Abstract
We analyzed what happens to a nursing home chain when private equity takes over, with regard to strategy, financial performance, and resident well-being. We conducted a longitudinal (2000-2012) case study of a large nursing home chain that triangulated qualitative and quantitative data from 5 different data sources. Results show that private equity owners continued and reinforced several strategies that were already put in place before the takeover, including a focus on keeping staffing levels low; the new owners added restructuring, rebranding, and investment strategies such as establishing new companies, where the nursing home chain served as an essential “launch customer.”
Keywords
nursing homes, private equity, strategy, staffing, care quality
Introduction
Private equity firms own and trade unlisted, private companies. A central investment strategy of private equity firms is the leveraged buyout (LBO), which is characterized by high leverage, large management ownership, and active corporate governance.1 In an LBO, the private equity firm creates a fund that obtains capital commitments from investors such as pension plans, insurance companies, and individuals. Using the fund’s capital, along with a loan commitment on behalf of the fund, the private equity firm acquires a so-called portfolio company and holds the portfolio company for approximately 3 to 7 years.2 During this period, it seeks to increase the value of the company, to realize a profit when it sells the company. The profits in case of such an “exit” are distributed among the fund investors and the private equity firm.3
In the past 2 decades, private equity interventions have been the issue of several public debates. Private equity opponents argue that the increased leverage in LBOs make firms short-term oriented. In addition, buyouts would often result in a redistribution of wealth from employees to investors.1,4-6 In contrast, proponents argue that the organizational changes in LBOs improve manager’s incentives to maximize value, leading to improved company performance.1
Since the 1990s, private equity firms regard the health care sector as an attractive investment area.7 The health care sector captures approximately 10% of the private equity deal activity worldwide, with providers and related services as the most popular sub sector (nearly 50% of the total health care deal volume). Providers and related services include large “healthcare-heavy assets,” the label private equity firms apply to “assets with meaningful exposure to reimbursement risk.”8 The involvement of private equity firms in health services fits into the global movement toward involving the private sector to attract capital and to deliver health services.9 Private equity in health services is most visible in the US nursing home industry, where 4 out of the 10 largest forprofit nursing home chains were purchased by a private equity firm in the 2003-2008 period.10 Moreover, in countries such as Canada, Norway, Sweden, and the United Kingdom, large for-profit nursing home chains are increasingly owned by private equity investors.11 It is therefore very relevant to study private equity in nursing homes.
– Aline Bos, MSc; Charlene Harrington, PhD
