Private equity firms are demonstrating a growing interest in the healthcare sector, and, with shrinking margins and growing capital expenses, many nonprofit healthcare organizations would welcome the attention. However, caution is merited before considering this approach.
"We're seeing lots of acquisitions of physician groups and more consolidation," says Brian Miller, president and founder of the nonprofit Healthcare Private Equity Association and managing partner in the Chicago-based private equity firm Linden Capital Partners. "As the healthcare landscape shifts … if a hospital can't afford an acquisition today they may look to partner with a private equity firm."
Growth tops the long-term strategic goals of many nonprofit healthcare organizations, and mergers and acquisitions and bricks-and-mortar expansions are two paths to achieve that end. The 2011 HealthLeaders Media Industry Survey showed nearly 46% of finance leaders anticipated either acquiring an organization or being acquired by another. Also, 26% of leaders plan their capital budgets for a new wing or building, according to the HealthLeaders Media Intelligence Report, 2011 Capital Spend: EMR Dominates Budget. The same survey showed that 42% of healthcare leaders anticipate increasing their capital expenditures budgets.
Mergers and acquisitions as well as expansion require large sums of capital, something that is—without the help of an outside funding resource—in short supply for many nonprofit healthcare organizations; indeed, 38% of finance leaders at nonprofits reported margins of less than 1.5%, according to the 2011 HealthLeaders Media Industry Survey. Reduced levels of revenue through Medicaid, Medicare, and reduced financing through the bond market have challenged nonprofit hospitals that have deteriorating operating margins and degraded credit ratings due to so-so balance sheets.
Stirring private equity interest
Though some nonprofit hospitals and health systems continue to turn to debt leveraging as a means to pursue growth opportunities, others are turning to and being welcomed by private equity firms. A Pepperdine University survey of private equity executives at the end of 2010 found that 11% planned to invest in healthcare, more than double what it had been just six months prior, 4.8%.