From Main Street to Wall Street: The Changing Dynamics of Hotel Ownership
By William A. Brewer III Managing Partner, Brewer, Attorneys & Counselors | December 13, 2015
From 2000 until recently, divested assets of the hotel chains have been frequently acquired by non-traditional investors in the hotel industry, such as private equity firms. In addition, other non-traditional investors, such as hedge funds, began investing in the hotel industry, usually in hotel management companies.
These non-traditional investors have differing investment strategies, and their emergence in the hotel industry may result in a new wave of activist investors who not only want their opportunity to act like fiduciaries and produce bottom-line returns - but have the sophistication and strength to demand it.
The emergence of these non-traditional investors in the hotel industry has affected the industry in noticeable ways. The potential divergence in the economic interests of these non-traditional hotel owners and the hotel managers (or even the traditional owners and non-traditional owners) increases uncertainty in the industry. It also engenders an increased risk of litigation between the non-traditional investors and managers/traditional owners or within the non-traditional investor groups as a result of these investors' differing investment strategies and economic objectives.
Traditionally, private equity firms buy companies to improve them, then sell them within four to seven years. Some private equity firms, however, are beginning to invest for longer periods. Currently, approximately $80 billion of private equity funds are invested in the hotel industry.
In fact, since 2009, private equity firms have been the largest acquirers of hotels. In addition, private equity firms have taken large investment positions in hotel management companies.
On the other hand, hedge funds traditionally play the role of activist investor in the general market and seek to change a company's strategic, operational, or financial strategies. Hedge fund managers are highly motivated by the prospect of short-term financial gain. Furthermore, hedge funds often have the potential for great financial returns when they urge management to put a company up for sale.