The past year has brought some notable private-equity investments in the healthcare sector.
Cerberus Capital Management, a New York-based private-equity firm, started on a healthcare buying binge last November. It began with the $895 million deal for six hospitals owned by the Archdiocese of Boston. Since then, Cerberus' Steward Health has added a string of deals to acquire four additional Massachusetts hospitals and officials have offered $1.1 billion for Jackson Health System, a government-owned and financially distressed system in Miami. Cerberus declined to comment for this article.
Meanwhile, the Blackstone Group owns a roughly two-thirds stake in Vanguard Health Systems, Nashville. In late 2010, Vanguard acquired the Detroit Medical Center, a six-hospital, not-for-profit health system.
At the same time, private-investor interest in healthcare appears increasingly mutual. In January, five health systems announced they would privately invest in healthcare companies with the Heritage Group, a Nashville-based investment and consulting group (Jan. 31, p. 6). Three for-profit hospital operators based in Tennessee—Community Health Systems, LifePoint Hospitals and Vanguard—and two not-for-profit systems, Iowa Health Systems, Des Moines, and Trinity Health in Novi, Mich., each committed up to $10 million to the fund, which set its fundraising target at $200 million.
Roughly one month later, Ascension Health, the nation's largest Catholic health system, and Oak Hill Capital Partners announced the formation of Ascension Health Care Network, a fund to invest in distressed Catholic hospitals (Feb. 21, p. 6).
The Ascension network listed seven Ascension Health executives and directors and five Oak Hill partners as officers and directors, according to a Securities and Exchange Commission filing. The new fund reached its initial fundraising target of $500,000, according to the filing.
Oak Hill declined to comment for the article.
The size of the healthcare market also makes it highly attractive for investors in search of deals.
“It's not an industry, it's a segment of the economy,” says Reeve Waud, founder and managing partner of the Chicago private-equity firm Waud Capital Partners. Waud says he first invested in healthcare in 1999 as the economy was slowing. (The U.S. entered an eight-month recession in early 2001.) Healthcare services would not be as vulnerable to outsourcing or downturns as other possible investments, such as manufacturing, he says.
The market is also highly fragmented, with smaller companies competing to emerge through growth or acquisitions as potential acquisitions for a limited number of major players, he says. “It's a target-rich environment.”
Often lacking are skilled healthcare executives, when compared with other more business-savvy industries, he says. Waud Capital scours for deals with strong management teams, he says.
Acadia Healthcare, a behavioral-health company owned by Waud Capital that last month acquired 13 facilities, recently named a few former Psychiatric Solutions executives to top positions including CEO, finance chief and chief operating officer. Universal Health Services, King of Prussia, Pa., acquired Psychiatric Solutions last year in a $3.3 billion deal.
The surge of seniors as baby boomers age also makes healthcare an attractive investment, says Riverside's Ibrahim. Seniors typically require more and more intensive healthcare. “The graying of America is a great investment thesis,” he says.
While the sector's size and fragmentation may be attractive, healthcare's regulation and major public payers are not, private-equity investors say.
Water Street avoids deals for companies heavily dependent on public or private payers and invests primarily in healthcare manufacturers, distributors or specialty outsourcing companies, Dugan says.
Medicare and Medicaid make up significant revenue for healthcare providers, he notes. Should Congress or regulators alter policy, investors fear revenue and profits may disappear “by the stroke of a pen.”