Private Equity Killed Grandma

Private equity.

The term once seemed sophisticated and mysterious.

Now it’s usually uttered as a curse.

For example, a friend recently lamented that, “Private equity just bought Jersey Mike’s. They’re going to ruin it…”

The private equity (PE) model is simple. Raise money from investors, take out huge loans, buy companies, improve efficiency, and sell it for a higher price.

That’s the goal, anyway.

Private equity first got my attention back in 2005 when three PE firms bought Toys ‘R’ Us. They loaded the company with $5 billion of debt, took huge paydays, and killed the company.

Since then, private equity firms have raised and borrowed trillions of dollars.

They are quietly buying up HVAC companies, dental offices, and most disturbingly, hospitals and nursing homes.

PE ownership of hospitals is particularly worrying. According to a 2023 review in JAMA, a respected medical journal, the results are not good.

“Private equity acquisition was associated with a 25.4% increase in hospital-acquired conditions, which was driven by falls and central line–associated bloodstream infections.”

So in hospitals owned by PE, patients are getting worse care. They’re getting more infections, waiting longer in ERs, and falling more often.

This is because private equity firms tend to cut costs ruthlessly. For example, one study found that hospitals purchased by PE cut emergency department salaries by 18%.

Unsurprisingly, emergency department deaths jumped by an average of 13%.

Salaries are cut, staffing reduced, and sometimes experienced nurses and staff are let go to cut costs.

It boils down to big-shot investors making medical decisions. Additionally, hospitals owned by PE are far more aggressive when it comes to billing and debt collection. TeamHealth, a large physician staffing group, actually sued a large number of poor patients a few years ago and caught a lot of (deserved) flak for it.

A number of family and friends have had nightmare experiences at PE-owned hospitals and medical practices.

My wife works for a non-profit in the long-term care (nursing home) space, and has private equity stories that would make your blood boil. I’ll see if I can get her permission to share some in the future.

In short, PE is worsening an already bad situation in U.S. healthcare.

The Private-Equitification of America

Of course, it’s not just hospitals being taken over by PE. Lawn services. Plumbers. HVAC. Dentists. Electricians. Restaurants. Retail.

Prices at PE-owned companies are going up, and service levels are dropping.

Even local sporting facilities are feeling the effects. Black Bear Sports Group, founded by private equity CEO Murry Gunty, has purchased 42 hockey rinks across the country, backed by PE funding.

At these rinks, parents are no longer allowed to record their kids’ games. They have to pay $14.99 to watch each game online, or subscribe for $26-$50 a month.

If they’re caught recording, it can harm the team’s standing in the league.

Private equity executives running sporting facilities is making the affordability crisis in kids’ sports worse.

The Financial Angle

Private equity has become a HUGE business, with an estimated $13 trillion in assets globally.

PE deals usually rely on large amounts of debt. This is the classic leveraged buyout model.

The hope is that they can improve efficiency and cut costs enough to cover the debt, and still make a profit when they sell the businesses.

The problem is that if we get a recession, which seems likely, many of these deals will go belly-up. PE-owned companies will go bankrupt, leaving employees and investors in the lurch.

If you own an S&P 500 index fund, you own a piece of PE deals through giants like Blackstone and Apollo.

Pension funds and other institutional investors also have significant exposure to PE. As do banks.

Meanwhile, private credit, which is related to PE, is another can of worms. One which we will be digging into more going forward. Banks are also deeply exposed to private credit, as Chris Whalen revealed in his recent DR article.

Private equity and credit have run wild over the past 15 years. Deals are complex, layered, and secretive.

Now we may be approaching a private equity and credit reckoning.

More soon.