With over $2 trillion of undeployed capital, private equity firms collectively hold the resources to cover the current cost of the novel coronavirus to the world economy. Positive inflows coupled with almost negative interest rates foster an environment where investors sit on reserves rather than address the inequalities they have helped perpetuate.
Supporting over 30 million jobs in the U.K. and U.S., private equity’s societal presence is particularly precarious when half of all defaulted companies have been leveraged buy-outs. While champions of the free market would argue that this is not the role of business but that of the government, the industry’s lobbying efforts have had an exigent influence on shaping everyday policies from your pension to your next physician visit.
COVID-19 has shone a light on the dark and deep-rooted inequalities in modern society. For all the progress of the SDGs and the MDGs it abrogated, quality healthcare remains reserved for the privileged few rather than a right for all.
Lack of Universal Healthcare Coverage and employee safeguards make populations with existing poor health status more susceptible to spreading pandemics. High-performing private markets have redirected capital flows away from vital public services with little consideration of long-term value creation for society. As a result, debt-laden takeovers within the healthcare sector are often causing financial, emotional and physical distress to the populations they were designed to serve.
Global healthcare is the fastest growing and most lucrative sector for private investors, closing over $100 billion worth of deals in 2019 alone. A record number of provider buyouts has involved aggressive takeovers ranging from consolidating physician practices to standalone emergency rooms, fuelling perverse incentives through the outdated fee-for-service model. Out-of-network “surprise medical billing” collectively costs U.S. households over $40 billion annually.
While unscrupulous insurance claims have been brought to the electoral foreground, it is fractional to the U.S.’ outsized health spending issues further exacerbated by a lack of governance from drug pricing to service provision. As the pandemic loops into an economic crisis, mass job losses tied to employer health coverage is pushing the most vulnerable past attenuated welfare safety nets and deeper into poverty.
Sustained government spending cuts to social care has presented lucrative opportunities for private equity worldwide. According to a recent study, PE buyouts of nursing homes are linked with lower nurse-to-patient ratios, poorer quality care, worse health outcomes and weaker performance on safety and hygiene inspections. With COVID-19 ravaging vulnerable, elderly adults in these risky settings, this is a cause for immediate national concern.
Mental health care has also suffered and is anticipated to grow exponentially due to the impact of COVID-induced social isolation. Moreover, almost all privately-owned mental health and elderly care homes are primarily funded by public finances, such as local authorities in the U.K. and Medicare/Medicaid in the U.S. As the trend for outsourcing care grows along with the size of shareholder dividends, governments, as activist board members, must ensure care quality is not compromised and must do more to hold private owners accountable.
Every cloud has a silver lining and PE’s fresh foray into ESG investing could be a turning point for the industry. GPs are becoming acutely aware of the long-term sustainability risks of this asset class, transferring pressure on to LPs who, to date, have pledged over $1 trillion to follow the UN’s Principles for Responsible Investment. From supply chain integrity surrounding PPE procurement to racial disparities in systems design, healthcare has much to learn and reflect on from its response to the pandemic through the lens of ESG.
Astute PE funds recognise sustainable wealth creation for all stakeholders also serves in the best interests of their shareholders, given that the financial viability of portfolio companies is dependent on the communities they operate in. ESG sceptics ultimately fail to recognise that firms do well by doing good; responsible businesses have proved resilient in protecting themselves from the downside risks associated with the scandals and controversies that have emerged throughout this pandemic.
COVID-19 reflects the globalised world we live in as well as the fragility of our capital structures. As governments increasingly turn to outside investment, the short-term profit-oriented incentives of traditional private equity may not always align with the long-term public interest. While private equity’s presence, both positive and negative, is too significant to ignore, policymakers and asset owners must also bear the onus of cultivating an economic climate that promotes private capital for public good.
This pandemic presents a defining opportunity to leverage private equity’s “dry powder” towards creating sustainable societal value whilst growing the economic pie. By shifting away from risky, average leverage ratios to impact-oriented patient growth capital, PE can provide a much-needed lifeline to support the fragile health and social care systems we all depend on. In the end, all public health roads lead to private equity.
Source: Forbes
