Wednesday Letter: A private affair

With Australia’s Blue Sky spending millions on a stake in Queenstown’s Active Adventures, the Ticker‘s Paul Yandall asks, what does the arrival of foreign private equity in New Zealand’s activities operator market mean for the wider tourism industry?   

Paul Yandall

Last week’s revelation by the Ticker that Australia’s Blue Sky Private Equity has bought a multi-million dollar stake in Queenstown’s Active Adventures is notable for a number of reasons.

First among them is that the deal appears to mark the arrival of a new class of capital to New Zealand’s activities operator market, which has tended to be funded off balance sheets, by private family money, individual investor equity or bank debt.

So, what does the Blue Sky deal mean for the NZ tourism industry?

At first glance, it would be easy to think of the deal as a sign of confidence in the New Zealand tourism sector and that the profits operators are reaping in the current boom are luring to our shores even the most strident of capital classes, private equity.

However, if you look a little closer, that view appears to be just a small part of the bigger picture.

Blue Sky is the only publicly listed private equity investor in Australasia and it has used its listed Alternatives Access Fund to invest in Active Adventures. The hurdle rate, or the minimum rate of pre-tax return required for that fund, is 8%. By private equity standards, that is quite low and Blue Sky will no doubt be seeking returns closer to the 16.4% it has earned across all of its funds since inception ten years ago.

Because the Alternatives Access Fund is financed via the Australian Stock Exchange, there are fewer restrictions on how Blue Sky can invest it. It can take relatively small, long-term bets compared to other private equity competitors who must make larger, shorter-term investments to satisfy the clients who provide them money, typically institutions such as pension funds.

Blue Sky’s circa 40% stake in Active Adventures is understood to have cost it between A$2m and A$6m, well below its A$40m ceiling for private equity investments, with Blue Sky referring to the deal as a long-term play, pushing it past the medium term three- to five-year horizon private equity likes to invest for.

It is the company’s first entry into tourism so, by a number of its own measures, the deal is a unique one for the Brisbane-based investor.

Active Adventures has its own unique selling points too. For starters, it may be based in New Zealand but its business is global and prospects for further expansion overseas look good. How many operators in New Zealand are in that position? Very few.

So, rather than a bet on the fundamentals of New Zealand tourism, the deal may be just what it is at face value: a relatively small, long-term, lower returning bet by a unique investor in Active Adventures’ global model and the people who have built it.

Now, we here at the Ticker have spent a fair bit of the past week going on about this deal mainly because the issue of industry capital is always at the front of our mind. The reason for that is if you want to understand how an industry operates, you must understand how capital – private or public – flows through it and how the people who control that capital act.

If you understand that capital, if you can see its various sources and how it is channelled, if you gain a feel for its ebbs and flows, its risks and power, then you can gain some insight into the pressures and motivations that drive the industry.

Well, that is the theory. We here at the Ticker are a long way from being there but something that may help all of us gain a little insight into how money is spent and earned in the industry is a new column we are starting Thursday week – Buy Side/Sell Side.

Buy Side/Sell Side will be dedicated to the buyers and sellers who make the tourism industry tick. We want to hear from them about the challenges and opportunities they face and how their products or markets are evolving or responding to New Zealand’s tourism offering.

We want to learn from them what has worked and, probably more importantly, what has failed when it comes to buying and selling New Zealand Inc. We want those buyers and sellers to have a voice here at the Ticker because we understand how vital their work is.

If you are a buyer or seller and would like to contribute to Buy Side/Sell Side, please do get in touch at paul@tourismticker.com.

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