Document Type

Article

Publication Date

6-1-2008

Abstract

Privatization of publicly traded companies arguably represents one of the most important trends in North American business during this decade. The sweep of private equity (PE) through the hotel and other industries was dramatic, until the 2007 credit crisis slammed on the brakes. Because these transactions are leveraged buyouts (LBOs), the reduced availability of debt capital stemming from recent problems in the credit markets appears to be responsible for the disappearance of PE deals. Notwithstanding those matters, conditions unrelated to debt financing sparked the PE surge during the early 2000s. As detailed in this report, these conditions are property market liquidity, real estate investment trust (REIT) shares trading at deep discounts to net asset values (NAVs), high regulatory costs for public companies, public company incentive problems, and factors specific to real estate ownership companies that make them poorly suited for public trading. The same conditions could motivate another wave of public-to-private transactions when debt for large-scale transactions again becomes available. A principal source of this funding is found in pension accounts. Despite problems in the credit markets and the U.S. economic slowdown, money continues to flow into the pension accounts from a record number of workers. Fund managers must invest this capital somewhere! Forecasting how much will flow to finance PE-led LBOs during the coming years, particularly hotel company LBOs, requires consideration of a variety of underlying economic, financial, and regulatory conditions.

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