Jim Merkel, president and CEO of Rockbridge, a private equity firm that invests in hotels, doesn’t spend much time looking backward.
“We know that we’re only as good as our last investment, and so we have to continue to evolve and deploy capital effectively,” Merkel says.
The company’s DNA is built on understanding how to structure a good deal, what to look for and who to partner with, but Merkel and others at Rockbridge are determined to avoid complacency.
“As you grow and you go through different growth spurts, you experience different challenges. And our focus has always been to be forward thinking — to look forward and remain relevant to the market,” he says. “Change is constant, and so if you’re not changing as an organization, you’re getting left behind.”
Balancing an ability to look forward while keeping the skills sharp that allowed the firm to grow is central to Rockbridge’s success, as it acquires hotels, creates value by either repositioning them or fixing what’s broken, stabilizing the investments and then selling them.
This formula has created an excellent track record with investors.
Over the life of the firm, Rockbridge has invested $5.5 billion in hotel assets. Of the more than 260 investments, 95 percent have had a 10 percent return or better.
Currently, the company and its more than 70 employees have $1.6 billion in assets under management.
Here’s how Merkel and Rockbridge are continuing to evolve and innovate by looking at a lot and doing a little.
Training top talent
Companies are not just defined by what they do in a crisis, but also by what they did before the difficult period.
Merkel says there isn’t a real estate company in existence today that didn’t experience significant challenges during the recession, including in the hotel space.
“It’s almost surreal to look back to 2009, and think (back to) the thoughts that we had of whether our banking system was going to make it through, and whether our cash was safe in the banks,” he says.
Rockbridge scraped through the global financial crisis without losing a single asset and being cash flow positive throughout because of the foundation it had already built.
Merkel says it’s difficult to find people that you can just plug-and-play to manage Rockbridge’s niche investments.
So, early on, the company determined it was going to hire the very best people — “A” athletes who were successful in whatever they did — and then train them in the business, which he says proved to be a very good decision when the firm met some headwinds.
“It put us in a position where, when we went through the downturn, we had everybody on the same page,” Merkel says. “We had people that were rolling up their sleeves, doing whatever it would take.”
He believes when you hire, the most important things to focus on are character, work ethic and cultural fit.
In order to ensure that new employees are team oriented, work collaboratively and will fit in, a large number of the Rockbridge staff meets with job candidates.
“We spend a lot of time recruiting. We look at a lot of people. We have an internship program that we invest in. These things all support getting to the very best talent,” Merkel says.
Making the right moves
The company has a philosophy of looking at a lot, but doing a little to make sure what it does do always works.
By looking at a lot of people, Rockbridge can pick the very best. By looking at a lot of potential hospitality investments, it finds the very best.
Merkel says the firm only does roughly 2 percent of the deals it looks at.
“We have great reach across our industry and our network,” he says. “We look at a lot and we do a little — and that enables us to be very selective.”
With highly trained people, the firm’s employees understand what components are necessary to make a deal successful. They use that knowledge to look at potential deals quickly.
Once they are vested in a deal, which only happens about 8 percent of the time, the hit ratio is high — anywhere from 20 to 50 percent.
And it’s always important to keep the end user in mind — focusing on each deal, every time to make it work, Merkel says.
“We focus on each investment and how we’re going to create value,” he says. “Because at the end of the day, we have to continue to do that in order to continue to attract investors to our platform.
“Our investors are our lifeblood. It’s a pretty simple equation: If we continue to take care of our investors, they will continue to take care of us and support us.”
Investing in your assets
In order to create more value, Rockbridge focuses on where a hotel can go — its potential.
Merkel says they look at demand. Who will use the hotel? What do those customers want? And is what they want underserved in the market?
Then, once they get the product right, it often comes down to the people.
“The best people want to work at the best properties or for the best companies that are good owners — that take care of their properties and take care of their people,” he says. “And so what happens in the hotel business is people under invest in their assets.”
Over time, that makes a property less competitive. Good people leave because they are tired of dealing with customers who are unhappy.
It can be a cycle where the least competitive properties get hurt the most, so Rockbridge seeks to break that.
“Can we create a product that the customer wants?” he says. “And if we can do that — if we can put that equation together — then we’re going to be able to attract the best team members to execute on that strategy and realize the potential of the property.”
Pushing to be better
Today, in the post-recession era, Rockbridge still pushes itself by reinvesting in the organization and infrastructure in order to better serve its customers — their investors.
For example, after the global financial crisis, the leadership of institutions, which invest with Rockbridge, more closely scrutinized how investments were performing.
“As a private equity firm, you have to be capable of answering those questions in detail, and servicing those institutions effectively,” Merkel says.
As the firm got more and more engagement from investors, it invested in technology and improved business processes for better financial reporting and business intelligence. He says this allows them to give investors first class, transparent information, which in turn provides a competitive advantage.
The company also created an affiliated group, RB Hotel Development, which oversees new construction and significant renovations for turnaround projects.
“What we found through the downturn is that when (we) invest in these types of projects, we needed to have our internal team overseeing those renovations because we were the majority investor,” Merkel says. “We needed to make sure that the dollars got invested where we wanted them to get invested, and that it was done correctly.”
- Focus forward to always evolve and get better.
- Look at a lot; do a little.
- Don’t under invest in your assets.
The Merkel File:
Name: Jim Merkel
Title: President and CEO
Education: Bachelor’s degree in history from the University of Michigan.
Why did you get a history degree? I knew that I wanted to go into the investment field, and when I went to school, I met a CEO who had gotten his MBA. He gave me very good advice: Get a liberal arts education, and then when you’re ready to specialize get an advanced degree.
I was taking history classes and getting a lot out of it. It taught me reading comprehension; how to draw conclusions where there’s really no right answer but where you’re being persuasive about your interpretation of a set of events; and to study human behavior.
The history degree is incredibly valuable in what we do — in understanding human behavior and determining what outcomes are going to result from certain behaviors. The adage that ‘history repeats itself’ is very true because humans are the same, just interacting with different variables at different points in time of history.
How did you determine you wanted to get into investing? When I was 10, my father — his father was an investment manager who invested in companies — taught me how to look at and invest in companies. So, I made my first investment. I put $200 into a company, and it turned into $600 in two years. And I thought that was the greatest thing in the world.
By making that decision and being able to evaluate companies and the trajectory of a company and create value that way, it was very impactful to me.
So, your father was a big influence? Yes. My other influence is from my grandmother who was an immigrant, a female who ran a business and this incredibly strong and successful woman — a make-it-happen person. I just always believed anything was possible when you roll up your sleeves and you work hard.
She really set an amazing example for me because the challenges I face today pale in comparison to the challenges that she faced and the courage that she had. It keeps me grounded.
What’s your favorite hotel amenity? It’s really the common area — the lobby and food and beverage experience at a hotel.