The past year saw a resurgence in private equity transactions within the travel industry, aligning with increased travel activity. This trend can be attributed primarily to the steady revival of tourist spots in the Pacific and Asia regions, coupled with robust contributions from major originating markets.
In Q2 2024, the European tourism and leisure industry saw fourteen private equity transactions totaling $822.9 million (€724.4m), as reported.
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In the travel industry for 2024, notable transactions include Ares Management Corporation along with its operational partner EQ Group acquiring the complete hotel collection of UK-based commercial real estate developer Landsec. This acquisition totals approximately £400 million (or €466.7 million).
However, what reasons explain why private equity firms are currently increasing their investments in the international travel and tourism industry?
Post-COVID rebound
During the pandemic, while travel demand lagged, undervalued assets were snapped up by several PE companies, who planned on investing further in them later on.
“Private equity activities in the travel industry have witnessed a substantial rise, representing approximately 40% of UK travel mergers and acquisitions in 2024, notably driven by robust interest in technology-driven and experience-based travel firms,” stated Andrew Keller, a director at Stax Consulting.
He went on: “The increase is due to the rise in travel demand following the Covid-19 pandemic, along with significant accessible funds (‘dry powder’), attracting companies back to the hospitality, tour operations, and travel agency sectors. Numerous private equity firms are adopting buy-and-build approaches, purchasing an established company and subsequently making smaller add-on acquisitions for rapid expansion.”
Graham Miller, who leads the Nova School of Business & Economics’ Institute of Tourism and Hospitality, stated: “Specifically, the hotels and resorts sector has attracted significant funding from private equity. Additionally, restaurant chains have been purchased, and tour operators have also secured investments from private equity.”
Dr. René-Ojas Woltering, an assistant professor specializing in Real Estate Finance at EHL Hospitality Business School, suggested that the renewed enthusiasm from private equity in the travel industry might stem from improved demographic patterns and supply dynamics.
“Multiple elements contribute to this positive outlook. Firstly, beneficial demographic shifts, particularly wealthy baby boomers nearing retirement age, suggest a likely increase in future demand. At the same time, supply remains severely limited in prime areas because of substantial expenses related to land, regulatory requirements, and rising inflation, which makes constructing new hotels prohibitively costly. This situation favors purchasing established properties instead,” he explained.
He stated, “My findings show that private equity firms often take advantage of market disruptions, like those seen during the COVID-19 pandemic, by stepping up their acquisition activities when assets can be purchased at favorable prices.”
Redirection of funds toward premium goods
The change in expenditure toward luxurious and wellness experiences, such as traveling, instead of premium products has generated additional private equity prospects within the travel sector. These opportunities frequently involve enhancing hotel amenities and various aspects of travel infrastructure to meet the preferences of modern travelers.
The rise of less mainstream travel spots, particularly in areas such as Central Asia and the Nordic countries, among others, indicates that numerous new hotels must be built, or current ones refurbished and updated, to handle the increased number of tourists.
Intrepid Travel, which transports over 4,000 travelers through Iceland, also observes this increasing pattern throughout the remainder of Scandinavia.
James Thornton, the CEO of Intrepid Travel, stated, ‘In Denmark, Sweden, Norway, and Finland, we aim to achieve comparable figures across these nations. There is significant interest in our type of travel within this region.’
Private equity firms have been progressively engaging in various aspects of the travel and hospitality industry, including both the development of new hotels and renovation projects, along with investments in engineering technologies, maintenance services, and operational businesses within this sector.
Despite ongoing worries about a decelerating worldwide economy, elevated inflation, and increased interest rates, consumers are still managing to maintain their travel activities. They are choosing less expensive vacations and planning shorter routes instead. This trend might indicate the robustness of the tourism sector and could possibly boost private equity investment in this field.
“We’re observing expansion in the high-end premium sector since it frequently attracts luxury travelers looking for more budget-friendly options. Similarly, our introductory level travel offerings are also experiencing robust growth due to their affordability, providing an accessible way for individuals to explore various destinations,” Thornton stated.
In what ways do private equity firms alter their acquisitions?
Private equity firms usually implement several modifications in the companies they invest in or take over. Their aim is to enhance profitability so that these enterprises become lucrative sources of revenue for a specific duration, following which they frequently resell these businesses at inflated prices.
These modifications could range anywhere from minor remodeling or refurbishment to an entirely new redesign or reconstruction.
Keller stated: “Private equity firms are fostering change in the travel industry via a mix of operational and strategic actions. Operationally, they are refining systems, adopting advanced technologies like dynamic pricing software and improved reservation platforms, and introducing fresh management to boost implementation.”
He emphasized that they were concentrating heavily on high-margin areas like experiential, luxury, and group travel. Additionally, he mentioned their plan to sell off or dispose of underperforming units and resources.
“Furthermore, numerous companies are adopting buy-and-build growth strategies — acquiring smaller businesses or agencies and consolidating them under one unified brand to increase their market presence and enhance operational efficiency,” Keller noted.
On numerous occasions, private equity firms might possess a particular goal when acquiring a travel business.
Miller noted: “The funding that Intrepid Travel obtained from Genairgy, which has ties to the Decathlon company, was intended to support Intrepid’s growth as an impact-driven business fostering sustainable tourism.”
Woltering clarified, “This process offers significant advantages for hotels since private equity not only supplies capital but also brings operational expertise and resources that are typically out of reach for smaller, independent, or family-owned hotel enterprises.”
Private equity firms might opt to refinance and reorganize debts to enhance cash flow for the travel businesses they acquire. Additionally, they could broaden distribution networks by incorporating travel tech and introducing advanced artificial intelligence tools like agent-oriented AI.
A lot of private equity firms opt to unify their services across various locations to achieve optimal cost savings as well.
What difficulties are encountered during this process?
While private equity capital and know-how may often be appreciated by certain travel firms, transforming these businesses into enduring sources of profitability frequently involves overcoming numerous difficulties.
Miller observed, “Private equity firms are known for having extremely high expectations regarding their targets and aspirations.”
Frequently, finding the right balance between reducing costs and maintaining top-notch client services can be challenging, particularly in an unstable market setting.
Keller stated: “The travel industry encounters numerous obstacles that introduce intricacies to both investments and day-to-day activities. Unpredictable markets, influenced by fluctuating demands, changing reservation patterns, and large-scale disruptions like political upheavals, make predicting trends and assessing values difficult.”
He stated, “Meanwhile, companies need to carefully balance cost reduction with keeping up the standard of their services; overly harsh cuts might harm customer satisfaction and tarnish the company’s image. Moreover, dealing with stricter rules and fulfilling higher demands for environmental responsibility and moral conduct add more challenges.”
Locating suitable purchasers capable of paying high prices even when faced with stiff competition can also pose difficulties for private equity firms.
For travel businesses, a major issue might be dilution of their brand identity, since quick alterations in branding, management, and pricing have the potential to drastically transform the company’s image.
A number of private equity firms concentrate on achieving quick profits, potentially exerting extra strain on these travel businesses. This emphasis might undermine their capacity for sustained growth and diminish client devotion over time.
A conflict in ideologies and approaches between the founding owners of a travel firm and private equity firms might add more complexity to this process.
Miller emphasized: “The constant challenge in investing lies in matching goals with timelines. Should the initial proprietors of the business remain engaged, they would strive to retain control. However, investments will be essential to enable them to accomplish things beyond their reach without such support.”
The investors pursue their individual motives and show minimal interest in the company’s past or its distant prospects. Such an alignment is vital for a fruitful collaboration.
High financing expenses in periods of increased interest rates can negatively affect investment returns, deal execution, and refinancing efforts, Macroeconomic and financial obstacles like these may do so. However, this situation might also create more opportunities for acquiring troubled assets, as stated by Woltering.
Labor shortages and regulatory obstacles might prove intricate and drawn-out to manage as well.
Woltering pointed out: “Following the pandemic, numerous European markets grapple with severe staffing shortages within the hospitality sector, making recruitment, retention, and operational shifts challenging. When private equity firms seek to implement efficiency-driven changes, they might run into opposition from current staff members or trade unions.”
Many European cities frequently enforce strict regulations such as zoning laws, urban planning guidelines, and historic preservation statutes. Such regulatory measures may substantially postpone or complicate the process of renovating and repositioning hotels, thereby escalating both the duration and expenses associated with implementing a private equity firm’s strategic plans.
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