Private equity dives into all-inclusives
12 MAY 2014 6:05 AM
A major transformation within the all-inclusive resort segment is under way, as large private equity investors dedicate capital in the sector.
Over the past year, billions of dollars have poured into the all-inclusive resort segment in Latin America. Large private equity investors are providing a wave of capital into this sizzling and growing sector that presents attractive return potential.
And, the impact of this trend is significant:
- Private equity firms are shifting their investments from just real estate to resort enterprises.
- An influx of capital is enabling these businesses to grow and significantly improve their value.
- With clearer exit strategies, these companies are achieving greater liquidity.
A major transformation within the all-inclusive resort segment is under way.
Achieving scale and obtaining capital
Historically in Latin America, real estate private equity firms, Mexican real estate CCDS funds and vertically integrated resort companies have invested in luxury assets in prime regional resort locations. In particular, vertically integrated Riu Hotels & Resorts has been quite acquisitive lately and has converted luxury resort acquisitions to its all-inclusive brands. (See Chart A below)
More recently, however, large global private equity investment managers such as Bain Capital and leading global real estate private equity firms such as Equity International have targeted and invested in all-inclusive resort companies with established brands and management teams—such as the Apple Leisure Group and Decameron Hotels & Resorts, respectively. Consequently, the firms achieve immediate scale in the segment as well as provide growth capital for the institutional grade all-inclusive resort companies. (See Chart B below)
The all-inclusive resort company Occidental Hotels & Resorts is finalizing a hopeful sale. Among the six potential finalists, four notably include joint ventures between a prominent private equity firm and an established operating hotel partner:
- Apollo Global Management JV with Grupo Posadas;
- KSL Capital Partners JV with Grupo Iberostar;
- Hyatt Hotels Corporation JV with Playa Hotels & Resorts; and
- Caribbean Property Group JV with Barceló Hotels & Resorts.
The two other potential finalists are global hotel company Marriott International and U.S. public real estate investment trust Host Hotels & Resorts.
These transactions by private equity firms go beyond just acquiring real estate components; they encompass portfolio investments in complex operating businesses and provide significant value creation opportunities.
Click to enlarge.
Company transformation and value creation
The capital and resources that private equity firms provide all-inclusive enterprises cannot be underestimated. An influx of money and human capital fuels multimillion-dollar product creations and renovations of older and tired assets at the real estate level as well as enables transformative growth at the business level.
Often, large family-owned all-inclusive companies excel in supply chain management, innovative guest experiences, product innovations and integrated distribution methods. Private equity capital infusions, however, can maximize business value during the holding period by further enhancing operating efficiencies. Examples include:
- facilitating changes in ownership and leadership through strategic hires;
- increasing unit growth and market penetration;
- providing technological enhancements; and
- optimizing resort pricing, volume and business mix.
These business improvements, coupled with intense investment oversight, should ultimately translate into increased earnings before interest, taxes, depreciation and amortization margins. However, private equity managers should expand debt carefully and optimize EBITDA multiples intelligently to best drive investment returns.
Exit strategies and greater liquidity
Once enterprise value has been maximized during the holding period, private equity firms will ultimately realize investment returns through an exit process, such as a potential initial public offering or a strategic sale to a private buyer.
Historically, the all-inclusive resort segment has not been favored financially by the public investment community because of high volatility and associated risk. Resorts are seasonal, prone to shocks (weather-related, socio-political), dependent on air access and highly capital intensive (require a lot of maintenance).
Although these risks still exist, all-inclusive property owners are now able to sell assets and recycle capital through a more liquid resort investment market. With the emergence of Mexican REITs (FIBRAs) and an active secondary market in Latin America, clearer exit strategies now exist, particularly for specialized resort assets and companies.
In Mexico, the existing hotel FIBRAs, Fibra Hotel and Fibra Inn, have not yet invested in resort assets. They have pursued a business class-oriented urban hotel investment strategy to capitalize on relatively favorable macroeconomic trends and focus on predictability and stability.
However, Fibratur is in the process of attempting to list on the Mexican Stock Exchange, through a new Mexican resort-focused FIBRA that plans to invest in timeshare, resort and all-inclusive properties, while another proposed vehicle includes the all-inclusive resort-focused FIBRA AMResorts. For these resort FIBRA IPOs to be successful, they must demonstrate high growth prospects in the sector. In addition, institutional investors must have been rewarded for the risk by having had positive experiences with prior FIBRA IPOs.
Nonetheless, some institutional investors remain skeptical of FIBRAs due to Mexico’s recent fiscal reforms and proposed changes to regulatory frameworks to resolve disclosure and governance concerns. FIBRAs may provide liquidity and a permanent source of capital to the all-inclusive resort industry, but they also come with high costs and an extensive time frame to materialize.
Undoubtedly, private equity firms appear bullish on the all-inclusive resort segment, having energetically splashed into the sector throughout Latin America. Fierce competition, consolidation, and institutionalization are taking place, generating a wave of growth and liquidity that is transforming the all-inclusive resort sector.
But are these firms following a herd investment mentality?
Indeed, time and tide wait for no man. But in Latin America, what we do know for sure is that skilled navigation proves essential in this sector of constantly changing currents.
Jonathan Kracer is Managing Principal of Sion Capital LLC, a hospitality and real estate consulting and investment firm focused on the North American, Latin American, and Caribbean regions, with offices in Miami and Mexico City. Mr. Kracer is a recognized expert on the hospitality sectors of South Florida, Latin America, and Mexico. Mr. Kracer’s columns primarily cover hotel asset-related subjects, with a particular emphasis on cross-border topics related to the U.S. and Latin America. He can be reached via email at email@example.com. More information about Sion Capital LLC can be found at www.sioncapitalco.com.
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