Alterra CEO Smith: KSL’s $3B "Not New Money"; Says “Vast Majority of Money We’re Investing Is Money We're Making”
“It's an amazingly good thing because what it means for us is we have stability in our ownership group.”
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First: I got it wrong.
Second: I’m sorry.
Third: Here is my attempt to make it right.
Last week, KSL Capital, one of two owners (along with Henry Crown, which in turn also owns Aspen Skiing Company), of Alterra Mountain Company, announced “the final closing of a single-asset continuation vehicle for Alterra Mountain Company, with total commitments of over $3 billion.”
I took a lazy approach to this story. Rather than dissect the nuance of what a “single-asset continuation vehicle” is and what it meant for the company, I jumped right to the headline number and started spending the $3 billion that I assumed Alterra now had in its bank account.
And then Alterra called and was like, “Yeah that was cute but if you don’t mind could you actually talk to someone who understands what’s going on?” and I was like, “Hmmm yeah that sounds like a genius idea,” and fortunately the person they gave me to talk to was CEO Jared Smith.
In a 20-minute conversation on Wednesday morning, Smith clarified what KSL had done, what it meant for Alterra, and the funding source for most of Alterra’s current capital investments. I’ve issued a correction on my Monday article, clarifying that the KSL announcement does not give Alterra $3 billion to spend, but I do leave much of it intact, as my convictions as to where I believe the company ought to invest (wherever the money comes from), remain unchanged.
Here, lightly edited for length and clarity, is my conversation from earlier today with Smith:
Stuart Winchester: Explain this to me like I'm seven.
Jared Smith: It's not as complex as it sounds. KSL is a private equity firm, which means they raise an overall fund from a variety of sources. And those sources could range from individual investors to pension funds to sovereign wealth funds to endowments and all of the like.
At any given time, most private equity firms have one or multiple funds, and then they invest those funds. In the case of KSL, their specialty is travel and leisure businesses. So they would've gone to the market and they would've said, “Hey, we're raising a new fund of X billion dollars and we're going to invest in travel and leisure businesses, what we're best at.” And then they would deploy those funds and they would've invested in hotel businesses and golf course businesses and restaurant businesses and, in the case of Alterra, ski businesses.
And Alterra represents the largest single investment that KSL has, but it is an investment amongst several investments that they would've made across a series of funds. So KSL invests directly, but they're really investing in Alterra from a fund of which lots of people have invested. And KSL is going to invest this money, and they're going to give those investors that money back with a return on their investment within – typically – five to seven years.
And generally, the way that a private-equity firm returns that money is that they sell the business. So I'm going to buy restaurant chain X, I'm going to operate that business for five years, I'm going to make it worth more money, and then I'm going to sell that business. And when I sell the business, I'm going to give that money back to you with a return because it's worth more.
So what happened was that Alterra is now six years old [the company was founded in 2017, but the process of building this continuation vehicle began more than a year ago] and the money that came in has been in for six years. So those investors were going, “Hey, we need an option to get our money back.”
But KSL doesn’t want to sell the business. They believe Alterra has a long way to continue to grow. So they were basically left with two options: we can either sell it before we want to sell it, or we can do what’s called a “continuation vehicle.” What a continuation vehicle is, is essentially, “hey, the existing investors want an opportunity to get their money out.” We can raise new money directly in this investment for the Alterra business from new investors, and we'll use that new investment money to pay out the old investors.
So it's not cash that comes onto Alterra's balance sheet for investment purposes. It's literally the underlying investors in Alterra's funds. It's new money that's paying out the old money. So the $3 billion actually goes to the old investors, not to the company.
SW: So there's no new money? The continuation vehicle is not larger than the fund that KSL was already using in support of Alterra?
JS: No, it's actually less, which is a good thing, because what that means is that some of the investors, even though they had been in for six years or six and a half years, they actually chose to leave the money in. They didn't want to get bought out, because they believe that the business is healthy and going to continue to grow. So the $3 billion is actually less than what the market value of those shares would've been. And that's the important piece for us as a company, even though it's not fresh capital into Alterra, actually it's an amazingly good thing because what it means for us is we have stability in our ownership group. So they're not up against any timeframe of, “Hey, I've got to return this money within five or six years.” They now get new investors, so that resets the clock. So KSL could be our majority owner for a long time now. So we get that continuity and it's generally a vote of confidence that we're doing the right things and people believe that the business has a long way to go.
SW: So I guess the logical question it leaves open, because Alterra is making so many investments, in Deer Valley in particular and across the portfolio, is where is that cash coming from?
JS: That cash is coming from the business itself. So that is most of that money. We raised some money post-Covid, and the company obviously had money on its balance sheet from inception and continued to grow, but the vast majority of the money that we’re investing is money that we're making. So think of that as our operating profit on an annualized basis. We're taking that money and instead of paying dividends to the owners, they're reinvesting that back in the business. And the same holds true largely for acquisitions, although we do do some debt financing of some of that stuff in much smaller numbers, a hundred million dollars here or there, which we've done on a rolling basis over the last two or three years, which is pretty typical of a business our size. But 90 percent of what we're investing is literally just profits that we're pouring back into the mountains.
SW: So this KSL continuation vehicle had nothing to do with the Arapahoe Basin acquisition earlier this week?
JS: No. It was completely unrelated.
SW: Should we read KSL’s reinvestment as an indication that Alterra is unlikely to go public anytime soon?
JS: Yeah, I actually think you can. A public offering is an option for us. It's definitely not the only option for us and it's not something that we're pursuing anytime in the foreseeable future. So this transaction gives us the optionality of staying private for an extended period of time. And when I talk about continuity of ownership, we've got a multi-year plan to continue to invest and it's this ownership group that's committed to that.
SW: What can you tell us about the Henry Crown side, the equivalent over there, and how they are supporting Alterra?
JS: It's just way simpler because Henry Crown, it's private money. Think of it as they are an individual investor, they are not an investor or a fund that's investing on behalf of others. It literally is their money and they're investing it directly. So this transaction didn't impact their share of the business, didn't impact their percentage of the business, they rolled forward, they didn't sell any to new investors, they just held their position and it's the same as it was. And that too is a vote of confidence that they like what we're doing and they feel good about the position that they're in.
SW: Do you anticipate making any more acquisitions this year?
JS: Beyond [the previously announced-but-not-yet-closed purchases of Arapahoe Basin and Mike Wiegele Heli Ski] there's always conversations, there's always things that we're looking at, but nothing that's imminent.
SW: Is there anything you can tell us about success metrics for the winter in spite of the slow weather start? Vail released theirs recently. Is there any version of that that you can share for Alterra?
JS: We don't release any of our stuff publicly, but generally we're following the trends that you see in the overall industry, which is a slow start to the season, but picking up some really, really great steam right now, and the last couple of weeks have been really strong, so we're hopeful that we're back on track for the rest of the year and we'll go from there.
SW: How would you characterize Ikon Pass sales for the 2023-24 season?
JS: Really strong.
JS: I would say they're really strong.
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