Following the revelation yesterday by the Ticker that Australia’s Blue Sky has spent millions on a stake in Queenstown’s Active Adventures, Bridget O’Connell takes a look at the role private equity is playing in Australian tourism and what that may mean for the industry here.
Tourism has become a sector of interest to some private equity players in Australia following the end of the resources boom.
With expanded mandates, increased capital and fierce competition for traditional assets, Australian investors are seeking new opportunities to deploy their war chests.
Quadrant Private Equity’s managing partner, Marcus Darville, explains his firm’s view in an interview with the Australian Financial Review last November: “With the resources boom having slowed, we started looking at what industries were going to supplant that – tourism was one of them.”
“Currency is coming back to more normal levels, there’s also an internal focus from some governments such as Western Australia on tourism and there’s the grey nomad factor,” says Darville.
“Within tourism, we pinpointed a growing demand for experiential travel, and started looking for companies with a strong position in an iconic Australian destination and like-minded vendors who want to be part of a larger group.”
The comment came as Quadrant made a A$300m bet on the Australian tourism industry, buying three ‘experiential tourism’ companies to create the Experience Australia Group.
The Sydney-based, mid-market PE firm, which has raised in excess of A$3.6bn since inception in 1996, started by buying the tourism rail company Great Southern Rail (GSR) in October last year.
GSR is the operator of luxury Australian transcontinental passenger rail services, The Ghan, The Indian Pacific and The Overland.
Quadrant then added the Cruise Whitsundays and Rottnest Express marine tourism businesses to create the Experience Australia Group.
With operations across every state of mainland Australia, the group now employs over 800 people and carries over 1m guests per annum.
“There is now so much confidence in the tourism sector in NZ that we are now seeing some of the non-traditional investors getting into the market” – Dean Humphries, Colliers International
Quadrant’s investment thesis is to build an iconic Australian tourism group leveraged to the strong industry dynamics and growing trend for experiential travel.
Further strategic acquisitions in this sector are planned, which Quadrant says “should benefit from the continued strong growth profile of the tourism industry, supported by strong inbound demand from Asian markets, an aging population and the trend towards authentic, high-quality immersive holiday experiences”.
Although yesterday’s revelation of the Blue Sky deal may be one of the first examples of a direct Australian PE injection into a specialist NZ tourism operation, another investor from Across the Ditch was seen here last year entering the broader sector through a transport and shipping acquisition.
In December, CHAMP Private Equity bought freight forwarding business Streamline, Freight Lines, and Strait Shipping, operator of the Bluebridge Cook Strait Ferry service.
CHAMP managing director, Cameron Buchanan, says his company was “committed to growing these businesses for the benefit of not only investors but also the wider New Zealand freight and passenger transport markets”.
In fact, foreign private equity investment into New Zealand transport companies from coach to railways to airlines – some with significant tourism interests – is nothing new.
Private equity interest in the NZ hotel sector was also reasonably common but non-traditional investment of that type tends to be cyclical, says Dean Humphries, national director of hotels for Colliers International.
“Back in 2005-07, there was quite a lot of private equity invested in the hotel sector in New Zealand, particularly from the Australian institutions. They dived into the market when the global economy was going well but they largely divested from around 2010-15,” says Humphries.
Now, with tourism booming and heating the hotel market, private equity capital is starting to become interested again, even if pickings are slim in NZ.
“There are an increasing number of private equity firms that want to place capital into the hotel sector here but they are struggling to find inventory,” says Humphries.
An example of a recent deployment is Australian private equity real estate firm Pro-invest Group’s joint venture with InterContinental Hotels Group. The companies plan to develop a 200-room Even Hotel in Auckland, scheduled to open in 2020.
Pro-invest is also behind plans to build a $60m, 227-room Holiday Inn Express in Queenstown.
“I think we’re likely to see more of that type of activity happen in the future, probably focused mostly on Queenstown and Auckland, which are our two main areas of growth at the moment,” says Humphries.
“There is now so much confidence in the tourism sector in NZ that we are now seeing some of the non-traditional investors getting into the market. There are obviously really good fundamentals driving the sector here.”
The Action Adventures deal sealed this week by Blue Sky, which has A$3bn of funds under management across all of its investment divisions, has been welcomed by the NZ private equity industry, which also has tourism interests.
“What is interesting about Blue Sky is it is the only listed fund of its type in Australasia,” says Colin McKinnon, executive director of the NZ Private Equity and Venture Capital Association.
That means it has a level of flexibility and possibly a longer-term view than most other private equity funds, which typically have a significant floor to the level of investment they can make and have to return capital to their investors after a set period.
“Blue Sky does not have to do that,” says McKinnon. “It can write smaller cheques and it doesn’t have to return the money to investors. It can invest in a similar way to an iwi investment vehicle.”
Although no-one knows if CHAMP’s and Blue Sky’s investments signal a wave of private equity capital heading for tourism businesses here, New Zealand tourism investors say foreign involvement in the industry can help the sector grow.
“The arrival of offshore capital in tourism businesses here is a good thing for owners and operators and a good thing for New Zealand,” says Phil Veal, chief executive of Rangatira Investments.
Rangatira owns Auckland’s Rainbow’s End and Rotorua’s Polynesian Spa in a portfolio that varies from ham and pork producer Hellers to venture capital investor Valar.
“We have some great world-leading tourism ventures here and in the spirit of continuous improvement it is always interesting to hear what new ideas folks offshore may have for our businesses and attractions,” says Veal.
A decade of Quantitative Easing has led to capital flowing into global public markets and that was now finding its way into private investment. In New Zealand, about a billion dollars of private equity has been raised in the past 18 months and was looking to be deployed.
“As tourists continue to flow into NZ, new businesses are starting and growing and developing and some of them are merging with other businesses and some of them are taking investment – that will continue,” says Veal.
“The most interesting thing we’re seeing is that NZ is probably a bit late in the investment cycle. The number of tourists arriving or expected to arrive is probably greater than our ability to accommodate, feed and entertain them.”
New Zealand Inc needs to be able to meet that demand to maintain the experience quality for visitors and that will mean investment.
For NZ operators, the prospect of private equity with its cheque book out is appealing, however, taking that type of investment is a complex process. But it is one that may become more common as the tourism boom here continues.
“Perhaps this is the changing face of investment,” says David Kettle, co-owner of NZ Fine Touring Group, which went on its own acquisition hunt last year snapping up Auckland-based Discover NZ and Thrifty Tours NZ from Tranzit Group.
“There are a lot of businesses, especially in inbound tourism, doing fantastic things out there and returning excellent profits so maybe it’s a new strategy for investors – look for smaller businesses with higher returns than the bigger companies, ensure they have good management and solid plans in place and leave them to do their thing,” says Kettle.
But any windfall from a business or stake sale has to be balanced against the current boom – and its associated revenues – that tourism operators are now enjoying.
“Given the returns that most inbound businesses should now be generating and enjoying, you would have to think carefully if selling was a good idea,” says Kettle.
“Unless, of course, the price was too good to turn down, and everyone has a price.”