Thanks to Our Team, This Client Was Able to Take a Stake in a Hospitality Company Without Reservations

empty hotel lobby communal area featuring bold artwork and bistro furniture
Private Equity

A very savvy client, considering acquiring a 25% stake in a privately-held hotel ownership group, was looking for a trusted advisor who could help evaluate the feasibility of a potential investment in the hospitality industry – and model a credible earnout projection.

Good things come in 3s. When diversifying into something new, the keys to success are maximize your insight, minimize your financial exposure, understand what exit options you have.

The client is an ultra high net worth individual with significant holdings in a business adjacent to hospitality who was seeking to leverage that knowledge and affinity into additional, more diverse investments.

No matter how successful you’ve been at one thing, doing something new is a big step you never want to take alone.

- client, addicus private equity

The challenge was to ensure:

  1. Investment was sound
  2. Deal structure would minimize client’s downside risk
  3. Earnout potential would be worthwhile

The Addicus difference was apparent in how we addressed all three parts of the challenge to this deal.

With deep experience in the hospitality investment space and, as a result, familiarity with the head of the hotel ownership group, Addicus conducted its due diligence of the ownership group and its operating results, including:

  • Analysis of projected versus actual results for all previous hotel projects
  • Independent market research on location and position validity of each property
  • Evaluation of signed operating agreement with the management company engaged to operate properties, as well as that company’s efficiency and effectiveness
  • Examination of hotel ownership group, including its development track record and market approach to development of new properties

After diligence confirmed the positive potential of this investment, the next step was to structure an equity infusion plan most beneficial to the client. Our suggestions:

  • Take on some limited recourse debt to help fund the equity investment and leverage the returns
  • Structure equity infusion via an Investment Fund through which Addicus would raise additional capital from our Limited Partner network, limiting the client’s risk while also providing an attractive opportunity to investment partners
  • Negotiate with sponsor to take an interest in the overall hotel brand in addition to the portfolio properties being constructed
  • Align with sponsor to receive 100% preference on cash flow to fund debt service cost prior to any other distributions

With diligence completed and an equity infusion plan in place, the Addicus team concluded:

  • Recommended deal structure would deliver strong initial rate of return as well as appreciable earnout potential with measured risk backed by a very strong developer track record of over 150 completed successful projects.

The financial result is a client-advantaged deal structure comprised of a $12MM investment fund with an expected 25% IRR and 2X equity earnout potential over a three year period.

financial results


investment fund from client-advantaged deal structure

25% IRR

and 2X equity earnout potential over a three year period

The business learnings confirmed that the responsiveness-focused way Addicus is structured is a key benefit to clients. By quickly understanding the client’s situation, supplementing it with our vertical industry knowledge, leveraging our ability to quickly raise additional capital, and thinking creatively to set up an investment fund with client-favorable terms, Addicus was able to ensure a high-quality business opportunity was not allowed to slip away. In fact, it was such a high-quality business opportunity that Addicus decided to co-invest its own capital alongside the client, and our LP, which demonstrated our faith and confidence in the project.

The opportunities for tax and financial planning are dependent on each client’s unique circumstance and past trends and performance are not guarantees of future market activity, deal terms, outcomes, or performance; accordingly, Addicus makes no representation, warranty or guaranty regarding any particular offer, deal term or transaction, or the outcome of or any returns related to any of the foregoing.

The analysis and discussion set forth in these materials are general and intended for informational and educational purposes only. They are not, and are not intended to be, investment or planning advice. In any case, Addicus is not making any representation regarding the suitability of any business, investment or financial decision for your particular circumstance, and any such decision should be made independently by you in consultation with your other tax, financial and other legal advisors. Further, any advice we may provide is qualified in its entirety by our limited knowledge of the relevant facts and circumstances of your situation, and only represents a reasonable interpretation of currently available information, including without limitation the language of the relevant provisions of the Internal Revenue Code of 1986, as amended, and regulations and administrative guidance issued by the Department of the Treasury. Any advice we may ultimately provide is subject to change based on further administrative interpretations or the availability of additional information.

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