Hospitality funds buck the trend, secure dry powder

While fundraising for real estate might be tough in the current climate, the fundamentals of hospitality are still attracting plenty of dry powder, according to Guy Vardi, co-managing director of partnerships for the Fattal Hotel Group. “We are hearing from more and more institutional investors that they would like to deploy into hotels,” Vardi says.

Fattal European Partnership, the European investment arm of the Leonardo Hotel Group, led by Vardi and Yaniv Amzaleg, has raised some €420 million in the past year for its third European hotel fund. This after Fund II spent some €850 million on 19 hotels over a 12-month period. Vardi says: “We are mostly dealing with institutions and major players capable of big-ticket investments.”

Fund III is already ahead of its deployment targets, with around 23 assets acquired and a few more deals on the table. At the end of July, Fattal inked a 12-hotel deal for the Zein Hotel Group in the Netherlands to up its presence in the Benelux to 28 properties. That transaction marked the eighth deal for Fund III, following key deals in Galway and Dublin in Ireland, the acquisition of the hotel Cicerone in Rome, plus a property in San Sebastien and a slate of serviced apartments in London.

Fattal European Partnership has now exceeded €1.5 bn in deal volume since its creation in 2022, with over 6,000 rooms added to the group across some 40 deals via its Leonardo Hotels division.

Strong post-Covid climate

Vardi credits the rapidity of its dealmaking to a strong post-Covid environment and a good sense of timing. “A lot of investors wanted out of hotels post-Covid, so 2022 was a great time for us to launch the second fund, and helped us deploy it really fast,” he says. “On top of that, the inflationary environment created a dislocation in the market.” He adds: “What was challenging back then was the financing, but luckily we had the support of the banks and our institutional partners who believe in our owner-operator capabilities.”

The fact that the firm is an owner-operator is a key draw for investors looking into its funds, says co-managing director Amzaleg. “While asset classes like offices and residential are locked in with long-term yields, hospitality yields depend very much on the operating partner.”

Amzaleg adds that operational experience is also crucial when it comes to renovating and upgrading the hotels they acquire. “We see a huge meeting room and know that if we split it into four we can triple revenues,” he says. “You gain the know-how and the capacity to add value.” He also notes that Fattal commits a stake to each of its funds which reassures investors.

Adds Vardi: “Being an owner-operator also gives us the possibility to access transactions that the typical financial investor will not be able to execute.”

Major global funds

Of course, Fattal isn’t the only big name securing dry powder for European hospitality. Major global private market players continue to amass capital for funds with an appetite for hotels, such as Blackstone reaching $7.6 billion in equity for BREP Europe VII – the largest opportunistic fund ever raised – which targets European properties and companies in the leisure and hospitality sectors as well as residential, logistics, offices and retail.

In July, HIG Capital closed its third European real estate fund, Europe Realty Partners III, at about $1.3 billion, raising nearly twice the volume of the predecessor fund which reached $760 million. The investor base was broad - including public and private sector pensions, endowments, foundations, asset managers, consultants, fund of funds, financial institutions, and family offices in North America, Europe, Asia, and the Middle East.

The US private equity firm sees hotels as a key part of its value-add strategy focusing on Europe’s middle market real estate segment. Earlier this year the business established a €1 billion resort hotel platform in Southern Europe under the Ella Hotels & Resorts brand. Kicking off with 13 hotels in Greece, Ella also seeks expansion into Spain, Portugal and Italy. Says Riccardo Dallolio, managing director and head of HIG Realty in Europe: “We believe the Mediterranean resorts market is one of the most attractive real estate sectors with the strongest fundamentals and secular trends.”

Value-add war chests

Institutional investor PGIM Real Estate, the real estate arm of PGIM, is also increasingly targeting hospitality on behalf of its European value-add strategy. Around 20 percent of the strategy is allocated to alternatives, which includes hospitality assets like hotels and campsites. The platform recently acquired four open-air sites in Tuscany and Veneto and launched a hospitality joint venture with Lisbon-headquartered real estate player Sierra, targeting value-add opportunities with a gross asset value (GAV) of €200 million.

With a focus on sizeable hotels in consolidated leisure destinations with value creation opportunities, the JV has launched with a deal for property in central Porto which will be repositioned as an upper-upscale hotel. Nabil Mabed, head of France, Spain and Portugal at PGIM Real Estate, says: “In the current environment, investors look for value accretive, inflation hedged and cash-flowing investments to deliver attractive returns. Our strategy aims to consolidate local players and improve the quality of the offering to guests.”

London and Barcelona-based Pygmalion Capital is another firm with fundraising plans as it targets growth opportunities. Following the strong performance of Pygmalion European Hotel Opportunities Fund II, which closed in 2021, the firm has a new investment vehicle in the works.

While managing partner Christophe Beauvilain concedes that “fundraising has been very challenging for the real estate private equity industry”, he thinks that a “differentiated, dedicated European Hotel investment strategy” should entice investors.

He says that Fund I secured key value-add deals in Italy which are translating into “attractive returns” following capex injections to make operations “more efficient”. Beauvilain adds: “We have been quite active in terms of asset management, so this is tracking to very interesting attractive returns for our investors. In the next 12 months, we'll be looking to potentially exit the position.”

In seeking to circumvent what has been a challenging time for capital raising, other hospitality firms are pursuing more niche routes for growth. Tech-backed platform Numa has had success in the venture capital arena, winning seed, early-stage and late-stage funding from LPs targeting firms with a digital dimension. The business has secured some $133 million in four rounds to date, with the largest, Series C funding last year collecting some €55 million from the likes of Verlinvest, Cape Capital, Headline Cherry Ventures and more. Numa is using the funds to develop its technology stack further and expand sites across Europe, where it is now present in 10 countries after entering the UK market in March.