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Is private equity a force for good in hospitality?

21 February 2008

This week we launch a new series of opinions, kicking off with a head-to-head debate on the increasing influence of private equity firms within the hospitality sector

Jeremy
Jeremy
Yes:Jeremy Jones, director of corporate hotels, Christie & Co

Last year was not a good one for private equity firms, who found themselves at the wrong end of a witch hunt, accused of over-leveraging, asset stripping and not paying tax.

The argument was that they took over companies, cherry-picked the best assets and then sold them on for profit a couple of years down the line without a thought for the business or its staff.

However, in the hotel sector, a number of private equity firms are changing the business community's perception by investing significant amounts of money in driving the market forward and repositioning assets.

aAim, the property investment company backed by Simon Cowell and Sir Alex Ferguson, announced last October a £20m investment programme across the six-strong Principal Hotels chain it acquired for £270m in a sale-and-leaseback deal from Permira in January 2006.

In the same month, JER Partners, the private equity arm of US real estate investor JE Robert Companies, acquired Morethanhotels for an undisclosed sum, believed to be in the region of £115m. It now plans to use the 11 Express by Holiday Inns acquired in the deal as a platform for the creation of a larger portfolio of branded hotels in the UK over the next three to five years. This will benefit the fragmented and undersupplied limited-service hotel market.

Global Hyatt Corporation's £5m refurbishment of the Great Eastern hotel in London and its decision to make the property the first in the world to carry its new lifestyle brand, Andaz, was another example of how investment in the sector was not necessarily for short-term gain.

While it is hard to determine whether customer service in these hotels will improve under private equity stewardship, the market as a whole has arguably become more dynamic and attractive to other investors through their continuing investment.

Chris Peacock
Chris Peacock
No:Chris Peacock, director, Conference Care

A shift in ownership means that we are coming to recognise new names in the hospitality sector. Blackstone, Quinlan, Cinven, BC Partners and Permira - names that are more likely to be found in the Financial Times than Caterer - are replacing the likes of Stakis, Crest, Ciga and the Savoy Group.

The brand is becoming the equity of hotel companies, upon which values are being based. And for those left in the operation, under task to perform by operators who don't traditionally understand their business, things are not as rosy: cutting overheads, standardisation of the product and capitalising on group buying power is having a knock-on effect, leaving many of the UK's hotels as bland and faceless money-making machines.

The cutbacks and cost savings have had their effects on jobs. The sector has strived to reduce staff turnover rates of 50% and managerial turnover rates of 25%. However, as the bottom line becomes more and more integral many true service professionals are turning away from a career where they can no longer make use of their hard-earned expertise.

Much of the service-related integrity of the hotel business has been blown out of the water to become a business of hotel financing, franchising and cost cutting.

Hotel deals

In 2005, 40% of hotel deals in Europe involved private equity groups, compared with just 1% in 2000. Since 2002, about 10% of private equity transactions in UK companies have been in the leisure sector.

The separation of hotel ownership from operations has been a clear trend in the sector, with sale-and-leasebacks or sale-and-managebacks driving many of the recent transactions.

The issue remains that the hotel business model is no longer based on pleasing the customer it is investors that are now number one in the equation where "the bottom line is king".

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