According to an ICRA report, with the pick-up in Revenue per available room (RevPAR), and the industry prospects, PE/VC interest in hotels is likely to pick up further. Hitherto Hotel PE/VC deals as a percentage of the total PE/VC universe in India had at its peak accounted for a miniscule 3% of total value of deals. The largest PE deals in the hotel industry include SAMHI Hotels, Lemon Tree and the hospitality division of Panchshil realty.
Explaining further, Pavethra Ponniah, VP, Corporate Sector ratings, ICRA says, “PE/VC activity has picked up in the market over the past 12-18 months; however, unlike the interest during 2005-2008, investors this time are cautious and looking more at operational/ready hotels, rather than going through 3-5 year construction cycle, to avoid project delays and cost overruns. Further, PE/VCs interest in the midscale segment has been driving investments in several smaller companies too during 2017. Typically, PE investments have been attracted to chains with multiple properties and a scalable model, which are also conducive to eventual listing through the IPO route. Example of such investments includes home-grown brand like Lemon Tree or asset-owning companies like SAMHI.”
PE firms typically also look for assets that have significant value-added opportunities and show upside potential. Confidence in being able to wring out operational efficiencies and a strong belief in India’s hotel industry growth story lead to sizable PE investments in Greenfield hotel projects during 2005-2008. However, with the down cycle leading to significant delays in under-construction projects and an elongation of the gestation cycle, PE interest waned during 2010-15. Most PE funds run for 8-10 years with possible extensions of 1-3 years; the current down cycle has elongated the breakeven cycle for hotel projects to more than 10 years, leading to conflict between the fund life and cash flow distributions from the PE funded asset.
“Another area which has attracted high PE interest is the budget hotel aggregator space, with players like OYO rooms, Zo Rooms, Stayzilla, Rooms On Call, and Treebo, among others, says Ponniah. “Hotel aggregator platforms act as a connect between guests and hotel listings, in return for which they charge a commission per booking. Competition in this space has been intense leading to heavy discounting (borne by the aggregator) and cash burn. Some players like Stayzilla, Roomstonight have as a result, burnt out,” she adds. Revival of PE/VCs interest in hotel industry augers well for its growth as the alternative bank funding route has had problems in the past. They have been averse to lending for hotel projects, since the down cycle of 2009 which trigged several delays and defaults. While debt structuring has improved (banks typically used to lend for shorter tenures of 7-8 years which was inadequate) in the recent past, with debt tenure extending to 15 years (structured with moratorium for construction and initial gestation), hotels require longer loan amortisation.
Another key development that is seen is that compared to the situation in 2010-15, when several real estate developers like DLF exited the hotel business, few real estate developers like the Embassy group and the Brigade group have evinced interest in growing their hotel portfolio. Bengaluru-based Brigade Enterprises has hived off its hospitality business into a separate division and plans to grow it over the next couple of years. Embassy Group is planning to build business hotels at its existing and upcoming office parks, along with investor partner Blackstone Group Lp. Canadian global PE Brookfield Asset management and GIC, Singapore are in discussions for acquiring Four Seasons, Mumbai.
The exit routes for PE/VCs include IPOs; secondary PE transactions; strategic sale and M&A driven PE exit; and promoter buybacks, in loose order of preference. Closer to the exit timelines (10-12 years for most funds), appetite in the primary markets plays a key role in driving valuations and supporting successful exits. Over the past 12 years (since 2005), there have been only a few IPOs in the tourism and hospitality segment (Hotels: Lemon Tree (2017 pending); amusement parks: Wonderla (2014) and Adlabs (2015); restaurants; and time share operator Mahindra Holidays (2009)). Of these only Lemon Tree is a pure-play hotel owner/operator. Few others like Four Seasons, Ahmadabad and Pride hotel had proposed and then withdrawn IPO plans during the past decade.
Given the lack of market interest and weak performance during the 2009-15 down cycle, most exits have been through promoter buybacks and PE backed M&A. Valuation write downs and haircuts have been significant in exists like Kamat hotels. Several PE backed hotel companies like Jalan Hotels, Neesa Leisure, Kamat Hotels and Royal Orchid went through periods of financial stress leading to defaults and/or restructuring of debt.
