Private equity is the fastest growing corner of the asset management industry. Morgan Stanley estimated in 2020 there was $7.2 trillion assets under management by private equity players and forecast that number to grow to $12.5 trillion by 2025. And all of that money needs to find a place to go.
So over the last few years we have seen massive private equity deals, acquiring everything from publicly listed companies, infrastructure assets and smaller private companies. Once an asset is acquired, private equity needs to make a return. Often this involves cutting costs, rolling up competitors or finding ways to push into new markets. And the record is mixed, with private equity successfully turning around some companies but also killing many other (Toys R Us in America and Dick Smith in Australia are two that come to mind).
This article from the New Yorker takes a look at what happened when private equity bought an aged care home in Virginia. This was part of a rollup play by the private equity firm, they already owned more than one hundred aged care facilities across America’s east coast.
And after ownership changed, operational changes soon followed. Cost cutting was prioritised – according to this article nursing hours were cut, services were reduced, and food quality suffered.
And this story isn’t isolated. Since 2000, private equity investment in nursing homes has grown from $5 billion to $100 billion. Private equity currently owns 11% of all nursing homes in America. In 2019, a study on these deals from the University of Pennsylvania found a troubling number, “when private-equity firms acquired nursing homes, deaths among residents increased by an average of ten per cent”.
This article unpacks this finding and the regulation and incentive structures that contribute to these outcomes. The good news is that these outcomes and the financial incentive structures that drive them can be changed. With the population ageing – by 2035 adults over 65 will outnumber children for the first time in US history – now is the time to make these changes.
Joe Biden acknowledged this in his State of the Union earlier this year, “As Wall Street firms take over more nursing homes, quality in those homes has gone down and costs have gone up. That ends on my watch.” However, his efforts to change the industry were stymied by lobbyists for the nursing home industry.
The trend of private equity buying nursing homes and other healthcare facilities will not stop. In fact, private equity investment will be a crucial part of building enough nursing home capacity to care for an ageing population. It is imperative that politicians and regulators keeps up. So the next time the University of Pennsylvania conduct their study, the results are quite different.
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