PE firms turns to the lodging industry for growth: Vacasa deal

screenshot-2018-10-28-10-55-24By Marco Di Biase and Davide Martelozzo

On October 17th, 2017 it was announced that $104 millions were raised from a group of private equity firms for Vacasa LLC, an online vacation rental company set to expand internationally and challenge the biggest player of the sector, Airbnb.

1.Industry overview

Vacasa LLC operates in the vacation rental management industry, which is an highly fragmented market, as there is no company that can exert enough influence to move the industry in a particular direction, with Airbnb and HomeAway being the biggest players. Looking from a higher perspective, this market segment lies in the broader market of the lodging industry, which means that Vacasa not only competes with similar home rental companies, but also with those defined as metasearch engine companies (e.g. The Priceline Group, Expedia) and hotel chains (e.g. Marriott, Hilton, Wyndham), all of which appeal to the same customer need: finding accommodation for travelers.

Overall, the travel industry has experienced sustained growth in the past few years, especially online travel agencies and home rental companies which have benefited more than hotel companies from the increasing customer usage and familiarity with Internet of recent years. In specific, the high-end rental business is a key growth area, which is what has drawn the attention of PE companies.

2. Deal and rationale

Going into the details of the transaction, Vacasa LLC raised $103.5 million in Series B funding from a group of private equity firms, with the ultimate goal of building up a challenger to Airbnb. The Oregon-based startup said it received funding from Riverwood Capital, Level Equity, NewSpring Capital and other backers. This represents the second injection of capital for the company, which back in 2016 received $40 million in Series A funding used to support its expansion plans. With their latest round of financing, Vacasa directors say they have nearly doubled their valuation, although the company declined to disclose further details which prevent us from providing a more accurate financial analysis.

Nevertheless, it is clear how investors were eager to put money into a business with clear growth opportunities, with analysts expecting revenues to grow 70% this year and more than double next year. Moreover, as a potential strong competitor to Airbnb, Vacasa might one day become an acquisition target, which is another point in favor of PE investors. From a business perspective, this round of financing will be essential in expanding Vacasa’s portfolio in new destinations and broaden its national reach, as well as develop their core technology platform.

3. Vacasa LLC

Vacasa, founded in 2009 in Portland, is a tech-enabled rental company operating in the US, western Europe, Latin and Central America and South Africa. With about 7000 vacation homes under management and 1600 employees, the Oregon-based tech company is now one of the biggest players in the market and the management intends to use the recently raised funds to expand its horizon and to compete with Airbnb, Expedia and the other big players of the lodging industry. Vacasa targets the high-end rental business and this strategy has proved to be successful to the point that the company’s revenues grew by more than 3.000% in two years, from $800.000 in 2011 to $26.000.000 in 2013, keeping an outstanding growth rate since that moment.

On top of that, only in the past two years the company started raising money from private investors and is now considered by EY one of the top-5 December 2017 IPO candidates. The company’s growth is driven by a plurality of factors: unprecedented growth of the private accommodation sector, which is currently outpacing the travel industry; technology and online payments, which are time saving and, thanks to dynamic pricing algorithms, economically efficient for both demand and supply; small size which helped the startup to avoid the regulatory scrutiny that plagues Airbnb; the full-service approach to housing rentals which differentiated the company from its competitors.

4. PE firms

The major investors of Vacasa, who recently provided the Oregon based startup with $104millions to finance its global expansion, are Riverwood Capital, Level Equity, New Spring Capital and Assurant Growth Investing.

Riverwood Capital is a PE firm with its base in Menlo Park, California, focused on high growth technology companies. Founded in 2008, the company has committed more than $2 billions raised through two funds closed in 2011 and 2014. The company has invested in futuristic American and non startups dealing with drone management as Skycatch, cloud data services as Druva, workplace platforms as Industrious and virtualized datacenter platforms as Nutanix; among the many startups funded by Riverwood there is the famous GoPro Inc, producer of world-renowned action cameras.

Level Equity is a New York-based PE firm founded in 2009 which has since then raised almost $400 millions, and about to double its capital with the third fund that has been launched in late 2016. The firm has committed capital mainly to software&data services companies and ecommerce startups directly connected to the data storage, wellness and education sectors; by now, Vacasa is the company which received more funds among the ones backed by the firm.

New Spring Capital was founded 18 years ago and since then has invested in more than 130 companies. Before raising about $500millions through two 2017 funds and investing considerable amounts in well-established tech companies like Vacasa, the fund was focused on smaller scale operations in the tech industry.

5. Airbnb, Inc.

Airbnb, the major global online marketplace and hospitality service, was founded in San Francisco by three university roommates in 2008, one year before Vacasa. Unlike Vacasa, Airbnb grew exponentially since the beginning (after less than one year, the site had 10.000 users and 2.500 listings) and venture capital firms, such as Sequoia Capital, flooded the tech company with money to the point that it has cumulatively raised more than $4 billions. This evergreen line of credit was used by the management of the company to expand its international presence and for acquisitions in the sector. After years of losses caused by an intense expansion strategy, the company achieved profitability for the first time in 2016 and with a $100 millions EBITDA on $1,7 billions in total revenues and both figures are expected to increase exponentially during 2017 with $450 millions EBITDA and $2,8 billions revenues forecasted.

Given the spectacular growth of the high-end rental business in which Vacasa and Wyndham Vacation Rentals are the biggest players, Airbnb recently acquired Luxury Retreats for $300millions and is set to take over Hoseasons and other UK travel brands in a $1billion deal. The San Francisco giant startup has now an undisputed, ever growing power in the travel industry and the market has acknowledged it valuing the company $31 billions in the last round of funding; this astonishing figure makes Airbnb the second biggest player of the lodging industry by valuation with Marriott first, at $49 billions on the NASDAQ, and analysts believe its valuation will get to the first place in a few years even without an IPO which doesn’t seem to happen any time soon.

Authors: Marco Di Biase, Davide Martelozzo

Editor Responsible: Carmelo Spallino

References:

1. Bloomberg.com. 2017. PE looks to challenge Airbnb with Vacasa LLC Deal. [ONLINE] Available at: https://www.bloomberg.com/news/articles/2017-10-17/private-equity-looks-to-challenge-airbnb-with-vacasa-deal

2. Crunchbase.com. 2017. Vacasa LLC. [ONLINE] Available at: https://www.crunchbase.com/organization/vacasa

3. Crunchbase.com. 2017. Airbnb, Inc. [ONLINE] Available at: https://www.crunchbase.com/organization/airbnb