The Miami symposium wasn't exactly explosive with encouragement for not-for-profit hospitals like Wyoming Valley and Nyack. In fact, when Nyack's Trust posed a direct question about private-equity interest in not-for-profit hospitals to a panel providing "the companies' view," he got a lot of dead air and blank looks before one of the three panelists suggested that if private-equity firms are focused on not-for-profit healthcare, it is probably only in terms of purchasing a hospital before converting it to for-profit status. Another panelist suggested that private-equity investors might be interested in providing services to the not-for-profit sector but not in owning anything.
That all turned around later in the afternoon during a panel discussion on investment banking for healthcare services. Matthew McAskin, vice president in the investment banking division of Goldman, Sachs & Co., lifted Trust's spirits when he declared that the not-for-profit space was seen "as the holy grail" for the public and private markets. "There is a huge untapped market out there," he said at the time.
"That made my day!" Trust said later that afternoon.
McAskin qualified those comments a bit later, noting that there are inherent challenges from a governance and ownership standpoint, but nevertheless 85% of all healthcare services are in not-for-profit settings. Wanting control, most private-equity firms would be reluctant to get involved in not-for-profit ventures, but there could be opportunities in noncore services or specific service lines, he says.
Outsourcing is another high-growth area of investment for private-equity companies. "It's such a large market," McAskin says. "I think not-for-profits are becoming more sophisticated, and it's not just acute care. People are becoming smarter about the assets in their system and are finding ways to partner and reap rewards. It's going to be interesting in the next couple years."
Other sectors of the healthcare industry may be further along in tapping into the private equity. Dan Hermann, managing director and group head for senior living finance at Ziegler Capital Markets, says the investment banking firm has set up its own private-equity funds to provide pre-finance capital for new not-for-profit continuing-care retirement communities.
"We call that startup capital, and it's grown into a relatively active area," Hermann says. Pools raised from investors are funding development and marketing costs needed to reach a two-thirds pre-sold requirement -historically a level demanded by the financial markets -- prior to qualifying for tax-exempt financing, Hermann says. The projects, which typically run in the $50 million to $200 million range, require anywhere from $5 million to $12 million in seed capital. The returns on these investments are "reflective of private-equity returns," somewhere in the 20% to 30% range, he adds. Hermann says Ziegler is involved in as many as eight new projects each year.
Private-equity money is definitely out there, although it is difficult to gauge how much is available since it is private, notes John Callahan, a partner at McDermott Will & Emery, who is focused on mergers and acquisitions in the health services and life sciences industries. Looking only at mergers-and-acquisitions activity in the healthcare industry, tracking firm Irving Levin Associates recorded 534 deals in 2006 totaling $90 billion, Callahan says. Eight deals alone-four of which were private-equity deals-accounted for $70 billion of the total.
Robert McCarrick, senior managing director of GE Healthcare Financial Services, says there are a lot of not-for-profits struggling to meet their business challenges by joint venturing while still maintaining their tax-exempt status. "I think it is something we are going to see more of. I don't think people have figured out how to do it yet," he says. Like McAskin, he says not-for-profit hospitals "in general have become a lot more competitive in their markets. If a hospital doesn't have a lot of access to capital, private equity can bring that as well as expertise. I think it can be compelling. It's just a matter of getting the right parties in the right situation and then being able to execute something that makes sense."
It won't be the easiest sell, although there is a lot of private-equity money out there "that people are looking to put to work," says Kip Kirkpatrick, a partner at Water Street Healthcare Partners, a middle-market healthcare-only private-equity firm. Nevertheless, Water Street has avoided the hospital sector "given its sensitivity to reimbursement changes. We prefer to be one or two steps removed from that direction," he says.
For her part, Koehler says she picked up "a lot of business cards" at the symposium, but no firm commitments. "I was very pleased," she says. "I have a lot of follow-up to do. I came back encouraged that no one said, 'That will never work.' I got a lot of names of people who said they want to know more."