'Investors are interested in niches because they represent barriers to entry - which means longevity'

'Investors are interested in niches because they represent barriers to entry - which means longevity'

If you've been paying any vague attention to the games news recently, you'll notice a spate of developers and publishers going public. In 2018 alone, Codemasters, Team17 and Sumo Digital have all done their initial public offerings, following in the footsteps of Frontier Developments in 2013.

Frontier and Codemasters had the help of one Neil Patel, managing director at investment banking firm Liberum, in approaching their IPOs, who says that a great deal has changed since the Elite Dangerous firm went public five years ago.

"Before, companies relied on the retail channel to distribute and publish physical product and get it to the consumer," Patel tells

"There's been this channel that's completely disrupted by high-quality internet and online stores. As a publisher, you can engage with the consumer with no-one in the middle. It derisks a lot of these triple-A games launches. Before they would be released and everyone would worry whether it's going to be a hit or a miss. Now, there's enough social interaction - developers engaging with their communities in order to shape bits of their games - than there was 10 or 15 years ago. That's helped drive returns and interest in the sector."

This echoes the remarks of Codemasters chief Frank Sagnier when speaking about the racing specialist's IPO last week; the CEO said that digital distribution had had a stabilising effect on the games market that gave investors greater confidence.

"In the old days, Codemasters used to get 50 per cent of the lifetime revenue for a game on Day One or Week One. Now that's barely ten," Patel says.

"The rest of it can build. With in-game transactions, there's the potential to continue that lifecycle. There's now an understanding that the business models of these companies have changed because of the internet and because of lessons learnt from the past. People know they can't put their eggs in on basket; they need to manage launches really carefully to derisk them. They aren't all about Day One; it can be a six- or seven-year journey, like Elite: Dangerous or PlanetCoaster. They're still selling copies of that years on from launch."

Codemasters went public last Friday with an IPO that valued the company at 1m

As mentioned before, there's been a real surge in companies heading towards IPO. Patel says that this is because the games market is growing at a high rate which often means a higher return.

"As an investor, you are paid to make returns and make money grow," he explains.

"If you're managing money for a pension fund, there are various strategies you can have. You can put it in an income fund to get four or five per cent per annum. If you buy into a house builder like Taylor Wimpey, you can get six or seven per cent income. That's a pretty safe return and very attractive. But then there are other mandates that complement that and one of them is growth. In the modern world, growth is quite hard to come by. So fund managers go down the market cap. Taylor Wimpey is a multi-billion market cap company in house building. When you go down the market cap spectrum, you tend to find higher-growth company and those tend to be tech companies.

The beauty of the stock market is that it wants you to unleash your creativity by giving you money. They want to back you and they want you to be successful.

"Tech is a way to get access to IP that is genuinely unique with barriers to entry with long-term counter-cyclical growth characteristics. Within that, investors are looking at games as a really interesting sector within technology. You have growth and a certain level of counter-cyclic growth as well because the end market is growing. Newzoo shows that the sector is growing at seven or eight per cent. The UK's GDP growth is only two per cent; you have growth above GDP, which is the first excellent thing.

"Within that, you have games companies that are able to grow 12-to-20 per cent topline by managing launches and R&D spend so that they get profitability growth which is well above that of the market. Growth equals higher returns so, as a fund manager, you can complement your safe returns with something potentially a little bit riskier but with significantly more growth. The risk comes from the fact you're not building houses; you're making a computer game where there is inherent risk: you have to spend $10m plus on R&D and you have to spend the marketing in order to make that game a success. Who knows whether the game will be a success, but in the old days is that people used to worry about that spend and the success of the game."

But what exactly are investors looking for in video games? What makes a company worth investing int?

"With regards to Frontier and Codemasters, they have a nice mix of their own IP - people love companies to have that - but also there's external validation of their IP from third parties," Patel says.

"Universal Studios could have picked any games company on the planet to make Jurassic World for a long time but the company went for Frontier. To win that is a great validation of the team.

He continues: "Codemasters with its 500 employees, 300 of whom are in development, is one of the biggest racing studio in the world. That's interesting for an investor; that strikes them as a barrier to entry. You can't just suddenly be on the bleeding edge of racing with everything that genre requires; the rendering, the graphics, the sound, everything about that immersive experience. We don't think you can just put a flag in the ground and start hiring people from all over and trying to build it. It would take years to create an engine which has a good track record and be able to do these games at a reasonable cost.

"Investors are interested in niches - strength in verticals - because it represents barriers to entry, which in turn represent longevity."

Frontier's value has skyrocketed since the Elite Dangerous firm went public in 2013

Though an IPO is a great means of raising money for your company, it seems logical that you might lose some independence or creative control. After all, you are taking on other people's money and the focus would appear to be pure profit, thus limiting your creative freedom. But Patel says this could not be further from the truth.

"I've never witnessed the stock market having creative control over a games company," he says.

"If you're selling yourself into private equity and an investor has over 50 per cent of shares, they have control. But in the stock market the biggest investors are only five or six per cent. I don't think the stock market is going to tell a CEO what creative direction they should take. That's the beauty of the stock market - as a founder or owner or exec, listing your company won't relinquish your control. If anything, the stock market wants you to unleash that creativity by giving you money. They want to back you and they want you to be successful. If you've been successful in the past, that's a great signal that you could be successful in the future. If it's your own creativity, then why on earth would the stock market want to affect that? They're buying you, they're buying the business. They're buying the people and the IP because they want more of that creativity. The stock market encourages companies and backs them to be creative."

Moving forward, Patel says that he'd like to see British companies that represent other sectors in the market heading towards IPO.

"I'd love to see more British companies going public. I'd love to see different verticals. You have Codemasters representing racing, you have Frontier representing open-world expertise... I wonder what other verticals there are out there hidden in the British games sector," he says.

"I'm trying to find the next games company to bring to the stock market which has a really interesting niche. Niches are really exciting and interesting. They're perceived to have barriers to entry and longevity. If they created a niche, then they clearly have something interesting and different."

PCGamesInsider Contributing Editor

Alex Calvin is a freelance journalist who writes about the business of games. He started out at UK trade paper MCV in 2013 and left as deputy editor over three years later. In June 2017, he joined Steel Media as the editor for new site In October 2019 he left this full-time position at the company but still contributes to the site on a daily basis. He has also written for, VGC, Games London, The Observer/Guardian and Esquire UK.