Following one of travel’s most intriguing deals, James Chapple examines how private equity backing continues to fundamentally shape investment and ownership structures throughout the industry
The £20 million sale of Classic Collection to On the Beach last week certainly raised eyebrows.
“Chalk and cheese,” said one TTG commenter on the meeting of tour operator and OTA. “Yin and yang” said another.
Whatever the merits for both parties, the deal keeps Classic Collection firmly in the hands of the travel industry.
And in doing so, bucks a prevailing trend in travel – the rise of the “virtuous circle” of private equity (PE) investment.
“PE investment is going to drive markets for the next five years,” Mark Farlow, partner at corporate finance analyst Alantra, tells me. “Over the last 10 years, travel has shown itself to be pretty resistant to shocks. Even Brexit hasn’t really had that much of an effect yet.
“So far as we can see, travel is showing around 5% growth every year – that obviously makes it a very attractive prospect for PE.”
And so it has proved to be over the past 12 months. Last December, Silverfleet Capital snapped up Riviera Travel from Phoenix Equity Partners for a reported £250 million.
In June, Vitruvian Partners pumped a similar sum into Travel Counsellors, completing a secondary management buyout from Equistone Partners Europe.
Other deals include Livingbridge’s buyout of Loveholidays in May; Duke Street’s purchase of Great Rail Journeys in July; and LDC’s investment in Neilson just this month.
“When the big four [Airtours, Thomas Cook, Thomson and First Choice] eventually became the big two (Cook and Tui), they bought just about everything that moved,” says Farlow, noting how Cook and Tui acted, tacitly, like PE investors.
“Since then, though, they have been relatively quiet, although I think we will see Tui making acquisitions later this year or next year.
“What this [consolidation] has done is leave travel clear for PE, and it has done very well out of it. I’m not sure I can see anyone breaking PE’s monopoly on good travel businesses either.”
For all PE’s investment in travel, though, it isn’t – and has never been – haphazard or random. In fact, Farlow quickly identifies three trends that have made travel businesses particularly attractive to PE investment: the margins in luxury travel; the rise of online direct-sell; and the silver pound fuelling the growth of escorted touring.
“It’s important to remember PE investors are rarely long-term holders,” says Farlow. “Those businesses sold to PE three or four years ago like Audley Travel [to 3i] and Scott Dunn [to Inflexion] I expect to come back to market again very soon, perhaps even Iglu too [sold to LDC in June 2015],” he adds.
“PE investment just breeds more activity. It’s a virtuous circle.”
Martin Alcock, director of the Travel Trade Consultancy, adds that what also makes travel attractive to PE is “a very favourable working capital cycle”.
“Businesses collect money from customers well in advance of delivering the product and often pay suppliers after delivery,” he explains. “As an investor, that’s attractive because it should mean less external funding is needed to fuel growth.
“Travel has proved very resilient,” Alcock continues. “Consumers will cut back on other areas during tough times, but will still take holidays.
"Demographics also play a big part. As a society, we’re spending more on experiences and leisure time. Travel companies that have focused on older, wealthier consumers have attracted the most investment.
“Finally, there’s definitely a herd mentality. Several high-profile, PE-backed travel businesses have been successfully sold on for large returns in the last three years. Other PE funds have noticed and are looking to emulate that.”
- Mark Farlow, partner, corporate finance analyst Alantra
Farlow sees a future for travel agents too, highlighting the sale of Travel Counsellors as potentially a landmark deal, straddling the line between investment in a business’s infrastructure and in people.
“I think we’ll see more deals in the agent space itself rather than travel companies,” he says.
“Agents who deal directly with customers and can influence what they do are obviously very valuable – more so than those agents who just sell Thomas Cook packages off the peg.
“Those bigger agencies that can control their content and service their clients uniquely – that’s where there will be transactions.”
It’s little surprise, though, that certainty, stability and buoyancy are key priorities for PE investment, and Ian Bell, head of travel and tourism at consultancy firm RSM, believes travel currently offers investors all three.
“While some PE houses specialise in specific sectors, other funds look to diversify to reduce sector risk,” Bell explains.
“Given the slew of profit warnings, restructurings, CVAs [company voluntary arrangements] and administrations affecting traditional high-street retail and leisure operators, attention is increasingly turning to the travel sector, which is seen as more buoyant compared to other consumer markets.”
While Farlow tells me the there is little to suggest over-55s’ spending on travel is likely to decline any time soon, Bell adds household spending on travel generally remains strong, with technological advances changing how people – especially young people – are travelling.
“Our own consumer research earlier this year found that despite pressures on household budgets, many people still plan to increase their spending on holidays,” he says, echoing Alcock.
“The travel sector is therefore seen as a likely winner in the experience economy, provided operators can innovate and tailor product offering to changing consumer tastes.”
Like Farlow, Bell reiterates PE is unlikely to move away from its short- to medium-term outlook.
“Funds have a shelf life and need to give a return to their ultimate backers,” he explains.
“Sales from one PE house to another are therefore quite frequent, albeit the incoming PE fund will need to see the potential for rapid future growth.
"Ultimately, the additional capital provided by PE makes the [travel] sector a more interesting place to be, with more developments in business models and choices for the consumer.”
- Martin Alcock, director, Travel Trade Consultancy
Bell adds: “Investors have recently sought higher performance through private equity investment. This has resulted in PE houses sitting on a fair bit of dry powder, and needing to find a home to invest their funds.”
Earlier this month, the Bank of England raised interest rates for the first time since March 2009 to 0.75%, still only a shade above the emergency level introduced following the 2008 financial crisis – and analysts believe low rates could be the norm for decades.
Alcock says that with rates still so low, pension funds and other investing institutions are more readily diversifying their portfolios and showing greater confidence in PE investors, who in turn consider travel an increasingly attractive sector for the reasons outlined above.
But is PE investment a sustainable route for travel? Alcock thinks so. “It’s all about numbers for them [PE houses],” he says.
“They exist to make money and maximise returns. I would say, on the whole, PE investment has been great for travel. It introduces funding into the sector and provides a viable exit route for owners and managers. They [PE houses] professionalise travel firms by introducing rigour and financial control.”
One criticism of outside investment is often the perceived loss of autonomy, but Alcock says this is in the hands of the seller.
“When selling a business, choosing a PE fund is like choosing any partner. You’re looking for shared vision and values, complementary skills and a warm, fuzzy feeling.
“Some [PE houses] are very hands-on – they bring expertise, financial management, procurement services, tech support and micro manage businesses.
"Others are more hands-off. They back the management team to run the business on their behalf and, as long as things go well, they stay out of the way.”
If Farlow’s assertion rings true and PE funding continues to back travel for the foreseeable future, it’s likely we will see the industry take advantage where it can. Clearly, there are trends in travel that will continue to entice PE investors.
But as the sales of both Travel Counsellors and Classic Collection prove, there is enduring value in agent expertise, strong trade relations and a bulging contacts book.