Get a room? Hotels, PE and the BVI – Part 1

For some readers of this blog, combining the words ‘Virgin Islands’ and ‘hotels’ in a sentence probably conjures up a beachfront suite, with a view of turquoise ocean and perhaps, a hammock hanging invitingly just outside, shaded by a solitary palm tree. If you are currently suffering through the dank days of darkest November, I can only apologise for putting that image in your head.

However, for myself and the corporate team at Harneys, the connection between the hotel industry and the jurisdiction is not limited to properties located in our corner of the Caribbean. During 2017, we have worked on hotel and hospitality transactions involving British Virgin Islands holding company structures with a combined value of more than US$1 billion and involving a change to the indirect ownership of more than twenty hotels around the world (some of them actually in quite cold climates).

So why are so many transactions taking place in the hotel space? My colleague Rachel Graham, in an earlier post on this very blog outlined the reasons why funds invest in property, much of which applies to the hotel sector as it does a residential or commercial development. But, while a hotel investment is partly a real estate play, it’s also in a classical private equity investment as a hotel is also an operating business. When it works, investors in the sector can get solid income returns in the form of operating profits plus capital appreciation as the business grows and the underlying real estate increases in value. At the same time, the rise of ‘boutique’ hotels and smaller chains has created an environment in which a lot of new entrants to the market are looking for capital to expand their business.

Even lawyers don’t chose where they want to go on holiday based on the quality of the legal system, the expertise of the local lawyers and the impartiality of their courts. Consequently, many hotels are based in places which are not necessarily renowned for those things – and if the potential returns are high enough that may not deter investors either. One way to help mitigate those risks, particularly in situations involving joint ventures or complicated ownership arrangements is to ensure the holding company is located in a place – like the BVI – which comes up strongly in all those categories.

Joint ventures are extremely common in the hotel industry – they might be between an established operator/manager such as one of the big hotel chains and a PE firm, between a local partner and an international chain (especially in jurisdictions with protectionist land ownership or licencing rules), or between investors and a celebrity designer or hotelier. The BVI’s modern corporate statute has been written with the needs of JVs very much in mind, and it allows the parties a great deal of freedom to determine the basis of their relationship and to protect that structurally by including key terms in the memorandum and articles of the company. If it all goes wrong, we have a sophisticated court system (with ultimate appeal to the UK’s Privy Council) and a brand new arbitration centre.

Rather than simply tell you how flexible our corporate regime is, in the second part of this blog I’ll aim to show you by looking at two recent transactions in this sector we worked on where, in response to specific and quite unusual circumstances, we developed some bespoke solutions.

George Weston
George is a senior associate at Harneys in the BVI, who specialises in M&A and corporate transactions, and works with investment funds and PE firms on downstream investments and disposals. When not at work or playing football for the mighty Wolues FC, George claims to be spending his time learning to surf; although no-one we know has ever seen him standing up on a board.

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