"Investors recognise the low revenue growth opportunity and compressed margins in gaming, keeping capital on the sidelines," says S&P Global Market Intelligence
A new M&A report from analyst S&P has indicated a weakening investment environment for games, with available funding increasingly going to businesse models relying on recurring engagement, platform leverage or alternative monetization.
The largest M&A transactions in Q2 were "hyper concentrated on AI," which has "siphoned interest away from other areas, particularly software," S&P Global Market Intelligence's Neil Barbour tells GamesIndustry.biz.
There were 23 M&A transactions in the second quarter, totaling $1.15 billion in gross transaction value.
These included Shengsong Investment's $596.4 million minority investment in Wemade and DoubleUGames' $183.7 million offer to increase its stake in social casino operator DoubleDown Interactive.
Integrated Media Company also acquired indie publisher PlayStack for $168.1 million.
The number of M&A transactions remained flat year-over-year in value but declined 85% from the first quarter.
S&P research analyst Barbour explains that this percentage drop reflects a market at "such a low level that the absence of a deal or two, even as low as $100 million, can have a major impact."
In private financing, there were 36 rounds totaling $519.7 million. Total funding increased 89.1% year-over-year, while the number of deals fell 29.4%.
The largest Q2 funding round was Veroplay's $215.6 million investment related to its acquisition of play-to-earn platform JustPlay. Grand Games raised $70 million to expand its mobile titles.
"The broader read is that investor and acquirier appetite has not disappeared, but it appears increasingly selective and not in a way that would advantage creative talent currently entering the market," says Barbour.
He also notes that "investors recognise the low revenue growth opportunities and compressed margins in gaming, keeping capital on the sidelines."
The shift in investment toward AI alongside live services, mobile, platform ecosystems, and play-to-earn business models "could make the current layoff and divestiture cycle especially difficult for traditional PC and console development teams seeking independent financing or acquisition," he concludes, "particularly as development budgets, user acquisition costs, and hardware prices continue to pressure the economics of new game creation."