“Scarcity is the only moat left. You can always build another tower. You cannot build another clifftop, another centuries-old vineyard, or another shoreline where zoning will never allow a repeat,” wrote Brown, who’s San Francisco bay-area firm places ultraluxury hotels with less than 100 keys. “That’s why family offices and institutions are competing head-on for the same assets. Families lean in for identity and legacy. Institutions lean in because they’ve realized scarcity — not scale — is where returns hide.”

Among the deals Brown has worked on more recently: arranging equity financing for the expansion of the famed Inn at Little Washington (new keys and spa) where but both institutional and family capital were at the table—and the family won. “That transaction shattered domestic records on valuation on a per-key basis,” he said.

Brown is currently arranging the LP equity financing for the One&Only Hudson Valley, Kerzner’s flagship U.S. development with Nolan Reynolds. “Who will win this round—family or institutional? Ask me in a couple of months because both are at the table,” Brown continued.

On the sell-side, Brown is co-marketing Berlusconi’s former estate in Sardinia, Villa La Certosa, Italy, with Sotheby’s and Knight Frank—a €330 million repositioning opportunity, he said.

Brown believes it is still relatively early days for institutional capital coming into the small ultraluxury space, but he expects more and more deals to get done with EBITDA multiples that have been 8x to 12x maybe increasing to 9x to 13x.

Working with Picasso

What has spurred this change, Brown said, is the pandemic, when smaller ultraluxe hotels defied big picture macros and hyper-performed. It drew a lot of attention from capital markets and what started as a trickle of capital coming into the space has continued to intensify.

On the sell side, even artists who create these unique, true luxury assets have noticed an opportunity to cash in.

“I’ve seen is a lot of people suddenly thinking, maybe this is a time where we can find the right investor, the right buyer, the right person with whom to place the baby,” Brown said.

At the same time, buyers understand they are not Picasso operator and maybe they want to buy 80% and keep the artist engaged, according to Brown. “The artist gets some chips off the table, which might have relevance because it gives them that ‘placing the baby’ kind of trajectory,” he continued. “Maybe it gives them some liquidity after all these years of working like a slave and also gives them the ability to continue stewardship of the baby.”

What needs to happen to make more of these deal truly work, Brown said, is for institutional capital to have longer investment horizons – at least eight to 12 years, and even better if 15 years.

“With institutionals that have these longer timelines they can start, at least in theory, to resemble the same attributes seen with families,” Brown said. “And where I feel best about having the conversation is when I have an institutional that’s been around long enough where that’s not just words on a page – I can actually see that’s what they’ve done.”

All this said, Brown said family offices and high net worth investor can still hold the advantage in negotiations because of their investment philosophy, and they don’t have accountabilities to LPs. “So, if they bump that multiple up to 14x, they can still hold and reap and harvest returns from the same investment philosophy,” he said. “Institutional capital coming into this space is still an experiment and I think there are limits to how far they will go because they still have to look at IRR. They still have to look at cap rates in a very different way than family offices.”

Nonetheless, the time has arrived, Brown believes, and more deals bringing in institutional capital will happen.

But he is quick to advise institutional players that the things that make small ultraluxury hotels attractive now are the things they have to preserve and protect because that’s where they are going to harvest real value for LPs.

“It’s not something to be exploited. It’s not something to be pimped out. It is something that can be leveraged in a good way,” he continued. “GPs are not here to serve this sector; they’re here to serve investors. I understand that. But they can serve their investors by serving this sector of the market because as luxury is commoditized and they honor and preserve and uplift what is unique about this sector, it will augment their returns because they will rise above.”

By Jeffrey Weinstein