DDM Games Investment Review Q3 Report

2020 is a Record-Setting Year for Games Investments

As we head into the fourth quarter of 2020, video games continue their resiliency. With the exception of certain eSports segments affected by lockdown restrictions like live events, gaming revenues have been up as player engagement has increased dramatically during the Covid-19 pandemic. Last quarter, based on companies reporting record monthly revenues, we increased our 5-year CAGR to 7.7%, an 11.6%+ lift, with revenues reaching nearly $280 billion in 2024 (excluding games advertising). However, gaming revenues are not the only area reaching new highs—what started as a slow year for investments has turned into a record-setter among investments as well.

Investments

The value of tracked investments for Q3 was more than all of the investments from 1H 2020 while the volume or number of deals of Q1-Q3 2020 outpaces 2019 at nearly +50% over Q1-Q3 2019. Q3 2020’s 110+ tracked investments reached $5.2 billion and brought the total for the first three-quarters of 2020 to $9.9 billion. This alone is the highest amount tracked for any year with the next highest year being 2017 when investments totaled nearly $8.0 billion. eSports and Mobile investments were the most active segments followed by Tech/other, Console/PC, and AR/VR.

Unlike Q2 where 82% of the quarter’s investments were driven by post-IPO equity raises, Q3 was driven by two areas: IPOs that totaled $2.1 billion and accounted for 41% and Epic Games’ raised funding that totaled nearly $1.8 billion (valuation of $17.3 billion) which accounted for 34% of the quarter’s total investments. It is noteworthy that Epic Games’ funding totaled more than the disclosed investments from all categories combined in this quarter when excluding IPO and Post-IPO equity raises.

We track deals at many funding stages such as Accelerator, Pre-Seed, Seed, and Series A to later stage funding rounds like Series G. Seed funding was the most common with a volume of 45 transactions. Series A was the next common funding stage with 20 transactions.

With the Q3 report, we changed the classification of MMO/MOBA transactions to Mass Community Games (MCGs) which we feel better encapsulates online games ranging from MMO to MOBA and includes battle royale games. Though this has been a slow area for investment in recent years, early stage investments like Build a Rocket Boy’s $40.7M may still be sizeable because of the large development and technical resources needed to create these games. As there is more talk about metaverse games and worlds, we may see renewed investment interest in this area.

If we remove Epic Games, the median category Tech/other investment value is $5.6 million.

For this quarter, there are familiar names of investment firms who stood out for participating in a number of investments. We list the most active firms by deal volume for the quarter as well as the total value of the disclosed investments in which they participated. Since announcements do not break down each participant’s contribution, there is no way to determine how much is invested by each firm on an individual basis. It is noteworthy that BITKRAFT Esports Venture dropped the “Esports” from its name and its Q3 investments in mobile games publisher Gamezop, development studios Starform and Carbonated, and voice changing tech developer Voicemod, show it has branched well beyond its original focus of eSports.

M&As

In Q3 2020, we tracked 54 acquisitions and mergers, surpassing 2019’s average deals per quarter of 41. The total value of disclosed deals for the quarter reached over $3.5 billion, more than double Q2’s $1.6 billion, and 2020 through Q3 is more than 1.6x larger than all of 2019. Like investments, eSports and Mobile were the most active segments followed by Tech/other and Console/PC.

Two large transactions lifted Q3. Zynga’s acquisition of Peak Games at $1.85 billion accounted for over 50% of the tracked M&A transactions. Tencent also increased its stake in game streaming platform Huya to 51% (70.4% voting power) with an $810 million share purchase through its subsidiary Linen Investment Limited. Embracer Group was the most active acquiring company in Q3, announcing acquisitions of eight companies as well as raising an additional $648 million earlier in October for future acquisitions.

We note that a few companies became public through reverse mergers in this quarter: ESE Entertainment, PopReach, and TGS Esports. These reverse mergers allow private companies to bypass the traditional IPO process and raise capital after gaining control of a public company, thus becoming publicly traded in the process. In these instances, each went public via a Capital Pool Company (CPC), a Canadian publicly traded holding company. Overall, we are seeing more coverage on reverse mergers via a CPC and another type of holding company, Special Purpose Acquisition Corporations (SPAC), and expect more transactions of this nature in the future.

IPOs

We have noted a historic three-year cycle for IPOs where one large year is followed by two smaller years. We saw only a couple of IPOs during the first half of the year, with one company even delaying its IPO, and considered that the pandemic may be affecting this cycle. Four companies held IPOs in Q3 bringing the volume of IPOs to six. The largest, Unity’s $1.3 billion IPO on September 18th, accounted for 60% of the quarter’s IPO values, and its market capitalization was $13.7 billion. Unity and the three other companies that held IPOs—Corsair, Kakao Games, and Archosaur Games/Zulong Entertainment—all ranked in the top ten for Q3 investments, achieved market capitalizations above a billion dollars, and were a big boost of confidence in raising capital on public stock exchanges during uncertain times. Total market capitalization from all IPOs in 2020 quarter-to-date is nearly $20 billion, 3.7x the total of 2019.

In 2019, total exits (M&As and IPOs) dropped 63% from 2018 and after record levels of the previous 3 years. However, due to the size of the IPOs in Q3, 2020 has already passed $26 billion in exit value and is well-positioned to pass the highest year of exits, 2016 at nearly $29 billion. As seen in the following chart, if no other IPOs occurred for the rest of the year, M&A levels would have to drop to levels not seen since prior to 2010 for 2016 to remain the highest year.

2020 is seeing record level player engagement, revenues, and investments across the games industry. We expect continued momentum through 2021, bolstered not only by the excitement of next gen consoles and games but investment news such as:

• Microsoft’s acquisition of behemoth developer/publisher Bethesda’s parent company ZeniMax for $7.5 billion to close next year
• Playtika, Roblox, and Skillz going public
• Deployment of recently created or injected funds including BITKRAFT Ventures (USA), Lumikai (India), March Capital (USA), Transcend Fund (USA), and VGames (Israel)

The Q3 2020 report is now available for purchase. In addition to our industry forecast, the report contains a complete list of investment/M&A transactions from the quarter as well as expanded lists of the quarter’s top transactions and investors. For more information on our Q3 2020 report or DDM’s Game Investment Review, visit www.ddmgamesinvestmentreview.com or e-mail data@ddmagents.com.

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