FINANCIAL INVESTORS IN THE TOURISM INDUSTRY

Only Yields Count

The economy is changing because the ownership of large undertakings is increasingly concentrated in institutional investors: investment and pensions funds press more forcefully than small investors for high capital returns but think differently than other large owners.

In spite of record profits many firms are reducing their labour force. One reason: they are under great pressure to deliver huge returns to the capital market. Competition between investment and pensions funds for investors is driving yield expectations sky high. The attractiveness of a fund to new customers depends on its previous returns: according to research in the USA, if a fund manager achieves a yield which is 1% above the average of his competitors, he can expect 1.3% more by way of investments in the following year. On the other hand, an uncompetitive result puts his job in danger.

Private equity funds are becoming ever more influential players in the European economy. The growing availability of capital allows them to make more, and larger, deals. At the same time indications of possible dangers are mounting. The FSA, the British financial regulatory authority, identifies a basic problem: more market participants are appearing 'whose business model does not in any way foresee that ailing firms survive'.

Investment funds pass on the pressure of competition to the firms whose shares they own. They operate a double strategy of exit and votes. Exit: the funds rarely acquire more than 2% of a firm. They are thus able to sell their shares at any time and switch to a more promising investment. On average, funds dispose of their investments after 20 months. The threat of selling makes managements more compliant with the funds' demands because of the fall in share price that can be expected. Votes: although they are as a rule only minority partners, they are listened to at shareholders' general meetings. If 20 funds, each with 2%, have a vote then that is a relevant group. The combination of exit and votes can damage a business. TUI Ltd was under enormous pressure from investment funds in recent years and the result has been a whole series of restructurings, social plans and job losses.

The activities of financial investors can be met in many sectors of the European travel and tourism industry. Hilton, AVIS, TUI and Amadeus are only a small selection.