WHARTON PRIVATE EQUITY & VENTURE CAPITAL Volume 1 / Issue 10 KKR AND KSL CAPITAL ACQUIRE APPLE LEISURE GROUP
IN THIS ISSUE: 1. Apple Leisure Group Acquired 2. Workfusion and the Workplace Future 3. Gaming, Gadgets, and IPO’s 4. Ferrara Candy Sold 5. VC and Cybersecurity in Israel
This past December, Apple Leisure Group agreed to a buyout led by KKR and KSL Capital Partners. Currently, Apple Leisure Group is one of Bain Capital’s portfolio companies. The nuances of the agreement have not yet been disclosed and the deal is expected to close in the first quarter of 2017. Headquartered right outside of Philadelphia, Apple Leisure Group is the only vertically integrated travel and hospitality company in the U.S. The most notable subsidiary in the company’s portfolio is Apple Vacations, which is an industry leader in the travel agency space. Due to the company’s strong relationships with airlines and hotel companies, Apple Vacations is one of the largest tour operators boasting the highest number of excursions to Mexico and the Dominican Republic than any other competitor worldwide. Other subsidiaries of Apple Leisure Group include AMResorts, which is a collection of luxury resort destinations across Mexico and the Caribbean. The Unlimited Vacation Club by AMResorts is an exclusive travel club whose members are given guaranteed preferred rates and benefits at AMResorts properties. In addition to AMResorts, Worldstar is another notable subsidiary that is a full-service destination management company, specializing in travel products and services throughout the Hawaiian Islands. Lastly, AMSTAR, a premier destination management company, is a provider of destination services, which Apple Leisure Group is currently planning on expanding to other countries. In 2012, Bain Capital gave Apple Leisure Group an equity infusion in order to promote growth. Following the buyout, the company underwent substantial changes. For example, the Apple Leisure Group acquired CheapCaribbean.com and vacation packager Travel Impressions in order to enhance its travel agency’s capabilities. Possibly the most significant contribution Bain Capital has made to Apple Leisure Group was promoting Founder and President of AMResorts, Alejandro Zozaya, to CEO of the hospitality powerhouse. Currently, Bain Capital is divesting its position in Apple Leisure Group and is in negotiation talks with KKR and KSL Capital Partners.
Author Suyash Hodawadekar Class of 2018 suyh@wharton.upenn.edu
KSL Capital Partners is a private equity firm based in Denver focused exclusively to investments in the travel and leisure sectors. The company has strong portfolio companies that would complement Apple Leisure Group’s subsidiaries well. This past November, KSL acquired Outrigger Hotels and Resorts. The transaction included 37 hotels, condominiums, and resorts. Once the Apple Leisure Group deal is closed, KSL Capital Partners will be well positioned to utilize the leading hospitality company’s integrated business model to bolster its existing portfolio companies. This transaction
was not the first time KSL Capital Partners teamed up with KKR. KSL Capital Partners and KRR first partnered nearly 25 years ago to acquire premier hospitality businesses. Credit Suisse and Kirkland & Ellis advised Bain Capital on the sale of Apple Leisure Group. On the other side of the negotiation table, Dentons and Thatcher & Bartlett served as advisers for KSL Capital Partners and KKR. In the private equity space, there has been a growing allure for prominent all-inclusive resort companies. Pace Holdings, a special purpose acquisition company owned by TPG Capital, entered into a merger agreement with Playa Hotels & Resorts on December 13th. The combined firm will be a publicly listed company with an enterprise value of $1.75 billion and retain the Playa name. The company owns and operates 13 all-
inclusive resorts with a total of 6,200 rooms across the Dominican Republic, Jamaica, and Mexico. Bruce Wardinski, the CEO of Playa, said that the $500 million equity infusion by TPG Capital was to finance growth. Based on the recent transactions in the travel and leisure space, one can infer that private equity firms see large potential for value creation. Nevertheless, it is still important to ponder why Bain Capital is divesting its stake in Apple Leisure Group. It is completely plausible that Bain Capital has benefited from as much returns from the company as it possibly can, which means that there might be fairly little room for KKR and KSL Capital Partners to generate a return. Even though KSL Capital Partners may reap synergies between Apple Leisure Group and its existing portfolio companies, it is almost certain that Bain Capital will factor such benefits in Apple Leisure Group’s final purchase price.
WORKFUSION AND THE FUTURE OF THE WORKPLACE Workfusion, an artificial intelligence startup focused on improving company’s back-end operations, recently raised $35 million of funding. Led by Georgian Partners with support from existing investors Mohr Davidow Ventures, iNovia, Nokia Growth Partners (NGP), Greycroft and RTP Ventures, the series D round brings the grand total raised by Workfusion to $71 million.
Author Armghan Ahmad Class of 2019 armghana@wharton.upenn.edu
The New York-based company combines AI with machine learning, seeks to revolutionize enterprise operations. Founded in 2010 by Max Yankelevich and Andrew Volkov in the MIT computer science lab, Workfusion’s earliest capability used a combination of human-in-the-loop information and statistical quality control to train AI to identify fraud in online financial transactions. From this endeavor emerged one of the company’s core principles: machines make people more accurate and productive, and vice versa. Dubbed “software robots,” Workfusion’s bots are able to learn from experience, allowing customers to automate the manual work of integrating Citrix, Oracle, SAP and other core systems; it eliminates the work of entering credentials, navigating application UIs, and performing core systems functions, and thus makes for more efficient operations for firms in dataintensive industries such as financial services and healthcare. Another function distributes tasks to employees with expertise in the area of question, facilitating more efficient problem-solving. At the end of January, Workfusion launched the world’s first free RPA (robotic process automation) product for enterprise operations, WorkFusion RPA Express, stating that its purpose is to “accelerate the digital transformation of work.” The RPA is not simply a trial version, but a completely free and standalone product that can do a number of functions on its own. Clearly, Workfusion is hoping to both disrupt the RPA industry and encourage users to first try the RPA and then purchase the SPA (service product automation) for their more complex needs. Certainly a bold move, but it remains to be seen whether it is a wise one. Having recently added a new regional headquarters in Noida, India, in November, Workfusion is looking to expand further in 2017. Adam Devine, vice president of marketing, said Workfusion is looking to open in London midway through 2017 and in Singapore soon after, to capture the fastgrowing Asian market. It will certainly be interesting to see how Yankelevich and Volkov manage to expand and the ways in which AI will change the information industry. On a broader note, it is both fascinating and frightening to see what the workplace of the future will look like; it could very well be an ideal, computerized, efficient workspace with not a moment wasted or a problem left without a solution for very long—but the larger question remains: do we truly wish to live in such a world? And what does our trend towards the exhaustive analysis of our surroundings reveal about us? We have labored for centuries to pinpoint, measure, and explain every phenomenon we come across, always heralding our efforts as bringing us to the brink of fully understanding our world—but as any researcher will tell you, for every discovery we manage to quantify and decipher, a dozen additional mysteries
emerge. And as Bridgewater Associates attempt to code Ray Dalio’s brain into an algorithm for the fund to rely upon after he is gone and McDonald’s responds to workers on strike by rolling out an automated menu, one cannot help but ask: why do we keep on trying to create the dystopian future we so love to watch on the silver screen? Apart from the larger philosophical discussion on our increasingly technology-dependent lives and how they reflect our values, there are the practical effects that accompany such developments. Along with automation comes a greater need for active work that calls for critical thinking, forcing one to envisage the role and responsibilities that a typical job in 2050 will consist of. In that same vein, one must then begin to conceive of the nature of the educational system and the requirements
to be an employed, productive member of society, especially in the context of today’s environment requiring a university degree for virtually every career. On a larger note, one must consider what the world will look like for the larger global population—many of whom do not even have the skills to compete today. Oxfam recently reported that the world’s 8 richest individuals have as much wealth as the bottom 50%. Coupled with economist Thomas Piketty’s conclusions about capitalism’s natural creation of inequality (disrupted in the United States only by the Great Depression and World War II), we can clearly discern the economic direction in which our world is moving. The presence of such automation technology could potentially create the utopia we have always dreamed of—but probably not universally. The distribution of resources and the power dynamics between countries (or corporations, depending on how the political/economic structure of the world evolves) could sharpen further and the standard of living of the poor, while rising overall, will probably never reap the real benefits of these advancements. Of course, nothing I have said here is set in stone, or even likely to occur. These are just the thought processes needed to consider the impact our innovations have on our lives (and perhaps still be able to nab a job a few decades from now). The fate of our world is akin to a coin resting on its side—a touch away from utopia, a slight tap away from dystopia. We have read Gulliver’s Travels and we have seen Black Mirror. What kind of a push will we give it?
GAMING, GADGETS, AND IPO’S
Author Colby Schofield Class of 2018 colbys@wharton.upenn.edu
This past year, the tech sector showed strong growth and busy M&A activity. Within tech, the gaming industry reported $30B worth of deals in 2016 alone (Figure 1). This was a new record for gaming mergers and acquisitions, mostly in the mobile sector, and notably the acquisition of Candy Crush developer (King), which closed at $5.9B. In addition to mergers and acquisitions, investments in the gaming industry included research and development in new technologies, mobile, web, and augmented reality / virtual reality (AR/VR) among others. The highly anticipated Oculus Rift introduced consumers to VR and Snapchat Spectacles, which drew more excitement than Google Glass and brought attention to the opportunities of wearable technology. The “unicorn” companies continue to grow and investors wait in anticipation for not only tech M&A, but the tech IPOs expected to take off. Many unicorn companies are likely looking to go public through an IPO in the coming year. Unicorn companies are private companies valued at one billion dollars or more and, in total, have a collective valuation of approximately $770B. These companies are predominantly in the tech industry and have been growing rapidly, which is largely due to companies staying private longer, increasing their valuation. Among the unicorn companies, Snap (ticker: SNAP) recently announced its IPO in early February, and Airbnb may follow suit. Snap has rebranded itself from a social platform to a camera company and had introduced the Snapchat Spectacles (Specs) late last year. The introduction of Specs, far more than just a toy, added wearable technology to Snap’s business model and was well-received by consumers, who were much more open to purchasing Specs than Google Glass. The video glasses were released in an enigmatic manner and were only somewhat attainable, differing from launches of most consumer products. However, this does not differ from Facebook’s initial release, where the company rolled out down the social hierarchy and drew demand from exclusivity. Snap released its new product in “Snapbots” that are only available in LA and NYC (where consumers look for the coolest trends) and put limitations to how many consumers could purchase at once. The Specs have already become incredibly trendy but getting a hold of them requires a lot of luck, and the exclusive, ambiguous aspect of them has attracted attention. Snap quietly purchased a struggling startup specifically for Specs in 2014 and the company, which has also toiled with AR and drones, will likely create new technology and drive innovation for Snap.
Figure 1: Digi-Capital Games Deals 2016
Both the challenges and optimism around Snap will influence the outcome of the IPO. Now that it has rebranded itself, it no longer has the profit margins of an internet company and the IPO will deviate from that of a purely tech startup. In terms of revenue and number of employees, Snap more closely resembles Twitter than Facebook. However, the company is hoping to repress that belief on its roadshow this year. Now that Facebook’s market cap is more than 30 times Twitter’s, the only thing Snap wants to convey to its investors is that it closely resembles Facebook, not Twitter. Snap’s current valuation is about $20B to $30B and the IPO will likely be valued closer to $20B. The co-founders, Evan Spiegel and Robert Murphy, will be the largest shareholders, each with 21.8% of the company’s class A shares, jointly owning almost 44% of the company even after having raised $2.6B in funding. However, the
remaining equity for Snap’s $3B IPO comes with a caveat: shareholders will not have voting rights. The limitation adds more risk to investors and Snap’s valuation may consequently suffer. While some investors are avoiding the risky investment, Snap’s revenue growth and unique products present an interesting and exciting opportunity. After Snap’s announcement, there is much anticipation for the next tech unicorn to go public. Investors are hoping Snap will spur the tech unicorn IPO market; given the valuations and company-specific factors, Uber, Airbnb, or Spotify may be next to launch an IPO (Figure 2). Given the current market conditions, it will no doubt be an exciting year for IPOs and unicorns.
Figure 2: Unicorn Startup Valuations
ONEX CORPORATION FILLS ITS SWEET TOOTH
Author Michael Springer Class of 2020 msprin@sas.upenn.edu
As of early January, Connecticut based buyout firm L Catterton is looking to close a deal to sell Ferrara Candy to Canadian Onex Corp. Onex has apparently won the auction for the confectionary company, beating out other private equity firms hoping to pay over a 10 figure sum to buyout the maker of Trolli gummies. The deal is supposedly valuing Ferrara at $1.3 Billion according to Reuters, making the deal a rare billion-dollar transaction in the confectionary sector. Although the deal has not yet closed and could still fall through, Onex appears to be the clear winner in the race for Ferrara Candy. According to Moody’s, Ferrara’s net sales this year through March 31st came in at approximately $880 million, proving the candy provider is able to sell its signature candies on a large scale. L Catterton bought the Illinois-based company in 2012, and under Catterton’s management, Ferrara was merged with another one of their portfolio companies, Farley’s & Sathers Candy Company. Through this merger, over the last 5 years the company has grown and expanded its reach as a provider of sweets. During this five-year period, L Catterton had been using its ownership to push executive teams that focused on innovation in the variation of Ferrara’s classic candies such as Cinnamon Red Hots, Now & Laters and Trolli gummi bears. This resulted in Ferrara rolling out varying flavors of the signature candies, likely increasing sales. L Catterton was also focused on implementing innovative measures on the packaging and marketing of the candy, hoping that new marketing strategies and revamped looks on the packages of Ferrara’s candy would yield better sales figures, ultimately driving the company’s valuation hire before the Connecticut firm exited. Ferrara is still up against candy making giants such as Hershey’s and Mars Inc., though their expertise in certain variations of candy such as gummi bears should allow them to produce solid sales, even due to a slowing demand for candy in many areas. Although the broader confectionary industry has recently been struggling due to consumer’s switching to healthier alternatives, the sector has remained attractive to private equity firms due to its ability to stay consistent in negative economic environments, as well as candy’s ability to appeal to consumers of all ages. This consistency in the sector makes candy a staple for many retailers in the United and abroad, which gives the owners of a confectionary company with signature brands such as Ferrara negotiating power with large scale retailers who hope to fill their shelves with popular candy. L Catterton likely used its merger and innovative strategies to combat the slowing demand for confectionary products, and Onex Corporation must also have a vision for where they will be able to take Ferrara in the future. The Canadian buyout firm will likely work to increase Ferrara’s value through continued innovation in the marketing of the company’s signature candies. In order to stay dominant over new consumers, Onex will likely need to gear much of its marketing toward youth who are witnessing a decline in the popularity of candy. Onex will also likely hope to outcompete Hershey’s, Mars Inc. and other big name confectionary companies in the United States using their signature brands, and possibly even using new products better suited to consumers who are looking to avoid high concentrations of sugar. Although the future of Ferrara candy is unknown, Onex will hope to implement value increasing changes that justify the billion-dollar valuation of Ferrara Candy.
SECRET DOUBLE OCTOPUS: VC AND CYBERSECURITY
Author Jason Cohen Class of 2020 cohenjas@wharton.upenn.edu
Cybersecurity is evolving at a pace not seen in virtually any other sector of the economy. Every year, the landscape changes completely as cybersecurity firms try to keep up with malicious hackers. In the last year, we saw an unprecedented number of large-scale hacks that has brought cybersecurity into the mainstream. 167 million users had their LinkedIn information compromised in May. The DNC was attacked, which resulted in the exposure of thousands of emails and other personal information. In August, Dropbox had millions of account credentials exposed. 500 million Yahoo accounts were compromised, and more than half those users’ information is being sold on the dark web. Yet, as cybersecurity gets more complex, it also becomes more important. A few years ago, there were 20,000 attempted cyber-attacks a week. Now, that number is nearing 700,000. While investments in cybersecurity have slowed over the past year, going from $3.8 billion of funding to just $3.1 billion, B2B SaaS companies selling directly to banks and corporations who are willing to pay for increased security have thrived because of the importance placed on keeping information private and secure. This is where Secret Double Octopus comes in. The Israel-based company, founded in 2015, uses a multi-layer approach to authentication. Their model gets rid of encryption keys and instead randomizes information as it goes to its destination. By removing the weak-point of the encryption key, Secret Double Octopus’ approach is unbreakable, even with unlimited computing power, due to the fact that not enough information is released in the first place to break it. The technology also removes the need for SMS and code-generating fobs by using a combination of biometrics and fingerprints integrated into a handset. This innovative method was enough to net them $6 million in Series A funding from backers such as Jerusalem Venture Partners, Liberty Media’s Israel Venture Fund, and others. While Secret Double Octopus is a fascinating look into what the future of secure authentication may look like, it is just one example of the incredible cybersecurity innovation coming out of Israel. On the same day that Secret Double Octopus was funded, Illusive Networks, and Israeli startup that builds “deception” frameworks to identify and trap malicious hackers, was backed by Microsoft Ventures. Illusive has already raised $30 million from funds such as Bessemer Venture Partners and Citi Ventures, and their technology is being used at numerous large corporations. These Israeli success stories are hardly rare: Israel is home to over 450 active cybersecurity startups, and that number is only going up. In fact, cybersecurity funding in Israel has increased over the past year, which comes in stark contrast to the decrease in overall funding. Why is this the case? Perhaps we should assume as little as possible—it could be that Israeli tech is just better. Israel has certainly been leading the way for the past several decades purely out of necessity. The target of attacks from many of its neighbors, Israel has put an intense focus on technological development, funding cybersecurity research before it was even a field. Additionally, compulsory military service breeds talented individuals with a drive and will to succeed, as well as a vast array of high-level experience, that does not exist anywhere else in the world. Graduates of the IDF’s elite
technological units, such as Unit 8200, have gone on to develop countless groundbreaking technologies, and the results show. According to Israel’s own National Cyber Bureau, Israel accounts for 10% of global security technology today. The world has recognized Israel’s adeptness when it comes to this technology, and numerous corporations have headquartered their centers of technology and innovation in Israel’s “Silicon Wadi.” For example, Intel has been in Israel for decades, and Microsoft is moving their security business to Israel while also acquiring numerous major Israeli cybersecurity firms every year.
Looking ahead, it will be interesting to see where cybersecurity takes us and how markets react. Investors are increasingly seeing how lucrative cybersecurity can be and how educating themselves on cybersecurity trends may be worth it in the long run. Israel is the center of innovation in the field, and as artificial intelligence, the internet of things, and other fields within tech grow, cybersecurity will go in directions that cannot even be imagined now. It is a given that cybersecurity’s relevance will only increase, and funding will continue to pour in, especially given the current worldwide political tension and thus plethora of cyberattacks by state actors. The only question is who will profit from it.
Figure 3: Cybersecurity Global Yearly Financing History: 2012-2016 YTD (7/12/2016)
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