LONDON—A dearth of European portfolios on the market is forcing private equity—increasingly desirable of finding a home at the midpoint of the cycle—to shift the gaze to single assets. Stiff competition has followed that pursuit, said a panel of equity experts speaking at a roundtable session called “The money hall: A focus on investors (private equity)” during the 2014 Hotel Investment Conference Europe, known as Hot.E.
The return of liquidity has made for even faster currents in the acquisition waters, which in turn is driving pricing.
Jean-Philippe Chomette, founder and CEO of the Algonquin Group, said his group maneuvered around the equity entanglement by keeping beneath the radar.
“We’re a smaller player, only recently investing outside of France, and we choose to remain under the €20-million ($25-million) barrier, while everyone else focuses on the $100-million-plus mark,” he said.
Other panelists also had definite modus operandi.
“We always think of franchising, unless an asset is very specific, in which case we’d prefer to own but not manage. We use equity to cover the range, and we like to add value in the middle of the transaction cycle,” said Jochen Schaefer-Suren, partner, head of hotels and leisure division, Internos Global Investors.
Coley J. Brenan, principal of KSL Capital Partners, only has second-place ribbons to show for his efforts during the past 18 months, he said.
“The deals on my desk simply have not penciled. I need them to drive cash flow,” he added.
Over there, overvalued and overpriced
Competition inevitably leads to higher prices and potentially less value. Companies need to bring a heightened degree of single-mindedness to single assets, panelists said.
Chomette sees mezzanine debt as the most overvalued piece of the equation right now. Gabriel Petersen, Blackstone Group’s managing director of real estate, said he’d seen interest rates for mezz debt coming down to approximately 10%.
“It should be, in my opinion, 8% to 9%. I’d personally rather add in a little more equity, as long as the banks do not revert to the crazy 80% loan-to-value ratios. It’s also sensible to form segregated pools of capital to avoid intra-company conflicts of interest,” Chomette added.
Panelists complained about Europe’s overpriced core hotel market and said it is not too early to think about exiting certain interests. Pension money is, they added, thinking about exiting markets such as Germany and heading south to, say, Spain. Competition awaits there as well, however, often from well-connected, local investment communities.
“There is no new wisdom that can encapsulate all of Spain,” said Mark Rajbenbach, panel moderator and associate, real estate, at Paul Hastings LLP.
“From a macro perspective, you would say, it’s the bottom for Spain and Italy, but very little has come out. Hotels still are cash-flowing, so owners continue to kick the can down the road. Only some were successful getting into the debt stock,” Petersen said.
“Germany is a little like the Loch Ness Monster. You think (a sellers’ market) is there, but it is not. Germany will be interesting when other European markets regard leases as only one part of the overall market,” Chomette added.
“Germany is not a private equity market, though,” Schaefer-Suren said. “It’s a Steady Eddy.”
“Much like the Germans themselves,” Petersen added.
Equity’s future bed
Despite Europe’s mixed bag of differing business models and varying brand penetration, the market appears positive—but a landscape requiring careful analysis market to market, panelists agreed.
“As with most (companies), we’re underwriting successful exits. The best solution is for more people to be buying in Europe, as we have a lot to sell,” Petersen said.
“There is no doubt that the market is getting frothy. If in the next 12 months, single-asset prices rise 20%, then definitely I am selling up and heading to the beach. We are not seeing the prices we saw in 2006, when the industry was doing absolutely nothing,” Chomette said.
Potential storm surges still exist in Europe. Chomette argued that inflation would help the industry tremendously, although an awful scenario would be for interest rates to be high but deflation low.