digitalinfowave


A number of elements are conspiring to hamper growth of vacation rental startups, especially the technology-led companies.

The first is a more conservative investment landscape with investors no longer throwing about the kind of capital that was around in 2020 and 2021. The second is the high valuations of companies that want to sell up, which some believe is preventing acquisition activity.

Presenting the investor view during a session at the Short Stay Summit in London this week was Daniel Williamson of CVC Capital. Asked what has changed over 2023, he said capital allocation in vacation rentals mirrors other sectors including technology.

“Two, three years ago, it was all about growth at all costs. And it wasn’t about the future cash flows and profitability. The allocation of capital has become a lot more discerning. Unit growth at all costs as fast as possible with a lot of capital flowing in was the flavor of 2020/2021. Investors, we always try to take a view of the fundamentals, which is ultimately valuation, but in the late stage bull cycle, one of the longest bull runs we’ve ever had, there was a lot of capital chasing very few assets of quality, especially in a zero interest rate environment. It was all about growth, growth, growth. Now it’s all about ‘When I grow, I need to show that I can be profitable.’ I think that’s a good thing for the industry.”

Marcus Rader, CEO of Hostaway, which raised $175 million just under a year ago, provided his take on the current landscape across both funding and acquisitions. 

“We raised $175 million last year, but it seemed like suddenly there was no money or money was gone and nobody else was raising capital. There has been a change, speaking mostly on the technology side, where suddenly profitability is very sexy. It turns out that if you’re running a startup, it’s incredibly hard to get profitable. We’re very active on the [mergers and acquisitions] space. So there’s not a lot of profitable, fast-growing, solid companies out there.”

Despite the slightly bleak outlook, some in the space remain positive there are deals to be done given how fragmented the industry is.

Bodo Thielmann, chief investment director at HomeToGo, which recently acquired 51% of short-break specialists KMW Reisen and Super Urlaub, said, “My hypothesis on why this industry is a winning place to invest in is it’s still so fragmented. We have had certain consolidation on the [online travel agencies], demand side, but on the supply side, there’s so much fragmentation.”

Disciplined investment

But it isn’t only on the vacation rental technology side that the environment has changed. Consumer-facing operators such as Forge Holiday Group, the parent company for brands such as Sykes Holiday Cottages and Forest Holidays, have also changed their stance.

Graham Donoghue, CEO of Forge, said while the company had been acquisitive in recent years it hasn’t bought anything for 24 months, and the focus is on value creation and balancing top-line growth with margin growth.

“So when we look at valuation, I used to say I don’t care what I pay, it’s how do I synergize. I’m not saying that anymore. I think things are over-valued and expectations are still quite high in the sector I’m in. For us, it’s looking at how does it [an acquisition] help us move faster? How can we see value creation within 12 months? Most importantly, what’s challenging at the moment is the cost of capital. So buying something from debt, not necessarily from cash, and even if it is cash, how much is that going to cost you and how do you factor that into the return on investment because capital is expensive, debt is expensive, debt recap is expensive, so there are multiple things going on now to understand quite quickly how to get to that value creation. There’s a lot of over-inflated portfolios. We’re all really trying to understand the value of returns and how quickly can you get to value creation and ultimately profitability.”

Doing deals

Rader had more to say on high valuations of many companies in the space.

“Valuations haven’t gone down. If you segment companies into the top ones, in some case valuation has even gone up. Then you have everyone else. If you don’t fall into the top 10%, you’re in the bottom 90%, and there’s no data, there’s no transactions going on. There’s a lot of that going on right now in the vacation rental space where a lot of companies are looking to sell, but they think they are in the top 10%. They’re actually in the top 20%, and that simply isn’t good enough to get a deal done.”

The discussion also touched on what business models, from asset light to full-service, might win out going forward and how regulations might impact the sector.

Williamson said private equity investors tend toward asset-light companies.

“What’s more important and why this industry is so interesting is if you think about the fundamentals, we’re talking about owners here who are largely managers, largely amateurs, doing it part-time who have put a lot of their own capital to work in this unit, and if you start to think big, the list of things they need help with is very very long indeed. 

“And on regulation, there’s a lot of downbeat pessimism around regulation. My investor view over a 15 to 20 year period, if we had one distribution channel, if we had no regulation, if we had amazing software that allowed people to manage their properties with ease, we wouldn’t need property managers. The raison d’etre of the category is complexity, and the more complex regulatory landscape, the more complex the distribution landscape, the more complex the supply side, the more right you have to exist and also to help your owners succeed. When I zoom out, yes regulation is a short-term headwind, but it strengthens the owner value proposition.”

He provided an example of outsourced property management and home-owner associations with businesses doing $400 million to $600 million of revenue that started out doing property management, but it’s now only 10% of their earnings.

“They do insurance, they do payment, they do maintenance, they do repairs, they’re working on supplier management and the list goes on and on. I think this industry is relatively in the early innings of growing into being the full end-to-end support. So back to your original question, it’s not about asset light versus asset heavy as much as it’s about how much more can you do for the owner.”

Donoghue said he had no idea what model might work but sees his job as keeping customers happy so they come back.

“How do I know what’s important to owners? Not all owners are equal, some want maximum revenue over the lowest number of bookings, some don’t care about the revenue, it’s just about having a lot of people staying in their property. What’s important to them? How do we add value? We have a phrase internally that’s like, ‘Do you want more bookings, less hassle and more revenue?’ And everyone says yes, and if we can do that and keep them happy then what are the models that flow from that? Is it full-management services, or do you just us want us to do marketing services? It’s like a smorgasbord of options and it’s needs based.”



Source link

Leave a Reply

Your email address will not be published. Required fields are marked *