Nov. 15, 2006 -- A $15.5 billion buyout offer that would take Harrah's Entertainment private may be the biggest private-equity deal the gaming industry has seen, but it probably won't be the last.

And industry experts say gaming regulators must adjust their licensing practices to accommodate the private-equity trend if casino operators are to maximize their properties' potential to both serve consumers and grow in value.

A panel of gaming analysts, lawyers and regulators at the Global Gaming Expo in Las Vegas said Tuesday that the sheer size of new casino developments has transformed the nature of hotel-casino financing.

Lynne Levin-Kaufman, a gaming attorney with the law firm of Cooper Levenson, said casino owners 20 years ago pursued development money via two avenues: high-yield bonds or small credit facilities of around $100 million offered through banks.

Today, large credit facilities of around $1 billion have replaced bonds, and private equity has emerged as an important financing structure in deals, including Colony Capital's $280 million purchase of the Las Vegas Hilton in 2004, Columbia Sussex Corp.'s $2.75 billion agreement to buy publicly traded Tropicana owner Aztar Corp. by year's end and a partnership between Apollo Management and Texas Pacific Group to buy out Harrah's. Private-equity firms also hold local interests in Cannery Casino Resorts and the Aladdin.

Marc Falcone, a senior analyst with Magnetar Capital, said financial barriers to entry into the gaming sector have sent casino developers on a hunt for fresh sources of capital.

Circus Circus built the Excalibur in 1990 for $325 million, Falcone said. By comparison, the first phase of Wynn Las Vegas opened in 2005 at a cost of $2.2 billion, excluding the price for its predecessor, the Desert Inn. The substantial run-up in development expenses is due partly to property costs: The Columbia Sussex deal works out to between $25 million and $30 million an acre for the 34-acre Tropicana site, Falcone said.

"Land acquisition has made the cost of entry prohibitive for a lot of players," Falcone said. "There's a need for a strong capital base to push this industry to another level."

Enter private-equity firms, largely made up of pension and 401(k) funds, institutional investors and high-net-worth individuals who accept higher risks. Experts say private-equity funds are drawn to the casino sector for its high cash flow.

But private investors are challenging regulatory setups in gaming jurisdictions worldwide, many of which forged their licensing procedures in the last 20 years to 40 years as public companies came to dominate the casino sector.

The industry now must balance the need for private financing with preserving the integrity and stability of gaming, Levin-Kaufman said.

Mark Clayton, a member of the Nevada Gaming Control Board, said Nevada's regulations are evolving to serve private equity, just as they progressed in the 1960s to open casino ownership to public financiers and in the 1990s to waive mandatory licensing for institutional investors who wouldn't exercise control over a casino's operations.

When the Gaming Control Board approved financing of the Colony Capital-Las Vegas Hilton deal in June, it eased up on requirements that anyone with an economic interest in a gaming entity be licensed to have that ownership share.

Clayton said private-equity firms split control between voting shareholders who dictate investments and shareholders who merely hold a stake in investments, with no say over how and where assets are spent. Only controlling shareholders will automatically face state regulators' months-long background scrutiny, which would include an assessment of the "independence and sophistication of the decision-makers of a fund," Clayton said.

The Gaming Control Board is also monitoring who makes day-to-day operational judgments concerning newly private properties.

Clayton said the trend among private-equity firms is to leave existing casino managers in place, which gives the control board confidence that seasoned executives are still calling the shots. He said strategic corporate decisions -- whether to develop new projects, seek new investments or even file for bankruptcy -- should remain the purview of controlling shareholders, but the control board would like to see local executives maintain authority over operational issues, such as floor-plan changes or the addition of nightclubs.

The control board is also implementing safeguards that include limiting speedy transfers of gaming assets from private-equity buyers to unknown, unlicensed entities and monitoring investment companies to ensure they depict a complete, honest picture of all decision-making parties.

"We're looking for full transparency as to investors in a fund," Clayton said. "We don't want silent partners."

Michael Garrity, director of Morgan Stanley's gaming subsidiary, said adapting to the regulatory demands of private capital would help casinos expand their customer bases.

"The gaming industry is evolving. It's about providing an experience and captivating consumers," Garrity said. "Doing that takes a different magnitude of capital. The capital dictates the product, and the product dictates the experience. The question is how we solve that equation and deliver to various jurisdictions the products and experience to take the industry to the next level."

Garrity said keeping the "ethically challenged" out of gaming should remain at the forefront of control boards' efforts, but rules crafted over the last few decades "were not meant to prevent the Goldmans and Deutsche Banks from investing in (gaming)."

Falcone added that a lack of sufficient capital has constrained gaming companies' worth. Encouraging more "first-class" investors into the industry will boost casino valuations, he said.

He said he expects to see even publicly traded gaming operators dip into the private-equity well, as their development costs reach into the billions per project. MGM Mirage is spending $7 billion on its Project CityCenter, for example, while Boyd Gaming Corp. will invest $4 billion in building Echelon Place, both on the Strip.

Panelists noted other jurisdictions, including New Jersey, Mississippi and Louisiana, are aggressively adjusting their licensing requirements to account for private-equity investments, which means Nevada's casino operators will soon face stiffer competition for such financing.

"We're in the infancy stages of how private equity and institutional investors are looking at (gaming)," Garrity said. "The jurisdictions that are more progressive with private equity (regulation) will be rewarded with capital."

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