The legendary buyout firm Kohlberg Kravis Roberts is in heavy talks to take a potential stake in the Hollywood talent agency Creative Artists Agency according to people familiar with the matter, that could be priced at as much as $200 million.
But how do you value a business so dependent on the retention of finite groups of important people?
Companies like CAA are inordinately dependent on the retention of blue-chip clients and their agents—two groups of people who could leave the agency at any time. In the business world, this concern is referred to as a “key man risk,” and some companies actually buy insurance to protect them against losses that the departure of key men and woman could prompt.
The most famous example of a key man risk is probably Warren Buffett, whose followers often worry that his company, Berkshire Hathaway, could become rudderless upon his death or departure.
But key man risk has also been applied to money-management firms who depend on certain executives to retain business. The London-based investment firm Gartmore Group learned about key-man risk the hard way on March 30, when its shares plunged more than 30 percent after a star fund manager was suspended for allegedly steering trading business to favored brokers. News continues to dribble out on U.K. regulators’ investigation of the trader, and Gartmore shares, now trading at about $106, have not recovered.
Five years ago, the private-equity firm Rizvi Traverse Management took a controlling stake in International Creative Management, one of CAA’s biggest rivals, for about $75 million. Because the talent business is so unpredictable, however, the Rizvi team made no assumptions about whether any new business would come in the door, relying instead on profits from existing commissions, like ICM’s share of the profits of the sitcom “Friends,” according to someone who worked on the deal at the time.
A little over a year later, Robert Newman, the longtime head of ICM’s motion-picture unit, decamped for Endeavor Talent Agency, a top competitor.
CAA’s roughly 1,000 employee staff has been relatively stable in recent years, and the firm still boasts top-tier clients like George Clooneyand Julia Roberts, as well as athletes like LeBron James, who appears to be on the brink of signing a huge new basketball contract.
But keeping the agents who handle those stars around for the long term—especially if the firm’s leadership changes or KKR tries to reshape CAA’s insular culture in any way—could prove a challenge.
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