Investment in the superyacht industry
How can the superyacht market attract investors, and what are the benefits and drawbacks of outside investment?
Private investors generally look for a strong track record, the potential for financial return and predictable market growth when considering whether to buy into a company. The superyacht industry is largely perceived to be a niche market, with low profit margins, dependent on a very small pool of UHNWIs and, therefore, has not traditionally been seen as a good place to make money. Yet, a handful of companies have been successful at attracting investment and have found a way to educate investors about the industry and position their company so it appeals to alternative sources of capital.
One key point of interest for investors is that the superyacht fleet has grown in size every year, albeit at a modest pace. For Squircle Capital, a European private equity and real-estate investment firm that took over OneOcean Port Vell in Barcelona in 2017, the fact that the industry comprises a number of different sectors with varying characteristics – ranging from manufacturing and refit and repair to brokerage and management and marinas – makes it attractive for investors.
“As investment managers, we are firm believers that there are extremely attractive opportunities within the industry to generate risk-adjusted returns due to its strong long-term growth prospects,” says John Nery, managing director and head of investments at Squircle Capital. “With the fleet of superyachts on the rise, we foresee a continued demand for the goods and services year in, year out. Depending on the sector, we also foresee market leaders gaining traction in a high-barriers-to-entry environment or new opportunities to capitalise on consolidation.”
The superyacht fleet may be growing but there are still many reasons why investors might be deterred from getting involved in an industry that is fraught with uncertainty and risk. In the lead-up to the acquisition of Global Yachting Group (GYG) by Lonsdale Capital Partners in 2016, it was important that the management team framed its market in the correct way and helped investors to understand its nuances.
“What investors are looking for is some visibility or viability in terms of the revenue and profit stream of the business...”
Firstly, that meant GYG needed to educate investors on the difference between ‘the billionaires’ market’ and ‘the millionaires’ market,’ both of which exist within the larger superyacht sphere – and therefore distinguish its own market from the fluctuations of smaller- yacht markets. Furthermore, with part of its core business being resprays, GYG had to explain the cyclical nature of the superyacht refit market to prove to investors that it is both predictable and profitable.
Following the private-equity investment from Lonsdale Capital Partners, GYG experienced a period of sustained organic growth, culminating in the announcement of its application for the admission of its entire issued share capital to begin trading on AIM, the market operated by London Stock Exchange, in 2017, with Lonsdale keeping 19 per cent of the shares. “What we didn’t want to end up with was 250 shareholders on day one of entering the market because that can cause share-price volatility,” explains Remy Millott, CEO of GYG. “As such, we sold most of the stake to investors of funds, which gives us a lot more stability because there is only a certain number of free shares on the market. And being a business for which there was no comparison, it was an unusual business to float, so having Lonsdale remain as an investor showed a lot of confidence in the business to other investors.”
With AIM being a platform for fast-growing businesses, GYG’s interim chief financial officer Kevin McNair points out that an initial public offering (IPO) of this kind would only be suitable for a certain type of company. “What investors are looking for is some visibility or viability in terms of the revenue and profit stream of the business,” he explains. “So, depending on which part of [the] industry you are in, these businesses can be very cyclical and this subsequently makes investors very cautious. As such, you need a certain scale: it doesn’t make sense for a small company turning over 10 to 15 million euros to try to list because, while the IPO may get away, this is only the beginning of the journey and they may not get the attention and liquidity of the market.”
Any investment will undoubtedly have a significant impact on how a business is run. With more money in the bank, investors will want their investments to improve and operations to be streamlined to maximise returns. When Squircle Capital took over OneOcean Port Vell, it redefined the strategy of the business, bolstered management and improved its financial health. “The outcome has been very positive as witnessed by higher occupancy levels, berth sales and a growing number of superyachts considering OneOcean Port Vell as their preferred home port,” says Jose´Caireta, the company’s co-founder and managing partner. “The second phase of our investment plan will focus on growing the business, both organically and through the pursuit of strategic value-creating opportunities. Our target is to become the premier superyacht marina in the Mediterranean and one of the leading marinas in the world.”
With more money in the bank, investors will want their investments to improve and operations to be streamlined to maximise returns...
Changes were put in place at GYG to allow operations to be tracked on a more granular level and provide greater visibility on revenues, gross margins, sales and pipeline. Furthermore, the management team worked on executing the company’s long-term growth strategy to increase its market share of the new- build sector. “As a listed business, we needed to give the financial market a lot more consistency and transparency, for example, by having a two-year forward-facing order book that provides investors context and visibility in our forecasting,” says Millott. “Historically, GYG has always carried out new-build work but we were brought in by our owner relationships, which has been very successful but not always consistent. Our strategy post IPO has been focused on becoming a supplier to shipyards.”
The obvious benefit of any type of investment is that it can greatly bolster a company’s liquidity, enabling improvement and expansion as well as providing its principal shareholders with an exit strategy should one be required. “The decision to look for private equity was a natural next step for GYG because the team wanted to drive the growth of the business at a faster pace than they could without additional investment and provide the chance to exit some historic shareholders who were ready to leave the business,” says McNair. “They took the investment from Lonsdale and used it to put in some systems and infrastructure to drive the business forward and this then provided the opportunity to undertake an IPO. That again was another opportunity for some further exits whilst, more importantly, giving the business a chance to receive more capital and continue that trajectory of growth.”
An IPO also provides financial security and confidence for its employees and the clients that require its services...
As well as allowing companies to grow, because of the rigorous checks and balances that companies on the stock exchange are subjected to, an IPO also provides financial security and confidence for its employees and the clients that require its services. For GYG, this means an opportunity to attract new business. “The primary positive is that being listed gives us credibility; it has made the market recognise what we have achieved and can achieve while also making it easier to enter discussions with the big players in the market,” says Millott.
While much of the superyacht industry remains quite insular and, in some cases, even outdated, investment from outside can also help to stimulate new ideas in the market. “Private-equity firms have the capacity to generate strategic and operational changes that ensure benefits from the outset,” concludes Nery. “In particular, firms with solid experience in the real-estate sector are particularly well positioned to extract value from marinas that combine infrastructure services with a new concept of experience and lifestyle.”
Any drawbacks to investment might depend on the company being invested in – bringing in investors of any kind will, of course, result in a higher level of accountability. “Whether you are listed on AIM or bringing in external investment through private equity or any other means, people are going to want to measure and judge your performance against their expectations,” says McNair. “If you are a business owner and don’t like that idea, then you should disregard listing or going for private equity. However, what it does do is build a certain discipline into businesses. [Just] like an athlete training for an event, you set yourself a goal and work towards achieving it and then measure your performance against what your goals were, and that’s what happens in a business that is listed on the market.”
The transparency that comes from being a listed company might be considered by some to be just another drawback. For Millott, the key difference that comes with being a listed company is the necessary disclosure aspect. “This means you have to tell everyone the good and the bad news,” he says. “So when things don’t go quite so well then everyone knows about it, whereas if you are a private company, you can keep your financial reporting fairly discreet.”
"If you are going to be a PLC, you are going to have to put more systems in and invest in the business on a regular basis, and that is a really difficult decision for a lot of business owners and business managers..."
Furthermore, the actual process of an IPO, which takes six to nine months, might be a deterrent for many. “As part of the process, you have various advisors, including accountants who crawl all over the business and write a due-diligence report, known as a short form, that informs the directors and the professional advisors how well or poorly the business is run,” adds McNair. “A lot of small or family businesses won’t be willing to invest in more systems or technology than they absolutely have to. But if you are going to be a PLC, you are going to have to put more systems in and invest in the business on a regular basis, and that is a really difficult decision for a lot of business owners and business managers.”
McNair concludes, “The reality is [that] there is a cost of being a publicly listed company and you must believe that the benefits are greater than the cost. The benefits are profile, how we are treated by some of our clients and other operators within the industry and access to capital if we need it, but there are a lot of small cap companies out there, much smaller than us, that would struggle because they are too small to get these initial investors.”
Looking to the future, it’s inevitable there will be more large-scale investment as the superyacht industry matures and, as the second-tier market players consolidate, and this will have a positive impact for existing investors and help fuel further growth. GYG’s recent listing is particularly significant because any investor who has stocks and shares will see its updates and, as the superyacht industry catches people's attention, this will expose the market to a varied investor base. Therefore, it’s in the industry’s interests that current investments are successful because this will then open up other opportunities for other companies – whether through private equity or an IPO.
Read the full article in The Superyacht Business Report, out now.
Image: GYG's launch on the London Stock Exchange
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