Trinnex Workshop - Vanuatu Tourism Investment Turning Opportunities into Investment John Perrottet August 2010

The Approach Know the market Know the product Know the opportunity Know the investors Know their investment strategies Target the investors Take the opportunities to the investment market nities

PACIFIC REGION TOURISM INVESTMENT VEHICLE

What’s the Problem? Shortage of real equity Region is characterised by low levels of investment in tourism as a % of GDP High demand for Capital where Demand exceeds Supply This limits growth & places assets at risk Tourism requires long term “patient” money The Pacific tourism industry is fragmented

Nature of the Study The Task Feasibility Study for the Establishment of an Investment Vehicle in the SME Hotel sector of the South Pacific The Client

Our Approach STAGE 1STAGE 2 Increasing Commitment to the Concept Project Initialization Establish Expert Panel Desk Research Market Consultation Program Expert Panel Review Stage 1 Reporting Presentation of Stage 1 Report Discussion with PATA Decision to proceed Supplementary Consultation Program Analysis and Consolidation Expert Panel Review Stage 2 Reporting Presentation and review with PATA Assess DemandReviewFacility Scoping

The Market Research conducted in 18 countries. These countries attract almost 1.6 Million visitors per year. Average Annual Year on Year growth has consistently been over 3%. Fiji + French Polynesia account for 50% of visitors.

The Market Fiji Long Term Visitor Arrivals Growth

The Market Samoa Long Term Visitor Arrivals Growth

The Market PNG Long Term Visitor Arrivals Growth

The Market Cook Islands Long Term Visitor Arrivals Growth

The Market Vanuatu Long Term Visitor Arrivals Growth

The Market Tonga Long Term Visitor Arrivals Growth

The Market Combined Long Term Visitor Arrivals Growth

The Market 1,940 properties that represent 33,884 rooms. 4% offer greater than 100 rooms (75 properties). 26% offer between 20 – 100 rooms (510 properties). 70% offer less than 20 rooms (1,355 properties).

The Market

There are three distinct segments Upper Market – 4% properties; 1/3 rooms Relatively large (> 100 rooms) Formal businesses Commercially financed More likely to be foreign owned Usually professional management Can raise and package own capital Sound businesses with growth potential NEED – Equity (risk capital)

The Market There are three distinct segments Middle market – 26% properties; 1/3 rooms Mid sized (up to 100 rooms but generally 20-50) Formal businesses, many still family owned Some foreign ownership Commercially financed Generally undercapitalised Sound businesses but undermanaged Many have good growth potential Often sub-optimal profitability NEED – Equity and Management

The Market There are three distinct segments Lower End – 70% properties; 1/3 rooms Small (usually < 20 rooms but not always) Family owned and managed All local ownership Independently financed Often informal businesses Can be highly profitable Sound businesses but undermanaged NEED – Security and Skills in order to raise debt

The Opportunity Lower End Multi-country guarantee scheme to enable access to local financial market (mainly development and commercial banks) Combined with a skills building program focusing on financial management, marketing, training delivered by specialist advisers Probably donor funded or underwritten Cash backing (DFI) may be required in some countries

The Opportunity The Rest Commercial Investment Vehicle specialising in equity financing for tourism assets Creates a platform to enable essembly of investment rather than single assett purchase Consolidation opportunities Distribution of risk Ease of entry and exit

The Opportunity The primary target for the IV is: 650 hotels representing 10,000 – 20,000 rooms 40 – 100 rooms each, some larger Properties generating less than potential returns High growth potential businesses Values are USD$2.0M to USD$10.0M each Six priority countries

The Opportunity The funds would be used for: Financial restructuring of profitable properties Refurbishment of quality properties Expand & upgrade properties to meet international expectations Reposition properties to international branding Partial or full take-out of institutional investors Selected startups Tourism support businesses including transport

The Opportunity Scale of the Investment Vehicle Average room value of USD$100,000 1,000 rooms = USD$100 Million 500 rooms = USD$50 Million This suggests an Investment Vehicle value of USD$50M to USD$100M

Who Would Invest…….and Why? Regional Provident Funds Investment Funds Commercial Banks Corporate Investors Development Finance Institutions Existing owners Private Individuals Now

Who Would Invest…….and Why? Opportunity to engage in the Pacific region’s most important industry without the detailed planning & due diligence required for a direct investment Spread of risk by country & asset class Provides regional banks with access to new lending leads and risk sharing in projects that are thinly capitalised

Who Would Invest…….and Why? Investment Managers see the need for longer term finance being invested in businesses with good underlying capital bases which are not making good Equity returns. With both $s + Management these businesses can deliver higher yields and generate capital growth. A 15% return on funds invested is proposed as a realistic target – higher returns are possible

Who Would Invest…….and Why? An Investment Vehicle of a sufficient scale would eventually attract investment funds from AUS/NZ/ASIA/EU No other platform for accessing these sources of funds These generally have a minimum investment threshold of USD$10M At present only development institutions can consider this level of funds Later

Type of Investment Vehicle An Unlisted Limited Liability Company [ULLC] is preferred structure It should be Open Ended – no fixed termination date It should be established in the most tax-effective location that is not subject to foreign investment regulations affecting the flow of Dividends Needs access to professional management with strong knowledge of the tourism sector across the region

Managing the Investment Vehicle Oversight from a Board of Directors consisting of eminent leaders of the region’s tourism sector with private sector, investment, advisory, and regulatory experience A specialist firm to manage/advise the Investment Vehicle and with performance related remuneration $s + Management = Unlocked Value

Structure Issues Domicile – costs, regulations, tax status, blanket approvals Currency of investment Risk exposure – guarantees? Exit – from investments (trade sales, earn out) Subscription and exit – for investors (trading in units/shares, dilution) Relationship of advisory team to Board Need for local representation

Possible Structures A Fund ? An Unlisted Limited Liability Company [ULLC] ? A Trust ? A combination

Possible Structure Investment Country 1 Investment Company Trust Advisory Company Founding Shareholders External Shareholders Investment Country 2 Investment Country 3 Investment Country 4

Mobilisation Strategy Establish target level of funds Secure one or two key income generating assets to take to founding shareholders Obtain overall commitment (say USD$50m) with initial call of USD$5-10m Subsequent calls to founders over 5 year period as pipeline builds Introduction of additional investors as portfolio expands

Next Steps Consolidate responses and complete report Mobilise support for Information Memorandum Preparation of Investment Memorandum Capital raising program Commitment of Funds Establish Vehicle Select Management/Advisory Firm Commence operations

The Investors Who owns hotels/tourism assets in your market? Why are they investors - motivations? What is the structure of their participation? How do they invest – their investment strategy? What is the competition for your destination among the investment market? The role of brands – international, regional, local nities

The Investment Strategy Expansion of local brands Expansion of regional brands Long term vs short term positions Appetite for risk Strategic partnerships Property accumulation Job creation nities

The Pitch Develop skills Thorough research Careful targeting Understand the business proposition Professional documentation Develop relationships Formal presentation Attention to detail Closing and after care

The Barriers Destination Investor protection Foreign ownership Capital and profit repatriation Consistency Project Regularity of cash flow Capital – Equity, Debt Security Investor Reputation Business model Marketing Financial skills

Contact us John Perrottet Australia Dain Simpson New Zealand Neil Underhill Fiji