PE firms tour travel tech as industry evolves

Private equity shops are grabbing their tickets to tech investing with buyouts of online booking and travel software companies.

In the past year, firms including Accel-KKR, Thoma Bravo, Silver Lake and 3i Group completed 10 deals in the space, according to Pitchbook data. Buyouts in the space have increased 50 percent since 2014, according to Pitchbook.

Interest in travel technology investing comes as U.S. passenger revenue — a combination of revenue from passengers’ air transportation — is expected to reach $171.4 billion in 2019, up 2.6 percent from 2018, according to recent report by Skift.

Recently, Accel-KKR backed a merger of two providers of software for hotel booking, Pegasus and Travel Tripper.

The combined business, expected to post $65 million in revenue, is striving to bring more traffic to hotel brands through an improved booking system and more personalized reservation experience.

Currently, many hotel brands still use reservation technology developed in the late-1990s or early 2000s.

Houlihan Lokey’s Vikram Sood. ©2015 John Swanda, Swanda & Schindler Digital Photography, San Francisco.

This creates an opportunity for software providers to offer tech that can improve both the back and front ends of their systems, said Vikram Sood, a technology banker at Houlihan Lokey who advised the AKKR-backed merger.

“We are seeing a lot more activity across all parts of the travel-technology landscape,” he said.

Even with hotel-room rates and occupancy at peak levels, hotels don’t see more profit because operating costs are high, Sood said.

This happens because of rate-parity agreements, requiring distribution platforms like Expedia and Booking.com to offer the same rates as hotels.

At the same time, distribution platforms also have leverage to raise commissions charged to hotel brands.

Now hotels are pushing back to capture some margin. One way to do this is to offer more personalized booking experiences through AI and machine learning, Sood said.

Corporate travel technology will be another area to transform, industry observers say.

Alliance Reservations Network, a travel-booking engine for groups and corporations, is exploring ways to raise capital, a source familiar with the company told Buyouts.

The Orlando, Florida, business posted north of $55 million in revenue last year with more than 75 percent growth, the source said. The firm wants outside capital to scale operations and sales volume, potentially through PE investments.

PE is capitalizing on several factors as travel arrangements become more software-driven and the industry consolidates.

Pepper Hamilton’s Jim Rosener. Photo courtesy of the firm.

Factors include predictable revenue, ability to scale businesses with add-ons, and the opportunity for exit to future buyers, Jim Rosener, partner at Pepper Hamilton, told Buyouts.

Investing in web-travel platforms also makes sense as modern travelers are more focused on cost savings and points benefits, Rosener said.

Last month, 3i Group bought SOR Technology, a web platform that provides access to deals on hotels, vacation homes, flights and car rentals for business-to-business and end-user customers.

3i invested $24 million to merge SOR with International Cruise & Excursion, a 3i portfolio company that connects customers with exclusive promotions for cruise travel.

ICE technology works like this: The web platform connects credit-card holders of partner brands like American Express and USAA with unsold inventory on cruise liners offered at discounts and available for booking through collected credit card points.

The combined company’s business model enhances the marketing capabilities of partner brands while helping cruise companies like Carnival extract revenue from unsold inventory, Andrew Olinick, co-head of 3i Group’s North America Private Equity unit team, told Buyouts.

“The reality is if you are a travel supplier, you’re looking to find channels other than Expedia. Expedia solves one problem – which is quick and easy booking,” Olinick said.

“What we are excited about is the combined company solves a pain-point travel problem, which is to sell inventory.”

Action Item: To contact 3i Group’s investor relations email IRTeam@3i.com.