Recently, companies providing language services and products have become increasingly attractive to external investment firms. This is the case of language services providers (LSPs) like Amesto, Cyracom, Language Line, SDI, Semantix — and as of this week’s announcement — CLS Communication. Until a few years ago, capitalization via investor groups was a rare occurrence in the LSP arena. Why is this means of funding suddenly picking up momentum?

The investment firm of Zurmont Madison, which acquired a majority stake in CLS Communication, had previously focused on industrial and consumer goods companies — the Swiss LSP is the first services company acquired by the group. CLS ranked 13th in our global list of the largest LSPs (“Ranking of Top 30 Language Services Companies,” May09).

Given that private equity firms have historically approached language services companies cautiously, the trend toward a higher frequency of investment in the industry points to a better understanding of the industry and its potential. For these firms, an often small capital expenditure (compared to their other ventures) can have greater returns over a longer maturity period.

In our 2007 report on consolidation trends in the language services space, we remarked on why this market is such an attractive playground for investors (“Consolidation in the Language Services Market,” Jul07). Venture capital and equity firms are often lured by the space’s high fragmentation, demand ubiquity, and global nature. In the case of translation firms, there is also a low barrier to entry and decent profit margins to be obtained. In the telephone interpreting space, the barrier to entry is much higher, but so are the margins.

At Common Sense Advisory, we frequently handle calls from investors who are interested in learning more about the language services industry. Since the beginning of 2009, we have noticed a sharp increase in the number of calls we receive regarding language services companies across many areas, including translation, localization, and remote interpreting (both telephone and video). What sparks this interest?

• Mature suppliers. The companies fueled by investors are the “graduates” of the industry, ones that chose to first specialize in niche markets, and some of which later succeeded in replicating their business models in spin-off or acquired companies offering other services or products. Most of them also have professional management and have moved beyond the mom-and-pop mentality common to LSPs in earlier phases of development.
• Portfolio diversification. By virtue of its very nature, the language sector remains a highly fragmented industry. Paradoxically, there is minimal differentiation among supplier offerings. The current economic climate has prompted investors to build ever more diverse portfolios and invest in non-traditional sectors, including this space.
• Proven longevity. The first associations of translation companies were founded in the 1970s and 1980s. Many of the companies born during those times still exist, providing proof of permanence in times of economic uncertainty. They have now weathered three recessions. There is no question that the language services industry has taken root and it is as viable an investment as any.

Common Sense Advisory has forecasted that the language services market will hit $24 billion by 2012. Securing a stake in a sector that is clearly growing – and one that is instrumental to globalization — will continue to be an attractive proposition for an increasing number of investors.