The grass is always greener

Earlier this summer, while fireworks soared over the Statue of Liberty in celebration of the 4th of July, wellheeled golf aficionados nearby were celebrating a milestone of a different sort: the official opening of Liberty National, one of the most expensive golf courses ever built.

Set on the New Jersey banks of the Hudson River, within spitting distance of Lady Liberty herself, the course reportedly cost approximately $130 million (€100 million) to build; the lavish, yet-to-be-built clubhouse is expected to run an additional $20 million. Financed by Reebok mogul Paul Fireman, the exclusive club—where the $400,000 membership is by invitation only—has already reached its quota of 50 members for the year. Membership will eventually top out at 250 golfers.

While Liberty National is not backed by private equity real estate money—even though many industry titans are no doubt pining for an invitation— the same can not be said for a growing number of courses around the world.

In one of the most well-known examples, Lone Star and Goldman Sachs have both built up substantial golf portfolios in Japan, which they acquired in the wake of the country's economic crisis. Pacific Golf International, the Lone Star portfolio company, went public last year, while Goldman's Accordia Golf had just announced plans for a $1 billion initial public offering at press time (p. 25).

Over the past few months, activity has been heating up in Europe as well. In late June, London-based private equity firm Permira made an unsuccessful bid for hotel company De Vere, which owns the Belfry golf course, four-time host of the Ryder Cup tournament. That same month, Apollo Real Estate Advisors acquired the St. Andrews Bay Golf Resort & Spa in Scotland, which is located less than two miles away from the world-renown Old Course at St. Andrews (p. 56).

Yet while Scotland may be the home of golf, the US has been at the epicenter of the private equity real estate boom in golf course ownership. Last month, KSL Capital Partners paid $1.8 billion for the 170-odd golf courses and country clubs held by Dallas-based ClubCorp (p. 17). In August, Walton Street Capital announced the acquisition of PGA National Resort & Spa in Palm Beach, Florida. And not far from Liberty National, another recently opened course on the New Jersey waterfront, Bayonne Golf Club, was partially financed by Cherokee Investment Partners, a private equity real estate firm focused on environmentally contaminated properties. (Both Liberty National and Bayonne required extensive environmental remediation.)

As many of these recent transactions highlight, private equity firms are not necessarily fixated on the cash flows of the golf business itself, but rather on the secondary real estate opportunities that the courses offer. Hotels, condominiums, restaurants and retail opportunities are some of the ways in which investors are looking to boost the profile (and cash flow) of their fairways. At Liberty National, for example, the golf course is expected to lose money while a series of nearby condominium towers are projected to turn a tidy profit.

At the same time, however, many institutional investors are skeptical of private equity's ability to wring superior returns out of golf-related properties. At a recent conference, one limited partner listed golf courses as one asset that he would stay away from— in addition to other off-the-beaten-path investments such as parking lots.

One factor that limits the appeal of golf courses is their limited downside protection. Unlike, say, an urban office building, a golf course is most likely going to remain a golf course as there are significantly little conversion opportunities if the bottom falls out. At the same time, there are few exits available for large golf portfolios, particularly if the public markets don't cooperate. That said, one likely buyer of such assets may be another private equity firm— KSL, for example, built up one of the largest golf operators in the country during the 1990s, which was eventually sold to Apollo.

For the time being, at least, private equity real estate firms seem relatively unconcerned with the hazards that may lie ahead. Of course, can you really blame them? There are many perks to being a succesful private equity real estate GP, but is there anything that carries more caché than owning your own golf course?