Private equity in travel has proven to be resilient, say Henry Wells and Mark Stoddart of Duff & Phelps
Last week, we looked at the history of private equity investment in the travel sector and key themes that underpin this. This week, we explore the future of private equity investment in travel and why there is little evidence to suggest anything other than continued interest and activity.
Strong fundamentals, pipeline of deals and available funds to drive activity
We believe that the key characteristics that attract private equity to the sector are not going to change in the near term. Technology will continue to disrupt the sector; many business models will continue to be relatively asset-light; and the cash flow dynamics of the sector will continue to support leveraged deal structures.
Deal flow in the sector will continue to be strong. In the UK alone, more than 25 travel businesses currently sit in private equity ownership, and that number is expected to rise based on current potential deals. A number of those businesses will attract interest from larger private equity funds on sale and those funds that sell their travel businesses will look for their next opportunity in the sector. Private equity capital is not in short supply.
Pitchbook industry data suggests that more than £15bn of capital is available for deployment by mid-market UK and European funds that have an interest in the travel sector. Only a limited proportion of that money is going to be invested in travel, but fund managers will want to ensure that they get their fair share of the opportunity.
Potential headwinds exist but the sector is resilient
Brexit has created unwelcome uncertainty for the travel sector. Depreciation in sterling and a lack of clarity over what Brexit means have created a backdrop of hesitation. The rhetoric around Brexit is, however, becoming more optimistic with agreement reached on a transition period with the EU. Whilst much remains to be done, there is growing optimism that a certain amount of ‘common sense’ will prevail.
For the most part, investors are working on the assumption that Brexit won’t stop people from taking holidays and the issues around travel at an EU level will be ironed out. It is just a question of how and when. The answers to those questions could be some way off, and sitting and waiting will not be an option for most funds.
A further squeeze on consumer spending would weigh against the industry but we are seeing signs of green shoots. ONS statistics for the quarter to January 2018 suggest that wage growth is accelerating and unemployment is on the decline, all of which should benefit household spending.
Regulation is a further area for consideration, particularly if there was a significant change to the rules imposed by the regulators of travel. Private equity is getting better in understanding the nuances of structuring transactions under the existing CAA, ABTA and IATA rules. More high-profile collapses or major shocks may cause changes in the way these bodies assess license holders. This could impact on appetite for investment.
Keep calm and carry on
Private equity should remain a prominent player in M&A in the travel sector for the foreseeable future. The fundamental attractions remain and the sector has proven itself to be resilient. Faced with the ongoing threat of terror, political crises, refugee situations in key destinations, volcanic eruptions and a challenging economic backdrop, the industry continues to innovate and grow and private equity continues to invest.
Barring a major collapse in consumer confidence, the industry’s motto is an old one: Keep calm and carry on investing…
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