​Private Equity Makes Inroads Into the Hospital Sector

Private equity is making significant inroads into the hospital sector, according to a recent report by the Private Equity Stakeholder Project (PESP). It tracks a similar trend of investments by private equity into the healthcare real estate space, such as senior living and medical offices, where these firms have been active for years.

PESP found that at least 386 US hospitals are owned by private equity firms, representing 9% of all private hospitals and 30% of all proprietary for-profit hospitals.

Also, more than a third (34%) of private equity-owned hospitals serve rural populations.

Brad Shokes, Managing Director, Healthcare, JLL, also notes this latter trend. “We are increasingly seeing activity by private equity firms in the rural hospital space, as well as the community-based healthcare model,” Shokes tells GlobeSt.com..

“I expect to see even more private equity investment not just in hospitals but in more community and local-based healthcare – especially in the payer-provider space, where insurance companies are creating medical portfolios.

“Additionally, private equity investment in both telehealth and IT will remain strong, as the pandemic has changed many of the dynamics of healthcare. The value of private equity is around funding innovation and change, but also in streamlining costs.”

Sale-Leaseback Transactions are Common

It is often unclear what share of assets private equity owns and this report sheds light on their activities in the hospital space and how it affects their operations. For example, many private equity-backed hospitals have gone through sale-leaseback transactions, selling their underlying real estate to a third party, typically a REIT, and leasing it back, according to the report.

While these transactions provide a quick way to monetize real estate and generate cash, they can leave hospitals with fewer assets and higher monthly lease payments, according to the report.

According to the report, just a handful of private equity firms are active in this space. They include Apollo Global Management (LifePoint Health, ScionHealth), Equity Group Investments (Ardent Health Services), One Equity Partners (Ernest Health), GoldenTree Asset Management and Davidson Kempner (Quorum Health), Surgery Partners (Bain Capital), and Webster Equity Partners (Oceans Healthcare).

PESP also found that Texas has the most private equity-owned hospitals (85); the highest proportion of private equity-owned hospitals (43%) is in New Mexico; and psychiatric hospitals comprise 24.1% of private equity-owned facilities.