Stoneleigh Seeks Hotel Growth With Deal

Target: Capella Hotel Group

Price: Minority investment, plus $60 million “sliver equity” fund for expansion

Sponsor: Stoneleigh Capital

Stoneleigh Capital, a buyout firm with expertise in hospitality investments, hopes to cash in on the next boom in luxury hotels by backing an Atlanta company whose founder helped Ritz-Carlton make its mark on the industry.

Stoneleigh, based in Norwalk, Conn., provided an undisclosed amount of growth equity capital for a minority position in Capella Hotel Group, which operates a handful of “super-luxury” hotels around the world, and it is sponsoring a $60 million “sliver equity” fund to support the expansion of the Capella portfolio.

“Capella is a unique operator with a very skilled management team,” Frank Palmer, a managing director of Stoneleigh, told Buyouts. “In the hospitality space, this is a great opportunity for this next cycle and beyond.”

Capella, which did business as the West Paces Hotel Group prior to the Stoneleigh investment, is headed by long-time hotelier Horst Schulze, a former vice chairman of the Ritz-Carlton Hotel Co., who guided the company’s expansion from a single facility in 1983 to more than 40 hotels in 41 countries. Under his leadership, Ritz-Carlton received the Malcolm Baldrige National Quality Award twice. Schulze founded West Paces Hotel Group in Atlanta in 2002.

“I think today is an ideal time to connect with a financial partner,” Schulze told Buyouts. The company operates six super-luxury Capella hotels today, in locations including Cabo San Lucas, Singapore, Dusseldorf and New York, along with one under the company’s proprietary Solis luxury brand, and several independent hotels in locations such as Bali and Indonesia. Capella has another five deals in the pipeline, which it expects to close in the next six months.

“The investment by Stoneleigh Capital will increase our expansion by two times,” Schulze said. Capella plans to double its size in the next two years.

Stoneleigh, whose recent investors include JP Morgan Private Equity Ltd, a publicly-traded buyout shop in London, will seek to co-invest with owners of hotel and resort properties that expand the Capella and Solis brands. Since the financial crisis of 2008, property owners have increasingly insisted that the management companies for their facilities have “skin in the game,” Palmer said. “Capella needs this tool in its kit.”

In conjunction with the investment, Gary D. Engle, the chairman and CEO of Stoneleigh Capital, James A. Coyne, its vice chairman and CFO and Palmer have joined Capella’s board of directors.

Stoneleigh, founded in 1994, has typically operated as a fundless sponsor, investing its own principals’ capital and that of select investors on a deal-by-deal basis. “We don’t feel we are an any disadvantage,” Palmer said. “We are not an auction player.”

The firm did form a $226 million special purpose acquisition company, Stoneleigh Partners Acquisition Corp., in late 2007, but ended up returning the capital to its investors, “a who’s who of hedge funds at the time,” after the market break of September 2008, Palmer said. “We looked at hundreds of opportunities, and we did not find a business in the spaces we were looking at that made any financial sense under those circumstances.”