Health Care

Private equity’s healthcare role draws spotlight

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Testimony highlighted other potential issues at private equity-backed healthcare companies, including billing fraud allegations and dividend recapitalizations in which portfolio companies take on more debt to pay dividends to the private equity funds that made the investments. Ms. Howell said dividend recapitalizations create early cash flows for investors but can weaken companies with added debt.

With enough early cash flows, the private equity firm can provide investors strong returns even if the company goes bankrupt, Ms. Howell said.

However, the practice “put those companies at risk for restructuring, bankruptcy or cost-cutting to make up the interest payments and pay off debt,” Eileen O’Grady, healthcare coordinator of non-profit Private Equity Stakeholder Project, told the subcommittee. The Private Equity Stakeholder Project receives funding from unions and other non-profits.

Some private equity-backed companies that used dividend recapitalizations over the past year also received relief under The Coronavirus Aid, Relief, and Economic Security Act support, Ms. O’Grady said.

One such company is Prospect Medical Holdings Inc., a chain of hospitals primarily serving low-income patients, which is a portfolio company of private equity firm Leonard Green & Partners’ fund, Green Equity Investors V LP. During its ownership of the chain, the fund has taken dividend recapitalizations, including a $460 million dividend in 2018 when the company reported a $244 million net loss, Ms. O’Grady testified. Several Prospect hospitals have some of the lowest quality ratings from the Centers for Medicare & Medicaid Services, she added.

One of Green Equity Investors V investors, the $32 billion New Mexico State Investment Council, Santa Fe, has been looking into the matter since 2020, said Charles Wollmann, spokesman, in an email.

At a February meeting, members of the New Mexico State Investment Council voiced concerns with Green’s management of Prospect Medical, a recording of the meeting shows.

New Mexico State Investment Council member Nicholas Telles called the situation “deeply concerning, very unsettling.”

Debbie Romero, secretary of the New Mexico Department of Finance and Administration, said: “For us to do nothing is to accept potentially bad behavior.”

New Mexico State Investment Council has committed a total of $205 million to Leonard Green funds. Green Equity Investors V earned 21% IRR as of Sept. 30, according to a private equity report in February to the council from its private equity consultant, Mercer LLC.

Land Commissioner Stephanie Garcia Richard, also a board member, added that investment council officials need “to look carefully at some of their (Green’s) policies about reinvesting dividends into their properties, especially at this time when that kind of medical access is critical for certain populations that are being hit hard by the pandemic.”

Since that meeting, council staff contacted Leonard Green and shared the firm’s responses with council members, Mr. Wollmann said. So far, there is no formal council action pending, he said.

Erika Spitzer, partner who leads capital raising, investor relations and limited partner co-investment at Leonard Green, could not be immediately reached for comment.


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