Asia's KINGMAKER - Investment Outlook - September 2006

A ground floor investor in Amanresorts, Minor International and more, Anil Thadani sees a new wave of opportunities for innovative hotel concepts.

By Staff -- HOTELS Magazine, 9/1/2006

Friendships, partnerships and the potential to make "a nickle or two" drive Anil Thandani.

Most of us fly at 20,000 feet Anil Thadani flies at 50,000 to 100,000 feet," says William Heinecke, founder, chairman and CEO of the Bangkok-based Minor Corp. A friend and business associate of Thadani's for a quarter century, Heinecke characterizes the Indian-born founder of Singapore's Symphony Capital Partners as a creative thinker who moves ahead of the curve, a visionary who knows how to make dreams both possible and profitable. "Let's just say he is unique," says Heinecke, when trying to sum up Thadani. It only takes five minutes with the chemical engineer turned financer to understand what Heinecke means. Thadani combines a passion for investing with an obsessive interest in people-from what they need to what they want and what their dreams are. He takes the pulse of real estate prices and interest rates as assiduously as he trawls for the subtle indicators that signal the next trends in consumer spending. He wants to know what people want before they know and present them with a concept they cannot refuse.

With his 360-degree vision, Thadani sees two major plays in Asia's hotel segment. One will be to build and manage 1-, 2- and 3-star properties all over Asia-particularly in China and India-"as Accor has done in Europe." Despite projections about massive upturns in travel, both domestically and regionally, Symphony will take a pass. "It is a great opportunity, but we will leave it for large companies with both the financial and human resources to manage a growing business of this scope," Thadani says.

The other opportunity, and the one that fits Symphony's strategy, will be niche plays-specifically with longtime Symphony portfolio components Amanresorts and Minor, which counts Marriotts, Four Seasons and its own Anantara brand among its hotel holdings. "We will continue to invest in a niche we understand and partner with the entrepreneurs with whom we have built close relationships in areas where we have accumulated domain experience and achieved recognition in the market. By so doing, we think we will be able to attract more proprietary deal flow and stay focused on what we know," Thadani says. "In other words, almost anything we would want to invest in would fit into either Amanresorts or Minor. Why invest in something new if it can fit into one of the two pockets we have? It is better to grow and expand the businesses we know."

NEW MARKETS FOR AMANRESORTS
Ultra-luxury Amanresorts is bracing for a growth push. In the future, the faithful Thadani calls "Aman junkies" will not have to look so hard nor travel so far to find their favorite hotel experiences. "In the past, Amanresorts was all about exotic locations. It did not matter to guests if they had to fly to a hub, hop on a small plane and take a boat to get there. Amanresorts built a better mousetrap and the mice came," Thadani says.

"Now, long-haul travelers worry about security risks. If their boss tells them to go to a risky market, they have to go or someone else will. Leisure travelers have the luxury to choose their destination. We need to put properties closer to where the mice are and reduce the perceived risk."

A former jockey, competitive squash player and, currently, a competitor in the grueling Le Mans Classic car race, Thadani is not just being skittish when he talks about risk. From 1997 to 2003, he watched the Asian region move from one disaster to the next-beginning with currency devaluations in Indonesia and Thailand and worsening to devastating bombings, the tsunami, SARS, bird flu and earthquakes that stunned the world. "It was the worst period we have ever had," he says.

Though the human toll dominates the aftermath of these events, there were business repercussions that shaped Thadani's current views on risk. "Just keeping our portfolio going was a real feat." As recently as December 2002, investors would have been happy to cash out at 50 cents on the dollar. It would have marked the first time a Symphony fund lost money. Thadani convinced them to stay in, a decision that rewarded them with positive overall returns just two years later.

Successful as the outcome was, Thadani says the lesson is not over. Bali still "has not been able to shake off the threat of terrorism." That is one reason Amanresorts is moving into Croatia, Morocco and Turkey. The first city center hotel will open in Delhi next year, complemented by top-end residential serviced apartments.

OPPORTUNITIES, CHALLENGES
As it has been since the 1980s, residential real estate-villas, serviced apartments, condominiums-will continue to be an integral component as Amanresorts grows and diversifies geographically, as it will for Minor's portfolio. "People are willing to pay a huge premium for a managed, branded, serviced lifestyle," Thadani says. "They do not have time to wash their sheets and put food in the refrigerator. A property that normally would be priced at US$2,000 per sq. ft. could sell for US$2,500 to US$3,000 per sq. ft. if you add a serviced residential component." It is also a cushion in an uncertain world. "You can recover your capital on the front end," Thadani adds. "If the hotel does well, hallelujah. If it does not, you can stand the pain because you have taken your money off the table."

Among Anil Thadani's passions: racing cars and thoroughbreds, as well as playing squash.

Even with his world vision, Thadani believes this will be the "Pacific Century." Symphony will be shopping opportunities around the region from healthcare and "wellness" to hospitality and, what Thadani sees as the next hot market: education. And, why not? As Thadani points out, GOP margins for Asian businesses stand at 40% to 55%, among the highest in the world, while wage bills generally run 20% to 25% of revenues-less than half of what a 5-star hotel in the western world would pay. "Hotels in Asia are also easier to sell. Branding is easier with hotels than with other real estate, which creates considerable value," Thadani says. "Asians have a passion for real assets, and hotels are particularly attractive as an asset class because they combine real estate and lifestyle."

In development terms, Thadani likes India, Phuket, Thailand, Singapore and Hong Kong as destinations for further hotel growth. Vietnam is "interesting," and Phuket remains a world-class resort destination. India should be a major play given its current under-supply of hotel rooms. Still, meeting demand will be no easy task for the uninitiated. "The biggest hurdle in India will be the lack of real estate laws," Thadani says. "In the United States or Thailand, you know exactly what you have bought by the time the transaction closes. In India, there is little title information. The property might be defined as an area between two trees. If someone cuts them down, you do not know where your boundaries are. India is a fabulous market, but there is going to be a lot of blood in the streets as legislation evolves. Once the regulatory problems are cleaned up, everybody will make money."

THE LONG HAUL
Thadani's love of fast cars and motorcycles as well as what Heinecke describes as his "quick, creative mind" belies his patience as an investor. The staying power of upmarket concepts such as Amanresorts and Minor appeal to his long-term view of investing-a view which shareholders expect will generate returns upward of 25% to 30% per annum. "Stocks markets average returns of 15% per annum. Private equity has to deliver 3%, 5%, 7% or more over those averages," Thadani maintains. With return potential that can meet these targets, hospitality companies will continue to make up 30% to 40% of the partnership's portfolio. Symphony's business model suits high-end hotels as it allows its businesses adequate time to ramp and profit from their investments.

Other funds are all about windows and exit strategies. Thadani does not see the rationale. "What is the point of having a perfectly good portfolio, being forced to sell it because the fund window has expired, and then having to go out and look for something else to buy?" Thadani questions.

"Buying, holding and selling a business does not do a lot for me, particularly if it has a lot of steam to keep growing." That does not rule out further acquisitions. However, any offer would have to be extraordinary to remain as a stand-alone entity in the portfolio. "We will be opportunistic. If we do a hotel deal, it is more likely that we would provide the funding and acquire it through Minor," Thadani says. "There is no overlap now between Amanresorts and Minor. Why would we acquire an entity that would force us to compete with ourselves?"

To capture value, Thadani believes, "You have to build from scratch or wait patiently for a distressed property you can acquire well below replacement cost. Many of the recent deals I have seen seem to be pretty fully priced. They will work only if the investors are lucky enough to have a sustained bull run. There is very little downside protection in the price."

What keeps Thadani doing deals is a self-confessed "love of the business of investing-of meeting people from different walks of life and understanding their dreams-then, perhaps, helping them achieve some of these dreams. In the process, we form close and enduring friendships and partnerships. Sometimes we even make a nickel or two."

Head Of The Asset Class

Anil Thadani’s career path has been more of a winding mountain road than a laser-straight autobahn. Frequently referred to as “visionary,” Thadani saw the possibilities around every bend. He offers his take on key hotel deals: An Indian-born chemical engineer turned financier, Thadani spent eight years with Bank of America in the United States and Asia before setting up on his own. With “a small amount of capital from a few friends” in Hong Kong, he established one of the first, if not the first, private equity companies in Asia. A few years later, he raised what was then the headline-making sum of US$170 million, making it Asia’s largest private equity fund at the time. “From my travels in the region, it was clear Asia was undergoing a transformation in lifestyle, and that the population would see a steady growth in disposable income and spending power,” Thadani says. That would be the focus of his investments. Minor Corp./Minor International: In 1981, close friend and business partner Randy Stevens suggested Thadani meet with a young American entrepreneur in Thailand, William Heinecke. "We got along immediately. I was impressed by his energy, his enthusiasm for building a business and his obvious zest for life in general. "We spent most of the time talking about what he wanted to do. The more he described his vision, the more I realized that he was talking about exactly the kind of things we had set out to invest in," Thadani says. "When I came back to Hong Kong, we discussed it and decided we would partner him from an early stage. Bill was just beginning to build his business. For our part, we felt we could add some value in terms of financial management and future capital needs." Twenty-five years later, the duo's shared vision has grown into Minor International and Minor Corp., which includes almost 600 restaurants in five countries, 15 hotels and businesses involved in the manufacturing, trading and retailing a variety of western style consumer products. These businesses operate as two public companies listed on the Stock Exchange of Thailand with the hotel and food business recently earning a spot on the Thai SET index of the top 50 stocks. In addition to operating hotels under license and management agreements with Marriott and Four Seasons, Heinecke developed Minor's own brand, Anantara, with a heavy dose of encouragement from Thadani. The new Anantara Resort in the Maldives. Regent International/ Amanresorts: In 1983, Thadani met Adrian Zecha socially at dinner party in Hong Kong. Later that year, Zecha called Thadani after reading about his inventive positioning of Universal Furniture's IPO in the United States rather than on an Asian exchange-a strategy that doubled the company's value. Zecha was then a partner with Regent International, which he founded with Robert Burns and Georg Rafael. "I went to Adrian's office at noon for what I thought would be an hour-and-a-half lunch at most. By the time I left, it was 8 p.m.," Thadani says. The friendship that began with this meeting transitioned to investment exposure in Regent International Hotels, including the purchase and subsequent sale of the Regent Bangkok and the Dorchester in London. "In both of these cases, we had to make very quick investment decisions," Thadani says. "While both acquisitions may have looked opportunistic and almost reactive, in reality they were part of a well-defined strategy on the part of Regent. Both were financially attractive. Bangkok was priced well below replacement cost. The owners thought the market was bad and getting worse; we thought it was bad and getting better. "Fortunately, we got that right. In case of the Dorchester, the price paid was high. No London hotel had changed hands at that price per room. But price per room was the wrong way to look at it. Not only was the price well below replacement cost, but the property was irreplaceable. With 11% yield on the purchase price, it was one of the few freehold properties in Grosvenor Estate. Also, Regent believed it could further improve cash flow." (Thadani subsequently bought back a stake in the Bangkok hotel 10 years later for a price even lower than the original investment in 1985. He sold it, for shares, on behalf of the funds to a company controlled by Heinecke.) When Zecha and Rafael sold their Regent stakes to Regent co-founder Robert Burns, Thadani partnered Zecha in founding Amanresorts. Zecha became a shareholder in Thadani's investment business, and also partnered with Rafael in Rafael Hotels (later sold to the Mandarin Oriental Hotel Group). Over the last two decades, Amanresorts has developed a chain of jewel-box properties that stretches from Asia to Europe, the United States and the Caribbean. Beaufort Hotels: In the mid-1980s, Thadani invested in Beaufort Hotels, a startup deluxe chain of 200- to 250-room hotels launched by Zecha and Seigfried Beil, one of the original partners in Regent. The chain built the Heritage in Brisbane, the Sukothai in Bangkok and the Beaufort in Sentosa, as well as acquiring the Beaufort in Darwin-an acquisition Thadani still ruminates about. "While the hotels were distinctive, we found the capital requirements of a sustained program of building hotels of this size was simply beyond our financial capabilities-especially with the unprecedented rise in real estate values around Asia in the 1980s," he says. "It was more difficult to find attractive parcels to build new properties, nor was it always possible to find distressed properties that could be raised to the same standard. So we sold the business to a Hong Kong public company in order to focus our attention on Amanresorts whose capital requirements were more manageable. We were already impressed by the early returns from the properties in Phuket and Bali." Southern Pacific Hotels/ Orient-Express Hotels: In the late 1980s, the fund used the profits from its sale of the Regent Bangkok (which had required an investment of only US$4 million in a highly leveraged deal) to invest in Southern Pacific Hotels in partnership with Hyatt, and took "a large stake" in Orient-Express Hotels. "We felt we could expand Southern Pacific's brands into other Asian countries and, in fact, got off to a pretty good start. Our timing was unfortunate. The whole sector was beginning to look quite shaky in 1988-89. When the Pritzkers (the owning family behind Hyatt) offered to buy out our shares in 1989, we readily agreed," Thadani says. Thadani didn't have much involvement in decision-making at OEH and decided to sell when it became clear it would be always a portfolio type of investment.