PwC: Private Equity Will Pick Up Non-Core Assets, Drive Innovation in 2019

National health care operators would be wise to consider selling non-core assets to expansion-minded private equity firms in 2019, according to a recent report from Big Four audit and accounting company PwC — while also looking to the investors as partners for growth and innovation.

“For years, private equity firms have invested in health care, but now the pace is quickening as they step up their presence in a highly fragmented health industry, seizing on consolidation opportunities to build a better business model,” analysts from the PwC Health Research Institute wrote in the report, which identified private equity investment as a key trend for the coming year.

While the global audit firm didn’t specifically point to skilled nursing in its assessment, PwC did mention the 2018 purchase of Kindred Healthcare — formerly a major player in the SNF space — by a pair of private equity firms and insurance giant Humana as indicative of the larger trend in health care finance.

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“The $4.1 billion deal complements Humana’s existing capabilities while capitalizing on private equity’s strengths to enable growth,” PwC observed.

PE firms’ influence over the overall economy has grown substantially over the last decade, with $1.35 trillion in assets under private equity control in 2017 — a significant jump from $75 billion in 2006, according to a PwC analysis. This has extended into the health care space, which has seen private equity deal count balloon from 229 in 2009 to a projected 747 in 2019.

Despite the reimbursement pressures facing a variety of providers, from hospitals to post-acute care operators, health care can represent a recession-proof hedge for private equity firms that invest in a wide variety of sectors.

“As private equity firms seek to balance their investments in more volatile industries, such as technology, with investments in more stable industries that are less prone to a recession’s effects, the growing healthcare industry may appear even more attractive,” PwC wrote.

At face value, the private equity model of finding efficiencies and cutting costs may seem incompatible with nursing homes and other care settings, and investors such as The Carlyle Group have faced criticism for their perceived lack of investment in crucial nursing home infrastructure. But the report echoed what many in the skilled nursing world have identified as a key advantage of private equity: an increased flexibility and focus on innovation.

“Private equity investment in health care isn’t going to single-handedly improve care quality, enhance the patient experience, or reduce health care costs to consumers. But it likely is fueling the efforts already in place,” PwC concluded in its report.

At the skilled nursing level, this has taken the form of specialized ownership groups — frequently consisting of former clinicians — that are more willing than larger, publicly traded real estate investment trusts (REITs) or banks to invest in new programs and specialities. Michael Smith, division president at the PE-owned Marquis Health Services in New Jersey, told SNN last year that the flexible investment model meant key operational changes could be made in weeks, not months or years.

“These are things that were honestly impossible with large organizations that weren’t forward thinking,” he said. “It’s a huge advantage.”

And amid the vertical integration plays sweeping the industry — most notably Welltower Inc.’s (NYSE: WELL) multi-billion deal to acquire HCR ManorCare in conjunction with hospital system ProMedica — private equity will see no shortage of opportunities to increase their sway in the coming year, according to PwC.

“Health care companies should consider selling non-core business units to private equity firms that have money to invest and may be more apt than a corporate buyer to purchase a single business unit,” the firm noted. “As megadeals complete, newly consolidated entities should consider shedding non-core assets, with private equity as a potential buyer.”

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