Private Equity and the Pandemic: Brace for Impact…Investing

Yves here. This short series shows why private equity’s efforts to jump on yet another investment fad bandwagon, that of “environmental, social, and governance” driven investing, is all optics, no substance. Sebastien Canderle starts by documenting at length how private equity has done great harm though its rent-extraction practices in the health care industry.

By Sebastien Canderle, a private equity consultant, a lecturer at Imperial College London, and the author of The Good, the Bad and the Ugly of Private Equity


Increasingly, governmental investors exercise significant pressure on all of us to act more responsibly. Canada’s initiatives towards sustainable finance aim to couple healthy economic growth with long-term environmental (i.e., climate-neutral) objectives. Norway’s sovereign wealth fund has also divested parts of its fossil fuels holdings.

“Impact investing” is one of the fastest growing segments in asset management and a fantastic public relations tool for private equity to polish up its tarnished brand.

However, in March 2019, Bill McGlashan, head of TPG’s impact Rise Fund and one of private equity’s most prominent environmental, social and governance (ESG) managers, was charged in connection with a US college fraud scheme. To put it politely, the headlines were at odds with industry’s efforts to build up its do gooder bona fides.

Thankfully, the Covid-19 crisis has given dealmakers another chance to remodel their image as social citizens and actively pursue this market-wide value-signaling trend.

KKR boasts on its website that its Global Impact unit “builds on our track record of investing in solutions and our history of thoughtful management of ESG issues.” It mentions past deals in food safety, waste management, water treatment and renewables. As mainstream PE firms make the most of socially-responsible initiatives, it is worth reviewing their credentials.

Barbarians Refashioned As Samaritans

Well before the term ‘impact’ became the buzzword of any self-serving PR campaign, several politically-charged sectors received significant interest from alternative investors. As this two-part series demonstrates, examples of leveraged buyouts (LBOs) in health care, incarceration and education offer dire warnings.

Hospitals, prisons, schools and universities represent fantastic investment targets due to long-term positive trends, such as an ageing population, lengthening life expectancy, the rising prevalence of chronic diseases, persistent social and economic inequality, and the need for extensive skills as a differentiating factor in a fiercely competitive job market.

These sectors offer predictability; they are seen as recession-proof. Because they serve local needs, they have traditionally been extremely fragmented, offering an opportunity for deal-doers to act as consolidators, creating platforms across verticals but also across geographies.

In 2019, the value of private equity deals in the health-care sector reached an all-time high of almost $80 billion globally, topping the previous record of 2006 and up 10 times on 2009 levels, according to Bain & Co.[1]In the US, PitchBook reported that PE investments in hospitals and care centers have trebled between 2012 and early 2019.[2]

Because a large number of private equity fund managers remain generalists and invest across industries, they do not always have a well-grounded understanding of sector-specific fundamentals. While health care can indeed prove sustainable due to its important role in modern welfare states, it is frequently exposed to regulatory changes, as many PE firms have found out the hard way.

In 2014, Dutch childcare Estro (previously called Catalpa) went bankrupt after going through four successive LBOs. Waterland had successfully sold the business to Bencis in 2006 on the back of market deregulation with the 2005 Childcare Act. Bencis sold out to Providence Equity in 2010 as the economy was reeling in the wake of the financial crisis. Within two years, Providence was forced to write off its $400 million investment and relinquish control to KKR and Bayside who rescued the business with further financing.[3]But that proved insufficient to avoid bankruptcy.

The party that acquired Estro out of administration in August 2014 was a buyout firm that, we will see in Part II, has a debatable track record in health care: H.I.G. Capital.

The private equity groups involved in this fiasco blamed the economic crisis – so much for “recession-proof “- and government cuts, even though market downturns and budget constraints were evident at the time of the purchase by Providence.[4]

After sacking 1,000 employees, the business finally reached positive cash flow, and sold to yet another private equity firm – Canada’s Onex – in July 2018.[5]Beyond the threat to jobs for medical staff, the risk of chronic underinvestment – and the effect this could have on patient health and safety – is real.

Health Warning

The reason why private equity is such a popular trade is because of the very generous fees fund managers can earn irrespective of performance. And practitioners apply the same exploitative business model at the portfolio company level.

Patients, physicians, and policy makers are the victims of a trend that takes a leaf out of the PE playbook. Across the US, a worrying number of patients attend appointments at their local hospitals but receive treatments from out-of-network physicians, subsequently receiving “surprise medical bills” adding up to thousands of dollars. Such bills are charged whenever a patient is treated by external contractors, generally without the patient’s knowledge, or whenever urgent treatment is required. In other words, bill increases take place due to the hospitals’ cost-cutting strategies (outsourcing) and in situations when patients are most in need (emergencies).[6]

Last year, the US Congress investigated dodgy practices related to surprise bills. Two physician service providers singled out by the investigation were KKR-owned Envision and Blackstone’s TeamHealth, acquired in June 2018 and February 2017 respectively.[7]

Many patients are among the poorest, and therefore uninsured. They often get sued when they cannot afford the unexpected bills. One of the most rapacious companies, charging surprise bills and filing thousands of lawsuits, is private equity-backed – Southeastern Emergency Physicians is the staffing division of TeamHealth. The group seems to have ended these lawsuits following pressure from investigators at ProPublica and advocate group MLK50.[8]

But the fact that no legislation has yet been passed to end the practice is not because, on balance, all parties agree that surprise billing is a small matter. It is due to a more nefarious aspect of private equity’s growing influence: political lobbying. For now, private equity firms can continue to introduce innovative ways to swindle the vulnerable. But as representatives of the foundation Commonwealth Fund pointed out in a recent Harvard Business Reviewarticle, “lawmakers and regulators won’t let them get away with such practices for long.”[9]

Not What The Doctor Ordered

To complete this tale of woe, a recent report published by Eileen Appelbaum and Rosemary Batt, respectively of the Center for Economic and Policy Research and Cornell University, highlights the impact that the industry’s profit-maximization tendencies can have on operational decisions. Urgent care is a segment where private equity owners “focused on building out urgent care centers in the wealthier suburbs…to serve [higher-margin] patients with private insurance.” The authors explain that growth in healthcare spend by Americans is “due to higher prices, not more visits to doctors or hospitals.”[10]

They also provide an overview of several failed buyouts of US hospital chains in the last two decades. Cerberus’s investee Stewart Health Care System has been struggling due to a heavy debt burden and poor operating performance following several sale-leaseback transactions and dividend recapitalizations.

Failure to deliver adequate returns under LBO can ultimately lead to operational disaster, such as the May 2019 bankruptcy of BlueMountain-backed New LifeCare Hospitals, which operated 17 facilities in nine states.

Another example is the recent demise of the 171-year-old Hahnemann University Hospital in Philadelphia, sponsored by PE firm Paladin Healthcare. The owner was not able to make money off the hospital facilities so it shuttered the operation, laid off 2,500 staff and sold the real estate to investors, converting the site to build condos and hotels. Former presidential candidate Bernie Sanders used this example to prove that PE fund managers simply fulfilling their fiduciary duties could lead to morally questionable decisions.

Nursing Losses

PE-backed nursing homes have not fared much better, either in America or in Europe. In the US, ManorCare went belly up with $7 billion in debt in March 2018, a decade after its buyout by Carlyle. The company partly blamed government for its predicament, with reduced reimbursement rates and a shift toward Medicare plans supposedly at fault.[11]The fact that few other nursing homes filed for bankruptcy during the same period shows that this explanation does not hold water.

A Washington Postinvestigation described how ManorCare’s 25,000 patients suffered due to a rise in health-code violations while the nursing home chain was under Carlyle ownership. Crucially, thanks to a multibillion-dollar sale-leaseback deal agreed in 2011, the PE owner had fully recouped its initial $1.3 billion equity outlay. But the move made the company’s leverage unsustainable.[12]

Some nursing homes in the UK have gone through a similar ordeal. There, Blackstone’s unfortunate adventure into health care does not bring up the name TeamHealth. Instead, the Brits remember the downfall of Southern Cross in 2011. While local authorities were tasked with bailing out this group of 750 care homes, Blackstone reportedly walked away with a £500 million gain.[13]

The financial troubles of care homes have a political dimension because almost half of Britain’s 410,000 residents receive some level of local council support.[14]Unfortunately for private equity owners (and for patients), these subsidies dwindled during the Great Recession as the Conservative government of David Cameron launched a fierce austerity program.

Although financial sponsors have shown a real hunger for a sector where demand is inelastic and the demographic trends are too good to resist, in truth most health-care service providers are low-margin businesses that do not fare well under financial stress.

Staff cuts are the prime objective for LBOs’ legendary focus on margins: in the UK’s care home sector, labour accounts for 70% of costs.[15]Not surprisingly, that makes the sector’s profitability highly dependent on legislation. The rise in the minimum wage in recent years put significant pressure on the industry.

Sector consolidation by LBO firms led to price increases for patients despite the fact that consolidation should have led to efficiency and, thereby, to lower costs. If indeed private equity owners managed to reduce overheads, they did not pass on the benefits to the patients.

PE-backed groups are among the worst-ranked providers of care homes in Britain. In 2018, nearly 45% of 44 sites of Orchard Healthcare, owned by Alchemy Partners, were deemed unsatisfactory. At Terra Firma’s Four Seasons Health Care, the proportion was 35% one year before the company went under, while at HC-One – the post-bankruptcy reincarnation of Southern Cross – it was 29%.[16]

Losing Patients

A 2011 report by the US Government Accountability Office underlined that strategic decisions taken by PE-backed nursing homes “were consistent with attempts to increase their homes’ attractiveness to higher paying residents.” We saw earlier that private equity owners embraced the same up-market strategy to urgent care centers in America. Thus, in their ‘impact investing’ efforts, private equity practitioners adopt practices applied to other sectors of the economy: they raise prices and focus on premium customers.

Disconcertingly, these moves occur to the detriment of cost-conscious, therefore lower-margin, patients. Researchers at New York University, the University of Chicago and the University of Pennsylvania reviewed the effect of staff cuts at private equity-owned nursing homes across America. Their study revealed that these facilities were able to fill more beds than their peers, with patient volume increasing by 8%. But at the same time, nursing staff declined. Lower costs and higher volume (and revenue) from patients led to higher profits.

As already pointed out earlier in relation to care homes in Britain, the decline in the number of staff per patient was responsible for a deterioration in service standards, measured in terms of non-compliance with federal guidelines on quality of care, facility infrastructure, managerial quality, and patient rights. As the report concluded: “the particular incentives of private equity managers appear responsible, as quality does not decline after acquisitions by non-PE corporates and chains.”[17]

For fund managers primarily habituated to deal with spreadsheets and board meetings, it can be difficult to picture how aggressive financial techniques translate on the ground:

– in Britain, before it filed for bankruptcy, Four Seasons Health Care’s Millbrow Care Home was singled out by inspectors for its ‘unpleasant smells of urine‘ and ‘17-hour gaps’ between dinner and breakfast[18]

– at another Four Seasons property, Whitchurch Care Home, many of its elderly residents were not washed or bathed for a month.[19]

Under LBO, many health-care providers seem to lose sight of their social mission.

Health Hazard

What drives so much interest in health care is market fragmentation. The sector lends itself well to one of private equity’s favourite value-creation techniques: roll-ups. Consolidating a large number of small operations into a larger platform gives the amalgamated entity more market power, making it easier to negotiate with suppliers, insurers, local authorities, staff and patients.

Having witnessed the consolidation pioneered by their peers in general practices and specialized care like surgery, many fund managers have since entered other medical areas like dermatology, physical therapy, gynecology, allergy medicine and, worryingly, mental health. A recent estimate sets dermatologists, who make up just 1% of US doctors, as the target of 15% of all recent PE-sponsored medical-practice buyouts.[20]

Given that the typical EBITDA multiple paid for medical practices sits in the mid-range double-digits, LBOs are under extreme pressure to lower the entry multiple, completing bolt-ons to build market power. The consolidation trend has been felt across all segments of the medical trade. The share of US doctors in independent practice, for instance, has plummeted from 57% in 2000 to one-third in 2016. The consequences have almost been universally similar in terms of value for money.[21]

But in some segments, consolidation is not necessary – operators already hold a monopoly. A June 2016 investigative piece from theNew York Times, titled When you dial 911 and Wall Street answers, showed the effects of outsourcing emergency services, from ambulances to firefighting, to financial sponsors with an eye more on cost-minimization and price hikes than citizens’ health and safety.

Several entertaining, if dispiriting, anecdotes related in the article concern predatory billing – such as sending a $761 collection notice to an infant born in an ambulance of Rural/Metro, at the time owned by Warburg Pincus, or the unnecessary transportation of patients to generate revenues, a practice adopted by Patriarch Partners-backed TransCare.[22]

Rural/Metro eventually went bust, but it was purchased out of bankruptcy by Envision, a company since bought by KKR. As for TransCare, it hit the wall in February 2016, 13 years after Patriarch had rescued it from bankruptcy following an ill-fated period under the stewardship of other LBO firms. In private equity, history does seem to repeat itself.

After years of under-investment by private equity owners, the medical sector is witnessing an alarming penchant for short cuts, from doctors reporting pressure to upcharge when billing health insurers or to sell products and procedures, to facilities suffering from understaffing, to malpractice due to underqualified practitioners misdiagnosing patients’ conditions, and hospitals skimping on medical supplies. In the last few months of operations at TransCare, staff was encouraged to steal supplies from local hospitals’ emergency rooms to replenish stock in their ambulances. Under Warburg’s ownership, Rural/Metro’s fire fighting unit made it a habit of suing victims, who often had lost their homes in a fire, for unpaid bills.

In the midst of a pandemic, the situation raises uneasy questions: can the private equity model – relying on operating efficiency and supplementary revenue streams – lead to systemic risk? About a quarter of ambulance companies and 4% of fire departments in America are privately owned.[23]Does society face a moral hazard as more service providers with a social mission – traditionally not-for-profit – become private equity-owned?

Part II will show that health care is not the only public service to have come under the yoke of private equity

[1]Bain & Company Global Healthcare Private Equity Report 2019





[6]Financial Times, 14 October 2019




[10]Private Equity Buyouts in Healthcare: Who Wins, Who Loses? – Working Paper No. 118 – March 15, 2020 – Eileen Appelbaum, Rosemary Batt




[14], Care home crisis deepens under PE owners, Financial Times, 16 December 2017

[15], Care home crisis deepens under PE owners, Financial Times, 16 December 2017



[18], Care home crisis deepens under PE owners, Financial Times, 16 December 2017

[19], Financial Times, 9 February 2020





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