Starwood Capital Group last month revealed it was selling a minority interest to Dyal Capital Partners, a Neuberger Berman division dedicated to purchasing stakes in alternative investment firms like Silver Lake Partners, EnCap Investments and HIG Capital, whose subsidiaries include HIG Realty Partners.
While details were not disclosed for the Starwood deal, the Barry Sternlicht-led firm said the transaction would enable it “to fund its strategic growth initiatives worldwide.”
To be sure, the Greenwich, Connecticut-based private alternative investment firm is in expansion mode and a partner to help fund that makes sense. Starwood has a high level of capital requirements, including making co-investments in increasingly larger commingled funds and growing the company’s platforms in energy infrastructure, oil and gas, and of course, real estate.
For example, Starwood Energy Group, its energy infrastructure business, currently manages total equity commitments of approximately $2.3 billion. The group’s last fund, Starwood Energy Infrastructure Fund II, attracted a total of $983 million in 2013. In recent years, the firm formed a new retail business, Starwood Retail Partners, and launched two new hotel brands last year alone.
But the stake sale is also meaningful because it has helped to establish a succession plan for a firm that has often been considered a ‘one-man show’ centered on its 55-year-old chairman and chief executive Sternlicht. Indeed, Sternlicht is understood to have sold part of his interest in the company in order to provide equity to new, younger partners at Starwood. That aligns not only the interests of junior talent, but also the firm’s new shareholders who presumably view wider sharing of equity as providing greater depth to the organization they’ve backed.
Meanwhile, multiple industry observers have noted the timing of the sale. Both US presidential candidates, Hillary Clinton and Donald Trump, have proposed eliminating the current lower tax rate for long-term capital gains and taxing capital gains as ordinary income. Of course, it remains to be seen whether this nowadays standard election rhetoric will actually materialize into real policy changes. Current US President Barrack Obama, after all, also had vowed to reform the current tax law on carry, but ultimately was unsuccessful during his eight years in office.
That said, because of the current election and the prominence of the issue on both candidates’ platforms, taxes paid by private investment professionals have received renewed attention once again. Even though the prospect of actual reform may not necessarily be strong, the fact is the issue is more prominent on many people’s minds right now. Some market sources believe that partly because of this, some owners seeking to sell their interests will be compelled to do so before the end of the year, given that the tax considerations could be material for this type of stake sale, should reforms actually take place.
Another interesting aspect is that the Dyal deal has allowed Starwood to lock in a valuation for its management company, prompting natural speculation about an eventual public listing given Apollo Global Management and Oaktree Capital Group are among the handful of alternative investment firms that first sold a minority stake and later went public. However, PERE understands the firm is not seeking an IPO at the present time. For one thing, it is not considered an opportune time right now for firms to go public, as public market multiples are considerably less favorable than when Blackstone had its IPO in 2007, for instance.
Starwood declined to comment, but is believed to have received a better valuation for the interest in its business than what some of its publicly listed peers are trading at today, such as Blackstone which was trading at $25.94 at press time. That said, few people are ruling out the possibility of the firm eventually making its public debut.
All told, this was an interesting turn of events marking the next stage of evolution for Starwood. It is worth watching this space.