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Private equity cleans up

• Robert Peston
• 4 May 07, 08:28 AM

Grant Hearn ought to be a pin-up for the private equity industry.

For the past four years, this product of a family of hoteliers has been chief executive of the distinctly unglamorous budget hotel chain, . Since taking the helm, he has transformed it from a lacklustre number two in the market, to a fast growing company that is shaking up the hotel industry.

He has opened thousands of new rooms and expanded employment. Along the way, a fat profit has been generated for its first private-equity owner, Permira, which sold out in August of last year. And its new owner, Dubai International Capital, is backing him in a second three-year growth spurt.

And he’s done it not by asset stripping or by squeezing working capital to unsustainable levels – which are the charges most commonly levelled against private equity – but by improving working practices, passing some of the productivity gains on to customers in the form of lower prices and improved marketing.

I interviewed him for a short item on private equity that’s being broadcast today or tomorrow on Radio 4's PM Programme. What impressed me is that his private equity owners gave him the resources and freedom to revitalise a business that was drifting when owned by the giant catering conglomerate, Compass.

Among his innovations was to adopt the pricing policies and internet-booking approach of the low-cost airlines, Ryanair and Easyjet. Travelodge's rooms are often cheaper for early bookers than those airlines' giveaway deals, when tax is included.

There are two statistics which explain both how Travelodge can cut prices and also make substantial returns for its owners. The time taken to clean a room has been cut from 40 minutes to 25 minutes and will come down to 20 minutes in the coming year. And the number of staff employed per hotel has roughly halved.

Those are massive productivity gains. In the case of room cleaning, they have been achieved by studying working patterns and sharing best practice. This year, the company is showing all its cleaners a DVD which demonstrates how a room can be prepared for occupancy in just 20 minutes. And on the basis of a Google search, customers don’t appear to believe that cleanliness has been sacrificed.

But here's what bothers me, and will prompt many of you to accuse me of being a soft-in-the head, bleeding heart something-or-other. The allocation of risk and reward in this business, after it was acquired by private equity, has been unevenly shared – as it is in most private-equity deals.

The managers of this business took risks, as did the executives in the relevant private equity firms and the investors in their funds. Hearn’s prescription to revive Travelodge might have been a disaster. He might not have been able to boost cashflows sufficiently to meet the increased debt-financing costs incurred after the takeover.

But their rewards have been huge, millions of pounds each for a small number of individuals.

However junior employees incurred the same risk of disaster – though one difference is that they didn’t choose to take on the risk of the private-equity deal, it was foisted on them. And they’ve had no opportunity to participate in the investment rewards of the private-equity deal.

Their pay has probably gone up a bit. But have they captured a significant proportion of a staggering 100% improvement in their productivity, a doubling in their individual output? What do you think?

Just to be clear, I am not singling out Travelodge for special criticism. I would imagine that compared with many businesses in its industry, it treats its staff pretty well: otherwise it probably wouldn’t be thriving.

But it is the nature of our globalising world that the top prize for those with the fewest skills – even if they improve their output exponentially – is that they get to keep their low-paying jobs. Next time my boy moans about going to school, I’ll probably feel compelled to tell him about Travelodge’s super-productive cleaners.

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