The deal gives a nice return to private equity firm Livingbridge, which bought Sykes in 2015 for about $75 million. What makes Sykes Cottages stand out is that it has fully built almost all of its technology on its own and has almost 80 percent direct bookings. New majority stakeholder Vitruvian is now placing a bet on short-term rentals.
Sykes Holiday Cottages, one of the largest short-term home rental agencies in Europe, has changed hands in a deal worth about $480 million (£375 million).
Private equity firm Vitruvian Partners has taken a majority stake in the property management company, which has 17,500 vacation homes in the UK, Ireland, and New Zealand.
The price represented a significant multiple on the company’s earnings. In the year through September 2019, Sykes generated sales of $87 million (£68 million), the company said. Its earnings before interest, tax, depreciation, and amortization, or a measure of profit, were $25 million (£20 million), it said.
Sykes, based in Cheshire, UK, didn’t disclose the financial terms.
Vitruvian took over shares from previous private equity owners Livingbridge. In 2015, Livingbridge, a private equity firm, bought Sykes in 2015 for about $75 million (£54 million). Virtruvian has invested in travel before, having been a backer of Skyscanner, which sold on to the Chinese online travel company, now known as Trip.com Group, for $1.74 billion.
The deal underscores private equity’s interest in the tech-savvy short-term rental companies. On Tuesday, Vacasa, a vacation rental property management system based in the U.S., announced an investment of $319 million led by Silver Lake.
Like Vacasa, Sykes says that finding demand from guests is much less of a challenge than finding supply, or properties that will be the most appealing to guests. Sykes uses software to identify properties in popular destinations. The software scores properties by a variety of data-based criteria to make sure salespeople spend their time only on the most promising leads. The company then uses technology to track the process of trying to sign those properties, whether or not their owners are currently renting them out.
A Technology Play
Many short-term rental companies claim to be technology companies as a way of trying to attract more investment from private equity and other investors.
But Sykes stands out among most of its peers for having created almost all of its technology in-house, managed by more than 100 software engineers.
Sykes has built a property management system for checking guests in and out and handling payments, a revenue management system for setting rates based on changing supply and demand, a bid management system for choosing what price to pay for ads in auctions to advertise in Google and other online search companies, and its own real-estate prospecting tool to identify properties to acquire.
Some industry experts have criticized the notion of property management companies building their tech. Their theory is that it makes more sense to focus on a core competency like servicing properties. Critics argue it’s hard to compete with startups devoted to perfecting services for, say, revenue management, digital marketing, property management, and reservation systems, messaging with guests, and housekeeping operations management systems.
“I’m not saying our model is better than any others,” said CEO Graham Donoghue. “When we started eight years ago, we had to build our tech because many of these other players didn’t exist or have perfected products yet. We started down a journey. If we were starting out scaling today, we might do things differently. But now that we have 17,500 units under management, we find having full control of our technology stack gives us an edge in scaling up efficiently.”
While several companies now offer revenue management services for short-term rentals, Sykes relies on its software for changing rates based on shifts on demand and occupancy, overseen by a team of 14 people. The software, dubbed Prism, alerts the crew to opportunities for generating the most yield and integrates into its bid management system for search engine marketing.
The goal is to boost direct, repeat bookings. Sykes says 46 percent of its bookings in the UK are by repeat customers and that about 80 percent of bookers come directly to its website and mobile app. These statistics make it something of an anomaly in an industry that often heavily depends on online travel brands like Airbnb, Booking.com, and Vrbo to drive demand.
“When we acquire a customer from, say, an ad on Google, we do everything we can from incentives and marketing to have them come back directly the next time,” Donoghue said.
In April, Sykes made its first acquisition outside of the UK and Ireland in April, when it bought a holiday home company in New Zealand called Bachcare. The deal was opportunistic, but Sykes is looking closely at additional acquisitions in New Zealand and Australia, countries with cultural affinities with the UK, said Donoghue. Next month, it will bring Bachcare onto its tech platform.
Last year, the company turned over about $280 million in transaction value. The company has an average transaction size of about $840 (£650). Many of these are repeat bookers, about a third of whom in the UK travel with pets and so are likely to seek similar types of lodging and destinations for holidays even during recessions.
Investors may wonder if Brexit and other European economic uncertainties pose risks, especially given that private equity firms in the class of Virtruvian tend to seek exits after about four years or so. But Donoghue said vacation rentals are resilient during economic downturns.
“Even during the 2008 credit crisis, we barely skipped a beat,” Donoghue said.
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Photo Credit: An image of holiday cottages in Cornwall in the United Kingdom. Sykes Holiday Cottages, one of the largest home rental agencies in Europe, has sold itself for $480 million (£375 million) to private equity firm Vitruvian Partners. Sykes Holiday Cottages