PE investments in hospitality industry rose threefold in 2017

Mumbai: Private equity investments in the hospitality industry jumped three-fold in 2017, with transactions worth around $119 million closing during the year, indicating renewed interest in the sector.

According to data compiled by VCCEdge, the financial research arm of News Corp.’s VCCircle, 17 private equity deals were signed in the hospitality sector during the year, including hotels and restaurants. While the number of deals remained the same, the size of transactions jumped significantly from the previous year. Deals worth around $43.58 million were signed in 2016, the data shows.

Hotel consultants and owners said that while the pace of investment has been slow, there has been a gradual increase in interest from private equity firms as the sector has been showing signs of recovery in the last two years.

Hotel deals, including mergers and acquisitions, are likely to pick up further in 2018 as several premium hotel properties are up for sale and a few deals are likely to close in the coming months.

For instance, while the Lemon Tree hotel chain will soon launch a $700 million initial public offering, other marquee properties such as Delhi’s Taj Mansingh, Asian Hotel and Hotel Connaught have been put up for auction. Besides, four properties of Aloft Hotels in India, comprising 638 rooms, are up for sale.

One of the biggest deals was closed in September, when Goldman Sachs-backed Samhi Hotels bought out Premier Inn’s India portfolio for around Rs250 crore.

Other private equity deals in the sector include Goldman Sachs Group Inc.’s investment in Delhi-based Azure Hospitality Pvt. Ltd, which runs a restaurant chain under the Mamagoto brand, and Gaja Capital Fund II picking up a stake in Massive Restaurants Pvt. Ltd.

“In terms of private equity investments, 2017 was markedly better than 2016. While there is an immense interest from PE firms, the challenge is finding the right kind of portfolio. PE firms do not want to invest in singular assets,” said Saurabh Gupta, managing partner (investment advisory and asset management) at Hotelivate, a hotel consultancy firm.

The private equity interest has been driven by the growing occupancy and also a gradual improvement in room rates over the last two years. “Hotels have changed from being seen as a highly risky and non-dependable investment (platform) to a very stable cash flow-based business and this has happened in the past two years,” Gupta said.

Mandeep Lamba, managing director (hotels and hospitality) at real estate consulting firm JLL India, agreed that there has been growing interest from private equity investors in the last few years. According to him, hotel deals valued at almost $1 billion are likely to take place in 2018. “It could be one of the significant years for hotel transactions,” he said.

According to a December report by rating agency Icra Ltd, private equity and venture capital investors’ interest in hotels has revived in the last past 15-19 months and is likely to pick up further.

“Another area which has attracted high PE interest is the budget hotel aggregator space, with players like Oyo, Zo Rooms, Stayzilla, Rooms On Call and Treebo,” Pavethra Ponniah, vice-president, corporate sector ratings, Icra, wrote in the report.

Bengaluru-based Brigade Enterprises Ltd, which hived off its hospitality business into a separate division, is also looking to partner with private equity investments to expand its business, said Vineet Verma, executive director, Brigade Hospitality Services Ltd.

The company, which operates hotels of international brands such as Grand Mercure and Sheraton, is planning to double its room inventory to 2,000 in the next two years. “PE funds have started revisiting hospitality sector. This wasn’t the case earlier. As an asset class, hotels are beginning to grow again. However, most of the investors are interested in long-term investment as hospitality has a long gestation period,” Verma said.

Disclaimer: This information has been collected through secondary research and IBEF is not responsible for any errors in the same.