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Arnold M. Knightly

Official sees more private equity investment in gaming

13 November 2007

LAS VEGAS, Nevada -- Private equity's influx into Las Vegas' gaming industry is probably just beginning, Colony Capital's chief investment officer told a group of gaming attorneys on Friday.

"I think we're in the infancy of private equity in gaming," Jon Grunzweig said during a panel discussion on private equity at the Gaming Law Conference at Mandalay Bay.

The Los Angeles-based real estate investment firm has a majority ownership interest in the Las Vegas Hilton and, now, Station Casinos.

"You will see other sources of equity," Grunzweig said. "Non-U.S. sources of capital, family, entrepreneurial and individual capital are anxious for financial exposure to gaming assets because of the generational aspect of an investment in Las Vegas."

The $5.4 billion management-led buyout of Station Casinos, which had its stock removed Wednesday from the New York Stock Exchange, is the latest example of private equity investments in local gaming properties.

Investment firms have significant holdings in many valley gaming companies and properties including Cannery Casino Resorts, Planet Hollywood Resort, the Sahara and Hooters Hotel.

Private equity is also involved in the pending $17.1 billion buyout of Harrah's Entertainment and the $1.3 billion sale of the parent company of the Stratosphere and two Arizona Charlie's hotel-casinos and many Strip construction projects.

Grunzweig said private equity companies are looking to reap value from gaming companies' assets in the long term.

"Private equity's interest in gaming is based on a belief that attractive risk-adjusted returns can be generated from the assets in a different way than the public market accepts and demands," he said.

Private equity has flexibility that public companies don't because private equity is not beholden to public shareholders and can look long term rather than quarter to quarter, Grunzweig said.

He added that the funds expect higher returns than public market-based investors do.

Private equity is able to meet those returns, however, without selling as many assets as public companies often do.

"You will see benefits, not quick flips," Grunzweig said.

One example is Colony's managing of the Las Vegas Hilton since its $280 million purchase in 2004.

Panelist Eric Matejevich, chief financial officer of Resorts International Holdings, said the off-Strip property is an example of current private equity's strategy of smart capital investment bringing stronger returns.

Cash flow at the property has increased from $11.3 million in 2003 to $47 million in 2007 on a capital investment of $105 million, he said. Renovations have included refurbishing 2,500 of the 3,000 rooms, renovating some of the public areas and replacing 75 percent of the gaming machines under Colony.

Grunzweig said the funds will cash out one day, usually within three to seven years, meaning some casino companies could end up back on Wall Street.

"The need for an exit will mean, inevitably, the bigger companies do return to the public markets," Grunzweig said. "I do think there is a place for public equity capital for gaming, without question."