Investment Funds

Investing in Indian hospitality

Sarmad N Zok CEO Kingdom Hotel Investments

Kingdom Hotel Investments (KHI) plans to take the Indian hospitality industry by storm with its keen interest to pick up private equity in leading hotel companies in the country as well as invest in upcoming projects. Sarmad N Zok, CEO, talks about why India is on the top of its charts at the moment

"We will re-finance the hotels or re-capitalise their debt, we won't sell them. After all we are a private equity company," expressed Sarmad N. Zok, CEO, Kingdom Hotel Investments (KHI), in a nutshell the core focus pattern of the group. Today, KHI is a prominent hospitality related investment company in the region with an underlying portfolio consisting of 28 properties out of which 17 are operational and 11 under construction. "We are active in debt and equity capital and have raised in excess of over US $2 billion of third party capital since our inception in 2000," asserts Zok.

In its global presence the group enjoys strategic partnerships with leading global hotel operators such as Four Seasons Hotels and Resorts, Fairmont Hotels and Resorts and Mövenpick Hotels and Resorts. "We are looking for new hotels in the Middle East, Africa, Eastern Europe, Russia and South Asia. In South Asia we will focus on Sri Lanka, Pakistan and Bangladesh but are very keen on the Indian market," says Zok. In its India focus the group has earmarked US $1 billion set aside for private equity placements in hotel projects in India.

The game plan

KHI strategically blends mergers, acquisitions and construction activity to maximise growth and profitability in its hotel portfolio. It dedicates itself to acquiring assets at the right time, in the right place, for the right price. "We like to buy where we can see the infrastructure improving, or a unique location. In Syria, for example, we can see that in Damascus there is no possibility another five-star hotel could be built in the next 15 years for planning reasons. This gives us a unique position in the market," reveals Zok.

Focussing on value enhancement of acquired hotel assets is a critical component of KHIs' strategy for success. KHI maintains an active development role in properties under construction. Its role is carefully structured to ensure it can provide critical project management input to help foster cost-effective, timely progress that positively impacts the bottom line. "Hotel operators don't know how to own hotels," he states, while maintaining that the interests of the hotel owner and operator are best separated to achieve maximum operational efficiency. It is not an attitude that endears him to traditional family hotel owners.

KHI employ four different methods of investment: acquisitions of existing assets - existing assets are selected for their upside potential with a view toward achieving this potential in the short to medium term. New Developments - investments in new developments located in strategic destinations, with the view to driving long-term value. Corporate Acquisitions - investments into a corporate entity, which has the critical mass to allow for: i) value engineering, ii) minimisation of overheads through rationalisation of head office costs, iii) individual value enhancement through asset management, and iv) re-positioning through re-branding. Distressed Acquisitions - provide an immediate cash return with the potential to enhance value over the short and medium term.

"Acquisitions as well as new developments are subject to a rigorous and structured process, which is designed to provide KHI with limited exposure, maximum flexibility, governance rights and an exit strategy. Transaction structures are devised to allow KHI to achieve significant direct or indirect control for a minimal amount of investment. Our acquisition and development strategy's aim is to diversify and balance investments, which in turn reduces company risk and maximises shareholder's value," states Zok.

KHI effectively asset manages its expanding portfolio of superior properties by capitalising on brand equity and implementing effective re-positioning strategies. Ask him why such a strategy becomes critical Zok, replies that it is imperative to align the owner's and operator's interest to the greatest extent, as the priorities of the owners are not the same as the operators.

On the horizon

KHI has crystallised its plans for its foray into the Indian hotel sector. The group is looking at investment to the tune of US $1 billion and is currently in talks with leading hotel companies in India and is looking out for land and hotel projects in the country. "We are looking at investment opportunities within the Indian hotel sector and are confident that the market is on an upward swing with tourism in India growing phenomenally."

Zok believes…

"There is a general change in governance style, even in what were isolated markets, towards capitalist transparency and labour flexibility to nurture growth. The entry barriers to the Indian market are high, and the Indian business mindset is hostile to foreign investment," feels Zok. Foreign firms find that they can't run their business here in the way they can elsewhere in the world. This notion, however, is expected to change in the next couple of years, with the liberalisation in the Foreign Direct Investment. "Questioning the very potential of the Indian market would be foolhardy as it has immense potential for any company looking at setting base in the country, but, government would need to work on certain critical aspects like infrastructure, more liberalisation to make international funding a non-tedious affair," asserts Zok.