth rates, but it does mean much more achievable, capital efficient and sustainable growth through 2024 albeit at a slightly slower pace.

From an M&A perspective, we definitely expect an uptick in M&A across the VC market over 2024 for several reasons. Firstly, we are already seeing much closer alignment around pricing between buyers and sellers, and we expect that alignment to get closer over the coming months. Secondly, strategics are back at the table, particularly in North America, as public market tech valuations have continued to strengthen in recent months. And lastly, many founder and VC backed companies are now looking at being part of a larger strategic in a more positive way than they would have done a couple of years ago – there are potentially huge synergy opportunities for independent businesses with the right larger partner, and an increasing number of independents are keen to explore these.

If you have any queries or would like to have an in depth discussion on this article or the broader market please Contact us.