New Zealand is getting its first private equity fund directed solely at tourism.
Tourism Investment Partners aims to raise up to $125 million from seasoned investors for tourist attractions and other businesses in the sector which are struggling to get capital from banks and other sources.
The fund is the brainchild of corporate finance and investment expert Jonathan Cameron and tourism veteran Jason Hill who with Sir John Kirwan have committed $500,000 to set it up.
It is targeting at least $30m initially (although it will proceed if it gets $15m) up the s maximum of $125m for investing in medium-sized tourism businesses.
While acknowledging high returns come with high risk, the fund is not be aimed at start-ups but aims to back businesses that have been in the black for at least three years.
Tourism Investment Partner's investment strategy is to build scale, consolidate businesses and provide capital to support management seeking to buy into or buy out a company from existing shareholders or founders. It would also provide capital for shareholders or founders exiting a business and/or take the businesses through to a public listing.
Investments would range between $2m and $20m — depending on how much is raised — and the fund would take shareholdings of between 20 and 80 per cent.
Cameron says private equity strategies are all different.
"Some are there purely to turn around a business and get out, some are there to strip the assets and get out, seeing more value in the parts rather than the sum of the parts. We bring the partnership," he says.
"United States private equity has a five-year window — they're in, they're out. In New Zealand typically it's an eight-year horizon by the time you take the time to invest, do what you have to do to create synergies, build value and then in the end it might be a sale, it might be a listing.
"The key thing for us is to provide expansion capital — a lot of them do find it quite challenging to find capital to grow and banks may not lend to them because they are a cashflow business not a property-backed business."
Cameron says there were misconceptions about tourism businesses, which are seen as small, low wage operations, but there are a number of successful companies which generate big returns.
"It's a matter of pushing the boundaries a bit further and giving them the strategic direction."
Cameron and Hill, or people they designate, would sit on the boards of companies they invest in and would take a long view.
Behind them, the partners have an advisory committee and investment committee chaired by former Air New Zealand deputy chief executive and tourism industry leader Norm Thompson; tourism operator and investor Chris Sattler; company and iwi funds director Kristen Kohere-Soutar; and investment adviser and First NZ Capital director Nick Caughey.
In a document for potential investors, Tourism Investment Partners says that despite the size of the $39 billion sector there are few opportunities for investors to get direct exposure as most operations are privately held, unlisted businesses.
There are several large family owned entities (Scenic Hotels, Southern Discoveries, Real Journeys, Trojan Holidays) and a number of small to mid-size businesses operating across the sector, many of which are key target opportunities for the fund.
There are five NZX-listed companies involved in tourism: Air New Zealand; Sky City; CDL Investments (Millennium and Copthorne hotels); Tourism Holdings; and Auckland Airport (Skyline Enterprises is on the alternative market).
The document says the five listed companies have delivered an internal rate of return to shareholders of between 18.8 per cent and 31.3 per cent since 2010.
It sets out targeted rates of return for Tourism Investment Partners investors, including stating that 80 per cent of net gains from investments after fund costs will go to investors, and the remainder to the fund, subject to investors getting returned their capital contribution and an 8 per cent return on top of that.
Distributions are to be paid as soon as "practically possible" from pre-tax dividend and interest income or after the business is sold.
Wholesale or eligible investors need a certain asset base, a track record of investment or to come from a financial services firm. The fund is not making a public offer.
Cameron says the management company will take a 2 per cent fee at the outset to employ staff, do all the screening and due diligence, make the investments and go on the boards of the target companies.
Thompson is involved in tourism organisations throughout the country and says while it's not going to be easy to raise the money, the opportunity is huge.
"There's alot of inefficiency, it's hard for small people to grow. This really strengthens the base for small and medium size business."
What cooling growth means
Tourism vies with dairy as New Zealand's largest export earner. Combined with domestic tourism ($21.4b), it contributed $39.1b to the economy in the year to March last year.
According to government figures, international arrivals are forecast to grow by 42 per cent during the next six years, reaching 5.1 million by 2024.
Despite growing competition from other destinations, New Zealand continues to feature highly on peoples' "dream places" to visit and further digital disruption could take out pain points for travelling and help tourists access more tailored, personalised experiences, the document says.
Stats NZ figures out yesterday show annual visitor numbers climbed to 3.88 million people in the year to January, another record.
However, the rate of growth has tailed off significantly compared to the 2016/17 peaks, with the 151,500 annual increase in visitor numbers about half of what it was during the most rapid growth period.
Hill has had 25 years in New Zealand and Japanese tourism and has seen market fluctuations before.
"We've had a good period of tourism over the last five years — it's slowing down but we're not in negative territory."
He says with some steam coming out of the market, this is arguably a good time to invest in it.
Spending by domestic tourists is bigger than that from overseas, he says, and this provides something of a hedge against any international drop-off .
And the conference market would grow when Sky City's delayed convention centre project is completed, with thousands of delegates and spouses interested in activities around the Auckland region.
But the fund's document sets out a number of risks to tourism which mean investment returns can't be guaranteed.
These include: changes to the state of the New Zealand and global economy; promotion of this country as a tourist destination; exchange rate fluctuations; tax changes; and the impact of natural disasters, terrorism, safety issues and health outbreaks affecting travel decisions.
"There is no assurance of investment returns and the fund does not guarantee a return on investment, nor the return of investors' original capital contributed.
The success and profitability of the fund will depend on the manager's ability to choose investments which increase in value over time and provide a yield."
Private equity in NZ
The document says private equity has developed over the past 15 years to be an important player in the New Zealand merger and acquisition market and the private placement market, typically making up about 10 per cent of transactions a year.
Most funds target private mid-market companies in other sectors which is why the Tourism Partners fund is being launched, Cameron says.
"We know that NZ and Australian private equity firms have been wanting to get into the sector, they just haven't figured out how because they're not prepared to roll up their sleeves, have the connections and get in there."
The document cites a Cambridge Associates study done for the NZ Private Equity and Venture Capital Association which says returns here are on a par with other parts of he world.
The study reviewed 131 private equity investments and found average returns were 22 per cent a year and the median 33.7 per cent. Further analysis showed smaller deals of $5m to $50m delivered the highest returns — 35 per cent a year.
Research by Chapman Tripp (not cited by Tourism Investment Partners) released last month says in New Zealand last year, private equity firms invested $3.72b in New Zealand — skewed by the Trade Me deal — and divested $902 million.
The research doesn't break out any tourism deals, but says leisure deals made up 1 per cent of the top 40 transactions.
It does highlight tourism as one of eight sectors to watch because New Zealand would remain a relatively popular tourist destination despite softening consumer confidence in the rest of the world.
"Investments in the tourism sector ought to provide good returns for buyers willing to take a longer term view."