The paradox of the private equity business today is that although it permits long-termism it encourages short-termism. Companies move between public and private sectors, sweeping money out of pension funds into the hands of managers and advisers at every rotation.
When I played Monopoly as a teenager, I always geared to the maximum extent and bought as many as possible of those red hotels. In good times the money rolled in and in bad times the hotels were returned to the bank. Hotels were bargaining counters in a world of high finance, not places to stay. Recently, the hospitality business (as practitioners like to call it) has looked more and more like Monopoly.
I spent a night recently in a chain hotel close to a motorway intersection. I had not chosen the hotel and I doubt if any other guests had chosen to stay there either. The rack rate quoted behind reception is extremely high and I suppose that if you pulled off the motorway on a cold and foggy night that is what you would pay. But the hotel offers discounted corporate rates to local companies and sells most of its rooms to organisers of business meetings and training sessions.
Hotels make large margins on extras. Like car manufacturers and sellers of computer peripherals, they reason that customers pay more attention to the headline price than to the overall cost of ownership. They can extend this strategy up to the point at which the price of spares, consumables or additions becomes so notorious that it damages initial sales.
And that was happening here. The bar was expensive and the cost of phone calls and internet access was prohibitive. And at €20 ($26) for breakfast you expect a freshly squeezed juice and an egg cooked to order, not thin liquid from a carton and self-service from a greasy hotplate. The publicity material in reception proclaimed the management’s dedication to customer care, but the reality was scuffed decor and worn carpets. Sometimes you need to remind yourself that there is generally no connection between the people who write the advertising copy and those who make the product or deliver the service.
Buy the best bed you can afford is good advice for a household, because the cost of a superior mattress is only a few pennies per night when amortised over its expected life. But the domestic bed always has the same customers and the hotel bed has different ones. This makes a big difference to the economics.
As you toss and turn and resolve not to spend another uncomfortable night there, the hotel franchise erodes. But the pennies saved pass straight through to the bottom line, while the reduction in brand value does not. Many hospitality company balance sheets do record intangibles, but these reflect amounts overpaid for acquisitions, or a capitalisation of future franchise fees, rather than the opinion of customers about the services they receive.
Back at the office and before I fell asleep at the screen, I looked up the corporate history. The hotel belongs to a group that was spun out of a much larger company. After an interval, there was an initial public offering, which made money for the managers. But not for subscribers: hotel chains did not do well in the dotcom era and analysts did not seem to realise that September 11 2001 had little impact on hotels at motorway intersections. More recently, a management buy-in took the company private again.
Perhaps the current team does not have the cash to replace the carpet, or perhaps it is enhancing pro forma earnings ahead of another flotation. Probably both. The paradox of the private equity business today is that although it permits long-termism it encourages short-termism. As I left that hotel in the morning, the relevant metaphor seemed that of the revolving door. Companies move between public and private sectors, sweeping money out of pension funds into the hands of managers and advisers at every rotation. Many shop assistants, watching the explosion of private equity activity in British retailing, must today be harbouring an ambition to run a closing down sale and fill their own pockets with the proceeds.
But in the high street, as at motorway junctions and in the economy more widely, business development requires stable ownership. Since we cannot adequately account for intangibles, companies have to be judged by a balanced scorecard, not only by quarterly earnings. Those comment cards on the pillow should go directly to the auditors. But until that happens, the only way to probe the financial figures is to poke the mattresses.