At the height of Portugal’s financial crisis in 2013, private-equity firm ECS Capital took over the Herdade dos Salgados resort in Portugal’s southern Algarve region with its Miami-style palm-tree lined golf course surrounded by lakes along the Atlantic ocean.

The resort was among 10 hotels, three golf courses and other real estate assets the firm took over from investor Carlos Saraiva after he buckled under his debt load. The transfer was part of an attempt to cap banks’ bad loans and bolster debt recovery, and the hospitality industry expected Lisbon-based ECS to turn around and offload the assets to sector players.

Four years on, ECS is still managing most of these hotels. What’s more, rival hotels say the firm that got the assets on the cheap is hurting them by offering steep discounts for rooms. The Vintage Lisboa, a five-star hotel in Lisbon controlled by ECS for instance, charges 122 euros ($129) for a double room, with breakfast, the sixth-cheapest rate on a list of 20 such options available in the Portuguese capital on the website.

“These firms received the assets under favorable conditions and can now afford to offer lower room rates than most of their competitors,” said Raul Martins, head of Portugal’s Hotel Association, which represents about 600 hotel companies.

Bad Loans

When Portugal sought a bailout in 2011 and investors fled, the country’s lenders were left with large portfolios of non-performing loans from hotel groups that had relied heavily on the sale of real estate to repay their debts. To limit losses on the loans, some of these assets were transferred to funds managed by private equity firms, which invested money in the businesses to recover some of their value.

Two years after Portugal exited its international bailout program, banks are still trying to trim a high burden of bad loans. Credit at risk as a percentage of total loans has been around 12 percent for the last two years, according to the Bank of Portugal.

For Banco Comercial Portugues SA, the restructuring funds created by the private-equity firms enabled some highly indebted hotel projects to be completed and allowed units that had shut down to reopen for business.

“Many of these today can already take advantage of the good moment that tourism in Portugal is going through, benefiting their clients, employees and, naturally, also their creditors,” said Miguel Maya, a Banco Comercial board member. “The goal is obviously not to keep these hotels for 20 years. The fund managers know this and have the right incentives to sell.”

Managing Hotels

The firms show little sign of doing that. Many have set up companies to manage the hotels, rarely transferring management or hiring hotel groups.

ECS, Portugal’s biggest private-equity hotel owner, manages them in its Recuperacao Turismo Fund through a company it helped create. Explorer Investments SCR SA, another private equity firm, has at least four hotels in its Discovery Fund managed by DHM, its hotel company. Oxy Capital controls several hotels, including two five-star hotels in the Algarve and one in Troia, a finger-shaped peninsula south of Lisbon. The firms didn’t respond to calls and emails seeking comment.

The problem for hotel association president Martins is that most of these private equity firms acquired the assets at below market prices and are even paid a fee for managing these units.

“That’s why they can afford to compete aggressively for clients in the market,” said Martins, who is also the chairman of the Altis hotel chain. “Our desire is that they set prices according to the market.”

ECS, co-founded by Antonio de Sousa, a former chairman of state-owned bank Caixa Geral de Depositos SA and a former central bank governor, has in less than five years become the 10th-biggest hotel group in Portugal, with 3,699 beds, according to Deloitte’s Portuguese Hospitality Atlas of 2016. ECS took over Saraiva’s hotels, some of which had completely shut down, and currently manages them under the NAU Hotels & Resorts brand. The company’s website is offering 20 percent discounts for stays until April 10 at its Salgados Dunas Suites hotel in the Algarve.

‘Lost Opportunity’

And while some private equity firms have sold or transferred over management of some of these hotels to other hotel groups in Portugal, their “preferred option” has been to manage these units, said Jose Theotonio, chief executive officer of the Pestana Group, Portugal’s biggest hotel operator. Pestana currently manages a hotel that belongs to ECS and two units that belong to banks.

“That option, in my opinion, was a lost opportunity,” Theotonio said in an e-mailed response to questions. “The profitability obtained by hotel units that are parked in restructuring funds would be much higher if these units were managed by players with a track record that could take advantage of economies of scale.”

Vila Gale SA, Portugal’s second-biggest hotel group with about 20 hotels in the country, is also among those complaining that private-equity firms turned hotel owners have a privileged position in the market.

“It would be one thing if these funds had to invest money to buy these hotels like a normal investor,” said Jorge Rebelo de Almeida, owner of the Vila Gale hotels. “The hotels that I own weren’t given to me. It wasn’t my aunt who gave me these hotels.”

–With assistance from Luca Casiraghi and Anabela Reis

©2017 Bloomberg L.P.

This article was written by Henrique Almeida from Bloomberg and was legally licensed through the NewsCred publisher network.

Photo Credit: A private equity firm acquired The Vintage Lisboa hotel in Lisboa, Portugal when it had a crushing debt load. Now the firm can offer rates well below market prices. NAU Hotels & Resorts