By Nicole Witowski
Private equity is seemingly everywhere. From housing to retail and technology to media, equity investors have acquired companies across diverse industries over the past two decades. Healthcare is no exception.
Seeking to add value in this ecosystem, these investors are buying into ambulatory surgery centers, hospitals, laboratory services, long-term care facilities, physician practices, and various other companies that provide health services.
As private equity extends its reach into the industry, there is debate about the benefits and risks. Proponents of private equity in healthcare tout its ability to fund innovation and streamline operations to boost revenues. Opponents say the profit motive puts patients at risk.
In this blog, we’ll explore how private equity in healthcare works, why firms are targeting healthcare, and some of the implications for stakeholders.
First, what is private equity?
As the name suggests, private equity is a source of private investment in companies that are not public, meaning they’re not traded on the stock market.
Private equity firms pool money from groups of investors, such as pensions, endowments, wealth funds, and other institutions. They use this money to invest and acquire a stake in a company with the general goal of making a profit from that investment.
Private equity encompasses various types of strategies. At one end of the spectrum are venture capital (VC) firms that mainly invest in early-stage companies with high growth potential.
On the other end are traditional private equity firms that borrow money to take a controlling stake in mature yet underperforming companies through leveraged buyouts.
Growth equity firms often fit somewhere in the middle. These investors usually make minority investments in later-stage companies that need capital to pursue further growth.
When you hear about private equity moving into healthcare today, you’re often hearing about traditional private equity, or leveraged buyouts. Buyouts make up the largest portion of funds in the private equity space.
Below is a table comparing these strategies.
Comparison of venture capital, growth equity, and traditional private equity
|Traditional private equity (leveraged buyout)
|Mid to late stage
|Minority stake, <50% ownership
|Usually minority stake, <50% ownership
|Majority stake, >50% ownership
|Type of companies targeted
|Start-ups or early-stage companies with less of a proven business model but high growth potential
|Companies with stronger revenues and proven business models, but in need of financing to grow further
|Established businesses that are undervalued or underperforming, with inefficiencies that could be addressed through changes, such as improvements in operations
|Cash or equity investment or convertible debt that turns into equity
|Equity investment, low or no debt
|Equity and debt, often a majority amount debt
|Exit timeframe (on average)
|Examples of firms
|Andreessen Horowitz, Sequoia Capital, Tiger Global Management
|Blackstone Growth, General Atlantic, Insight Partners
|The Blackstone Group, The Carlyle Group, KKR & Co.
Why are private equity firms targeting the healthcare space?
While private equity investment in healthcare isn’t new, firms are increasing their involvement in the industry. Over the past decade, private equity investment in healthcare climbed from $46.3 billion in 2012 to $208.7 billion in 2021, according to Pitchbook.
U.S. healthcare private equity deal activity, 2012 – 2022 YTD
Fig 1. – U.S. healthcare private equity deal activity from Jan. 1, 2012 – Oct. 19, 2022. Source: PitchBook Data.
There are several reasons private equity firms are attracted to healthcare. First, demand for healthcare is often considered recession-resistant, with valuations remaining high despite economic downturns. People still get sick and need healthcare, no matter the economic climate.
Second, waste is endemic in healthcare, which attracts private equity firms with expertise in reducing inefficiencies. According to research by Health Affairs, at least half of administrative spending is likely ineffective or wasteful. Many private equity investors consider industry inefficiencies an important investment driver. These firms aim to reduce costs through efficiency gains.
Third, providers are often fragmented geographically, which creates opportunities for private equity firms to consolidate market power and seek economies of scale. Much of private equity’s current interest in healthcare is driven by opportunities to consolidate organizations in highly fragmented markets.
In this scenario, private equity firms usually acquire an established entity, such as a physician group practice, and buy smaller groups along the way to increase their market power in a specialty or geographic region. This can lead to advantages like greater bargaining power with payors and cost savings that come from group purchasing.
So, what does this mean for healthcare stakeholders?
Private equity firms say they bring value to healthcare, while critics of private equity’s approach argue that the profit motive is misaligned with the mission of healthcare. However, the impact of private equity on stakeholders, including providers, payors, and patients, is not clear.
Most research looks at traditional private equity (leveraged buyouts) in hospitals, physician practices, and nursing homes. One study found that private equity ownership increased deaths among nursing home residents by 10%, while another showed that specialty practices acquired by private equity firms charged insurance 20% more, on average, than they did before.
Conversely, at least one study found improvement in some quality measures in hospitals acquired by private equity firms relative to non-acquired hospitals. Researchers also found financial performance improved, with cost per adjusted discharge decreasing by $432 after acquisition. In an era of narrowing margins, provider organizations that are in financial distress stand to gain from private equity acquisitions through cost reduction measures and the infusion of capital.
Fewer studies look at the impact of venture capital and growth equity investments in healthcare. These models typically aim to foster innovation by funding disruptive companies. If investor incentives align with those of providers and patients, private equity firms can bring significant value to the space.
As private equity investment in healthcare increases, data will be critical to understanding the impact on healthcare stakeholders. Our healthcare commercial intelligence can help you keep up with trends in consolidation as well as cost and quality. Sign up for a free trial of Definitive Healthcare’s commercial intelligence platform, where you can dive deeper into these trends and more.