Michael Karamardian*, Perelman School of Medicine and The Wharton School, University of Pennsylvania; Ekta Jagtiani*, University of Pennsylvania; Ankit Chawla*, IESE Business School, and Ingrid M. Nembhard, The Wharton School, University of Pennsylvania

Contact: ingridn@wharton.upenn.edu

* Denotes that authors contributed equally as lead authors of this article

Acknowledgements: We are grateful for the expert assistance of Marcella Barnhart, the Zilberman Family Director of the Lippincott Library of The Wharton School, who performed our databases searches and helped us process the results. Tina Horowitz provided expert administrative and research assistance that saved the day; we are beyond grateful for her and that. We also thank Stephen Sammut, MBA, DBA (Senior Fellow in the Health Care Management Department of The Wharton School and Chair of the Industry Advisory Board of Alta Semper Capital, a private equity impact fund focused on health care investing in Africa), who participated in early conversations about the private equity landscape to help orient us. Kevin Schulman, MD (Professor of Medicine, Clinical Excellence Research Center at the Stanford University School of Medicine and Professor of Operations, Information and Technology at the Stanford Graduate School of Business) provided inspiration and motivation for this work.

Introduction

Since 2012, private equity (PE) firms have completed more than 8,000 transactions involving healthcare entities, with an estimated combined value of nearly $1 trillion.[2] Using money from investors, these firms have acquired healthcare services entities (e.g., hospitals, medical groups, nursing homes), whom they then typically charge a management fee and incur sizable debt against. They quickly turn around these organizations, selling them to make profit for their investors, normally within five to 10 years.[3]  An estimated 788 PE transactions occurred in 2023 alone just within the healthcare services sector ─ our focal sector in this article ─ making 2023 the third highest year by deal count, even though the count declined relative to recent years. [4]

PE transactions within healthcare services ─ most recently documented in Ma et al.’s [5] article in this issue of HMPI ─ are part of what is labeled the “financialization of health.”[2] This label captures the growing influence of financial incentives, markets, motives, and institutions in the functioning of the healthcare industry.[2] This influence is growing internationally,[1,8] which has sparked the interest of organizational leaders, media, policymakers, clinicians, and researchers who all ponder whether PE investment in healthcare services is good or bad for the industry. [6, 7, 8]

In theory, on the positive side, PE firms may improve the cost and efficiency of healthcare delivery given the inherent financial incentives of their workflow. Because they aim to optimize investment returns, they frequently implement substantial restructuring of acquired entities to generate improvements in these areas.[3, 9] Conceivably, restructuring can also deliver patient care benefits if prioritized as well.[10] However, several reports indicate troubling trends associated with PE ownership including higher bills for patients, outsized growth in earnings for insurers, and high bankruptcy rates, especially in communities that serve a large proportion of low-income and uninsured patients, leading to greater difficulty in accessing care.[7, 11, 12]  Over 20% of healthcare entities that filed for bankruptcy in 2023 were owned by PE firms,[13, 14] prompting concern that PE ownership may leave communities depleted of healthcare. This concern has intensified as PE-backed Steward Health Care, the largest physician-led hospital operator in the United States (U.S., with 30 hospitals), filed for bankruptcy in May 2024, unable to pay its $750 million debt.[15, 16] Steward, formerly renowned for its outstanding performance in the value-based Medicare Shared Savings Program (MSSP),[17] had served as a compelling example of the positive influence of PE. After PE acquisition, Steward transformed into one of the major for-profit U.S. hospital systems, expanding healthcare nationally. Then, under pressure to achieve financial profit, Steward underwent substantial operational restructuring, primarily emphasizing cost reduction and division optimization, but remained unable to repay its sizable PE-linked debt. See related article by Kumar in this issue of HMPI.

The recent events and growth of PE have prompted many commentaries, conferences, and case studies on PE’s impact in healthcare.[18, 19, 20, 21, 22, 23, 24, 25, 26]  Recently, they also spurred a systematic review of all related empirical research published from 2000 to 2023. That review by Borsa et al.[a][1]aimed to provide an evidence-based summary of the impact of PE ownership with respect to health outcomes, costs to patients or payers, cost to operators, and quality. In sum, Borsa et al. found that PE ownership is “often associated with harmful impacts on costs to patients or payers and mixed to harmful impacts on quality” (p. 1). This largely negative conclusion has been affirmation for some within the healthcare community. Others wonder whether the conclusions would stand with additional data and finer-grained analysis of study outcome variables.

To answer these open questions, we conducted a systematic review with three aims: 1) to include data from the year since Borsa et al. (April 2023-April 2024) to assess if the patterns identified by them persist; 2) to assess the influence of PE on patient health outcomes and care quality as a single category, distinct from process quality enablers (a departure from Borsa et al. that we explain in Methods below); and 3) to investigate whether the effects of PE ownership differ by PE firm. Our analysis updates the existing systematic review of the evidence of PE’s impact and adds nuance through subset analyses of data. It thus is both a replication and expansion to contribute to a detailed and current evidence base on a key topic in healthcare management today, enabling knowledge to guide policy and practice. 

Methods

Search Strategy and Eligibility Criteria

Given our aims of providing a detailed and updated systematic review of empirical research on PE, our review consisted of three components. In the first component, we abided by the Preferred Reporting Items for Systematic Reviews and Meta-Analysis statement[27] and used our search procedures to bring Borsa et al.’s review forward in time. Specifically, with the assistance of our university librarian, we searched for English-language articles in PubMed (MEDLINE and MEDLINE In-Process), Scopus, and Web of Science for the full year following Borsa et al.’s, that is, from April 16, 2023 (the final date of their search) to April 15, 2024. In PubMed, a search was conducted for “private equity”. For Scopus and Web of Science, the search strategy included various bibliographic fields (title, abstract, and author keywords in Web of Science; and title, abstract, and keywords in Scopus) using the terms health* or hospital* or physician* or doctor* or medical or nursing or hospice or ambulatory or “long term care” and “private equity.”

To limit the possibility that we missed relevant research published by business or economics scholars, we added search of Business Source Complete, ABI/Inform and EconLit. As these sources were not included in the Borsa et al. article, we expanded the search of these to begin in 2000 to align with Borsa et al., agreeing that PE acquisitions before that time were likely to be less relevant to current events. Our search terms were the same as for Web of Science. Identified articles were reviewed by our librarian to assess whether they met our three inclusion criteria: (1) studied any form of PE ownership, (2) utilized empirical, quantitative data, and (3) assessed the impact of PE ownership in a healthcare delivery setting using statistical analyses. Our librarian uploaded articles that met criteria to a shared Box for our full review and data extraction. She also uploaded Excel files with the list of all articles from each database that documented reasons for exclusion/inclusion and provided a link to the article. Excluded articles focused on non-healthcare related effects, did not include statistical analyses, analyzed predictors of PE ownership, or were commentary/editorial or news pieces.

The second component of our review aimed to capture studies forthcoming in publications in an effort to be as current as possible. To identify these, we conducted an online search of the 2024 AcademyHealth Annual Research Meeting (ARM) program.[28] AcademyHealth is the premier professional association for health services researchers, policymakers, and healthcare practitioners and stakeholders in the U.S. Selection for presentation during its research meeting occurs through blind, committee review of abstracts, with selection for podium presentation limited to research assessed as most rigorous and impactful. We searched the 2024 program using “private equity” and applied the same eligibility criteria used in the first component of our search methods.

The third and final component of our review consisted of revisiting the 32 articles identified by Borsa et al. as evaluating the impacts of PE ownership on at least one category of health outcomes, costs to patients or payers, cost to operators, or quality, or a combination of these factors. We revisited these articles to ensure that our categorization of impacts for new research aligned with theirs in order to create continuity as the field of study and analysis grows.

Data Extraction and Analysis

Our data analysis and extraction had two phases. In the first phase, we focused on establishing the categories of impact that would be the focus of our review. We used Borsa et al.’s categories (health outcomes, costs to patients or payers, cost to operators, and quality) as our starting point and also allowed our “fresh eyes” to consider whether additional or more fine-grained categories would be valuable additions to present. With this objective, one team member (EJ) documented the results in detail from 20 articles in our dataset (the first 12 in Borsa et al. and the first 8 published since then) and noted themes across them, all in an Excel file. Next, two additional members of the team (MK and AC), both with clinical and business training, reviewed the Excel file independently and then jointly to create the list of categories of impact to be used for the analysis of all articles. All authors met to finalize the categories, which are presented in Table 1.

A notable distinction between our categories of impact and those contained in Borsa et al.’s is that we chose to differentiate within the category of Quality, drawing upon Donabedian’s[29, 30] taxonomy. Specifically, we distinguished between impacts related to patient health (often regarded as technical quality of care and labeled here as “Health Outcomes and Health Quality”) and impacts related to enablers of care delivery (often regarded as process and labeled here as “Process Quality”). We see value in distinguishing these impacts because, although process and outcomes measures are often loosely-coupled, systems that affect them and interventions to improve them can differ. Our differentiation led to reclassification of some measures from Quality in Borsa et al. (i.e., surgical site infections and (in)appropriate antipsychotic use) to Health Outcomes and Quality here. That resulted in more specificity as the broad category of Quality became more precisely Process Quality enablers. Within the Process Quality and Health Outcomes and Quality categories, we took the added step of documenting sub-categories to add another level of precision to our main results presentation. Similar content is captured in Borsa et al.’s supplement.

Once we finalized our categories of impact as noted in Table 1, we divided the articles/abstracts identified from our three (search) components among our three lead authors for data extraction. Each article/abstract was reviewed by at least two team members to ensure accuracy and consistency in categorization. Reviewers for each article extracted the following study information: author, year of publication, article title, research question/objective, country, healthcare setting, sample, study design, time period of analysis, sample size, named PE firm (if applicable), impact(s) assessed, significance of impact based on p-value < 0.05 as significant, and indicator for whether a category changed from Borsa et al. Information was recorded in Excel spreadsheets. The full authorship team then met on four occasions to review the data to identify patterns and answer the research questions.

Results

One-Year Growth in Research (2023-2024)

Our three search strategies yielded 47 articles/abstracts for analysis, 15 of which were additions to the 32 articles previously identified by Borsa, for a research growth rate of 47 percent in just one year for studies meeting our inclusion criteria. Of the 15 new articles, eight were identified from among 57 new articles retrieved through our database search of articles since Borsa et al. and seven were identified through search of the AcademyHealth program, which contained 14 studies. These additions from AcademyHealth were largely by research teams (5 out of 7) with a track record of publishing empirical research on PE, adding credibility to our inclusion of their forthcoming work. Excluded articles obtained from both searches had failed to meet our inclusion criteria. Of note, no new articles were identified in our added databases; either nothing new had been published or articles were already included in Borsa et al., demonstrating the completeness of their 2023 search.

Impact of PE in Healthcare

Table 2 shows the impacts reported across the 47 articles/abstracts published from 2000-April 15, 2024. Part A shows the results for the research published in the most recent year, whereas Part B shows the results for articles contained in Borsa et al. and whether a classification change had occurred based on categories in Table 1. These tables also indicate the five studies that assessed whether results varied by PE firm, comparing HCA-ownership relative to other owners.

Health Outcomes and Quality

Within this category, the majority of effects assessed in studies during the last year indicate unfavorable health consequences for patients. Specifically, studies indicate that patients served by PE-owned entities have higher rates of mortality, major and other adverse health outcomes, and complications such as hospital acquired infections. The most recent year’s data reinforces the negative view of PE’s impact on health outcomes overall, as there were relatively few articles citing positive impact, and they often indicated negative impacts as well. Just one study in the past year indicated uniformly better health outcomes, with the patients in that study having lower readmission rates and better other health outcomes (e.g., improved rates of urinary tract infections).[43] Moreover, as Part B of Table 2 shows, we observe more studies reporting negative and neutral impacts compared to Borsa et al. in this category due to our decision to include health quality impacts in this category, which shifted some studies into this category. Thus, across the entire time frame for review, the data suggests that PE ownership is associated primarily with negative impacts on patient health outcomes and health quality, although there are studies indicating positive and/or neutral effects.[43, 57, 60, 73, 74] This is seen in both Table 2 and Figure 1, which presents the number of studies that report each type of impact (positive, mixed, neutral, or negative) within each category.

Cost to Patients and Payers

Studies to date overwhelmingly indicate that PE ownership is also associated with higher costs to patients and payers. Across time periods and all sub-categories assessed (overall costs, billing codes (e.g., changing to higher paying codes), payer/patient mix (e.g., shifting away from costly patients), and volume of more expensive services offered/provided), the preponderance of evidence indicates negative financial effects for these two groups, with a recurring pattern of higher expenses for payers and patients linked to service fee growth after a PE acquisition.[41, 63, 68] Studies also suggest that financial access to care is hindered as changes to payer/patient mix occur that typically involve reduced percentages of Medicare, Medicaid, or Dual-Eligible patients being covered, [38, 39, 42]^,, a pattern highlighted in the most recent year of studies, although evidence is mixed. To the extent studies indicated positive effect on costs for these two groups, they also included negative effects. Thus, overall, the most recent year of results is consistent with the results of Borsa et al., with the most recent studies expanding the field by offering mechanisms for the overall cost growth indicated by the 2000-2023 articles. Notably, increased costs were not often accompanied by better Health Outcomes or Health Quality; only one [65] of three studies that examined this possibility [12, 48, 65] indicated such betterment.

Costs to Operators

Studies in this category indicate a mix of positive and negative effects on cost for operators (i.e., operational expenses). That said, this is the only category with significant evidence of positive impact, relative to the number of studies. While several studies indicate cost reductions resulting from greater efficiencies,[31, 40, 55, 65, 68] there was counterevidence that in some cases PE ownership actually raised costs such as lease costs,[12] which may not be directly linked to improved service delivery or patient care. Additionally, one of the studies in the past year, the first to consider how provider availability or utilization is impacted, found a negative effect, i.e., lower utilization that increased cost for operators.[42]

Process Quality

Overall, process quality had largely mixed impact, though notably many studies reported significantly decreased staffing levels at PE-owned facilities.[12, 24, 40, 43, 51, 52, 55, 68, 71, 73] The sub-component within process quality where analysis shows that PE firms perform most positively is in their impact on Validated Quality Metrics.[20, 51, 59, 73 ] Notably, no studies reported any positive impacts on patient experience scores.

The Effect of PE Firm

Five articles contained a sub-analysis to parse the effect that PE acquisition of HCA-associated hospitals had on various impact metrics. All of these articles were included in the Borsa et al. review but had not been examined separately to assess whether specific PE firm management moderated the impact of ownership. Notably, HCA’s impact on health outcomes, though only analyzed in one study, [55] was significant on the important metrics of 30-day patient mortality and mortality from myocardial infarction (heart attack). While impacts on costs and process quality were mixed,[20, 56, 57, 68] the significant and positive findings provide evidence of potential variance in impact due to specific PE firm ownership. We observed no systematic differences in impacts based on healthcare setting or specialty.

Discussion

The primary purpose of our review was to provide the most up-to-date summary of research on PE’s impact on healthcare delivery settings. In multiple venues, we had heard or read debate about whether PE is good or bad for healthcare – for patients, the workforce, organizations, and ultimately the system. Borsa et al. had admirably conducted an extensive systematic review of the literature from 2000 to 2023. It left a negative impression of PE ownership and raised the question of whether newer, additional studies would provide results that offer a more mixed or favorable impression. Our review, which adds a year of studies to Borsa et al.’s and reports on more sub-categories of impacts as part of the main analyses, reinforces Borsa et al.’s findings. This is true whether just the 15 new studies are considered or the entire set of 47 studies.

Our review confirms negative associations across three of the four categories of impacts identified: health outcomes and health quality, cost to patients and payers, and process quality enablers. The negative associations appeared stronger in the category of health outcomes and health quality once we shifted adverse event quality measures to be alongside health outcomes. The one categorical exception to negative-dominant impacts occurs for cost to operators, which had the most evidence of positive effects. Gains in this area indicate that PE ownership is delivering on this expectation. A modus operandi of PE is to increase operational efficiency and reduce costs so the acquired is sellable at a profit for original investors.[2, 3, 7]^,

The results of this review add to concern about the growth of PE in healthcare. They imply that this form of financialization in healthcare can bring cost efficiency for the acquired operator but also significant detrimental effects for patients on multiple dimensions, some of which may result from declines in organizations’ process quality, as processes influence outcomes in many instances, meaning they too deserve attention.[29,30] Given the negative findings for process quality and outcomes, it is not surprising that no study showed improved patient experience scores after PE acquisition. Lack of improvement and negative effects may have several potential reasons, ranging from PE’s inherent focus on short-term profitability and thus cost-cutting actions to less tangible causes like disruptions to organizational culture due to restructuring and operational ‘optimizations’, which can undermine service delivery.[

Our findings, however, are not wholly damming of PE. At least two sets of findings suggest that PE can have beneficial effects. The first are the subset analyses of HCA versus non-HCA PE-owned hospitals, which showed significantly better 30-day patient mortality rates and mortality from myocardial infarction (heart attack) for the HCA hospitals.[55] The second indicator is the many mixed results studies (orange boxes in Table 2) alongside the few positive impact studies (green boxes) such as for readmission rates.[43, 65] While the number of these studies is far fewer than the negative studies, as evident in Figure 1, their existence is noteworthy. They imply positive possibility and that more research is needed that examines under what conditions PE is helpful. The HCA studies, in particular, beg the question: What exactly do PE firms that perform well in areas beyond own-cost management do? We know that firms operate differently and management matters in healthcare.[75] It may be time to study how different PE firms in healthcare manage differently, the implications of those choices, and what shifts in operational and managerial strategy are possible to allow PE-owned entities to not only deliver efficiency but also other health system aims, assuming that investors are willing to accept this challenge. Study of over 15,000 firms across industries found that PE firms are better managed than government, family, and privately owned firms, and have similar management to publicly listed firms, in the developed and developing world. They tend to have strong people management (hiring, firing, pay, and promotions) and monitoring management practices (lean manufacturing, continuous improvement, and monitoring).[76] Therefore, it may be that there is lurking potential in PE firms for healthcare. Current negative impacts may be the result of the PE model itself or insufficient experience with or adaptation of this innovation to the current era of healthcare. Innovation and organizational learning research both indicate that negative results are common early in the use of new innovations; time is often needed to learn appropriate strategies for the setting.[77, 78] Though PE investment in healthcare services has been occurring for decades and the recent volume of transactions appears motivated by the same uncertainty, goals, and motivations of past private investment in healthcare,[7] the current era differs in ways (e.g., more burned out workforce, players, technology-enabled activities, and reserves for capitated business amid expectations for transparency and value-based care) that may present novel contexts for PE operators. Thus, additional study of specific PE-firm behavior is needed to get us closer to understanding the variation in impacts observed across studies.

Our study’s (re)classification of specific measures into separate categories of quality, specifically ‘process’ and ‘health outcomes’ quality, and examination of the sub-categories within them allows for nuanced understanding of effects. While completely reasonable to group all under “quality,” the two levels of categorization allowed us to observe the distinct association of PE ownership with patient health (for example, we felt patient mortality effects deserve to be highlighted) and observe the association across the spectrum from the most serious (e.g., mortality) to minor health effects. It also allowed us to appreciate the distinction of effects on process quality enablers (e.g., resources), which can affect patient health but also have separate effects (e.g., affecting staff retention rates) that may not impact patient health. The categories presented in Table 1 may be used to guide future studies and serve as a starter checklist for PE performance.

While we endeavored to capture all published research and forthcoming articles since Borsa et al., it is possible that studies were missed despite our broad search for “private equity,” search of databases across scholarly fields, and search within the program for the most prominent health services research conference. Another potential limitation of this work is that its conclusions are based on studies that vary in their rigor and bias. We did not document these threats for the new articles. Borsa et al. had already documented such variation for the studies included in their analysis. Although we observed that several of the new articles used more robust study designs (e.g., allowing for difference-in-differences analyses), across the dataset, the threats to our findings remain. Several studies did not account for confounders that may impact the results, such as pre-acquisition financial health, market conditions, and regulatory modifications. This hinders attribution of identified impacts to PE ownership. Additionally, the included studies exhibit substantial heterogeneity in scope, setting, and measurement. This has the advantage of allowing assessment of generalizable patterns but also means that setting-specific effects (positive or negative) are obscured, especially given the few studies in any context. Given the growth in studies in one year, however, we are optimistic that the research on PE will continue to grow such that robust conclusions about the impact of PE in healthcare generally and with nuance will be gained.

The increase in empirical study following Borsa et al.’s work suggests an ongoing need for comprehending the influence of PE on healthcare. Research to date shows that PE ownership can deliver the cost efficiency gains promised but also that positive impacts on patient health outcomes, process quality, and cost to patients and payers do not naturally accompany these gains. Rather, much of existing evidence indicates negative impacts in these areas. There is also some indication, however, that management can matter. The positive health impacts found for readmission rates and in HCA-hospital sub-analyses suggest the possibility for PE ownership to deliver on cost and quality aims for patients and organizations. This likely depends on organizational priorities and management systems implemented.

 

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[44] Singh Y, Aderman CM, Song Z, Polsky D, Zhu JM. Increases in Medicare spending and use after private equity acquisition of retina practices. Ophthalmology. Published online 2023. doi:10.1016/j.ophtha.2023.07.031

[45] Singh, Y, Song, Z , Polsky, D, Zhu, J. Increases in physician professional fees in private equity owned vs health system-affiliated gastroenterology practices. Unpublished paper. AcademyHealth Annual Research Meeting (Baltimore, MD, June 2024).

[46] Borsa A, Bruch JD. Prevalence and performance of private equity-affiliated fertility practices in the United States. Fertility and Sterility. 2022;117:124-30. doi:10.1016/j.fertnstert.2021.08.035

[47] Bos A, Kruse FM, Jeurissen PPT. For-profit nursing homes in the Netherlands: What factors explain their rise? International Journal of Health Services. 2020;50:431-43. doi:10.1177/0020731420915658

[48] Braun RT, Jung HY, Casalino LP, Myslinski Z, Unruh MA. Association of private equity investment in US nursing homes with the quality and cost of care for long-stay residents. JAMA Health Forum. 2021;2(11):e213817. doi:10.1001/jamahealthforum.2021.3817

[49] Braun RT, Yun H, Casalino LP, et al. Comparative performance of private equity-owned US nursing homes during the COVID-19 pandemic. JAMA Network Open. 2020;3:e2026702. doi:10.1001/jamanetworkopen.2020.26702

[50]Braun, RT, Bond AM, Qian Y, Zhang M, Casalino LP. Private equity in dermatology: Effect on price, utilization, and spending: Study examines the prevalence of private equity acquisitions and their impact on dermatology prices, spending, use, and volume of patients. Health Affairs (Millwood). 2021;40(5):727-735. doi:10.1377/hlthaff.2020.02062

[51] Broms R, Dahlström C, Nistotskaya M. Provider ownership and indicators of service quality: Evidence from Swedish residential care homes. Journal of Public Administration Research and Theory 2023:muad002.

[52] Bruch J, Zeltzer D, Song Z. Characteristics of private equity–owned hospitals in 2018. Annals of Internal Medicine. 2021;174(2):277-279. doi:10.7326/m20-1361

[53] Bruch JD, Nair-Desai S, Orav EJ, Tsai TC. Private equity acquisitions of ambulatory surgical centers were not associated with quality, cost, or volume changes. Health Affairs (Millwood). 2022;41(9):1291-1298. doi:10.1377/hlthaff.2021.01904

[54] Bruch JD, Foot C, Singh Y, Song Z, Polsky D, Zhu JM. Workforce Composition In Private Equity-Acquired Versus Non-Private Equity- Acquired Physician Practices. Health Affairs (Millwood). 42:121-129. doi:10.1377/hlthaff.2022.00308

[55] Cerullo M, Yang K, Joynt Maddox KE, McDevitt RC, Roberts JW, Offodile AC 2nd. Association between hospital private equity acquisition and outcomes of acute medical conditions among Medicare beneficiaries. JAMA Network Open. 2022;5(4):e229581. doi:10.1001/jamanetworkopen.2022.9581

[56] Cerullo M, Lin YL, Rauh-Hain JA, Ho V, Offodile AC 2nd. Financial impacts and operational implications of private equity acquisition of US hospitals: Study examines the impacts and operational implications of private equity acquisitions of US hospitals. Health Affairs (Millwood). 2022;41(4):523-530. doi:10.1377/hlthaff.2021.01284

[57] Cerullo M, Yang KK, Roberts J, McDevitt RC, Offodile AC 2nd. Private equity acquisition and responsiveness to service-line profitability at short-term acute care hospitals: Study examines private equity acquisition at short-term acute care hospitals. Health Affairs (Millwood). 2021;40(11):1697-1705. doi:10.1377/hlthaff.2021.00541

[58] Creadore A, Desai S, Li SJ, et al. Insurance acceptance, appointment wait time, and dermatologist access across practice types in the US. JAMA Dermatology. 2021;157(2):181-188. doi:10.1001/jamadermatol.2020.5173

[59] Gandhi A, Song Y, Upadrashta P. Have private equity owned nursing homes fared worse under COVID-19? SSRN Electronic Journal. Published online 2020. doi:10.2139/ssrn.3682892

[60] Gandhi A, Song Y, Upadrashta P. Private equity, consumers, and competition: Evidence from the nursing home industry. SSRN Electron Journal. Published online 2020. doi:10.2139/ssrn.3626558

[61] Harrington C, Olney B, Carrillo H, Kang T. Nurse staffing and deficiencies in the largest for-profit nursing home chains and chains owned by private equity companies. Health Services Research. 2012;47(1 Pt 1):106-128. doi:10.1111/j.1475-6773.2011.01311.x

[62] Huang SS, Bowblis JR. Private equity ownership and nursing home quality: an instrumental variables approach. International Journal of Health Economics Management. 2019;19(3-4):273-299. doi:10.1007/s10754-018-9254-z

[63] La Forgia A, Bond A, Braun AM. Association of Physician Management Companies and Private Equity Investment With Commercial Health Care Prices Paid to Anesthesia Practitioners. JAMA Internal Medicine. 2022;182:396-404.

[64] LaFrance A, Batt A, Appelbaum R. Hospital Ownership and Financial Stability: A Matched Case Comparison of a Nonprofit Health System and a Private Equity-Owned Health System. Advances in Health Care Management. 2021;20. doi:10.1108/S1474-823120210000020007

[65] Liu T. Bargaining with private equity: implications for hospital prices and patient welfare. SSRN. 38964. doi:10. 202110.2139/ssrn.3896410.

[66] Nie J, Hsiang W, Marks V, et al. Access to urological care for Medicaid-insured patients at urology practices acquired by private equity firms. Urology. 2022;164:112-117. doi:10.1016/j.urology.2022.01.055Nie J, Hsiang W, Lokeshwar SD, et al. 5

[67] Nie J, Hsiang W, Lokeshwar SD, et al. Association between private equity acquisition of urology practices and physician Medicare payments. Urology. 2022;167:121-127. doi:10.1016/j.urology.2022.03.045

[68] Offodile AC 2nd, Cerullo M, Bindal M, Rauh-Hain JA, Ho V. Private equity investments in health care: An overview of hospital and health system leveraged buyouts, 2003-17. Health Affairs (Millwood). 2021;40(5):719-726. doi:10.1377/hlthaff.2020.01535

[69] Patwardhan S, Sutton M, Morciano M. Effects of chain ownership and private equity financing on quality in the English care home sector: retrospective observational study. Age and Ageing. 2022;51(12). doi:10.1093/ageing/afac222

[70] Pradhan R, Weech-Maldonado R, Harman JS, Laberge A, Hyer K. Private equity ownership and nursing home financial performance. Health Care Management Review. 2013;38(3):224-233. doi:10.1097/HMR.0b013e31825729ab

[71] Pradhan R, Weech-Maldonado R, Harman JS, Hyer K. Private equity ownership of nursing homes: implications for quality. Journal of Health Care Finance. 2014;42.

[72] Singh Y, Song Z, Polsky D, Bruch JD, Zhu JM. Association of private equity acquisition of physician practices with changes in health care spending and utilization. JAMA Health Forum. 2022;3(9):e222886. doi:10.1001/jamahealthforum.2022.288

[73] Stevenson DG, Grabowski DC. Private equity investment and nursing home care: is it a big deal? Health Affairs(Millwood) 2008;27:1399-408.doi:10.1377/hlthaff.27.5.1399

[74] Winblad U, Blomqvist P, Karlsson A. Do public nursing home care providers deliver higher quality than private providers? Evidence from Sweden. BMC Health Services Research. 2017;17(1). doi:10.1186/s12913-017-2403-0

[75] Bloom, N., Sadun, R. and Van Reenen, J., Does management matter in healthcare. 2014. Boston, MA: Center for Economic Performance and Harvard Business School.

[76] Bloom N, Sadun R, Van Reenen J. Do private equity owned firms have better management practices?. American Economic Review. 2015;105(5):442-6.

[77] Keating E, Oliva R, Repenning N, Rockart S, Sterman J. Overcoming the improvement paradox. European Management Journal. 1999;17(2):120-34.

[78] Nembhard IM, Tucker AL. Deliberate learning to improve performance in dynamic service settings: Evidence from hospital intensive care units. Organization Science. 2011;22(4):907-22.

 

 Notes

[a] As this work builds on Borsa et al.,[1] that work is mentioned often. To reduce citation fatigue due to repetition, we do not provide the citation for Borsa et al. at each mention after this one. All instances of Borsa et al., refer to Borsa A, Bejarano G, Ellen M, Bruch J D. Evaluating trends in private equity ownership and impacts on health outcomes, costs, and quality: systematic review BMJ 2023; 382:e075244 doi:10.1136/bmj-2023-075244

 

 

Lucy W Ma, Cyrus Buckman, Shreya A Shah, Stanford University School of Medicine and Graduate School of Business; and Kevin A Schulman, Stanford University School of Medicine and Graduate School of Business, and Clinical Excellence Research Center, Stanford University School of Medicine

Contact: lucywma@stanford.edu

Introduction

The healthcare sector has always been a critical area for private equity (PE) investments, given its significant impact on the economy and its potential for innovation and growth. For the past decade, PE firms have invested more than $1 trillion into U.S. healthcare.¹ The appeal of healthcare for PE investors is multifaceted, driven by both industry-specific and macro trends. Within healthcare, the industry’s resilient “recession-proof” growth, high fixed demand, profitable loan restructuring, and the constant evolution and increasing commercialization of healthcare needs all present significant opportunities for value creation and sustainable growth. Additional macroeconomic aspects, especially in recent years, include low cost of capital from the Federal Reserve, a robust stock market, passage of the Affordable Care Act in 2010 which drove healthcare reform, Trump’s business-friendly administration boosting merger and acquisition (M&A) activity, and the COVID-19 pandemic’s acceleration of technology and healthcare delivery expansion.²

Rising in popularity during the 1980s, healthcare PE firms utilized leveraged buyouts (LBOs) most commonly to facilitate significant M&A activity among hospitals. This M&A wave, that continued into the 1990s and 2000s, arose from federal legislation that motivated hospital consolidation by incentivizing provider adoption of health information technology in order to facilitate more consistent, scalable care delivery.³ After Medicare introduced DRG-based payment systems in the 1980s, many hospitals also braced themselves for tightening operating margins and leaned into M&A in hopes of reducing costs and increasing revenue through economies of scale, streamlined operational efficiency, and increased market power. After initial LBOs to acquire hospitals, PE firms utilized a “buy and build” strategy to expand their platforms, and by February 2011, PE firms owned ten of the 15 largest for-profit hospital chains.

Nevertheless, healthcare PE activity has not always remained consistent. From macroeconomic trends such as changing interest rates and the COVID-19 pandemic that halted global operations, to regulatory shifts such as antitrust laws and the No Surprises Act (NSA), the PE industry has constantly needed to adapt their investment strategy in order to maintain their profitability in an evolving healthcare landscape. To fully understand how healthcare PE has responded to various changing influences and how sustainably the healthcare system can continue receiving private capital, we analyze three case studies that reflect critical changes in the industry’s primary investment themes over the past decade. Based on the responses of other players to these PE deals, we believe these case studies represent key inflection points in PE regulation and grant us valuable insight into the field’s relationship with governing regulatory, market, and financial forces.

Why Healthcare Attracts PE Investment

Between 2010 to 2017, private equity deals were valued at $42.6 billion, reflecting a 187% increase within that period.⁴ A year later in 2018, the value of PE investments in healthcare had reached $100 billion, more than double the amount in 2017.⁵ Starting in the late 1990s to early 2000s, increased investment of PE in healthcare services likely derives from a few reasons: high growth potential and economic resilience (and thus high returns on investment [ROI] for PE firms), deregulation or regulatory changes, and the growing need for capital investment and management expertise in healthcare facilities and services.

Recession Resilience

Healthcare has always demonstrated significant resilience to economic downturn, even showing growth during some recessions. One reason is the stable demand given health insurance as a non-cyclical means of financial support for these services. Even during the 2008 financial crisis or the COVID-19 pandemic, healthcare needs did not stop, but in fact spiked significantly to the point of overwhelming the system during the pandemic, a time when most other significant industries nearly shut down.⁶ Another reason is the favorable demographic trend resulting from our aging population, especially the Baby Boomers (born between 1946-1964). As patients age, healthcare needs and demand for healthcare services both increase, supporting long-term growth in the healthcare sector by providing a steady demand for services ranging from preventative care to chronic disease management and geriatric care.⁷ Thirdly, the healthcare industry has always had significant regulatory and government support through funding mechanisms like Medicare and Medicaid and other subsidies, such as the tax treatment of employer health benefits.

Regulatory Shifts

Another factor that contributed to PE’s growing interest in healthcare investment was a series of regulatory shifts to accommodate new business and care delivery models. For example, the Stark Law prohibited physicians from giving referrals that could lead to financial gain for the physician or their immediate family, and the Anti-Kickback Statute prohibited the exchange of trading valuable items for referrals of patients participating in state or federal health programs. However, as our healthcare system has increasingly recognized the need for providers to work together to improve patient outcomes and efficiency, exceptions and waivers have been added to both laws to accommodate new healthcare delivery models, such as accountable care organizations (ACOs) and value-based care (VBC). This loosening of regulations has also opened up new investment opportunities for PE firms.

Certificate-of-Need laws, requiring government approval before opening or expanding healthcare facilities, have been relaxed or repealed in many states in order to promote competition, address service shortages, and reduce unnecessary regulatory burden. As a result, there has been room for increases in and expansions of healthcare facilities, often funded by PE firms as they rolled-up practices and aimed to improve operational efficiency.

Another trend, especially seen with the rise in telehealth services during the pandemic, is efforts to make it easier for providers to operate across state lines, expanding the market for many healthcare services. These developments, along with the typical lag time that policy often experiences in keeping up with these rapid developments, has increased the attractiveness of healthcare for PE investments.

Growing Need for Capital & Management Expertise

Finally, PE firms provide significant capital investment to healthcare organizations that may not have access to other major forms of financing. This infusion of funds can greatly contribute to expanding facilities, upgrading technology and streamlining operational efficiency, and improving patient care services. In addition, group practices and hospital systems can encounter difficulty with management expertise and maintaining sustainable cash flows while providing the many services that patients need. Thus, on top of the capital they can provide, PE firms’ operational expertise is viewed as a significant benefit for small clinics that have difficulty scaling or healthcare systems struggling to stay afloat, even helping them become more competitive in concentrated areas, which can improve both patients’ continuity of care and job security of healthcare providers and staff.

Healthcare PE Strategy Over the Years: Case Studies

PE Investment Models in Healthcare

The most common financing model used by PE in healthcare has traditionally been a leveraged buyout (LBO). The approach involves a financial transaction where a PE firm buys a majority stake in a healthcare company using a significant amount of borrowed money. PE firms look for healthcare companies with stable cash flows, potential for operational improvements, and a strong market position. These companies can range from hospitals and clinics to manufacturers of medical devices and pharmaceuticals. Upon identification of the target healthcare company, the PE firm finances the purchase through debt and the use of private equity funds, with debt being a significant portion of the financing deal (sometimes as high as 70%).⁵ The assets of the healthcare company being acquired—and sometimes the acquiring company’s assets—can be used as collateral for the loans.

After the acquisition, the PE firm works closely with the management of the healthcare company to improve operations, cut costs, and increase efficiencies with the goal of improving profitability (also referred to as “strategic dismantling”).³ The ultimate goal of an LBO is to sell the acquired company at a higher value than its purchase price. This can be achieved through various means, such as a sale to another company, a public offering, or selling it to another PE firm. LBOs in healthcare have been particularly attractive and feasible due to the sector’s generally stable and predictable cash flows, which are critical for servicing the debt incurred during the buyout.

Another investment model increasingly used by PE is the “platform and add-on,” or consolidation, approach. The goal is to build value by acquiring smaller companies around a larger, core company, known as the platform.⁸ The platform company serves as the foundation for the consolidation strategy, providing the infrastructure and management expertise necessary to integrate add-on acquisitions of smaller companies effectively. This “buy-and-build” method aims to create significant value through synergies, market expansion, diversified product offerings, and improved operational efficiencies and economies of scale.^4,9

Buyout Strategy: KKR and Envision Healthcare

In 2018, Kohlberg Kravis Roberts (KKR), a globally leading PE firm, acquired Envision Healthcare Corporation, a provider of various healthcare services, post-acute care, and ambulatory surgery services, in an all-cash leveraged buyout (LBO) for $9.9 billion.^10–12 Of that valuation, KKR financed $5.3 billion—more than 50%—with debt.¹³

Envision provided emergency department and inpatient, anesthesiology, and radiology services to over 300 healthcare facilities in 45 states and the District of Columbia, staffing other hospitals with their physicians. It was the biggest player in the physician outsourcing space, capturing 6% of the $41 billion emergency department and hospital-based physician market and 7% of the $20 billion anesthesiologist market.¹⁵

In order to service the debt and yield the returns promised to its investors, KKR deployed surprise medical billing.¹⁴ Health insurers establish contracts with providers (physicians and hospitals) that set up payment models for services. These contracts prohibit the provider from billing the patient for unallowed charges, essentially the amount of the provider charge that is above the negotiated payment rate, or the disallowed amount of the bill. Pursuing payment for these disallowed charges is a practice called balance billing. Out-of-network providers do not have a contract with a health plan, so they face no restrictions on balance billing for services. Providers are free to set their charges as they see fit without any further justification. In many states, courts uphold provider charges as the financial responsibility of the patient—even when these charges are grossly exaggerated or well above market prices.¹⁶

Many of Envision’s employed emergency room and radiology doctors had deliberately remained out-of-network providers for most health plans. Prior to the passage of the NSA in 2020, the company could surprise even insured patients with drastic medical costs and burden them with significant debt.⁵ These numbers ranged from $600, the average balance bill charge for an emergency room visit, to $100,000 for out-of-network providers that patients neither select for themselves nor have a choice to avoid.¹⁷

In 2019, Envision’s, and in turn KKR’s, reliance on surprise medical billing became clear through a series of media investigations and increasing scrutiny by health economists and advocacy groups, in particular focusing on its emergency room operations managed by its subsidiary, EmCare. A team of Yale health economists found that, after EmCare took over hospital emergency departments, patient care charges nearly doubled compared to those by previous physician groups, sending out-of-network bills at a rate of 62% compared with a national average of 26%.¹⁴ This represented a more than 81 percentage point increase in out-of-network billing rates at these hospitals that previously had low rates.¹⁵ In addition, average physician payments increased by 117%.¹⁵

Combined with widespread outrage from patients receiving surprise medical bills, Congress launched an inquiry into Envision after the National Bureau of Economic Research circulated the Yale study.¹⁵ Out of this investigation birthed the bipartisan bill that would ultimately become the NSA passed in December 2020. This legislation banned the practice of surprise medical billing and effectively destroyed Envision’s business strategy. The onset of the COVID-19 pandemic further strained Envision’s finances as the numbers of elective surgeries and ER visits—the main sources of out-of-network billing and revenue—plummeted. By April 2020, only one month after the pandemic’s onset, Envision began considering the need for debt restructuring and the increasing possibility of bankruptcy.¹⁸ In May 2023, Envision filed for Chapter 11 bankruptcy. KKR lost more than $5 billion.^18,19

Roll-up Strategy: Welsh, Carson, Anderson & Stowe and U.S. Anesthesia Partners

In 2023, the Federal Trade Commission (FTC) sued Welsh, Carson, Anderson & Stowe (WCAS), a private equity firm, for creating U.S. Anesthesia Partners (USAP) in 2012 to “roll-up” anesthesia practices in Texas and create a monopoly over the market and gain ultimate pricing power.²⁰ The FTC claimed in its lawsuit that the PE firm’s actions violated key antitrust legislation, including the Sherman Act (which prescribes the rule of free competition), Clayton Act (which aims to prevent anti-competitive practices), and FTC Act (which outlaws unfair methods of competition that affect commerce). To address their concerns of competitive suppression and price gouging, the FTC demanded that WCAS permanently halt their add-on deals and undergo “structural relief,” or voiding past transactions to deconstruct the consolidated practices.

PE roll-ups of anesthesia practices have been shown to increase prices by 26% after acquisition.²¹ In addition, the prevalence of this investment strategy has led PE to control 18.8% of the anesthesia and 22.0% of the emergency medicine market by 2019, representing a sixfold and threefold increase, respectively, in market concentration since 2009.²² As a result, even though high-leverage buyout deals may have been curbed through legislative efforts like the NSA, add-on deals may continue to provide PE with opportunities to obtain rapid returns in healthcare, as this strategy enables them to manipulate natural market dynamics and laws of supply and demand in order to drive up prices and increase profitability.

The FTC’s complaint describes the actions of USAP after its creation. It suggests that USAP is the largest anesthesia practice in Texas, with control over almost 70% of the commercial-insured, hospital-only anesthesia market in Houston and Dallas, and performing almost half of all cases across Texas, while earning nearly 60% of the hospital-only anesthesia revenue. The complaint reports how the firm systematically acquired anesthesia practices within target markets. It also alleges anti-competitive behavior to keep other firms out of the market, and leveraging its billing clout for other anesthesia practices it does not own.²³

In May 2024, the court granted WCAS’s motion to dismiss it from the lawsuit, though US Anesthesia Partners’ motion was denied.²³ Thus, the ultimate resolution of this question of antitrust enforcement is still unresolved, but WCAS will not be held directly responsible for USAP’s actions. Nevertheless, the negative impact of such consolidations and the financialization of healthcare that results from PE ownership are well-documented, and the future of private capital investment in healthcare needs to be carefully considered while value-decreasing and cost-inflating PE strategies remain lawful.^3,24,25

The Shift Toward Value-Based Care (VBC) Models: New Beginnings or Continuing Consolidation Strategy?

In October 2019, TPG Capital, another leading global PE firm, executed a non-controlling strategic investment in Kelsey-Seybold Clinic Partners, a renowned leader in multispecialty medical group practice management.²⁶

In contrast to the LBO deal type and surprise billing business model deployed by KKR through Envision, the goal of TPG and Kelsey-Seybold’s partnership was two-fold: first, to expand the accountable care model to more geographic locations in the Houston area; and second, to provide additional capital and strategic expertise to the physician leadership who would maintain control of the organization. (Although, TPG quickly flipped the practice to UnitedHealthcare’s Optum in 2022.²⁷ (see related article by Rooke-Ley and Bowling in this issue of HMPI)

This is just one example of how PE has turned its focus to VBC in recent years. According to a 2022 McKinsey analysis, investment activity in companies focused on VBC over patient volume (traditionally seen in fee-for-service or surprise billing models) has increased more than 400% between 2019 and 2021.²⁸ (see study by Nembhard et. al. in this issue of HMPI) Additional examples of recent deals include Kinderhook Industries’ $500 million investment in VBC physician group Physician Partners and the insurance company, Humana’s, $1.2 billion joint venture with Welsh, Carson, Anderson & Stowe to expand the insurer’s VBC clinics for Medicare patients, CenterWell Senior Primary Care.^29,30 Similar to TPG’s investment in Kelsey-Seybold, Humana and WCAS aim to scale clinic operations and platform through de novo expansion and inorganic growth.

Analysts largely agree that the growing activity around VBC investments in the private sector is likely driven by concurrent public policy shifts aimed at aligning payor, provider, and investor incentives through improved reimbursement of VBC models.³¹ However, while these changes may be encouraging, healthy skepticism is still warranted, given the fact that many new VBC systems are just consolidated managed care organizations (MCOs), and thus continue to run the risk of gaining monopolistic market share and pricing power.³²

Takeaways & Remaining Questions

PE’s primary aim of generating returns for investors have often led to tensions between their profit motives and the intrinsic values of the healthcare services they are acquiring and operating, such as accessibility and quality of patient care.^25,32,33 Critics argue that the short-term investment horizons of some PE firms may not always align with the long-term nature of healthcare delivery, potentially leading to cost-cutting and profit-maximizing measures that could negatively impact patient care.^32,33 In addition, the emphasis on financial performance might overshadow the fundamental healthcare mission of providing patient-centered care. Concerns about PE investment stem from the existing correlations of negative impact on patient care and outcomes with PE acquisition and ownership.^25,34

Examples of the historically popular LBO model have not reflected kindly on PE as healthcare systems like Envision Healthcare, Hahnemann Hospital, and Steward Health Care failed to produce the outsized earnings needed to repay their debt and thus faced bankruptcy following PE ownership.^19,35–37 (see related Kumar article in this issue of HMPI) The model’s profitability has not only been heavily impacted by regulatory change like the No Surprises Act which removed a key revenue stream—out-of-network surprise billing—but also is subject to significant macroeconomic risk as PE’s ability to repay debt depends heavily on interest rates influencing their cost of capital. An open question, especially from the Steward bankruptcy, is the impact on the community from the financial collapse of an essential public service.^24,25

This model has left a great deal of carnage in its wake. In addition to the financial damage to the PE firms themselves from pursuing an unsavory (even unethical) business strategy, there is the loss to the community of the underlying healthcare company, the jobs lost as a result of LBO-induced bankruptcies, and the brunt of the consequences of the business model often manifest as higher prices for patients and worse clinical outcomes due to resource stripping to drive profitability.^24,25

While the roll-up model differs from the LBO in its degree of macroeconomic risk, it shares a key question of how PE constructs their core business model. In this case, the concern is that the strategy will use market leverage to drive up prices for services. The USAP case will help define the limits of this strategy and may portend its future application across provider markets.

Finally, the shift in PE add-on focus toward VBC may reflect hope that regulatory and reimbursement model innovation can drive PE cash flows toward delivering greater value to patients. However, as with all roll-ups, PE encounters the same risk of challenges with integration and cost-effective synergy. Furthermore, a common exit strategy is for PE to sell the consolidated outpatient entity to a healthcare services conglomerate, such as Optum, Elevance Health, and CVS Health, which raises further questions about price and quality of clinical services. Physicians and patients may find themselves whipsawed as ownership and governance of practices shift rapidly in the market.

Recommendations for the Future of Healthcare and PE

While the cash flows of healthcare delivery remain an attractive target for PE investors, the healthcare system is forced to grapple between the access to capital offered by private investment and the obligation to generate the financial returns required to sustain this investment model. The experience to date of several strategies to solve this equation seem to suggest that we have not yet reached an attractive solution that benefits patients in their search for affordable, high-quality healthcare services. Whether the adoption of “value” as a strategy for the latest round of investments results in a sustainable solution to this challenge remains an open question at this point.

Some observers have recommended policy strategies including improved regulation of fraud and abuse, greater antitrust oversight, regulating price inflation especially with consolidation and roll-ups in areas with limited market competition, and significantly increased transparency in the reporting of PE acquisitions.³⁸ Antitrust enforcement is also a challenge, Currently, only acquisitions over $111.4 million must be reported (under which only 10% PE acquisitions fall), so acquisition of smaller physician practices could easily be missed by antitrust agencies.

There is also concern about the lingering impact of PE investment strategies on cost, quality, and access over time. When individual firms fail, the public must struggle with the fallout. Bankruptcy of PE-backed healthcare firms was the most dominant business failure of any PE-backed sector in 2023.³⁹ The failure of a PE-backed retail chain not only has an impact on employees; it also limits access to essential services for the community. This begs the question of whether the public should be concerned over the long-term impact of PE-investment in healthcare. There is no data yet on what happens to health and healthcare after these bankruptcies. Healthcare providers are a limited resource, and financial distress may motivate early retirement or migration of providers from unstable markets.

As PE focuses more on VBC, many of the top firms ultimately exit their outpatient and specialty care investments by selling to large insurers and their health services branches.^27,40 Because regional and services consolidation strengthens these companies’ market power and could lead to higher costs, this strategy could add to the continuously rising cost burden on patients and the entire U.S. healthcare system.^40–42

Finally, the challenges of PE investment in healthcare reflect the issue that there is no public agency charged with oversight of healthcare markets in their entirety. There is limited data into the structure of care delivery across markets, and no entity responsible for reviewing this data. The new data transparency requirements may provide some insight into prices across markets and may bring greater visibility to business practices that serve to drive up prices.⁴¹ However, these rules still do not extend to many PE-backed practice models.

 

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11. Envision Sold to KKR for $9.9 Billion. Bass, Berry & Sims PLC. https://www.bassberry.com/experience/envision-sold-to-kkr-for-9-9-billion/. Published June 11, 2018. Accessed April 12, 2024.
12. Al-Muslim A. KKR to Acquire Envision Healthcare for $5.5 Billion. Wall Street Journal. https://www.wsj.com/articles/kkr-to-acquire-envision-healthcare-for-5-5-billion-1528718957. Published June 11, 2018. Accessed April 12, 2024.
13. Appelbaum E. Envision Bites the Dust. Center for Economic and Policy Research. https://www.cepr.net/envision-bites-the-dust/. Published July 10, 2023. Accessed April 12, 2024.
14. Cooper Z, Scott Morton F, Shekita N. Surprise! Out-of-Network Billing for Emergency Care in the United States. J Polit Econ. 2020;128(9):3626-3677. doi:10.1086/708819
15. Kincaid E. Envision Healthcare Infiltrated America’s ERs. Now It’s Facing A Backlash. Forbes. https://www.forbes.com/sites/elliekincaid/2018/05/15/envision-healthcare-infiltrated-americas-ers-now-its-facing-a-backlash/. Published May 15, 2018. Accessed April 12, 2024.
16. Terhune C. A Jolt To The Jugular! You’re Insured But Still Owe $109K For Your Heart Attack. KFF Health News. https://kffhealthnews.org/news/a-jolt-to-the-jugular-youre-insured-but-still-owe-109k-for-your-heart-attack/. Published August 27, 2018. Accessed April 12, 2024.
17. Richman BD, Hall MA, Schulman KA. Overbilling and Informed Financial Consent — A Contractual Solution. N Engl J Med. 2012;367(5):396-397. doi:10.1056/NEJMp1205225
18. Doherty K. KKR-Backed Envision Healthcare to Consider Bankruptcy Filing. Bloomberg: Business Deals. https://www.bloomberg.com/news/articles/2020-04-20/kkr-s-envision-healthcare-said-to-consider-bankruptcy-filing. Published April 20, 2020. Accessed April 12, 2024.
19. Khushi A. KKR-backed Envision Healthcare files for bankruptcy. Reuters: Deals. Published May 15, 2023. Accessed April 12, 2024. https://www.reuters.com/markets/deals/kkr-backed-envision-healthcare-files-bankruptcy-2023-05-15/
20. Kully DC, Katz B, Racowski K, Lundgren Z. FTC Sues Private Equity Firm, Portfolio Company Over Anesthesiology Roll-Up Strategy. Holland & Knight: Insights. Published September 26, 2023. Accessed May 13, 2024. https://www.hklaw.com/en/insights/publications/2023/09/ftc-sues-private-equity-firm-portfolio-company-over-anesthesiology
21. La Forgia A, Bond AM, Braun RT, et al. Association of Physician Management Companies and Private Equity Investment With Commercial Health Care Prices Paid to Anesthesia Practitioners. JAMA Intern Med. 2022;182(4):396-404. doi:10.1001/jamainternmed.2022.0004
22. Adler L, Milhaupt C, Valdez S. Measuring private equity penetration and consolidation in emergency medicine and anesthesiology. Health Aff Sch. 2023;1(1):qxad008. doi:10.1093/haschl/qxad008
23. Federal Trade Comm’n v. U.S. Anesthesia Partners, Civil Action 4:23-CV-03560.(United States District Court, Southern District of Texas 2024). Accessed June 25, 2024. https://casetext.com/case/fed-trade-commn-v-us-anesthesia-partners
24. Andersen JL. Impact of Private Capital And Financialization On Health Equity: A Response To Enekwechi. Health Aff Forefr. Published online January 3, 2024. doi:10.1377/forefront.20231222.899436
25. Borsa A, Bejarano G, Ellen M, Bruch JD. Evaluating trends in private equity ownership and impacts on health outcomes, costs, and quality: systematic review. BMJ. 2023;382:e075244. doi:10.1136/bmj-2023-075244
26. Kelsey-Seybold Clinic Partners with TPG. Kelsey-Seybold Clinic | Press Releases. https://www.kelsey-seybold.com/newsroom-landing/archive/kelsey-seybold-clinic-partners-with-tpg. Published January 21, 2020. Accessed April 12, 2024.
27. Goldsmith J. Multispecialty medical groups are rapidly losing their independence. STAT | First Opinion. https://www.statnews.com/2024/01/17/geisinger-health-system-multispecialty-medical-groups-value-based-care/. Published January 17, 2024. Accessed June 15, 2024.
28. Abou-Atme Z, Alterman R, Khanna G, Levine E. Investing in the New Era of Value-Based Care. McKinsey & Company; 2022. Accessed April 13, 2024. https://www.mckinsey.com/industries/healthcare/our-insights/investing-in-the-new-era-of-value-based-care
29. Kinderhook leads $500 million Investment in Physician Partners to Back Mike Polen and Management. Kinderhook Industries. https://www.kinderhook.com/press-release/kinderhook-leads-500-million-investment-in-physician-partners-to-back-mike-polen-and-management/. Published February 1, 2022. Accessed April 13, 2024.
30. Humana’s CenterWell Senior Primary Care and Welsh, Carson, Anderson & Stowe Announce Second Joint Venture to Develop and Operate Value-Based Primary Care Clinics for Medicare Patients. Humana News. https://press.humana.com/news/news-details/2022/Humanas-CenterWell-Senior-Primary-Care-and-Welsh-Carson-Anderson–Stowe-Announce-Second-Joint-Venture-to-Develop-and-Operate-Value-Based-Primary-Care-Clinics-for-Medicare-Patients/default.aspx. Published May 16, 2022. Accessed April 13, 2024.
31. Q2 2023 PitchBook Analyst Note: Value-Based Care: An Investor’s Guide. Pitchbook; 2023. Accessed April 13, 2024. https://pitchbook.com/news/reports/q2-2023-pitchbook-analyst-note-value-based-care-an-investors-guide
32. Brown ECF, Adler L, Duffy E, Ginsburg PB, Hall M, Valdez S. Private equity investment as a divining rod for market failure: Policy responses to harmful physician practice acquisitions. USC-Brook Schaeffer Initiat Health Policy. Published online October 5, 2021. Accessed April 8, 2024. https://policycommons.net/artifacts/4142287/private-equity-investment-as-a-divining-rod-for-market-failure/4950745/
33. Casalino LP, Saiani R, Bhidya S, Khullar D, O’Donnell E. Private Equity Acquisition of Physician Practices. Ann Intern Med. 2019;171(1):78. doi:10.7326/L19-0256
34. Kannan S, Bruch JD, Song Z. Changes in Hospital Adverse Events and Patient Outcomes Associated With Private Equity Acquisition. J Am Med Assoc. 2023;330(24):2365-2375. doi:10.1001/jama.2023.23147
35. D’Mello K. Hahnemann’s Closure as a Lesson in Private Equity Healthcare. J Hosp Med. 2020;15(5):318-320. doi:10.12788/jhm.3378
36. Lexa FJ. Hahnemann-The Fast Death of an Academic Medical Center and Its Implications for US Radiology. J Am Coll Radiol JACR. 2020;17(1 Pt A):82-85. doi:10.1016/j.jacr.2019.08.001
37. Steward Health Care says it is selling the 30+ hospitals it operates nationwide. AP News. https://apnews.com/article/steward-hospital-bankruptcy-264edc6309f7b9eaa309c4113211ce30. Published May 8, 2024. Accessed June 19, 2024.
38. Cai C, Song Z. A Policy Framework for the Growing Influence of Private Equity in Health Care Delivery. J Am Med Assoc. 2023;329(18):1545-1546. doi:10.1001/jama.2023.2801
39. Thomas D, Sabater A. US private equity portfolio company bankruptcies spiked to record high in 2023. S&P Global Market Intelligence. https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/us-private-equity-portfolio-company-bankruptcies-spiked-to-record-high-in-2023-80000182. Published January 11, 2024. Accessed May 13, 2024.
40. Baumgarten A, Hempstead K. Post-Pandemic Strategies For Retailers And Primary Care: Access And Quality Implications. Health Aff Forefr. doi:10.1377/forefront.20230612.304249
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42. Chernew ME, Pany MJ, Dafny LS. Two Approaches To Capping Health Care Prices. Health Aff Forefr. Published online March 31, 2022. doi:10.1377/forefront.20220329.385487

Lucy W Ma, Stanford University School of Medicine and Graduate School of Business; Shreya A Shah, Stanford University School of Medicine and Graduate School of Business; and Kevin A Schulman, Stanford University School of Medicine and Graduate School of Business, and Clinical Excellence Research Unit, Stanford University School of Medicine

Contact: lucywma@stanford.edu

Introduction

Private equity (PE) has held a longstanding interest in the healthcare sector, driven by the economic resilience of the sector and its continuous need for capital and innovation. Since the 1980s, PE has gained substantial momentum investing in healthcare services and pharmaceutical companies. For example, an early significant deal in 1989 was a $5.1 billion leveraged buyout (LBO) of Hospital Corporation of America (HCA) by Kohlberg Kravis Roberts (KKR), along with Bain Capital and Merrill Lynch. Over the decade following the 2008 economic crisis, sustained low interest rates significantly boosted PE investment activity not only in healthcare but across various industries.¹ However, the healthcare sector saw a disproportionate increase in attention from PE firms due to its stable growth prospects and critical role in society.²

Since the early 2000s, there has been a noticeable shift in the allocation of PE funds within the healthcare services sector, specifically among different types of providers, specialists, and care delivery practices. However, by 2020 there was significant concern about some PE investment strategies in healthcare. One business model that received negative public attention was PE-backed clinical practices that remained out-of-network for health plans, allowing the providers to send exorbitant balance bills charging patients for charges for their services. This practice of “surprise medical bills” led to the enactment of the No Surprises Act (NSA) of 2020, which sought to relieve patients of the financial burden when receiving care without prior informed consent about provider fees.³ Concurrently, 2020 saw the outbreak of the COVID pandemic, causing significant economic distress in the United States, followed by a dramatic rise in interest rates in 2022. As a result, the traditional model of leveraged buyouts (LBOs), which was highly reliant on low rates to refinance debt and often necessitated producing “outsized” earnings to repay immense debt, became less viable. Their notable decline also corresponded with an increase in add-on and roll-up deals, reflecting a strategic pivot towards consolidation and operational improvements in existing companies.

These strategic adjustments highlight the adaptability of PE firms to a changing economic and regulatory environment. The purpose of this paper is to analyze the investment patterns of PE in the healthcare sector, particularly focusing on how deal strategies and target sub-industries have shifted before and after 2020, using comprehensive data from Preqin, the leading database on private investment activity and PE financial data. Through this analysis, we aim to understand the impact of economic and regulatory changes on PE investment behaviors and strategies within the U.S. healthcare landscape.

Methods

Dataset

Using data from Prequin, we identified 2,712 PE healthcare deals that had been recorded between January 1, 2014 to December 31, 2023. We first focused on all buyout strategy deals in the timeframe listed above, and included investment deal types including growth, acquisition/buyout, add-on & merger, and other. The “other” category comprised the following deal types: corporate carve out, company formation, joint venture, LP direct, GP stakes, PIPE, private debt, recapitalization, restructuring, and spin-off. Descriptions of the PE’s two primary deal strategies—buyouts and add-ons—and their significance are covered in-depth in the Discussion section. Additional definitions of the other deal strategies included in our dataset can be found in the Appendix (section A.iv). We also included deals with the sectors of Healthcare and Healthcare Specialists listed as the primary industry of the target companies. Finally, we included all deals with the investor and deal locations listed as the United States. We excluded deals that were listed as venture capital strategy, early-stage and late-stage deal types, non-U.S.-based investors or target companies, and had primary industry sectors which were not Healthcare or Healthcare Specialists or were in non-services sectors within the Healthcare category: biopolymers, biotechnology, healthcare IT, medical devices & equipment, and pharmaceuticals.

We also categorized each deal by their sub-industry and specialist service labels in Prequin.

Sub-industries included aesthetic medicine; alternative medicine; clinics/outpatient services; diagnostic, medical & imaging laboratories; emergency services; epidemiology; home healthcare, nursing homes & assisted living; and hospitals.

Specialist services were divided into cardiology; chiropractic; orthopedic & physical therapy; dental products & services; dermatology; healthcare specialists; mental health services; oncology/cancer treatment; and optometrists & opticians products and services.

Analysis

After cleaning the data, we first assessed the descriptive statistics of our data to understand the deal types, sub-industries, and specialists that comprised our included deals. Next, we assessed the number of each deal type that occurred per year. Then we segmented the deal types based on whether it was completed before December 31, 2020 or after January 1, 2020 (pre- vs. post-2020).

Given that we are comparing a seven-year period (pre-2020) and a three-year period (post-2020), we compared the proportions of deals, instead of the raw number, in order to normalize our evaluation of the change in deal types between the two periods. We compared the proportions of each sub-industry and specialist service, among all the deals, on a yearly basis and in the pre- vs. post-2020 periods.

We used Pearson’s chi-squared test to evaluate whether the change in the proportion of deal type, sub-industry, and specialist services was statistically significant between the pre- vs. post-2020 periods. All statistical analyses were performed using R version 2023.12 “Ocean Storm.”

Results

In total, 2,712 unique deals, reflecting 2,821 total deal types, met inclusion criteria for our study (Figure 1). In our cohort, add-on deals were the majority deal type (52%), followed by buyouts (14%) and growth deals (10%)  (Table 1a). The median deal size was USD $200 million (interquartile range, IQR $50-700M), and the median enterprise value was $475 million (IQR $120M-1.1B). Deals involving specific sub-industries and specialist services were 71% and 18% of the data, respectively (Table 1b, 1c). Out of the sub-industry deals, nursing homes, clinics/outpatient services, and hospitals were the highest represented categories and had nearly equal proportions (23-24%). Among the deals involving specialist services, mental health services (24%) and dental products and services (24%) comprised the greatest proportion, followed by dental (18%), optometry (16%), and chiropractic and physical therapy practices (15%).

Figure 1 – Flow diagram of deals in study

Table 1 – Descriptive statistics of all deals included in study, sorted by: a) deal type, b) sub-industry, c) specialist services

 

Diving deeper into the deal types, a preliminary analysis of the yearly number of deals by deal type from 2014 to 2023 shows add-ons and buyouts dominating the majority of deals from 2014 to 2020 (Figure 2). Growth drivers of healthcare investments since 2014 included a robust stock market, which increased access to capital and enabled higher company valuations attracting PE investment activity; low interest rates, which reduced cost of debt and decreased financing risk, also enabling investments; the passage of the Affordable Care Act in 2010 driving healthcare reform and consolidation as it promoted pay-for-value over pay-for-volume reimbursement models; Trump’s election and his administration’s business-friendly policies which boosted M&A activity; and the COVID-19 pandemic which accelerated digital health solutions, telemedicine, and overall healthcare delivery expansion and opportunity to break into new geographic sectors and markets..^4,5 Around this point, we see a massive rise in add-ons from 2020 to 2021 and then a gradual leveling out back to its previous baseline seen during 2018 to 2020 (Figure 2, purple curve). In contrast, buyouts demonstrate a steady drop-off in 2018 and then again in 2021 through 2023 (Figure 2, orange curve).

Figure 2 – Change in number of each deal type by year from 2014-2023

Segmenting the deal types into pre- and post-2020 periods, we initially observe that add-ons consistently represented a significant portion of all deal types in both periods, with buyouts and growth deals following behind (Table 2). While growth, privatization, merger, and other deals account for relatively similar proportions of pre- and post-2020 deal types, there were notable changes in buyout, secondary buyout, add-on, and recapitalization deals, particularly in their proportions between the two periods (-53%, -45%, +35%, and -54% change in proportions, respectively; p < 0.001 for all comparisons).

Furthermore, within sub-industry deals between pre- and post-2020, we found statistically significant decreases in PE investment in aesthetic medicine (-33%), emergency medicine (-47%;), epidemiology (-79%), and hospitals (-43%), as well as a significant increase in clinics/outpatient services (+117%) (p < 0.05 for all). Finally, among the deals involving specialist services, we determined there was a statistically significant increase in PE investment into cardiology (+185%), chiropractic and physical therapy (+89%), and other specialist practices (+139%) and a statistically significant decrease in mental health service (-19%) and optometry practice investments (-11%) (p < 0.05 for all). The yearly number of deals by sub-industry and specialist service can be found in the Appendix (Table A.i-iii, Figure A.i-ii)

Table 2 – Deal types, sub-industries, and specialists by pre- and post-2020 period

Discussion

Healthcare has historically represented an attractive investment opportunity for PE due to its recession-resilient economic growth, legislative efforts to encourage innovation, and growing need for capital. In particular, since the 2008 economic crisis, a consistent slough of years with low interest rates under 3% have drastically increased PE’s investment activity across the board (Figure 3).^6,7 Total capital invested by PE has increased as interest rates have dropped, reflecting an inverse correlation of capital invested and Fed rate.⁶ Of note, over this period, PE firms shifted a greater proportion of their investment funds toward healthcare and away from other sectors. For instance, the proportion of PE capital invested in healthcare leveraged buyouts (LBO) shifted from less than 5% of all LBO funds in 2000 to 14% in 2018.⁷

In this study, we sought to examine the types of deals that characterized healthcare PE investment over the past decade. Given the lack of transparency and data around PE activity in the healthcare sector, we aimed to better characterize their investment choices.⁸

Since the 1980s, the most common financing model used by PE in healthcare has been an LBO, in which a PE firm uses a significant amount of borrowed money to buy a majority stake in a healthcare company. The buyout targets of these transactions tend to be healthcare companies with strong stable cash flows and opportunity for potential operational improvements to generate high enough earnings to repay the debt used to acquire the company. Debt can represent a significant portion of payment for the target, sometimes as high as 70%⁷. The ultimate goal of many LBOs is to sell the acquired company at a higher value than its purchase price, such as to another PE firm, a public offering, or another company.^5,7,9

Another investment model is the “platform and add-on” or “add-on and merger” approach, which aims to build value through consolidation of smaller companies into a platform, or a larger, core company.¹⁰ Also called “buy and build”, this strategy seeks to create value through synergy, economies of scale, and in some cases, care coordination to address patients’ diverse needs.² The platform company typically has substantial market share, financial stability, and a scalable business model to integrate “add-on” acquisitions effectively. These add-ons are smaller companies that are integrated into the platform to drive growth, achieve cost efficiencies, diversify services offerings (such as different clinical specialties), or expand market share (which often also increases the PE ownership and platform company’s pricing power or negotiating power with payers).¹¹

In our data analysis, we found a stark drop in buyout deal types after 2020, including secondary buyouts.7 Add-on deals increased in proportion by 35%, accounting for a majority of PE deals in the post-2020 period. Furthermore, the total deal value in healthcare dropped significantly from $151 billion in 2021 to $90 billion in 2022.^4,5

Our finding of the decrease in healthcare investments, in particular LBOs, likely converges with two macroeconomic factors. First, as U.S. economic activity recovered after the pandemic, interest rates have increased to multi-decade highs, which means PE funds operating highly leveraged buyouts can no longer depend on a low cost of debt and higher valuations to turn a profit.⁶ Healthcare deals were very heavily funded by debt, which could include debt multiples of 11x despite Federal Accounting Standards Board recommendations that banks do not loan more than 6x EBITDA.^5,12 As a result, investors needed to focus more on actual revenue growth strategy and operational improvements to meet their expected returns. Second, the passage of the No Surprises Act (NSA) in 2020 restricted PE firms from investing in LBOs providing out-of-network healthcare services and then implementing a business model of surprise (balance) billing.^3,13,14

In addition to these two major considerations, we recognize other significant concurrent factors that contributed to decreased investments, including negative sentiment and growing criticism, tightening of labor markets necessitating higher wages, instability among banks which restricted financing deals over $1 billion, as well as a growing number of PE firms seeking to directly partner with hospitals, all of which changed PE’s investment foci and activity across the healthcare industry.⁴

Given the increase in the cost of debt and the limits in revenue resulting from the NSA, PE firms found that they could no longer continue LBOs. Conducting such highly leveraged deals placed excess pressure on PE firms to extract outsized earnings from their deals, a goal that drove incentive misalignment in healthcare, negatively impacting physicians and patients.^5,7

Further insight into the influence of the NSA on PE investment activity comes from analyzing the sub-industry and specialist trends. Aesthetic medicine, emergency medicine, and hospitals were all high targets of PE investment because elective medicine tended to be out-of-network, emergency medicine could also be out-of-network (a big focus in roll-ups and surprise billing^15–17), and hospitals could be obtained in LBOs and their assets used as collateral for loans. As a result, the correlation of the decline in these three sub-industries with the passage of the NSA in 2020 appears consistent with the logic that the NSA disrupted these sectors’ reliable profitability for PE in the setting of LBOs and investors have shifted their primary focus away from this strategy, at least for now.

Since 2020, we observe a dramatic rise in clinics and outpatient services from 17% to 36%, a statistically significant 117% increase that may be part of PE’s growing shift toward add-on deals. Add-ons are an effective way for PE firms to gain market share and pricing power through consolidation of local and regional players, and PE has traditionally implemented this deal type in anesthesiology and emergency medicine.¹⁸ However, with the rise in value-based care (VBC) reimbursement models, PE seems to be following the tides of regulatory shifts, away from LBOs of out-of-network practices and surprise billing, and toward consolidation of specialist outpatient clinics. In fact, PE investment activity in companies focused on VBC over patient volume (traditionally seen in surprise billing models) has increased more than 400% between 2019 and 2021 according to a 2022 McKinsey report.¹⁹

Surprisingly, we had expected to observe a much more significant increase in PE investment toward imaging laboratories and decrease in investment toward nursing homes pre- and post-2020 because of the profitability of radiology services (due to increasing technology and imaging usage in medical standard of care, as well as reliably high patient throughput) and the negative outcomes seen in PE-owned nursing homes, respectively.^20,21 However, our analysis showed that investment in both of these sub-industries stayed relatively constant before and after 2020, with only a 1% increase in the proportion of laboratory service investments and a slight decrease in the proportion of nursing homes out of all PE healthcare investments. We hypothesize that PE’s stagnant interest in radiology services, compared to rising activity involving clinics and outpatient services, likely derives from shifting reimbursement trends in the market.

Another possible hypothesis is that PE’s motivation to acquire clinics followed the boom in large retailers’ consolidation of physician practices. As big-box retailers and pharmacy chains like Walmart, CVS Health, and Walgreens sought to create integrated care networks and leverage market power, PE likely identified a key opportunity in improving or consolidating previously fragmented primary care physicians and other specialist practices in key geographies or markets and selling them as strategic add-ons. The most prominent examples include the acquisition of practices by firms like One Medical, Iora Health, and Oak Street Health, with peak investment years around 2017 and 2018, and the eventual acquisition of these companies by the aforementioned big-box retailers and pharmacy chains: Amazon and One Medical, CVS and Oak Street Health.^4,22–24 Further research and analysis is needed to fully examine the nature of these relationships and the impacts of these retailer acquisitions on patient outcomes and healthcare costs.

The critical question that has been raised in the healthcare PE setting is whether the incentives of funds driven by short-horizon, high-percent ROI can truly be aligned with the needs for improved longitudinal patient outcomes and sustainability of a high-quality care delivery system. We believe that public policies like the No Surprises Act are critical guardrails to prevent adverse strategies by powerful financial entities that can destabilize, even lead to the collapse of, existing healthcare systems.²⁵ However, punitive or restrictive measures alone are not enough; policy that positively reinforces improving sustainability, enhancing quality of care, and decreasing costs is just as important. Finally, continuing research needs to examine how PE ownership might affect outcomes of patients cared for by their portfolio companies.

Limitations

As with any retrospective study, our work has limitations to address. First, our data on PE investments was limited to Preqin, public news articles, and press releases. As a result, there may be a few deals missing from our time period if they were not publicly released or recorded in Preqin. However, given that Preqin is the leading source for private investing activity, we chose to utilize Preqin data over Pitchbook because of the high quality of the database and the ability to conduct much more in-depth and rigorous data analysis external to the platform.

Second, our study’s outcome of interest—change in investment deals pre- and post-2020—is a transition point that marks several significant events, from the NSA to the COVID-19 pandemic to significant macroeconomic factors. As a result, we are not able to fully disentangle the impact that each factor might have had on our analysis. Given the complex landscape of the healthcare industry, we readily acknowledge that all these aspects contributed to the changes we observe in PE investment trends.

Finally, underreporting of PE investments, in particular smaller deal sizes and enterprise values, is a well-known occurrence and limitation of all private finance databases.⁸ There may be a higher number of PE deals over the last ten years than those included, likely with lower valuations since only acquisitions over $111.4 million must be reported. Nevertheless, Preqin is the most comprehensive database on the private investments that we can readily download and process with more sophisticated data analysis tools, which provides quantitative rigor and critical insight into the factors that we evaluated for association with our outcomes of interest.

 

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Appendix

Table A.i – Change in number of each deal type, year on year, 2014-2023 (correlates with Fig 2)

Table A.ii – Change in number of sub-industry deals, year on year, 2014-2023

Figure A.i – Change in number of sub-industry deals, year on year, 2014-2023

Table A.iii – Change in number of specialist deals, year on year, 2014-2023

Figure A.ii – Change in number of specialist deals, year on year, 2014-2023

A.iv Definitions of “Other” Deal Types

• Public to private or privatization involves purchasing all outstanding shares of a publicly traded company to take it private, thereby removing it from the stock exchange.
• A secondary buyout is when one PE firm sells a portfolio company to another PE firm. This allows the selling firm to realize returns on its investment while providing the acquiring firm with an opportunity to further grow and optimize the business before pursuing its own exit strategy.
• Corporate carve outs involve PE firms acquiring a target company and dividing it up to sell for parts.
• Company formation strategy is when PE firms create new companies from scratch.
• Joint venture is when two or more PE firms partner to combine resources and also share risk, leverage strengths, and achieve mutual growth objectives.
• In LP direct strategy, limited partners (LPs) make direct investments into companies, bypassing traditional PE fund structures and retaining greater control over their own investments.
• GP stakes involve investing in the general partners (GPs) of private equity firms, acquiring minority stakes in the management companies themselves.
• Private investment in public equity (PIPE) is investing directly in publicly traded companies through the purchase of shares at a discounted price, often combined with warrants or convertible securities, which enables public companies to raise capital efficiently while PE firms can acquire equity stakes with potential upside.
• Private debt is when PE firms provide loans or credit to companies that are not typically served by traditional banks, often in the form of senior debt, mezzanine financing, or distressed debt, and PE firms profit off interest payments.
• Recapitalisation involves restructuring a company’s debt and equity mixture to optimize its capital structure, often replacing old debt with new debt and terms.
• Restructuring strategy is when PE firms reorganize a company’s operations, finances, or structure to improve its performance, enhancing its value and returning it to profitability.
• Lastly, spin-offs are the separation of a subsidiary from its parent company to create an independent entity and in turn aim to enhance its operational efficiency, growth potential, and profitability.