Private Equity Ownership in Hospitality

Before the 1990s, real estate was mostly owned by families, developers, insurance companies, and pension funds. 

Closed-end, blind-pool private equity funds debuted in early 1990s.  The model benefitted from:

1. High cap rates (purchasing fragmented real estate, typically owned by families without other liquidity options)

2. Decreasing interest rates

3. Institutional value-add initiatives

4. Later, portfolio level synergies (internal infrastructure, property level costs)

Now we are in a rising rate environment with peak valuations (low cap rates), private equity firms are scrambling to justify acquisitions with #3 and #4. 

While those levers still work in certain asset classes, we increasingly believe that certain categories, like hotels, do not benefit from private equity.

Why?

1. Often, local family-run operators are more efficient than centralized, for profit hotel managers

   1. They are also better motivated than a helicopter AM team with mercenary GM

2. Private equity teams “design by committee” – same high-design renovations are everywhere, without buy-in from the local community.  “Design by committee is a camel.”

3. I would argue that culture / sense of place are the most important determinants of profitability of a hotel.  Locals, with the correct programming and buy-in, create culture.  Not desktop warriors in New York. 

Is it so wrong that some peoples’ dreams to run hotels should not include a “rollup”?