Leading private equity funds in hospitality are still finding “attractive returns no matter the macro environment, no matter the micro situation”, according to Coley Brenan, partner, KSL Capital Partners International.
He adds: “Buying at the right price means assessing a number of factors, and oftentimes the most important factor is the management team or the executives that you're backing to execute a strategy. We are simply a shareholder.”
Assessing distress
In terms of securing bargains, Francesco Orofino, investment director, Deutsche Finance International (DFI), suggests that there is “very little distress today”. He adds: “It has been limited to certain developers that have stretched themselves or markets, that have structural issues where we wouldn't want to own anyway”, pointing out that the reasons for this are largely positive ones.
“Income levels have been pretty strong and hotels have been performing well. Debt levels are conservative, and there's plenty of equity sitting on the sidelines. For all these reasons, lenders have been working with their borrowers and that repricing has been slow and hasn't corrected to the extent that we originally expected.
“So, unless there's an exogenous shock to the system, we do feel that the leveraging process will be kind of gradual over the next one to two years,” Orofino says.
Deals by geography
In the absence of cut-price product, smart capital is sniffing out opportunities market by market, Andreea Bodea, investment director at Pygmalion Capital suggests. “We are spending a lot of time in Italy,” she says. “Italy has the highest room count in Europe, but is one of the more fragmented markets. We see the model of owner-operator really struggling to keep up with the standards, and the investment that is needed in order to sustain the standard of quality that today's traveller is really looking for.
“When you combine that with a low presence of branding and some succession issues that can come up with owner-operators, we see a lot of opportunities there. In addition to that, we are also looking at Spain, but that market has matured and we’re not finding the same deal flow we once did.” She describes Italy as “ten years behind Spain in terms of institutional capital being in the market”. Other interesting markets for the firm include France, Germany and the UK.
Orofino says that DFI’s next deal is “definitely going to be in the UK… and it’s going to be an equity deal”. He explains: “We see pricing in the UK as more in line with what would work for our capital, compared to other jurisdictions in which we source deals.”
He says that DFI is also looking across sectors, which means investing in residential and industrial too. “Given the fact that performances in the hotels space have been so strong, it’s sometimes harder to have pricing discussions with hotel owners that are beneficial to us. So, we're potentially looking at resi really in the UK at the moment.”
Bodea agrees that different jurisdictions sometimes afford different opportunities. “We recently issued a mezzanine loan for a luxury asset in Frankfurt. It's not necessarily what we plan to do going forward, but opportunistically the asset presented itself and there was an opportunity to provide a solution.”
Budget and bargain hunting
For George Nicholas, CEO and founder of Shibui Capital, it is worth looking at different price points within the market, describing his approach as a “barbell” strategy, that is, overweight at each end. “We like ultra luxury… and we like budget,” he says. “Budget remains at the bottom of the totem pole, the first rung of the ladder and the last rung of the ladder. If you can't afford it, then you don't travel.” He suggests that there are opportunities for aggregation in this segment, as well as “the layering on of structure and protocols”.
In terms of the funding environment, and its likelihood to trigger asset sales, he adds: “If we’re looking at five-year loans from 2019, they’re coming up this year and people already know that the cost of financing from then to now has gone up a couple of hundred basis points. Their LTVs might have gone down because cap rates have increased, but they’re probably already working on it.”
On the somewhat sluggish transaction environment, he adds: “Post-GFC, there was a big pause in deals, liquidity stopped. But then we were off to the races again. So I think we’ll see that liquidity kick off again this year.”