How Can Private Equity Invest Responsibly in Public Services?

February 28, 2023

Authors

Cassie Collier

Former Manager, Financial Services, BSR

“Hospices have become big business for private equity firms.”

“Childcare is in chaos. Private equity is swooping in.”

“Private equity eyes youth treatment centers as a takeover target.”

These are just a few of the recent headlines showing the rise of private equity (PE) investing in public services, such as childcare, at-risk care, and senior care. These services, once only—or most commonly—offered by the government, nonprofit providers, or through a public-private partnership, are now increasingly in the hands of PE. While there can be benefits to private investment, it comes with significant societal, reputational, and regulatory risks with which PE needs to contend.

How Did We Get Here in the First Place?

One could argue that PE was filling an important void. Government and non-profit providers did not necessarily have the resources to manage these services on their own, so PE could theoretically create economies of scale, innovate broken systems, and achieve good for both society and investors.

In the last decade, however, evidence has shown that private investment is causing more harm than good. Let’s take hospice care. Data shows that for-profit hospices have higher rates of complaints and deficiencies, provide fewer community benefits, and higher rates of ER use. Patients in for-profit hospices were less likely to have received any hospice visits in the last three days of life. The impacts are pervasive—there has been an increase of 286 percent in PE-owned hospice agencies from 2011 to 2019.

Now let’s look at foster care centers. PE-owned centers have records of an increased rate of abuse, forced isolation, and suicide. PE-owned centers often fail to hire employees with adequate licensing, increase workloads of case workers, and underpay employees. This is all while certain PE firms record profit margins of up to 44 percent, a staggering rate for a public service.

And finally, childcare. For-profit childcare is less likely to deliver accessible and equitable services, pay decent wages to staff, or offer affordable parent fees. Furthermore, for-profit centers often carry significant debt, diverting money from operations to debt repayment.

Why should PE care? There are significant evolving risks for PE firms that do not integrate responsible investment in this space:

Reputational risk: There is an onslaught of attention on PE’s rapid rise of investments in public services, including from the Wall Street Journal, The Guardian, Reuters, and advocacy groups such as the Private Equity Stakeholder Project.
Regulatory risk: There is an increasing regulatory focus, including efforts to set wage floors for service workers and spending caps for individuals. In February 2023, the Biden-Harris administration issued a proposed rule that would increase the transparency of nursing home ownership and management.
Limited partner (LP) risk: Irresponsible investment is directly at odds with ESG and human rights goals and policies that PE firms set, at a time when responsibly minded LPs and other stakeholders are more attuned than ever to social-washing and green-washing.
Financial risk: There is the risk of financing drying up for PE firms, who often turn to big banks to fund a takeover. In a two-year campaign, faith-based investors advocated against investment in the private prison industry, leading a major US investment bank to announce in March 2019 that it “will no longer bank the private prison industry.”
Business continuity risk: There is the risk of government contract stoppages. In 2017, the Australian government closed its main offshore immigration detention processing center on Manus Island following allegations of inhumane conditions at the center, operated by a private company.
Personal risk: PE employees are also individuals living within this system. The rampant rise of private investment affects us all on a personal level when dealing with our own children in PE-owned childcare centers, our own families and communities in at-risk care, and our own parents in PE-owned nursing homes.

Despite the challenges and risks, there is a world where private equity can make a positive impact with its investments, especially in sectors where government and non-profit providers cannot do it alone.

By investing responsibly, PE firms can increase access to care for people that are currently left behind or ignored in the current system, offer reasonably priced care that still allows room for returns, and aligns incentives for both investors and the community.

Here are five ways PE firms can responsibly invest in public services:

Establish policies for investment in public services, including consideration for human rights
Facilitate engagement with stakeholders and impacted populations
Identify and understand impacts on people from current/potential investments
Engage with portfolio companies (individually or en masse) to improve policies, practices, etc.
Support transparency and credible disclosure