Private equity healthcare investment strategies are facing enormous regulatory, financial and headline risks.
Two such private equity investors in healthcare, Apollo Global Management and Leonard Green and Partners, were on the hot seat earlier this month after a bipartisan investigation by the US Senate Budget Committee concluded that they prioritized “profits over patients” in two hospital chains in their portfolios of healthcare companies.
The 162-page report concluded that private equity’s financial model poses “a threat to the nation’s health care infrastructure” by prioritizing short-term profits over patient care and long-term stability.
Another set of healthcare investors is raising and deploying capital on a different model of value-creation. They argue that putting a priority on patient outcomes and so-called “value-based care” can mitigate such headline risks and position the investors and portfolios for a regulatory push around such an outcomes-based approach. Earlier this month, Massachusetts last week became the latest state to enact a law aimed at preventing the kinds of PE-fueled acquisitions that have led to hospital bankruptcies. An analysis by OliverWyman said values-based care is “here to stay,” no matter who is in the White House.
Vistria Group this month closed its fifth fund at $3 billion, its largest ever, with a mid-market buyout strategy focused on US healthcare, fintech and education companies. Vistria drew commitments from US public pension funds including New York State Common Retirement Fund and the California State Teachers Retirement System, or CalSTRS.
Vistria’s investment strategy “ensures we are zeroing in on the biggest drivers of quality, outcomes, and access on every deal we do,” Vistria’s Elizabeth Jurinka, who heads the firm’s healthcare policy work, tells ImpactAlpha.
Townhall Ventures, led by Andy Slavitt, President Obama’s head of the Centers for Medicare and Medicaid Services, has raised $183 million toward a $400 million target, according to an SEC filing. Town Hall invests in companies working to improve “the social determinants of health,” along with healthcare services and access for underserved Americans.
Town Hall “has demonstrated that if you build great, meaningful businesses that change people’s lives you can create significant venture capital returns,” venture capitalist John Doerr, an investor in the firm’s $350 million third fund, said in 2022.
Bipartisan scrutiny
The report released by the Senate Budget Committee, led by Democratic Sen. Sheldon Whitehouse and Republication Sen. Charles Grassley, disclosed the results of a year-long investigation of acquisitions by Apollo Global Management, with $733 billion in assets under management, and Leonard Green & Partners, with $75 billion in assets.
At Apollo-owned Lifepoint Health’s Ottumwa Regional Health Center, a hospital in Iowa, the report concluded that staffing levels at ORHC were found to be inadequate, contributing to a deterioration in the quality of patient care and a decrease in patient volumes. In particular, investigators reported extended emergency room wait times, an increase in patient transfers to other facilities and a lack of specialist physicians.
Los Angeles-based Leonard Green is the former owner of Prospect Medical Holdings, which operates 16 hospitals in four states and dozens of outpatient clinics and this month filed for bankruptcy. According to the Senate Budget Committee investigation, Leonard Green loaded Prospect up with debt, extracted fees and sold off most of its real estate in lease-back deals.
More broadly, the report found that one-fifth of all healthcare bankruptcies in 2023 were by PE-owned companies. It also found higher rates of hospital-acquired complications, increased infections, and higher fall rates in private equity-owned hospitals.
The extractive model in many private equity strategies of investing in healthcare assets is a game of hot potato, with high leverage multiples, increasing profit margins and quick exits.
The Senate Budget Committee’s report shined the spotlight on the extractive practices of many private equity investments in healthcare and “uncovered troubling patterns of prioritizing profits over patients and of unfulfilled promises.”
The hallmarks of these extractive investment practices include using high factors of leverage, which loads up a hospital or healthcare company with debt; reducing costs by cutting back budgets, staff and services; and short holding periods, which allow a private equity buyer to push the company to sharp, immediate profits rather than long term financial or social sustainability.
In the case of Prospect Medical, the investigation found Leonard Green extracted significant dividends from Prospect Medical during its ownership period. The report states that Leonard Green received $424 million of the $645 million Prospect Medical paid out in dividends and preferred stock redemption. Additionally, the firm collected over $13 million in fees.
The Senate committee found that Prospect Medical issued a $457 million dividend payout in 2018, with CEO Sam Lee receiving approximately $90 million and Leonard Green shareholders receiving about $275 million. By 2019, Prospect Medical faced $2.8 billion in liabilities.
Eight of Prospect’s hospitals closed during or after Leonard Green’s ownership, the investigation noted. This includes Delaware County Memorial Hospital in suburban Philadelphia, which shut down in 2022, a year after Leonard Green divested its stake in Prospect Medical.
The report also highlighted that Leonard Green held a majority of seats on Prospect Medical’s board and granted stock options to Prospect Medical officials for reaching financial goals. No such incentives were provided for improvements to patient quality and safety.
Leonard Green has disputed the findings, stating that Prospect Medical was “in strong financial condition with access to over $500 million to support its operations” when it exited its position. The firm also asserts that it enabled Prospect Medical to invest in previously closed or failing hospitals.
Prospect Medical has challenged the report’s conclusions, stating that it has invested more than $750 million in its hospitals and provided over $900 million in charity and uncompensated care to patients.
Patient outcomes
Institutional investors have billions in capital for impact healthcare and responsible healthcare, and they are showing growing demand for it.
A 2023 survey by AlphaReal found that 94% of investment professionals at UK Local Government Pension Schemes, or LGPS, which has assets worth £391.5 billion ($487.7 billion), expressed interest in increasing their investments in the healthcare sector, making it the most popular choice for social infrastructure allocation. Two-thirds of these investors expressed an interest in increasing investments in primary care facilities.
“Investing in the health sector offers LGPS funds the opportunity to achieve stable long-term returns while also supporting the essential health-related services on which their members and wider communities rely,” Ed Palmer of AlphaReal, a UK specialist real assets investment manager, said in a report accompanying the survey.
In the two years since the report was published, market conditions have made social infrastructure investments even more appealing for institutional investors. Sticky inflation and uncertain markets are pushing investors towards inflation-resilient and inflation-based strategies and essential sectors.
Moreover, impact-oriented healthcare investors might argue that such a commitment to patient outcomes and long-term value-creation is a way to mitigate the increasing, and bipartisan, scrutiny and attendant headline risk – and create value. Their argument: Such strategies can attract pension funds and other institutional investors targeting commercial returns in part because they don’t undermine the well-being of, say, pension beneficiaries.
Vistria’s Fund V closed below its fundraising target. But at $3 billion, its large size underscores the sheer volume of impact capital seeking healthcare deals.
Many generalist private equity impact funds invest in healthcare as one of several sectors. With the bigger impact private equity funds, come bigger check sizes as well. TPG’s Rise Fund co-invested alongside Vistria’s Asia Capital fund in Asian hospital group Columbia Asia.
Goldman Sachs Asset Management is currently marketing the Horizon Inclusive Growth Fund, a social impact fund with a $1 billion target; it made its first healthcare investment last year. Bain Capital Double Impact Fund 3 is also in the market with a $1 billion impact fund, which includes healthcare. AXA Investment Management has a Global Health Fund under Article 9 under the EU’s Sustainable Finance Disclosure Regulation, a classification for funds with “sustainable objectives.” Stockholm-based EQT closed the Future Fund at €3 billion last spring with institutional support, including from two New York City pension funds. Apax closed an impact fund at $900 million in 2023; healthcare is one of four impact themes it is investing in.
These funds target a ‘double bottom line’ – positive social impacts and commercial-rate returns. As a data point about the commercial viability of such strategies, these impact funds are in many cases buying from, co-investing alongside, and competing for the same investment opportunities as impact-agnostic investors. Increasing access by opening new care centers, which also creates additional revenue streams, is another common business plan among private equity impact funds.
The first investment by Goldman Sachs Asset Management’s Inclusive Growth Fund was Xpress Wellness, a company providing urgent care services. Goldman Sachs’ Greg Shell, who heads the fund, emphasized Xpress’s business plan to “bring high-quality urgent care and select specialty services to underserved communities.”
Converging PE strategies
Private equity health care strategies that haven’t set specific impact-oriented goals now face new and ever-stronger competition for deals from healthcare impact strategies that do prioritize patient outcomes and community benefits.
Vistria, for example, co-invested in Sevita, a healthcare and social care provider, alongside impact-agnostic Centerbridge Partners. And it co-invested in pharmaceutical manufacturer Alcami alongside GHO Capital (also impact-agnostic), acquiring it from Madison Dearborn Partners (also impact-agnostic) and Ampersand Capital Partners (also impact-agnostic).
The firm’s mission to drive outsized returns while also driving meaningful societal impact, “has set us apart,” Vistria’s Marty Nesbitt, the treasurer for President Obama’s 2008 and 2012 presidential campaigns, said last week.
Many of Vistria’s investments have longer holding periods than private equity’s typical three-year holding period for healthcare investments. For example, it acquired the Supplemental Health Group in 2015 via Fund I and transferred the investment to Fund IV (also bringing in Apollo Global Management’s Impact Mission Fund) in 2021.
Vistria won the bid to acquire the Behavioral Health Group in 2018 from private equity firm Frontenac; the firm remains invested in this company. Over Vistria’s ownership, the company, which manages opioid treatment centres “has nearly doubled the number of outpatient treatment centers to increase the number of patients able to access critical care across the U.S” and “emphasized quality and compliance throughout its growth,” Jurinka said.
Vistria has established boards with medical, public policy, academic and operational experts to ensure prioritization of quality care.
“Impact is a core driver of value creation,” Vistria says in its 2024 impact report. “Responsible companies that align their growth strategy with impact priorities will be worth more.”
