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This is Scott Becker with the Becker Business Podcast. Today's discussion will we bring with you daily market insights, business insights. Today is a little bit longer episode. It's titled Private Equity in Healthcare Current Trends and Issues. So here's the deal with private equity in health care. We'll take you through this. Over the last several years, there's been a great deal of attention paid to private equity investing in health care. And some of that has been positive, some of that has been negative. A good deal of that intent of attention grew notably around health care investments by private equity funds that went really poorly. Perhaps the biggest name deal was the investment by a private equity fund in steward healthcare. And Steward Healthcare grew to be a 34 hospital system, then ultimately went bankrupt with some of those hospitals closing. Truly a disaster. The steward healthcare situation is really helpful in understanding where private equity health care investing in healthcare can go really wrong. But this isn't, and this is why this is important. It's not necessarily representative of all private equity investing as a whole. But the Stewart debacle was a debacle. It's been written about a lot. There's a great piece in the by the Lowen Institute. Stewart Implosion provides cautionary tale on private equity in health care. So again, that's steward healthcare and that's what some of what's given private equity investing in healthcare a black eye. But to give you a more general sense, private equity health care invests in a broad array of different areas. These can include hospitals and health systems, physician practices, outpatient facilities services, healthcare technology, dental services, a lot more. This also includes revenue cycle companies, AI companies and digital health companies. Private equity also invest in medical device firms Inc. And in pharmaceutical services and biotech companies. And again, a lot of it goes right, a lot of it goes wrong. There's also, it's worth noting, a clear distinction between healthcare venture capital investing and private equity investing. And this is similar across private equity venture capital as a whole. As a general rule, venture capital funds invest in earlier stage companies and generally not at the spot where they are profitable or have cash flow. So generally early stage, not profitable, or sometimes not even revenues. Oftentimes, right, they don't even have revenues at the time of investment. They're investing in a founder and an idea versus an ongoing business. In contrast, private equity funds largely invest in companies that have profits and have cash flow. They're generally past the startup phase. They could be growth companies or in a platform or or a platform company for further growth. Private equity in healthcare can be very successful or not, depending on a number of different factors. These factors can include the company that the fund is investing in, the market dynamics that the company is in, the management of the company, the headwinds and tailwinds facing the company and the industry they're in, and the amount of debt used by the private equity fund. And we'll talk more about debt and how it's part of the nature of private equity investing. By its nature and by design, private equity investors utilize mix of equity and debt to facilitate acquisitions. The company that the fund is investing in will generally have more debt after the acquisition than they did before the acquisition. I am one that generally hates debt, but that doesn't mean all debt is bad. And it's very hard to build a big company or do recaps on the kinds of things without some amount of debt as part of that type of doing transactions and growing companies. Now again, the occurrence of debt to fund acquisitions is not itself fundamentally good or fundamentally bad. However, when a private equity fund uses a lot of debt or places a lot of debt on a company, this can make the company a lot more fragile, that is more vulnerable to softening growth, unexpected challenges or market headwinds. So you see a lot of that. Thus, one critical issue in health care private equity transactions is is trying to measure and limit the overall amount of debt placed on a company, particularly when a company doesn't have high margins. Because this combination of lower margins, things going a little bit in the wrong direction, coupled with a lot of debt is generally a disaster. When private equity investments go poorly, it's often the mix of lower margins and or lower income combined with debt that creates serious challenges. Income goes down a little bit and the company has serious debt obligations to meet. And this could be a very bad combination. In healthcare, we find, and we've said already, the acquisition of lower margin businesses can lead to trouble. This isn't unique to private equity, and neither is the use of debt to finance acquisitions unique to private equity. However, because private equity by its nature uses debt, it can amplify and magnify problems when a private equity fund is acquiring lower margin businesses. A handful More Thoughts on Private Equity and Health Care Many private equity funded health care and hospital companies perform really well. Currently, about 8% of all hospitals are funded or owned by a company which has a private equity Investor. Similarly, nearly 7% of all physicians are part of a group that has a private equity investor. So when you look at this as a whole, 8% of hospitals, 7% of physicians, it's not an overwhelming number, but it is a serious number and a lot of those perform quite well in contrast to those that are performing well. But we have seen particular challenges when a private equity fund invests in practices or areas that have low margins. Primary care outside of the Medicare Advantage area. But even now with Medicare Advantage ob gynae where margins have been falling, these can be situations where the debt load placed on an existing practice creates a disaster. Even in those areas that there are some really successful large practices with private equity investors. Dooley Health Care is one of those that's been really successful with private equity investors over the last several years. The valuations of hospitals, health systems and physician practices have been fairly flat for some time. This is important, the values being flat. So it's made it harder for private equity investors to buy into these assets and then sell them to another buyer in A typical concept for private equity is we're going to buy something at one one price and then within three to seven years try and sell it at another price. This becomes much harder when valuations and multiples are not rising and in fact sometimes they're falling. That might change a little bit as interest rates start to correct themselves a little bit, go down a little bit. In addition, in terms of private equity and health care, more and more states have regulations that regulate the acquisition or provide notice on the acquisition of health care companies and assets by private equity investors. People often ask, why would a company or health system partner or sell to a private equity fund or private equity funded company? Generally, there are at least three core concepts. First, the private equity funded firm may provide a cash exit or cash infusion to the seller or to the practice or health system that wants to sell. Second, the practice or health system may need management expertise that they believe the investor can provide. And again, it's all over the board whether the investor is going to be useful or not. Third, the seller may need to sell due to difficult circumstances, I. E. They're in cash flow troubles, they've got other kinds of problems and so forth. There are other reasons why people do a private equity deal as well, but those are some of the three main ones trying to exit. They need help with management or they're in trouble and need to do something with a good number of them doing some amount of healthcare investing. Some really specialize in it, some don't. It's not one size fit, all fits all. Some private equity funds are great investors. Some are horrific all over the board. When doing a transaction with a private equity fund or sponsored company, a health system or A company has to really understand all the pros and cons and and what the operations will look like once the transaction is completed. They also need to know the vulnerabilities and sensitivities if they do a deal. Private Equity Defense also now joint venture with Health Systems to own and operate service certain service lines. Again, when you're doing so, it's critical that the hospital, health system or whoever doing a deal with private equity fund really understands what they're getting out of it and what the deal is likely to look like after the deal, how it's going to be operated after the deal is going to be so much debt on the company it's going to cause tremendous stress to the company or will the company still have some flexibility? Either way, you got to really understand the deal and the pros and cons of the deal. And you probably need good advisors too. Finally, health care, private equity investing and partnering should not be categorically viewed as good or bad. Rather, it really depends on the specific situation and what you're trying to accomplish. Again, we hope that people enjoy this Private equity in health care Current trends and issues thank you for listening to the Becker Business Podcast. We come to you day with short episodes and then some longer episodes. We hope you find it useful and thank you for listening. If you get a chance, please go to Amazon Buy our book Building Great Businesses, Create Momentum, Overcome Setbacks and Scale with Confidence. Pre order the book. Thank you so much for listening.