Private equity and venture capital investment in the global interactive home entertainment sector fell dramatically to $370 million across 70 deals in the first quarter, compared to $2.39 billion raised across 154 transactions during the same period in 2022, according to S&P Global Market Intelligence data.

Private equity-backed investments have been on the decline since the second quarter of 2022, when the sector pulled in $3.17 billion, the highest quarterly amount since 2020.

In the year to June 6, investments totaled only $490 million, putting the sector on course for the lowest annual investment total since at least 2020.

The sector is primarily composed of publishers and developers of video game products on mobile, PC and console platforms. It also includes a minority of education, fitness and gambling software produced for home consumption.

Regulatory risks

"The biggest threat [game] publishers and platform holders face is regulatory overhang. As we've seen over the past year, governments in major gaming markets can pull levers that suck hundreds of millions of dollars out of the industry," said Neil Barbour, associate research analyst at 451 Research.

India, citing national security threats, recently banned Singapore-based Sea Ltd.'s mobile-focused video game Free Fire, causing Sea's mobile revenues to fall over 50% year over year in the first quarter. In 2022, China ceased issuing licenses for new games, which hindered the growth for Tencent Holdings Ltd.

Video games are in a transitionary state, Barbour added. Nintendo's Switch, a console for video games, is almost at the end of its lifespan, and Microsoft is shifting its focus to cloud gaming. Mobile publishers are rethinking their user acquisition costs, and gaming based on non-fungible tokens (NFTs) has collapsed, Barbour said. In-game NFTs are digital assets backed by blockchain technologies that authenticate the ownership of in-game items, such as weapons, costumes, real estate and avatars.

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US, Canada dominate

US and Canadian interactive home entertainment companies received the largest portion of private equity capital. The region accounted for $4.50 billion of the $8.05 billion of investments in the sector globally from Jan. 1, 2022, through June 6.

Largest transactions

The largest investment by value since the start of 2022 was Epic Games Inc.'s $2 billion funding round, which was equally split between Kirkbi Invest A/S and Sony Group Corp.

Yuga Labs Inc. raised $450 million in a seed funding round, making it the second-largest investment as of June 6. The funding round was led by a16z crypto, a fund managed by Andreessen Horowitz LLC. Artist Capital Management LLC and Liontree Partners LLC, among other investors, participated in the round.

Sector outlook

Despite the introduction of new games in the core market, regulatory issues will continue to hinder the growth of video game publishers.

"We expect the video game content market to suffer another low-single-digit decline in 2023," Barbour said.

451 Research is part of S&P Global Market Intelligence.