BERLIN—Economists are trained to warn and flag potential road bumps. Private equity executives are about return on investment, searching for and realizing value over a cycle.
Can the two sides sit down together with an aligned view, even in a period mostly concluded as rosy? That opportunity came earlier this month during a session titled “The paradox” at the 18th International Hotel Investment Forum.
While there was mention of such headwinds as low and stagnant growth from Europe and the euro’s decline from Peter Arnold, director of economic advisory at Ernst & Young, the mood largely was positive, mirroring the entire conference.
Red flags still were waved.
“There is a huge amount of liquidity coming into the U.K. from different sources,” said Tim Helliwell, head of hotels at Barclays Bank. “It will be there, we sense, for the next two to three years. In 2012, you could hardly fund a regional property, but now there’s a sea of liquidity, so close to where we were in 2007. The equity guys will talk of values and opportunities, but from the lending side, it feels as we have gone through a whole cycle in 18 months.”
Helliwell said Germany and France look good, with outside liquidity following investors into those markets, but the rest of the continent resembles how the U.K. looked in 2011 and 2012.
“I see a real drive to get deals done by the end of (March), by mid-April in the very worst scenario, and then probably nothing until after summer,” Helliwell added.
Bet on equity
“The more difficult the country, the more opportunity, especially with (capital expenditure), but there’s a lot of capital chasing deals,” said Gabriel Petersen, MD, Blackstone.
Petersen said the tendency is to go to franchises in Europe, to allow more control over the middle section of the profit and loss accounts. Another trend is brands during the past 10 years are more flexible in management contracts.
“The (economic) questions we ask are: 1) Do local labor laws help drive operational performance, and 2) with lower interest rates, do new funds have different structures than traditional ones?” said Cody Bradshaw, senior VP and head of European hotels at Starwood Capital Group.
“It is always about how to drive operations performance through asset management that eventually has to lead to your exit plan,” Bradshaw said.
“The question of (2015) is how do we exit?” Bradshaw said, who added that with economic fundamentals being so strong, something had to give.
Europe in 2015 will be a mixed bag, panelists agreed. Growth is still possible and some exits likely—KSL Capital Partners and Malmaison Group were mentioned—and domestic buyers, especially those in the U.K., will finally realize chances to buy domestic platforms.
“We could have an entire conference on misalignment of interest. Also, even if the interest rate goes up 150 points, it will still be way below the historical average,” Bradshaw added. He said Starwood Capital’s focus in Europe would be on top-line performance in gateway cities.
Andrew Taylor, head of leisure, retail and franchise, sectors and specialist businesses at RBS/NatWest said: “RBS predicted interest rates in the U.K. not to increase until the second quarter of 2016 and then only by a quarter of 1%.”
“You will not invent another Rome, Amsterdam or Prague, and even if you half the estimation of incoming tourists, especially from China, I still have no idea where all these people will stay. We are looking at luxury development, not through our usual funds but through investor opportunities,” Bradshaw added
A paradox could certainly be seen in Petersen’s comments that assets are flooding the market due to rising multiples, helped by financing getting up to high levels, against Helliwell’s wonder as to who will constitute the buyer side of the equation.
“Double-digit leverage on what are essentially provincial deals does make me feel we are back to 2007 levels. So who will be the buyers? You would have to have some incredible management initiatives in place to see what the value will be,” Helliwell said, who cautioned buyers to be selective and strategically clear.
“Maybe with office or retail you could predict multiples, but not with hotels, although they’re definitely going up,” Petersen said.
“We are under pressure to do bigger deals as (private equity has) raised mega-funds and not adjusted staff accordingly,” Bradshaw said. “There was the idea there would be more consolidation, but that was rather spoiled by too many people coming in with the same ideas.”
Bradshaw said private equity has often overpaid for assets knowing it has the ability to perform strong underwriting and restructuring from top management down to procurement.
“I get yelled at if I bring in anything lower than a $15-million check, even if it’s a great deal,” Bradshaw said.