The Exempt Market: Open For Business
By: Matt McKellar
As an investor in a new private venture, there is almost nothing as attractive as being able to rely on a proven, successful, and well-honed business model, as well as being able to rely on existing brand capital to help drive sales. This is one of the reasons that many people are drawn to opening and operating franchised businesses; there is an existing model and support structure for many of the hardest things about starting a new business, including most decisions related to product, marketing, and operations. Additionally, investors are able to experience the success of the business model they would like to operate by visiting stores, talking with other franchisees, and sampling product. Run successfully, these franchised businesses can be very profitable for their owners.
Unfortunately, many franchise investments have drawbacks that prevent the vast majority of people from participating. Firstly, the capital requirements can be enormous. To start and run a McDonalds, for instance, requires a total investment of approximately $2,000,000, including maintenance of a $750,000 operating reserve in liquid cash. For businesses that aren’t as capital intensive to start – like a Subway location, which can take as little as $100,000 to open – investors typically find themselves earning a return that is mostly reflective of the labour they put into managing the business, rather than their capital invested. This is associated to the other major drawback in this type of investment: the time that must be invested in not just opening the business, but managing its operations on an ongoing basis. Despite above-average returns, many potential investors are turned off by the idea of spending extra hours in the back of a restaurant or other service business after a full work day.
Prestige Capital, founded by a group of Alberta-based entrepreneurs, seems to have found the solution. In 2011, the group raised $16.5 million in capital through the Exempt Market for investment in the first two phases of a three-phase hotel development adjacent to the rapidly expanding Calgary International Airport. Integral to the business plan was their having secured an agreement to brand and operate the three hotels as a Hampton Inn by Hilton, a Homewood Suites by Hilton, and a flagship Hilton Hotel & Resort. All three brands are the property of Hilton Worldwide, which, with 687,000 rooms in 92 countries, is the largest hotel company in the world and an excellent source of development and operational expertise. Prestige would develop and own the property, while outsourcing its management to a third party. The two offerings were structured to deliver what similar private market opportunities had always lacked: passive ownership in proven business models at reasonable minimum investment amounts.
The Hampton Inn and Homewood Suites were successfully opened in late 2013 and early 2014, respectively, and Prestige Capital has since offered several site tours to investors. The benefits of leveraging an established and successful business model and brand are immediately evident when walking through the two finished hotels. There is an extraordinary combination of attention to detail, design excellence, and relentless efficiency at play which newly-formed businesses are rarely able to achieve, especially at the scale of what will be a $170 million investment. An affiliation with Hilton means meeting certain design specifications and standards, but also access to an incredible network of service providers, including architects, interior designers, and international purchasers who help elevate the hotels and their finishings beyond that of any other Calgary hotel completed in recent memory.
Since opening, business at the first two hotels has been brisk, with occupancy and rates both above projections. This has prompted Prestige Capital to approve upgrades and an expansion plan for the Hilton phase, which will begin construction later this summer. As the only flagship Hilton hotel in Alberta, and with a newly-approved 60,000 square foot conference centre, it is already being used by Calgary Economic Development to entice major events to the city. The development should cause a serious shake-up in Calgary’s hospitality market once open.
Prestige management have announced their intentions to continue to pursue financing through the Exempt Market, and there is projected strong demand among existing investors. Although principals’ own investment has always been the cornerstone of the development’s financial backing, they believe Exempt Market capital is an excellent way to finance a project and build community support for a venture. The principals also believe that an important model has been demonstrated. The Exempt Market is an ideal place for competent management teams to leverage existing business models, both for the purposes of ensuring smooth operation and for reasons of investor familiarity and interest. Prestige’s shouldering of the management responsibilities, low minimum investment requirements, and partnership with a leading brand has created both profits and pride for its investors.
This is just the latest example of a group of entrepreneurs using the Exempt Market to create a thoroughly unique opportunity for investors, and executing on their plan successfully. As an industry, we should also feel pride.