Why private equity is chasing existing, operational assets

(Hyatt Regency Pune)

Here's something: In India, private equity investors are looking to buy into operational hotels rather than projects under construction or in the planning stages. This tactic avoids potential delays, which can lead to cost increases, while still contributing capital to the sector. 

Large global and domestic funds, such as Blackstone Group, TPG Capital Management, Capital International Group, Goldman Sachs and SAMHI, have been looking to acquire more assets or create new platforms to buy and own hotels.

In the past two years, according to data by Venture Intelligence, these funds and others have invested more than $100 million in several Indian hotel chains. In February, hotel development and investment firm SAMHI Hotels acquired the Hyatt Regency in Pune from RK Jatia Group-owned Ascent Hotels for an estimated Rs 350 crore. The acquisition was funded through a mix of debt and equity, Ashish Jakhanwala, founder and CEO of Gurgaon-based SAMHI, said at the time. And according to Cushman & Wakefield, PE investments have increased from $40 million in FY 2014-15 to $66 million in FY 2015-16, a 65-percent increase in the Indian hospitality sector. 

"Private equity investors are now being cautious of developing a project due to several failures in meeting the deadline and cost overruns apart from market risks. The shift (in investment portfolio) allows private equity players to infuse more capital in the project as the degree of risk is lesser," said Ashish Jakhanwala, founder and CEO, SAMHI Hotels. Earlier, this year, SAMHI received $66 million from Goldman Sachs to invest in hotels. 

Marriott Starwood Merger

Global Trends

The trend also reflects the recent mergers and acquisitions that have dominated industry headlines over the past year. Building something new takes time and involves risk, but buying an existing asset offers an existing consumer base and a bit more security. Marriott purchased Starwood; HNA Group bought Carlson Hotels; and AccorHotels bought FRHI Holdings, whose luxury brands include Fairmont, Raffles and Swissotel. All of these hotel companies were well-known and respected at the time of their acquisition, boosting their appeal for investors seeking secure assets and a likely ROI. 

Real estate consultant Anand Moorthy of Sanctum Wealth Management said that the number of large-scale M&A transactions over the past fiscal year is double that of the previous year. "The relaxation through automatic FDI route into this segment is a key driving factor to its growth," he said. "We are getting query from clients wanting to invest in hospitality giving 6- to 7-percent yields for marquee assets in metro locations." Many hotel chains in the country have taken huge debt, Moorthy said, which is forcing their owners to opt for private capital as many of the projects have been stalled for more than two years.