Deal focus: Running the CFIUS gauntlet for Grindr

The investor group behind San Vicente, an entity that recently completed the $560 million acquisition of LGBTQ dating app Grindr, was carefully selected. The business was only put up for sale because the previous owner, Beijing Kunlun Tech, had to unwind its position at the request of US regulators concerned that Chinese agencies could use the personal data to blackmail US citizens.

This was one of the first examples of the Committee on Foreign Investment in the US (CFIUS) using its voiding right in more aggressive manner. Anything involving certain critical technologies and sensitive personal information is subject to closer scrutiny, ostensibly to curb the global technology ambitions of Chinese investors. Whoever sought to buy Grindr from Kunlun would be grasping a political hot potato – and the regulatory attention that came with it.

“CFIUS left no stone unturned. The process took six months, a solid six months of back and forth,” says James Lu, an investor in San Vicente and now chairman of Grindr. “We are 100% American and we had 100% of the funding in place. All the controlling voters are Americans who hold or have held national security clearances."

Lu previously worked in China, most recently spending a couple of years at Baidu. However, he was born in Los Angeles and notes that his first job out of the University of Michigan in the early 2000s was as a software engineer for NASA.

Kunlun hired US boutique investment bank Cowen to run a sale for Grindr and more than 240 bids were submitted. Several reasons are given for San Vicente’s triumph, despite entering the process with no committed pool of capital. First, some participants were likely uncomfortable with the level of regulatory oversight, which included complete transparency as to their sources of capital and the ultimate beneficiaries. Second, Kunlun sought to distinguish bidders who were serious from those who were not by asking for a $10 million non-refundable deposit.

Third, there appears to be a stigma attached to LGBTQ assets, or perhaps to Grindr in particular. This was apparent when San Vicente’s advisors tested market appetite. One-third of the deal is senior debt, one-third deferred equity – Kunlun is being paid in installments – and one-third is traditional equity. When the likes of pension funds were invited to contribute equity, the responses were often blunt (“It won’t ever get approval”) or evasive (“we have other priorities”), says one advisor.

Lu ended up keeping the circle small. He made a sizeable personal contribution and then offered the rest to a few family offices and high net worth individuals he knew well. It was oversubscribed.

Grindr is already a strong business, said to generate $130 million a year in subscription revenue. However, reassuring users that their data is indeed secure – and making improvements if necessary – is a priority. Beyond that, Lu is keen to explore ways in which Grindr can expand into new domains, especially messaging. “Every day, our users send an average of 60 messages. The average daily use time is 81 minutes, twice as long as Facebook,” he says. “What are they doing? Looking at profiles, messaging, chatting.”

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