Pornhub and the fake private equity firm

On 16 March 2023, it was announced that “IT company” MindGeek had been sold to a Canadian PE firm. MindGeek may not ring any bells, but perhaps you have heard of the company’s popular internet property ‘Pornhub’. No? Yeah, I haven’t heard of it either.

The deal has attracted very little scrutiny, given the status of MindGeek's internet properties. MindGeek's internet properties have around 124 million daily active users; for comparison, TikTok, which is under heavy scrutiny, has around 45 million daily active users.

The terms of the transaction have not been publicly disclosed but estimates of MindGeek’s value range from $475 million to $1.5 billion depending on where you look. In 2020, MindGeek generated $482 million in revenue and $186 million in EBITDA. No more recent data is available.

Questionable capital

Ethical Capital Partners is not truly a PE firm. On its website, ECP states, “We seek out investment and advisory opportunities in industries that require principled ethical leadership. ECP invests in opportunities that focus on technology, have legal and regulatory complexity and that put a value on transparency and accountability.” But this is actually its first deal; it appears to have been set up solely to acquire MindGeek.

The funding for private equity investments typically comes from institutional investors and high-net-worth individuals who commit their money to the PE firm's fund for a set period, often 10 to 12 years. ECP partner Solomon Friedman says that the firm is actually structured like a ‘fundless sponsor’, raising capital on a deal-by-deal basis. ECP has not disclosed from who the funds were raised.

A fundless sponsor is an investment fund that lacks committed equity capital required to complete acquisition transactions up front. After identifying a potential investment, the fundless sponsor seeks out financing for the deal. We do not know whether ECP is planning on making further investments or whether it has the capital to do so. So, the use of the word ‘capital’ in the name is kind of a misnomer but is nothing compared to the inaccurate use of the word ‘ethical’.

Even more questionable ethics

ECP Managing Partner Freddy Mansour said, “At ECP, we seek out innovative and ethically-driven companies that operate at the frontier of new, evolving industries.”

When announcing the transaction, ECP also stated, ‘MindGeek is a dynamic tech company committed to providing quality adult entertainment with an emphasis on safety, trust, and compliance measures that surpass those of other platforms on the internet.’

The truth is that even by porn standards, MindGeek is known as a bad actor. I won’t go into it here because it’s gross and this is a companies and markets blog but check out this piece by the New Yorker that details MindGeek’s disgusting record.

Because of MindGeek’s record, Mastercard and Visa cut ties with PornHub in December 2020. This was extended to all MindGeek subsidiaries in August 2022. Without access to payment providers, MindGeek's ability to collect revenue was stymied.

Perhaps because of this, in 2021, some of those now involved in ECP saw an opportunity to acquire the hamstrung MindGeek through Bruinen Investment Inc. offering $475 million. The deal failed as Bruinen could not raise the necessary capital.

A new strategy focused ESG may have been needed to raise the capital and hence the creation of Ethical Capital Partners. A naysayer might say that the use of the word ‘ethical’ has less to do with ethical leadership and more to do with opportunistically buying a distressed asset, painting it with a veneer of respectability, and then working to re-establish links with payment providers and mainstream advertisers to improve the value of said asset.

Ragtag team

This is not your typical deal and not your typical team. PE firms usually comprise professionals from backgrounds like investment banking, management consulting or industry-specific roles. ECP’s team is irregular…

One notable figure listed as an adviser is Kortney Olson. Her bio points out that she unofficially broke the Guinness World Record for fastest time to crush three watermelons between her thighs - a skill that, while entertaining, is questionable in terms of its relevance to investment results or governance. While the sentence (now removed) is meant to be lighthearted, it paints a picture of the unconventional nature of this entire acquisition.

The deal deserves more scrutiny - someone needs to crack this case open like an unlucky watermelon and see what’s really going on here.