Private equity firms checking out of hotels

Private equity players are making the best of the market opportunity as action picks up in the Indian hospitality space.

In a recent deal, Kotak Realty Fund has exited Lemon Tree Hotels, a Warbug Pincus-backed hospitality chain.

In another deal, investors in Sarovar Hotels – Bessemer Venture Partners Trust and New Vernon Private Equity – are working out exit modalities.

When contacted by dna, Patu Keswani, chairman and managing director, Lemon Tree Hotels, replied in a text message saying, "I don't have any comments to offer."

However, a spokesperson from the PE firm confirmed the development in an email reply: "Kotak Realty Fund has successfully exited its investment in Lemon Tree Hotels." The spokesperson did not share details about who bought their stake in the hospitality chain and whether the PE firm was able to make a decent return on this investment.

Kotak Realty had taken position in Lemon Tree Hotels and Red Fox Hotels (both promoted by Patu Keswani) in 2006 by investing Rs 32 crore and Rs 2 crore, respectively.

In 2008, the PE firm along with Japan's Shinsei Bank acquired a 5.9% stake in Lemon Tree Hotels for $30 million.

Media reports in the past have pegged Kotak's stake in Lemon Tree to be around 9.5%, or Rs 130 crore. Hence, there is still a question mark on the kind of returns Kotak may have got from this over eight-year-old investment in the hospitality chain.

For Kotak, exiting the investment seemed to be only option at present considering it has been waiting patiently for the Lemon Tree initial public offer (IPO) that has got postponed thrice at least. While Keswani has been contemplating going the IPO way for quite some time now, the decision had to be delayed owing to unfavourable market conditions. In fact, Keswani has now set a 2017 timeline for the company's public offer, and Kotak may not have wanted to wait two more years.

As for Bessemer Venture Partners Trust and New Vernon Private Equity, the duo had invested Rs 37.5 crore for a 30% stake in the home-grown hospitality chain Sarovar Hotels & Resorts during the peak season of 2005.

While both PE firms have been looking for an exit they couldn't for lack of buyers and nonexistent profitable exit opportunities. However, there is some ray of hope now that NYSE-listed Wyndham Hotel Group LLC and Sarovar Hotels Pvt Ltd have initiated discussions for acquisition of 100% (including stake held by promoters viz. Anil Madhok and Ajay Bakaya) of the issued share capital of Sarovar Hotels. In fact, dna has learnt that Rs 330 crore is the enterprise value that Wyndham is likely to offer to stitch the Sarovar Hotels deal.

What could possibly be driving PEs to take the exit route from hospitality investments?

According to a top executive from an Indian hospitality chain, "One reason is that PE firms have already exceeded their holding period and would be under pressure to recover their money. Also, since hospitality investments aren't really giving good returns the sudden spurt in activity presents a good opportunity for those looking to exit their investments. It certainly makes sense to make hay when the sun shines considering the PE firms have waited so long already."

As far as valuations are concerned, they continue to be under stress.

"The deals being concluded or are to be announced, are being done for a completely different reason. It's not as if things have suddenly changed and buyers have opened their wallets to pay a higher valuation. The business sentiments have improved a bit and that is showing in the occupancy levels, though average room rates are and will continue to remain under pressure for some time now," said a senior hospitality professional.