When EG interviewed Sir David Michels, the former UK chief executive of hotel giant Hilton Group, in 2015 he professed that owning an actual stake in a hotel was a long-held ambition.
That year he established a £200m fund aimed at the provincial hotel market, managed at arm’s length by Michels & Taylor, a fee-based management and advisory firm he had set up with Hugh Taylor OBE.
Fast-forward four years to the present and M&T has taken this effort a significant step further, after striking a new agreement with European investor and developer Freo Group.
M&T currently operates 25 hotels for its clients – a roster that includes the Abu Dhabi Investment Authority, Oaktree Capital, Orion Capital Managers and Queensgate Investments – under full-management contracts.
This deal, however, will now allow M&T to move into investment positions with its clients.
EG chats to Taylor, who is chief executive of the consultancy, about M&T’s diversification into this space.
Why go into hotels investment?
What we believed was right for the next stage of the business was an ability to be involved in investments with our clients, and our future clients, so that we can actually better control the process of investment.
We like to think this [added capability] will take the business to a significantly different level, not just in terms of what we are building organically, but also when you are involved in investments, the returns are significantly greater and therefore also profits, than you could earn from just the fees you get from management contracts. We would hope we would be able to grow the business by a multiple of times over the next three years.
How did the partnership come about?
Freo came to us around eight months ago and suggested joining up in some form. The deal has taken six months to negotiate and has involved them coming in and buying 25% of the company’s shares, and giving them a seat on our board.
We are now able to work closely with them to tap into their own investment resources and those of their clients, in addition to supporting on an ongoing basis, the clients we already have. Now we have an opportunity to take some of those through the Freo relationship and go into the market ourselves.
How is the agreement structured?
In the model we have, investment opportunities will either come from our existing clients, where an investor will approach us with an asset they own or want to buy and we help run them or do due diligence for them as fee-based support.
But over and above that, we now have the opportunity to go back to them and suggest going in with them, using the resources Freo brings us.
We will do the due diligence and identify the opportunity; Freo and its investment partners would acquire it; we would run it, having developed the business plan; and we would have an investment position in the business from which we can get a return, as well as management fees we would charge for running it.
What’s the criteria for potential purchases?
We are in the part of the cycle in the UK where you are seeing signs of market growth slowing down, in addition to which it is quite difficult to have visibility, with Brexit and various other macro-economic issues in the industry, so there is a bit more risk in the market too.
So we are not looking for investment opportunities that are necessarily going to be market-driven. What we are really looking for are businesses that have either been badly invested in, badly branded, or where the management on the ground is not good, where we have the ability to reposition the product before selling.
These are the moving parts of the hotel business we can control. We seek those opportunities where some or all of those factors exist in the business. We can go in, turn around, enhance and get a better return for us or our partners or client investments and not worry too much about what the market will do, because we are not in an element of the cycle where you can rely on it.
The average ticket value for Freo is around £100m. We look at assets of £10m-£20m on average, and we also look at portfolios.
When does M&T expect to make its first investment?
I have already been abroad with Freo on meetings on two opportunities we are looking at. We have also identified another substantive project we would like to work on with Freo.
We want to find assets or portfolios large enough for us to put structures in place across Europe. Our advisory and asset management business is almost entirely European-based as opposed to the UK – we do a lot of work in Spain, Greece and Italy, Portugal and [Freo’s native] Germany.
On the management side, we only run hotels in the UK, our home market. But as larger assets are looked at with this deal with Freo, we will be able to justify investing resources in those sorts of assets as opposed to ones that are more difficult to run from London.
What is your perspective on the outlook for the hotels market?
Generally speaking, I would say that capital cities and the main corporate and tourist destinations are still growing, but at a slower pace than they have in the past.
Provincially, the UK market is slowing down after a very good run – but it is not going backwards. But there is a lot of uncertainty out there; that has to play out, to see how the market will move forward.
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