The fall of Vice: private equity’s ill-fated bet on media’s future
The evaporation of TPG’s $450mn investment shows what can happen when Wall Street collides with an uncontrollable creative industry
When private equity investors put nearly half a billion dollars into Vice Media in 2017, co-founder Shane Smith hinted that the cash would help his digital media company achieve a public listing that “would look very sexy”.
Speaking at an advertising festival in Cannes, with sunglasses on and the French Riviera behind him, the blustering media executive joked with reporters that he “rounds up” Vice’s $5.7bn valuation to $6bn “because it’s easier to say”.
For years, Vice had been widely regarded as the future of media. The injection of cash led by private equity group TPG and its then-partner Sixth Street was meant to propel the company towards either a splashy initial public offering or a multibillion-dollar sale.
Instead, the opposite happened. After a series of disappointing results, years of chaotic management, risky endeavours and a liquidity crisis, Vice has filed for bankruptcy. TPG’s $450mn bet has been wiped to zero. Vice’s overall valuation rests below $300mn.
“You put a big target on your back when you say ‘we know better, we’re the future’,” says a former senior Vice executive. “Shane was always out trying to be the rainmaker . . . Everybody bought into it. But it didn’t come to bear, and now look at the downfall.”
Vice’s demise is the culmination of an era where legacy media and investors put billions into online news start-ups such as BuzzFeed, Vox Media and Group Nine hoping to capture millennial users and ad dollars. In 2012, Rupert Murdoch drank tequila with the bearded, tattooed Smith at Vice’s Brooklyn office. Months later, his 21st Century Fox group invested $70mn in Vice.
The fall is also the story of Wall Street colliding with a creative industry that was home to big personalities and towering egos. In a few months, the company that staked its reputation on being edgy and irreverent — publishing stories such as “Here’s everything you need to know about ketamine” and “Twenty hours in a New York strip club” — will be owned by Wall Street lenders.
It raises questions about the tactics of private equity companies, which have in recent years earned a reputation as the curse of the US news media, gutting newspapers for short-term profits. Some Vice investors and former executives, including shareholder James Murdoch, the son of Fox Corporation chair Rupert Murdoch, blame TPG for Vice’s demise.
“[James Murdoch] was very disappointed and upset at [TPG’s] position,” says one person close to the situation. (Many former Vice executives and investors interviewed for this article requested anonymity due to the legal proceedings; James Murdoch declined a request for comment.) A different person close to Vice described the TPG-Vice relationship as an ill-constructed marriage: two attractive and accomplished people who got quickly hitched only to realise that they were incompatible. Another investor described TPG as “choking the company to death”.
“We actively supported Vice throughout our investment and despite not controlling the company, we worked tirelessly with its leadership to enhance its profitability,” TPG said in a statement. “Vice’s liquidity situation is a result of operating losses and the company’s inability to pay debt that was separate from TPG’s investment,” it added.
Losers of the Vice bankruptcy include titans of media and finance — the Murdochs, Bob Iger of Disney, Sir Martin Sorrell, and others — whose companies or former companies combined poured about $1.5bn into Vice over the years, and lost almost all of it.
The losses reveal how a good sales pitch can impress even the most experienced giants of business — particularly during the “free money” era of the 2010s, when investors searched for places to put their cash.
The money transformed Vice from upstart disrupter to a standard-bearer for the future of digital media. As Smith himself framed it: “We were everybody’s kid brother until we started taking a lot of money from people.”
New kid on the block
Smith started Vice almost three decades ago as a counterculture magazine in Montreal. His early audience of a few thousand Canadians turned to Vice for its subversive articles about music, fashion, drugs and sex — topics that remained a core part of the brand.
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In 1999 Smith moved the operation to New York and befriended the likes of director Spike Jonze and media executive Tom Freston. With their encouragement he expanded Vice into online video, where advertising money was migrating in the 2010s.
Vice gained a big following for its eclectic mix of silly coverage — such as a dispatch from a journalist who had taken LSD and attended the Westminster dog show — with award-winning documentaries about the Islamic State in Iraq and Syria filmed in a characteristic gonzo style.
Mainstream media publications marvelled at Vice, the radical new kid on the block. “News Corp, Time Warner, Bertelsmann, Condé Nast . . . everyone is after us,” Smith told the Financial Times in 2012.
The biggest old media conglomerates piled in. Fox’s $70mn was followed by Disney in 2015 with a $200mn stake it quickly doubled. In 2014, Smith personally handed out $1,500 in cash to each employee at a company-wide party where rapper Lil Wayne performed. Smith’s taunting message to old media was clear: join us or get left behind.
Flush with cash, Smith in 2015 announced Vice would go on an aggressive “deal spree”. He took on a lofty, expensive new project: launching a cable news channel. Describing ambitions to build a hybrid of “MTV, ESPN and CNN” for millennials, Viceland quickly expanded into dozens of countries through a series of joint ventures.
Around this time, Vice spent several months discussing with Disney an acquisition of all of the company, but a deal never materialised, according to four people familiar with the matter.
What had started as a print magazine had grown into an online video and television production company with an array of global distribution and licensing deals, including a nightly news show for HBO, and an in-house advertising agency. Somehow, even while producing sponsored videos for legacy corporations such as GE, Vice held on to its “cool” factor.
You put a big target on your back when you say ‘we know better, we’re the future’
Former senior Vice executive
Enter TPG, one of the world’s largest private capital groups, which had made its name as a canny value and distressed asset investor in the 1990s, turning round busted airlines, banks, and the likes of Burger King and J Crew.
By the 2010s, with interest rates hovering around zero and corporate valuations soaring, the limited set of bargain buys forced TPG into so-called growth equity.
In these deals, TPG funded businesses on the cusp of going public that needed a last infusion of cash before reaching escape velocity. TPG made big bets on Uber, Airbnb and Spotify, among others, that would pay off richly.
But such investments come with conditions designed to protect the investor’s interests. TPG’s and Sixth Street’s money came in the form of preferred stock rather than common shares. The preferred stock paid a 12 per cent dividend in the form of additional stock and junior debt rather than cash and had other rights for priority payment which contributed to a “complex and restrictive equity structure”, according to bankruptcy filings. This investment, however, did leave room for higher priority senior loans to be undertaken by Vice in future years.
It was not the deal small print, but rather Vice’s staggering $5.7bn valuation that made headlines. TPG had placed Vice’s worth at more than double the market value of The New York Times at that time, and more than 22 times what Jeff Bezos paid for The Washington Post in 2013.
Vice insiders and investors point to Smith’s gusto — which had helped build a small punk magazine into a sprawling global media empire — as the engine behind what became a toxic cycle of ever-higher valuations.
“When you raise money at increasing valuations, if you have portrayed yourself at a certain value, you end up managing the strategy of the business in accordance with that,” says one large Vice investor. “So if you established you are a $10bn company, then you have to get bigger in a way that’s . . . irrational.”
Yet the 2017 valuation was something of a mirage. One person close to the company’s financials notes that while the TPG preferred stock investment valued Vice at a total of $5.7bn, such a number was largely contrived for marketing purposes.
Rather, the key figure at the time was the “liquidation preference” on the preferred stock of 1.8 times. That meant that in the event of a bankruptcy, TPG and Sixth Street were entitled to receive $810mn — their $450mn original investment multiplied by 1.8 — before any other of the then shareholders could get any proceeds.
By the time TPG entered the picture in 2017, cracks had begun to appear across the Vice empire.
Viceland, which Smith had promised would “bring millennials back to TV”, bombed, drawing minuscule audiences. The company was still winning acclaim for its journalism, notably a dispatch from a 2017 neo-Nazi rally in Charlottesville, Virginia.
But Smith’s executive team, as well as Vice investors and staff, were growing impatient. “People were mad that they hadn’t gotten rich like Shane had promised,” says a former senior executive.
“All of it was: come join us, get equity, we’re on the rise of new media . . . there were a lot of young people who didn’t understand what equity structure means,” the executive says, pointing to staffers who joined the company on salaries of only $40,000 a year.
Vice had spent heavily to launch its television channels, pressuring its finances, just as online advertising was slowing. Weighed by its miscalculation with Viceland, Vice missed its revenue targets by $100mn in 2017.
Capping off the bad year, days before Christmas The New York Times published a report of widespread sexual misconduct at the company. Vice’s irreverence, previously an asset, became a liability. Former executives describe that moment as the inflection point at which the company descended into “utter chaos”.
Amid all these factors, some investors ultimately blame TPG for Vice’s downfall.
“Private equity does this: they give you a high headline valuation. But the paper they give you is like a noose around your neck that gets tighter the longer you don’t have a liquidity event,” says one longtime shareholder, referring to either an IPO or a sale of the company. “If it goes past two years, forget it. They basically own the company.”
Other investors in Vice say that TPG’s capital structure bred a combative atmosphere because TPG’s preferred standing left it with incentives different than seemingly equally situated stakeholders. “The investment table pitted one against the other,” says one such investor.
Some insiders push back at the depiction. “This kind of business is hard to manage,” says another person close to the board. “The culture was high-flying and running-and-gunning and they got into some trouble.”
One investor says that Vice’s problem was not the strings attached to the money, but the fact that the company continued to haemorrhage cash each year, burning, by his estimate, $1bn in recent years. What Vice lacked was a stronger voice in the boardroom calling for a sustainable business strategy, says the investor.
People close to TPG reject the suggestion that its financing terms were too onerous, noting that it never took interest or dividend distributions in cash and continued to pump money into Vice after its original 2017 preferred stock deal.
In 2018, with the company in crisis, Smith brought in Nancy Dubuc, a respected television veteran, to take over as chief executive. Her task was to shore up the business and handle the “boring corporate stuff”, as one employee describes it. But that year, operating losses ballooned to more than $200mn, says a person familiar with the financials. Dubuc moved to reduce costs, cutting staff as part of a restructuring.
Even as Vice’s prospects deteriorated, new and existing investors — including TPG, Sixth Street, Disney, Technology Crossover Ventures, James Murdoch’s Lupa and Antenna Group — pumped in more capital in the form of junior debt and preferred equity.
This continued even after the Covid-19 pandemic hit. According to court filings, Sixth Street was able to raise more than $300mn in 2020 and 2021, while it sought in vain for a buyer or a public listing through a special purpose acquisition company, or Spac, merger. Much of the preferred stock and debt was accruing dividends and interest at double-digit rates, even if not owed immediately in cash.
In 2022, TPG and Sixth Street took control of Vice’s board, hoping to sell Vice for $1.5bn, or fetch hundreds of millions for different pieces of the business. Board meetings began to resemble shareholder meetings, with discussions centred around selling the company, rather than operations or strategy, according to people in the meetings.
The sales process coincided with a marketwide revaluation for media and tech companies and an advertising market slowdown. As the Federal Reserve raised interest rates, Wall Street soured on companies that were not profitable, or only marginally profitable.
Vice Media’s most consequential financing turned out to be a $250mn senior secured loan that was led by another hard-edged fund, Fortress Investment Group, in 2019. That loan’s maturity in late 2022, along with its priority ranking in the Vice capital stack, put Fortress in position to gain control of a reorganised Vice Media.
That is exactly what happened last week as Vice filed for bankruptcy, with Fortress striking a preliminary deal to swap $225mn in debt for ownership of the company.
The next chapter
Falling into administration is a humbling moment for Smith, who spent years gloating at old media. In 2016 he said that the media business was on the verge of a “bloodbath” and that “we will be sitting there laughing our heads off”, while predicting that Vice could soon be worth $50bn.
Fortress is open to keeping Smith on in some capacity, according to a person familiar with the matter. Fortress executives speak highly of Vice’s studio and television news units, as well as the Virtue ad agency. They are less keen on Vice’s online publishing business, where they will look to cut costs. But Fortress has no current plans to shutter Vice News, according to people close to the situation.
Apart from TPG and Disney — which had already written off its entire stake in 2019 — another person who has suffered losses from the Vice debacle is James Murdoch. After serving on its board for several years while he was chief executive of 21st Century Fox, Murdoch used some of his proceeds from his father’s blockbuster Fox-Disney deal to invest in Vice. It was one of his first bets after stepping out of his father’s shadow. “James is super involved,” says a person close to the board. “It’s his money but it’s also reputational.”
Company insiders insist that Vice’s cost structure has markedly improved with the input of the private equity investors, even if revenue has not rebounded. What was once a complicated set of disparate media segments had been streamlined and headcount has been cut in half.
Vice insiders and investors are holding out hope that another bidder will enter the room. They believe that the bankruptcy process will rid Vice of its maze of financial liabilities, emerging leaner and more attractive to acquirers.
“There is no better salesman than Shane . . . and that [current] valuation couldn’t be lower,” says a person close to the board. “Buying something cheap cures a lot of ills.”