As Defenses Mount for Private Equity in Senior Living, History Bears Lessons

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Private equity’s role in health care has been a hot topic in 2024, due to situations such as the collapse of Steward Health Care.

This week, PE is on my mind, as I spoke with a researcher on the issue of private equity in assisted living, new NIC data shows an urgent need for greater senior living investments, and Focus Healthcare Partners closed on a $370 million fund.

Private equity firms are the target of two new bills from Massachusetts senators Elizabeth Warren and Ed Markey. Though I highly doubt either bill will make it to law given the divided state of Congress, they exemplify a sour mood among some lawmakers – and the public – regarding private equity ownership in U.S. health care businesses.

It’s no secret that private equity firms have steadily invested in the senior living industry for years, with notable examples including Bain Capital, Apollo Global Management, TPG and The Carlyle Group. (Full disclosure: Senior Housing News’ parent company, WTWH Media, is also backed by a private equity company, Mountaingate Capital).

The impact of private equity investment in assisted living has been the subject of a four-year research effort that was detailed in a recent editorial on the “Health Affairs” policy blog, Forefront.

In a nutshell, researcher and study co-author John Bowblis told me that assisted living is simply too different from nursing homes and hospitals to compare to those industries. As such, he thinks lawmakers should slow their roll before taking further aim at private equity players in the AL sector.

“You have policymakers who are trying to take something that they’ve seen in a different industry and apply it directly to assisted living, saying that all private equity firms are bad,” said Bowblis, who is professor of economics in Miami University’s Farmer School of Business and a research fellow with the school’s Scripps Gerontology Center. “It’s taking a few examples that were bad in other industries, and just assuming that it’s going to happen [in assisted living] even though you have no evidence.”

Still, I think it’s natural to be cautious over private equity investments in senior living, given all the health care and business strife linked to private equity firms. And I think there are steps private equity firms could take to help assuage fears.

In this members-only SHN+ Update, I analyze the Health Affairs editorial and my interview with Bowblis for insights into private-equity investment in senior living, and offer the following takeaways:

• More evidence is needed to determine the potential impact of private equity
• Private equity’s history in other sectors is still worth noting
• What private equity firms could say or do to demonstrate they’re serious about senior living

Jury out on impact of private equity in senior living

It’s no secret that lawmakers have often confused assisted living for skilled nursing. And that is what occurred with the most recent legislation under consideration from Markey and Warren, according to Bowblis.

Bowblis is part of a team of researchers studying private equity in assisted living led by Kali Thomas, professor at Johns Hopkins University and associate director of health services research in the university’s Center for Equity in Aging.

Thanks to a four-year grant from the National Institutes of Health (NIH), the team studied a handful of cases of private equity acquisitions in health care. Based on this work, the team has flagged several crucial distinctions between assisted living and other types of health care, which would have a bearing on how private equity functions in the space.

“People are making assumptions about what happens in hospitals or what happens in nursing homes, and how that one hundred percent applies to assisted living,” Bowblis told me. “And that may not be the case.”

The researchers found that private equity companies typically took over both the operations and real estate of a company. That is different than in assisted living, where owners are more interested in the physical real estate than the actual operations, Bowblis said.

Another crucial distinction is the fact that senior living is a primarily private-pay business, while nursing homes are primarily funded through federal reimbursements. While assisted living companies can annually raise rates to match the cost of providing services, skilled nursing operators companies largely cannot – and that leaves owners of the latter with fewer options for achieving profitability.

Given those characteristics, Bowblis believes that private equity investors of assisted living properties are more incentivized to try and improve the quality of their communities rather than cut costs to meet their returns. And he does not believe that private equity companies investing in assisted living seek to become directly involved in operations.

All of that leads him to the conclusion that lawmakers should not assume that private equity investment in assisted living would follow the same trajectory as those in nursing homes. As such, the team has urged lawmakers to pause any new legislation on private equity until the sector’s positive or negative impact can be determined.

He also underscored the need for new investments to bring the senior living industry to its next iteration in the years to come. Just this week, NIC MAP Vision this week projected an “investment gap” for senior housing of $275 billion by 2030, at the industry’s currently slow pace of new development.

Deep-pocketed companies like private equity firms and REITs are in the driver’s seat as financial and lending conditions remain tough for borrowers. And many are indeed gearing up for more investments in 2024.

While I wholeheartedly agree that more investment is needed to support the evolution of senior living, I also think it’s important to consider how private equity’s approach to the sector might evolve in the years to come. Across the industry, I see big investment companies trying to take a larger role in managing the outcomes of the senior living communities they own, which I believe would be a shift from the historical patterns that Bowblis and his colleagues identified.

An example of one company with that strategy is SPHERE investments, which has a strategy to in 2024 deploy $300 million in senior living, partly by investing in senior living communities and the operators that manage them. And of course, the big REITs such as Welltower and Ventas have launched increasingly sophisticated platforms meant to inform and improve operations through leveraging data.

Obviously that is a far cry from a company buying an operator outright. But my point is that I do sense a growing appetite from capital sources and ownership to have more control over what occurs in the communities they manage in order to drive a suitable margin.

Private equity could ultimately be friend or foe to quality

It’s no secret that private equity firms have a checkered history and a tarnished public opinion, particularly in the senior care and hospital spaces. For recent evidence of that, one need look no further than the saga of now-defunct nursing home company HCR Manorcare.

The Washington Post in 2018 chronicled a growing number of health code violations at ManorCare that started in 2011 when private-equity owner Carlyle Group and its investors executed a sale-leaseback agreement with the company now known as Healthpeak Properties (NYSE: DOC).

Under the sales lease-back, Carlyle is said to have made a significant stack of money. But while the deal was lucrative for the private equity firm, it saddled HCR Manorcare with financial obligations that were too great to overcome.

That is in fact what then-Welltower CEO Tom DeRosa said when the company took over ManorCare with ProMedica in 2018.

“Because of the leverage that private equity firms who owned these businesses put on these businesses, the operations became unsustainable,” DeRosa said that year.

The dust has long settled on HCR Manorcare and its woes. But I do think the example provides a cautionary tale for private equity investment in senior living.

That is because regardless of the differences between nursing homes, assisted living, hospitals or other types of health care, at the end of the day, PE firms make their money buying and selling assets. Critics of the model often point to the fact that such companies are incentivized to worry about their profits and investors first, and the quality of their assets second.

Private equity firms also are often on short-term timelines, with hold periods of just a few years in some cases. This complicates the notion that private equity is the type of capital that can support notable changes in the senior living operating model, which requires greater investment, more uncertainty and – likely – time to bear fruit.

Short private equity hold periods were a cause of concern for Juniper Communities CEO Lynne Katzmann, when she observed the influx of PE hitting the sector in early 2020. She told SHN:

“Aligning capital with changing operating strategies – when the primary focus of capital is rapid generation of cash flow to pay debt service and increase net operating income to generate a sale price quickly in order to boost IRR – may be difficult. In other words, the way to short-term gains is to push rate, occupancy and reduction in expenses. Investments in the future often have high costs — both time and money.”

As it is said, history doesn’t repeat, but it can rhyme.

I think private equity players must show they are serious about actually investing in and improving the senior living industry for the long-term, not merely flipping assets. On that front, I do often hear assurances from leaders of these companies that they favor the long-term demographics of senior living and are in the business for the long haul.

Furthermore, I think it’s notable that Katzmann’s comment came just before the Covid-19 pandemic. The crucible of the pandemic illustrated the health care-intensive nature of senior living, upended some unrealistic investor expectations regarding returns, and drove some investors from the industry entirely. This all might mean that private equity firms today have a more realistic understanding of assisted living and are doing different math as they consider the time and capital that such investments require to succeed.

All that said, much of this perspective comes to me second-hand from operators, brokers, bankers and others in the space. Private equity firms themselves largely remain tight-lipped. I also think it would help assuage fears if private equity firms were more vocal and visible with their investment strategies in senior living beyond the kinds of property types they want to buy. Specifically I’d like to see more private equity investors address the basic business model, and address questions related to how they’re supporting – and not just pressuring – operators.

Although I admit I am skeptical of private equity in general, given its history, there are several well-established private equity players in senior living that have proven to be valued partners for decades now. Focus, for example, has acquired about $1.2 billion in senior housing since 2010, and its latest fund attracted repeat and new investors.

Examples of successful alignment between senior living and private equity gives me hope that as more PE dollars enter the space,they could be put to good use developing a new business segment for the middle-market or creating a truly new model for senior living’s next generation of residents.