The Las Vegas Strip has always been about big bets and the people who make them. In recent years, the stakes have only gotten higher and the people wagering on Las Vegas aren't the insiders who built the Las Vegas Strip, they're some of the biggest players in finance.
Not only do private equity firms TPG Capital LP and Apollo Global Management LLC own and control Caesars Entertainment (NASDAQ:CZR), Blackstone was just approved by the Nevada Gaming Commission to buy the Cosmopolitan, and even MGM Resorts (NYSE:MGM) is a major holding of hedge fund giant John Paulson (4.6% stake) and mutual fund giant T. Rowe Price (9.9% stake). The face of Las Vegas has changed.
Las Vegas, debt, and the private equity boom
In many ways, Wall Street and Las Vegas go hand in hand. It could be argued that buying and selling stocks and bonds is the biggest legal gambling forum in the world, especially the way many short-term traders do it, and gambling is what Las Vegas does best. But you may not know that Wall Street has played a major role in building the Las Vegas Strip we know today.
It was Wall Street that drove the building boom of the late 1980s and 1990s, offering junk bonds to Steve Wynn to construct The Mirage, eventually funding debt for resorts like Bellagio, Mandalay Bay, Luxor, and most of the modern Strip we know today. A love affair between Wall Street and Las Vegas was born.
In the 2000s it was Wall Street's investment banks who had their eye on Las Vegas, dealing in the mergers of MGM and Mirage as well as Harrah's and Caesars Entertainment. But it wasn't until TPG and Apollo's $25.9 billion buyout of Harrah's Entertainment that Wall Street and Las Vegas took their relationship to another level.
When the two private equity firms took Harrah's private, they took most of the heart of the Las Vegas Strip with them. Combine that with Blackstone's buyout of Cosmopolitan Las Vegas and institutional shareholders who are buying more and more of MGM Resorts and you have a paradigm shift in Las Vegas.
Slowly, control has been transferred from icons who created The Strip, like Steve Wynn, Kirk Kerkorian, and Sheldon Adelson, to private equity board rooms who are investing other people's money. It changed Las Vegas and it may not be for the better.
How private equity has changed Las Vegas
The first thing people should know about private equity's move into Las Vegas is that they don't necessarily have The Strip's long-term success in mind the way someone like Steve Wynn or Sheldon Adelson do. Private equity firms buy companies, fix them up, and then sell them within a few years, hoping to make a tidy profit in the process.
They also generally use a lot of debt to buyout companies. It's $23 billion in debt that is strangling Caesars Entertainment today, likely leading to bankruptcy early in 2015. Debt is great if your business is growing, but Caesars was bought out just before the financial crisis and it's paying the price now.
Most noticibly, may be the difference in a Las Vegas icon building a megaresort and a private equity or public company developing a property. Look no further than the mishmash that is CityCenter and Caesars' newest addition the High Roller, a ferris wheel that already looks to be a financial disaster. These projects are not only less profitable than buildings like Wynn Las Vegas, The Venetian, and Bellagio, but also they're not the glowing icons Las Vegas moguls built in the past. We may be in for a less inspiring future as Wall Street takes more control of The Strip.
More of Wall Street's presence in Las Vegas
Las Vegas resorts have gotten so large and expensive that you have to have big money to own anything on The Strip. That's why most of the major properties in Las Vegas are either owned by public companies or private equity firms -- they're the only ways to finance buyouts in Las Vegas.
Private equity, hedge funds, and even mutual funds will continue to have their fingerprints on Las Vegas and before long the old guard will have an even smaller stake on The Strip. The days of colorful characters owning the Las Vegas Strip are probably over and the future will be filled with more wheeling and dealing for Wall Street's elite.
It's the kind of gamble Wall Street loves to make and the money has gotten so big that they may be the only game in town.