Private equity: the new face of privatisation?

Big privateers, like Virgin and Operose, may have abandoned their interests in NHS contracts – facing shifts in government policy and elusive profits. The private equity investor though is gaining a stronger foothold.

Involved in the care and education sectors for many years,  private equity has added to their interests in mental health and elective care, with further investments in ambulance fleets, diagnostics, home care, and ophthalmology.

Much of this expansion has followed the pandemic, amid huge pressures on the NHS and an openness from the government to the involvement of private companies.

According to a report in early 2023, from consultancy LangBuisson, a record 150 deals with UK healthcare companies and private equity have been struck since 2021.  

How does private equity work and what are its aims? 

Private equity companies are investment partnerships that buy and manage companies for institutional and individual investors to gain a relatively quick return. 

They generally choose companies where they feel they can create value by running the company differently or by stripping the assets.

The target companies are often struggling, have seen little growth, or are in an area of high growth where the private equity funds see that quick profits can be made. 

Funds generally want a return on their investment within three to five years and rarely hold on to an investment for ten or more.

In Healthcare

Companies that have signed contracts with the NHS have a dependable income and are attractive to investors. Hundreds of companies are now listed on several public framework contracts to provide clinical capacity to the NHS and to set up Community Diagnostic Hubs. 

The Lowdown has compiled a table –  see below, that provides examples of UK healthcare companies with private equity involvement. Many with NHS contracts. It is not an exhaustive list as private equity deals are often not publicised widely, and regularly involve a series of shell companies, making them difficult to track – although details of changes in ownership will eventually appear on Companies House. 

Mental Health

One of the early targets for commercial interests was the mental health sector, where NHS-run facilities have struggled for years with underinvestment. The result is that the private sector supplies over 30% of NHS mental health hospital capacity, including over half the NHS inpatient beds for children and teenagers with mental health problems, and almost all of the secure beds for adults.

Alarmingly though, these outsourcing arrangements have been dominated by a string of contract failures.

Huntercombe Group

In October 2022, a Sky News investigation highlighted repeated allegations of over-restraint, abuse and inadequate staffing, stretching back over a decade at hospitals run by the Huntercombe group, which at the time was a subsidiary of private equity-owned and debt-laden Four Seasons.

When the Four Seasons care group went into administration in 2019, the Huntercombe Group, was sold on to another private equity firm, Montreux Healthcare based in the Isle of Man, which merged it with its Active Care Group. As well as the Sky News investigation, previous years have been peppered with complaints and reports of issues at the Huntercombe hospitals.

Priory Group

In December 2020 The Priory Group was acquired by private equity group Waterland. Despite its reputation for treating celebrities, The Priory’s main business is funded by the tax-payer; the company received £440 million from the NHS and £179.8 million from UK social services in 2021.

In an interview for the BBC, former members of senior management at the Priory Group, said that when they were working for the company, they found it difficult to recruit or retain staff, due to poor pay and conditions. They believed patients were being placed on wards that did not have staff with the right skills.

The two whistleblowers told the BBC they felt the Priory Group wanted savings to be made, with the main priority of the group’s central senior management being to keep bed occupancy high to maximise income.

In January 2023, the BBC reported that three women had died at the Priory Hospital Cheadle Royal near Stockport in a three-month period in early 2022, Beth Matthews, Lauren Bridges and Deseree Fitzpatrick, with the coroner citing neglect and failings by the hospital – following a list of other issues in recent years.

The Priory was fined more than £650,000 in March 2024 over the death of a 23-year-old patient who was hit by a train after absconding from one of its hospitals. The patient was able to leave Birmingham’s Priory Hospital Woodbourne by scaling a wall after being “inappropriately unattended” for several minutes in September 2020.

Evidence from outside the UK

A recent BMJ paper, which derived most of its data from the US market, showed that the takeover of healthcare services by private equity funds is associated with a worse quality of care and higher costs. 

The systematic review in the BMJ – Evaluating trends in private equity ownership and impacts on health outcomes, costs, and quality – considered 1,778 studies and evaluated 55 studies with the correct inclusion criteria across eight countries, although with a heavy bias on the US market (47 studies).

The researchers looked at studies in a range of healthcare settings, with nursing homes the most commonly studied, followed by hospitals, dermatology, and ophthalmology.

The researchers found that private equity ownership was “most consistently associated with increases in costs to patients or payers” and was “associated with mixed to harmful impacts on quality.” 

Furthermore, the review identified “no consistently beneficial impacts of PE ownership.”

Nine of 12 studies revealed higher costs to patients or the funders of healthcare at services owned by such firms, three found no differences, and none showed lower costs.

When quality of care was assessed, of 27 studies, 12 found harmful effects, three found beneficial, nine found mixed, where some measures declined and some improved, and three were neutral.

The researchers note that in some cases private equity ownership was associated with reduced nurse staffing levels or a shift towards lower nursing skill mix. 

The review was heavily biased to the US, but private equity is a global phenomenon, and the researchers note that there is a need for rigorous research on such ownership in healthcare, in other non-US settings, such as Europe.

Lack of research into primary care and UK

Earlier in the year, in April, an article in the European Journal of Public Health also called for such research into private equity. 

The article – Private equity investment in Europe’s primary care sector—a call for research and policy action, noted that such investment in Europe’s primary care sector seems to be increasing in many countries, but that there is no information on its impact, such as on access to care, competition, data protection and health care costs.

In the UK, private equity is invested in some notable healthcare companies that receive millions from NHS contracts. Yet, the researchers of the systematic review in the BMJ found only one paper they could include that looked at the effect of these companies in the UK – Effects of chain ownership and private equity financing on quality in the English care home sector: retrospective observational study – published in Age and Ageing in December 2022.

This study concluded that private equity financing and independent for-profit ownership is associated with lower quality in care homes and called for quality to be monitored.

An article from late 2022, on the website of RSM a leading audit, tax and administration company for the private equity industry, noted that the UK healthcare industry offers “rich pickings for PE investors large and small” and that “political pressure to relieve NHS backlogs will benefit businesses that can bring down waiting lists,” and these are attracting private equity investment.

Germany

Often cited as a positive alternative to the NHS by right-wing commentators, there is emerging evidence from Germany. Over 500 ophthalmology practices and hundreds of dental practices have been bought by private equity in recent years. Eye doctors told the Guardian they face pressure to make “as much money as possible” by selling patients additional services, and a German documentary revealed alleged instances of dentists drilling into healthy teeth.

What happens to a company acquired by private equity?

Private equity companies often take strong action to increase company value once the acquisition has been made. Frequently, this includes cost-cutting and restructuring.

Common steps are to reduce the size of the workforce; use lower-skilled workers on lower wages and where possible, to transfer production overseas to a low-cost economy.

Suppliers should expect a renegotiation of their contracts to drive down costs.

Mergers with a company they already own, or selling of company subsidiaries and with it valuable assets are also common. Often assets, such as property are then leased back.

All these changes depend upon private equity funds gaining control of a company, leaving them free to make these changes without having to report to shareholders – as publicly traded companies are obliged to. However, this also means there is little transparency.

Large and not venture

In contrast to venture capital, which invests in new or very small companies, private equity typically acquires small to medium-sized companies.

Investing in private equity is not for small investors – significant capital is needed, limiting access to institutions (such as pension funds) and individuals with high net worth.

Another important aspect is that private equity often buys companies using a mixture of investor money and borrowing. After aquisition, companies are often saddled with large debts which can push their finances into a precarious position.

Higher risk of bankruptcy

Firms acquired by private equity funds are ten times more likely to go bankrupt—which can be disastrous for employees and their communities, though not the fund managers themselves, who often come out ahead.

In 2020 an analysis published by Ludovic Phalippou, professor of finance at Oxford Saïd Business School found that private equity has resulted in a handful of super-wealthy multibillionaires that have accumulated vast riches from running private equity funds, but the funds had performed no better on average than basic US stock market tracker funds since 2006. 

He told the FT that:

“This wealth transfer from several hundred million pension scheme members to a few thousand people working in private equity might be one of the largest in the history of modern finance.” 

Private equity in the UK care and education sector

The downfall of Southern Cross in 2011 and more recently Four Seasons in 2019 are examples of care companies that were saddled with enormous debts by private equity investors.

Private equity is still heavily involved with the UK care home sector and making vast profits.

More recently the involvement of PE in children’s social care, which includes fostering, children’s homes and other services such as residential school places, has been the subject of damming investigations by the Competition and Markets Authority, the Local Government Authorities (LGA) and the Observer. 

According to a March 2022 report by the CMA, the UK has “sleepwalked” into a dysfunctional market for children’s social care with local authorities forced to pay excessive fees for privately run services that often fail to meet the needs of vulnerable children.

In March 2022 analysis by the Local Government Authorities (LGA), compiled by Revolution Consulting, found that eight of the 10 largest providers of children’s social care now have some kind of private equity involvement. 

The report also highlighted concerns over the level of debt taken on by some of the groups. Nine of the top 20 providers had more debts and liabilities than tangible assets.

The LGA report noted that many private companies were often failing to provide the right services in the right places with children frequently placed in homes miles from where they live, often separated from their siblings, and unable to access care and therapies they need.

An Observer investigation found more than 100 privately run children’s homes in England with serious failings have been branded inadequate by inspectors, with several found to have links to private equity firms.

But the companies, themselves, are making significant profits “higher than expected”, according to the competition regulator. Staff at the companies were not benefitting though, as the report noted that wages had not risen nor had there been more investment in training.

Can private equity be kept out of the NHS

Private equity has been criticised for many years over the way it operates. In March 2023, Wes Streeting, mooted that private equity-run care homes will be stripped of public sector contracts by a Labour government if they fail to meet quality and value-for-money standards. Streeting told the FT that care providers would need to demonstrate they paid “their fair share” of tax in the UK. With the Care Quality Commission given powers to require state-funded providers to maintain a “safe” level of reserves to ensure financial stability, Streeting said.

Labour has also suggested a change in the tax position for private equity investors. A recent analysis by the Treasury found that the UK’s top private equity dealmakers earned £5bn in carried interest in 2022, that’s just 3,000 people.

Carried interest is the cut of gains private equity investors make on successful deals and it has come under increasing scrutiny in the UK. The Labour party has pledged to increase taxation of the incentive fee from 28% to the marginal income tax rate of 45%.

The authors of a BMJ article called for regulation, but this was primarily referring to the USA. Yes tax changes could take place in the UK for private equity, but for the NHS the only surefire way private equity can be kept from draining money out of the NHS into the hands of a few rich people is to not award contracts for NHS work to private companies in the first place. 

 Company table

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