The structure and finances of private equity investors in the skilled nursing space have come under the federal microscope, with two U.S. senators and a U.S. representative demanding answers from four major firms about their investment in nursing homes.
Presidential hopeful Sen. Elizabeth Warren, along with Sen. Sherrod Brown and Rep. Mark Pocan, sent strongly-worded letters dated November 15 to executives at The Carlyle Group, Formation Capital, Fillmore Capital Partners, and Warburg Pincus LLC late last week.
“We are particularly concerned about your firm’s investment in large for-profit nursing home chains, which research has shown often provide worse care than not-for-profit facilities,” the lawmakers, all Democrats, wrote in their letter. “In light of these concerns, we request information about your firm, the portfolio companies in which it has invested, and the performance of those investments.”
Representatives from Warburg Pincus and Formation Capital declined to comment for this story. The Carlyle Group and Fillmore did not respond to requests for comment as of press time.
Targeting private equity
Warren, Brown, and Pocan were among a group of Democrats in both the Senate and the House of Representatives who in July introduced the Stop Wall Street Looting Act, which takes aim at the private equity industry.
The bill would “hold private funds … jointly and severally liable for all debt incurred by a target firm, including for legal judgments, liabilities in connection with violations of the Worker Adjustment and Retraining Notification (WARN) Act, and pension-related obligations,” according to a breakdown of the legislation released by Warren.
It would also introduce similar liability for holders of economic interests in those funds, would ban target firms from making capital distributions in the 24 months after a leveraged buyout transaction — and allow the clawback of funds transferred out of portfolio companies by removing “safe harbors in fraudulent transfer laws for certain kinds of transactions in cases where such transfers are connected to a change in control transaction.”
The law also would extend the statute of limitations for fraudulent transfers to at least eight years after the transfer was made, if it was linked to a change in control.
The letter to the private equity firms called on them to answer several questions related to their ownership and investment in the skilled nursing world. Specifically, the letters asked for the firms to disclose the nursing homes and long-term care service companies in which they had stakes or owned, including any affiliates or related entities. The information requested included:
- The company name
- Total number of facilities by type
- Ownership stake
- Total revenue and revenue from Medicare and Medicaid, net income
- Other private equity firms with a stake in the company
- Nursing homes and facilities for which the private equity firms acquired real estate and the existence of any sale leaseback agreements
- Receiverships that occurred in the last 20 years at any facilities in which the firms had an ownership stake
This isn’t the first time in recent weeks that the relationship between private equity and SNFs has come under fire on the national stage. One long-term care advocate last week told the House Ways and Means Committee that private equity and real estate investment trust investment has “savaged the industry.”
In a hearing on private equity practices held Tuesday by the Committee on Financial Services, Rep. Maxine Waters, a California Democrat, called out the growing ownership of private equity in multiple industries.
“Private equity firms increasingly hold ownership of our hospitals, nursing homes and emergency services. In 2018 alone, private equity firms spent a total of $10.4 billion buying up hospitals and medical clinics, a drastic increase from the $250 million it spent in 2009 on those industries,” she said in her opening statement.
SNFs and private equity’s fraught relationship
The letter sent to the private equity firms detailed a range of investigations and news stories on the impact of private equity ownership on nursing homes. One 2007 story from the New York Times cited in the letter found that by several benchmarks, the residents at private-equity owned nursing homes were worse off. The letter also cited the Washington Post’s deep dive into the effect of Carlyle Group’s ownership of the HCR ManorCare chain, which was eventually taken over in a major deal with the real estate investment trust Welltower Inc. (NYSE: WELL) and the non-profit health system ProMedica.
At the time the deal with ProMedica and ManorCare was being finalized, Welltower CEO Tom DeRosa argued that the private equity ownership kept the SNF assets “capital-starved.”
“Don’t confuse over-levered skilled nursing deals that were done by private equity groups with the operating viability of this post-acute care business platform,” DeRosa said at the National Association of Real Estate Investment Trusts’ annual REITweek conference in June 2018. “Remember, post-acute care is a very viable and important component of health care delivery. Because of the leverage that private equity firms who owned these businesses put on these businesses, the operations became unsustainable.”
The letters also cited multiple studies and reports, with sources ranging from academic journals to the Kaiser Family Foundation to the U.S. Government Accountability Office (GAO), on the ramifications of different types of ownership for nursing homes.
One point that stood out to Michael Carroll, an analyst with RBC Capital Markets, was that the letter appears to be comparing statistics of non-profit and for-profit nursing homes. But as the letter notes, the majority of nursing facilities, at 70%, are for-profit.
“That’s what caught my eye, comparing for-profit to not-for-profit,” he told Skilled Nursing News, while noting that he’s not familiar with the exact percentage of facilities in the space that are non-profit. “I don’t know how statistically significant those comparisons can be.”
Scrutiny of private equity ownership of nursing homes is not new. In 2007, after the Times published its investigative report, Sen. Chuck Grassley, Republican of Iowa, requested a review of the effect of private equity ownership on nursing home care.
The resulting GAO report found that the Centers for Medicare & Medicaid Services (CMS) system for maintaining ownership and chain data “provided a confusing picture of the complex ownership structures and chain affiliations of the six [private investment]-owned nursing home chains GAO reviewed.”
That said, Carroll noted that since the data used by the government can be some time out of date, it’s not always clear whether the data cited in the November 15 letter holds true for the more recent investment by private equity firms.
And that recent investment has been significant. Multiple stakeholders, ranging from SNF-focused private equity firms to major REIT CEOs, have discussed the growing interest of private equity in the SNF space. The consensus is that private equity has to take a careful approach if it wants to invest and thrive in the nursing home space, since the existing private-equity playbook used in other industries may not apply to post-acute care.
Some firms are quite optimistic; Northwind Group in New York announced in March a health care lending platform for providing debt and preferred equity capital to seniors housing and skilled nursing as part of a major push into the senior living and SNF space.
In fact, private equity firms topped the list of likely SNF buyers at 38% in SNN’s 2019 Skilled Nursing Outlook Report.
One such firm, Twin Light Capital, sees opportunity in the SNF sector. That said, co-founder Chad Buchanan, who spent several years with the SNF-focused private equity firm Tryko Partners, acknowledged in a June interview with SNN that private equity’s reputation is somewhat checkered in the skilled nursing sector.
“Private equity in our industry — and frankly in a lot of other industries — has a reputation of acquiring to basically strip down and over-leverage and cash out, and everyone else left in its wake be damned,” he told SNN at the time. “That’s not how I managed the portfolio at Tryko.”
Reached Tuesday via e-mail, Buchanan noted that the requests for information focus on private equity, but this presumably excludes publicly traded owners and operators, as well as possibly excluding privately held firms that issue loans backed by the Department of Housing and Urban Development (HUD) Loan.
He also noted that several transactions involving both private equity firms and publicly traded entities have had both good and bad outcomes, which makes it unclear how much the nature of equity ownership plays a direct role.
Like Carroll, Buchanan pointed out that the statistics and examples cited in the letters are some years old, and that the role of SNFs in the health care continuum has evolved and changed over that time — with private equity playing a meaningful part in that metamorphosis. He also noted that several non-profit operators have had to either sell, file for bankruptcy, or close.
“Despite private equity’s reputation, even in long-term care, there are strategic private equity investors in our industry who take a long-term view of the industry and our residents, even in short- and medium-term investments,” he wrote. “I strongly believe that investment success in long term care is not at odds with resident care and patient outcomes.”