Josh Wyatt, director of hospitality and leisure at Patron Capital, explains why the firm has invested €100 million (£87 million) in the Generator Hostels chain.

Private equity firm Patron Capital has invested €100 million (£87 million) in transforming a small family-owned hostel business into a pan-European operation – and there is more to come.

Generator Hostels, which has just opened a new hostel in Dublin, now has four branches across Europe. Four years ago, it was a family-owned operation consisting of just two hostels – one in London and one in Berlin.

Josh Wyatt, director of hospitality and leisure at Patron Capital, says hostel accommodation is a fast-growing market, much as boutique hotels were in the 1980s. One factor behind the trend is a tightening of holiday budgets, leading those who would not have stayed in hostels ten years ago to hunt for better value.

Wyatt adds, ‘Patron has invested €100 million to date and there is a significant amount to come – by 2013 we want to see a dozen hostels across Europe.’ Sites are currently being sought in Italy, Spain and other German cities.

Though beds are available for as little as £13, Wyatt says hostels offer a higher margin than any of the other hospitality businesses Patron invests in. He attributes this to a ‘highly efficient and profitable business model that sees them running at high capacity, with an appropriate labour and cost structure’. Net profit margins stand at roughly 45 per cent.

Generator Hostels has over 3,500 beds across Europe and its estimated revenue for 2011 is €16.8 million. Next year this is expected to double due to new properties opening as well as other ones maturing.

Generator has been involved in budget accommodation since it opened its first hostel in London city centre in 1995 and markets itself by claiming to be different to the conventional ‘backpacker’ hostel.

Take the Dublin hostel for example; it boasts a large bar with a chandelier made out of Jameson bottles and a 40-foot mural, an American-style café and a public space with televisions and game consoles. Wyatt says the money Patron has put into the business has made it possible to invest in what he calls ‘cutting-edge design’. The hostels also provide a range of services under one roof including bars, cafes, lively public spaces and in-house entertainment. Such differences from standard hostels make Wyatt believe that ‘Generator has the capacity to grow to a size similar to a hotel business’.

Patron, which invests in property assets, property companies and financial institutions, represent approximately €1.7 billion of capital across several funds.

Along with Generator Hostels, other investments include the Manchester Arena Complex, two hotels in Stratford opening prior to the Olympics and just recently Patron acquired the Jarvis hotel group, which consists of 24 hotels.

The Generator brand though remains a top priority for Patron with Wyatt and his team aiming to spread the Generator name across the continent by 2013.

Wyatt believes that Generator could become the major player in its sector, remarking, ‘A fundamental opportunity has presented itself in the market to grow this business model.’