Private equity firms are known for their latest deal, the strength of their investments and their returns. It’s not often that “the money guys” are known for their corporate culture and solid company philosophy, but those are aspects of Rockbridge’s business that president, CEO and founding partner Jim Merkel is just as proud of as he is of the company’s latest deals.
That’s because the people side of the business is part of Merkel’s DNA, particularly at Rockbridge, the company he helped found at only 25 years old. It’s evident all over the company’s Columbus, Ohio, headquarters, which feels more like a high-end advertising agency than a private equity firm. Photos of the company’s philanthropic activities are all over the walls (under Merkel’s leadership Rockbridge has built huge support for the Big Brothers/Big Sisters Bowl For Kids’ Sake program, and Columbus’ Pelotonia cycling event to raise money for cancer research).
“Our business philosophy is not an accident,” he said. “Our culture is a function of the people who started the firm. I’m blessed that they believed in me and they let me push the business forward.”
Though Merkel himself describes his entry into the hotel industry as “nontraditional,” it’s clear his early professional experiences shaped Rockbridge’s position today.
Rockbridge purchased the Atlanta Perimeter Hotel & Suites in 2012 and completed a renovation to convert it into the Le Meridien Atlanta Perimeter, which opened in February 2013.
Growing up in Columbus, Merkel and his father invested in the stock market together as a hobby. This piqued the young Merkel’s interest in investment and finance, which he pursued by completing a school work project at an investment bank during his senior year in high school. At the University of Michigan, he majored in history.
“People ask me, ‘How do you get to do what you do with a history major?’” he said with a laugh. “I was involved in investing at a young age, but was always intrigued by history. My history degree has been incredibly valuable to me. It enabled me to have a deep understanding of human behavior. History challenges you to come up with conclusions when dealing with many variables.”
Turns out, that understanding of the human condition over the ages helped Merkel find his place in hospitality. “The hotel business is such a people business, on both the deal and operations sides,” he said. “Our success is about understanding how people behave and how we can take the dynamics of a situation and put together a prescription together for how to fix it.”
In June Rockbridge purchased Indianapolis’ historic Canterbury Hotel. The company is renovating the hotel and will reflag it as a Le Meridien.
Merkel’s nontraditional path ended up placing him right where he needed to be. The Columbus investment bank he worked for during high school was acquired by Banc One and became Banc One Capital Markets, which was Rockbridge’s predecessor company. After talking the managers into hiring him as an intern (the company didn’t have a formal internship program), Merkel joined Ron Callentine’s group that had just been formed to invest in hotels.
Thus, Merkel began to work with the man who would become a mentor and peer to him throughout his entire professional career. Callentine had launched the Pickett Suites brand with Jim Pickett in the early 1980s and had co-founded the aforementioned Banc One Capital Markets.
Since it was part of Banc One, the capital markets group couldn’t own real estate due to federal regulations. The group had a lending platform based on highly levered mezzanine debt and subordinated debt transactions. In 1999 the bank was sold and Rockbridge spun off, enabling it to add equity to the platform.
Merkel was 25 when he started Rockbridge as a co-founder with Callentine, Stephen Denz (current EVP and CFO) and Kenneth Krebs (current EVP and general counsel). Callentine now serves as Rockbridge’s chairman.
“I was young, but I never saw myself as young,” Merkel said. “Ron chose me as his partner and he wouldn’t have done that if he didn’t view me as a partner and a peer. Ron wasn’t just a boss to me. He saw the potential in me and we became a great team where we respected each other, we challenged each other and I couldn’t be more blessed to have met Ron. He’s had a big impact on my life, as to how I approach business and people.”
Merkel credits the team-focused foundation of the company’s founders with establishing Rockbridge’s cornerstones today. “It’s the integrity of my partners that has enabled Rockbridge to grow,” he said. “That alignment on philosophy and integrity and the way we want to build our business has enabled us to grow the way we have.”
So what forms that philosophy and integrity? Merkel says it all comes back to people. “From the beginning we had an intense focus on people, both with who we hired and who we did business with,” he explained. “We know the impact the right people and teams have on creating value. We focus on strategy and how a property will be positioned in its market, what the guests want and using that to always create value.”
As a result of this focus, Rockbridge has built its reputation as an ownership company known for thoughtful repositioning of assets into top performers that maximize market-specific demand.
As it happens, current economic conditions put Rockbridge right where it likes to be. “We’re in a unique market right now where you can sell stabilized assets for a good price, and you also can buy unstabilized assets, fix them and create value,” he said. “That’s exactly what we do. It’s difficult today to just buy an asset and let the market add value; you have to be proactive and hands-on and really create that value. That’s been our strategy for more than 20 years.”
Merkel cited the company’s June acquisition of Indianapolis’ historic Canterbury Hotel as a good example of this strategy (see sidebar above). Rockbridge first got involved with the hotel in 2009, working with a lending partner on a non-performing loan. The company then ended up buying the property three years later. “This property would be nothing without a major renovation to change its market position,” he said. “We knew the property’s potential and what it would take to make it happen, so we knew what we could pay for it and how much to spend on it to make that happen.”
The company is renovating and repositioning the former independent hotel to re-open as a Le Meridien. The project is an example of how Merkel and Rockbridge work backward on each deal to unwind the maximum value at every step. Each deal is like an equation, Merkel said, in which all sides have to balance out. “We spend a lot of time thinking through to what the consumer wants. Customers will pay for value. If you’re not providing value, you’re de-leveraging your deal. If you do provide value, you’re leveraging your opportunity. Our intense focus on repositioning hotels enables us to put renovations together that take away risk.”
The company did 12 deals in 2013 and Merkel said Rockbridge is geared up to do 10 to 15 deals a year in the near future. “We look a lot,” he said. “We spend time on probably 50 of the 300 deals that crossed our desk and we ended up doing 12.”
The common element of all Rockbridge’s deals is discipline to the company philosophy. “We like deals where we can generate a strong risk-adjusted return,” he said. “It’s the type of deal we’ve been doing for more than 20 years.”
That means the company isn’t laser-focused only on top 25 markets, or one segment or brand. “We want a diversified portfolio. We look for opportunities where there are diverse demand generators and opportunities to create value,” he said. “Markets alone don’t create value—the right deal characteristics do.”
To achieve this consistency through diversity, Rockbridge targets upper-midscale to upper-upscale properties. The company ends up branding most, but some remain independent if the market dictates it. Merkel said the institutional quality inherent in this group is attractive, as is the supply-demand ratio. In addition, investing in this segment means Rockbridge can have more control over the management partners it signs on. “We believe we have to be aligned with our operators,” he said. “We view management companies not based on whether or not they make mistakes. It’s more like, ‘Are we all working together to fix mistakes and meet goals to make the project successful and create value?’”
While the time might be right for Rockbridge to do what it does best, Merkel is not content to rest. “I measure our success by asking if we are we pushing ourselves hard enough, effectively managing risk and creating value for our investors,” he said. “If we do that well, we will be successful and grow.”
Merkel said Rockbridge right now is focused on ensuring its platforms and processes can scale and grow. He’s applying the strategy the company takes with investing in hotels to maximize value to the company. That means spending on technology and process improvement to increase efficiency, so the team can spend more time on value-creation activities, Merkel said.
And through it all, Merkel remains steadfastly committed to perpetuating the Rockbridge culture. “Everybody has to be engaged and perform at a high level to make this work,” he said. “We focus on getting better as a team. I want to always learn from the people around me and have them push me to do the best job I can. That’s what we have here.”
At a glance
Headquarters: Columbus, Ohio
Structure: Private equity firm with five active hospitality funds
Portfolio: Formed and managed 10 private equity funds since 1992 and executed more than 325 hotel investments in transactions worth more than $5 billion
Portland Westin: Inside the deal
The Westin Portland Harborview opened in mid-December as the first Westin in Oregon. Rockbridge completed a $50-million renovation of the 86-year-old former Eastland Park Hotel over 18 months. “This is a great example of what we do,” said Rockbridge president and CEO Jim Merkel. “We saw opportunity in this market. We could buy the hotel with good cash flow and we had extra time to plan the renovation. This hotel has tremendous leisure demand. We added 80 rooms to the same footprint, we added the Westin brand and we retained the original historic style.”