NEW YORK (TheStreet) -- A lot has been made of Blackstone's (BX) $10 billion paper profit on its Hilton Worldwide (HLT) leveraged buyout, in the wake of the hotelier's first day of trading on Thursday.
Those billions stand out as among the biggest PE-industry profits, and Blackstone's internal rate of return on the deal is even more impressive when you consider the timing of Hilton's $26 billion leveraged buyout. When you run the numbers, Blackstone's Hilton investment also further underscores the importance of leverage for PE-industry returns.
But in Hilton's case, there is far more to the story than Blackstone's financial engineering and, in particular, a 2010 debt restructuring that gave Singaporean sovereign wealth fund GIC Private Ltd. a 5% stake in the company.
Blackstone may have had a no-lose plan when making its Hilton buyout bid.
Whatever Blackstone's profit winds up being when the firm cashes out of its Hilton shares, much of it will also be attributable to the firm's reliance on franchised hotels as a source of growth.
Since taking Hilton private, Blackstone has focused on achieving growth at the hotel chain without putting up much of its own cash to buy and develop real estate in the U.S. and internationally. As a result, 99% of new rooms opened or in construction since 2007 have come from franchisees, allowing Hilton to realize industry-leading growth at little cost to the debt-laden company.
According to Hilton's S-1 documents, the company has grown its total rooms by 36% since June 30, 2007 -- the fastest growth rate of any major lodging company. Rooms in the company's development pipeline have grown 60% and rooms under construction have grown 133%, virtually all of which has come from franchiseess.