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Do Private Equity Investors Create Value? Evidence from the Hotel Industry

We dissect possible mechanisms of private equity (PE) value creation by studying the U.S. hotel industry. We observe acquisitions, dispositions, and granular operating performance data for several thousand hotels owned by PE and non-PE investors over the past two decades. PE-owned hotels experience only limited operating efficiency gains, and no change in bottom-line profit measures on average. Nonetheless, PE investors earn above-average capital gains on their hotel real estate investments. They do so by acting as arbitrageurs, selling to counterparties with high valuations. Finally, PE investors’ returns to equity are boosted by their superior access to cheap financing.