Private-equity buyouts in the hotel industry
Private-equity buyouts in the global hotel industry are on the rise. In many cases private-equity funds are interested in hotel real estate as a financial asset, and are not interested in running a hotel business. This has led to significant changes in the priorities and goals of hotel management. These changes are based on financial targets that include extraordinarily high rates of return to shareholders (15-20%), financing new hotel properties through debt rather than re-investing profits and the rapid acquisition and liquidation of hotel properties as ‘real estate assets’.
The strategy of separating hotel business operations from ownership of hotel properties is geared towards “unlocking” the financial value of real estate assets. Hotel properties are sold not on the basis of business performance or profitability, but as a means of generating cash flow needed to satisfy the short-term demands of shareholders. As a result, hotels are seen by investors not as a long-term, viable service-provider, but as “… a bundle of assets to be deployed or redeployed depending on the short-run rates of returns that can be earned.” This transformation of hotel properties into a bundle of assets that can be bought and sold on a short-term basis is largely the result of the entry of new financial players such as Real Estate Investment Trusts (REITs) as owners of hotel properties and private-equity funds as owners of real estate, hotel companies and/or brands.
In several countries the “buyout” activities of private-equity funds, geared towards large, short-term returns, have involved asset-stripping and closures. This destructive approach has led them to be labeled “locusts” in Germany. Private equity funds undertake buyouts on the basis of an "exit" strategy cashing in on the investment within three to five years. Thiis the opposite of a committed, long-term investment geared to the development of the company.
Private-equity funds have now become major players in the global hotel industry. Even in Europe where private-equity fund involvement in the hotel industry is relatively new, from 2001 to 2003 an average 33% of all transactions in hotel properties were the result of private-equity fund buyouts and divestments.
The largest private-equity fund in the world, Blackstone Group, acquired five hotels in the past year, including the purchase of the hotel REIT MeriStar Hospitality Corporation (which owns 57 hotels under the Hilton, Sheraton, Marriott, Ritz-Carlton, Westin, Doubletree and Radisson brands in the US) for US$2.6 billion. In 2005 Blackstone bought Wyndham International hotel group for US$1.44 billion and subsequently sold the brand and franchise system to Cendant. In Europe, Blackstone recently bought the Hospitality Europe hotel group for US$790 million.
Starwood Capital Group a US-based private-equity fund that holds $14 billion in real estate assets, including Starwood Hotel & Resorts Worldwide Inc. (Sheraton, Luxury Collection, Four Points by Sheraton, Le Méridien, Westin, St. Regis, W Hotels) with 850 hotel properties in 95 countries and 145,000 employees. Starwood Hotel & Resorts Worldwide Inc. is in fact a hotel REIT that was merged into other Starwood companies and the holding company, Host Marriott Corporation, in 2005.
Even hotel properties that are not taken over by private-equity funds are subject to new financial pressures. Shareholders of hotel companies expect the same high rates of return paid out by these new financial players, which in turn shifts the priorities and goals of management. In fact, financialization does not necessarily require a change in ownership to have an impact on the workplace. The threat of a hostile takeover, falling share prices or the withdrawal of investment funds may be sufficient to change business plans and investment decisions to meet the short-term demands of financial investors.