Carlyle sees value in mid-market hotels

This is the logic behind the private equity firm's investment in Mandarin Hotel Holdings. Talks began at the end of last year and at the end of last week Carlyle acquired a controlling stake of 49%.

"We invest in sectors we know and where we can create value and China's hotel sector is one of those. Even during the economic downturn in 2008 and 2009, the mid-end hotel segment performed resiliently with steady room occupancy rate," Eric Zhang, a managing director at Carlyle, tells AVCJ. As part of the deal, he will join Mandarin as co-chairman.

Founded in 2006, the company operates 25 designer hotels in Beijing, Tianjin, Dalian, Hangzhou and Ningbo. It has two brands: Crystal Orange Hotel targets business and leisure travelers in the mid- to high-end segment while Orange Hotel offers affordable solutions to budget-sensitive customers.

According to Carlyle, the mid-market hotel segment has been growing an annual rate of 13% for the last five years, benefiting from growing overall demand and low-end consumers trading up. There is ample room for consolidation: Chain hotels represent around 12% of the mid-end hotel segment in terms of room count with the top 10 players contributing less than 5%.

The investment was made via Carlyle Asia Partners III, a $2.55 billion buyout fund that closed in 2010. It is the third round of financing received by Mandarin. The company reportedly received $30 million and $20 million in 2006 and 2008, respectively. Existing investors include Hong Kong early-stage investor Mandra Capital.

This is not Carlyle's first Chinese hotel deal. In November 2007, it invested in Zhejiang Kaiyuan Hotel Management, a Hanghzou-based hotel operator with around 70 properties in Beijing, Shanghai, Hangzhou, Chengdu and Kunming. The company was reportedly planning an IPO last autumn but nothing materialized.

Although Zhang says it is too early to discuss exit routes for Mandarin Hotel Holdings, the company chairman told local media earlier this month that he is anticipates an IPO later this year.

In the past decade, China's budget hotel sector has delivered sizeable public market exits for private equity and venture capital investors. IDG Ventures and Sycamore Ventures were early investors in Home Inns while IDG also participated in funding for China Lodging Group, alongside Chengwei Ventures and Northern Light Venture Capital. Each company raised $100 million-plus through a NASDAQ IPO.

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• Topics
• Greater China
• Consumer
• Real estate
• China
• Consumer
• Real estate
• The Carlyle Group
• IDG Ventures
• Sycamore Ventures
• Chengwei Ventures Shanghai
• Northern Light Venture Capital