Blackstone Group LP, whose pending $26.5 billion purchase of Hilton Hotels Corp. will set an industry record, plans to expand the hotel brand in Asia and other markets that are expanding faster than the U.S.
"The most interesting thing is the growth opportunity overseas,'' Gary Sumers, a senior managing director of Blackstone, told trustees for the $64-billion Oregon Public Employees Retirement Fund at a meeting today in Tigard, Oregon. "There are great possibilities for expansion overseas, in China and India.''
About 11 percent of Hilton's hotel development pipeline is outside the U.S., lagging behind Starwood Hotels & Resorts Worldwide Inc., which has more than half its franchise business overseas, Sumers told the Oregon Investment Council during a fund-raising pitch. Blackstone plans to invest about $2.25 billion of equity from its latest fund in the Hilton purchase.
Real estate funds investing record inflows from pension managers and other institutions are turning to hotels after a wave of office building acquisitions. Increased demand for lodging spurred by greater travel and a relative dearth of new construction have made hotels attractive to buyout firms such as Blackstone that can acquire hotels for less than replacement cost in some cases.
Blackstone also used part of the $21.7 billion Blackstone Capital Partners V fund it recently closed, the world's biggest private-equity cash pool, to buy Hilton, helping fuel a record $707.8 billion in private-equity transactions this year, data compiled by Bloomberg show.
Real Estate, Private Equity Oregon voted to invest $200 million in a new fund, Blackstone Real Estate Partners VI. That vehicle will have $10 billion of capital commitments from pension funds, endowments and foundations when completed, and an additional $1 billion from Blackstone and its partners and employees.
The fund pledge came as Oregon lifted its target for real estate investments to 11 percent of the public retirement fund from 8 percent, seeking higher returns. The state also boosted its private equity target to 16 percent from 12 percent and international equity to 23 percent from 20 percent. It slashed U.S. equity to 23 percent of the fund from 33 percent and kept fixed income at 27 percent.
The Hilton takeover follows Blackstone's February purchase of Equity Office Properties Trust for almost $39 billion in the biggest real estate buyout. Blackstone has since sold off most of Equity Office's buildings except those in Boston, west Los Angeles and Northern California, to repay debt.
Blackstone doesn't plan a similar program of sales with Hilton, Sumers told the Oregon council.
"This won't be a quick-flip situation,'' he said. "It fits very well with our existing hotel portfolio and new hotels we'll buy for this fund.''
Blackstone expects Hilton's worldwide reservation system and its marketing and sales organization will help increase revenue from the buyout firm's other hotels and that Blackstone's experience with hotel acquisitions will help it reduce costs at Hilton, Sumers said.