Thread

Bill to Ban Private Equity from Owning Medical Practices

509 points · 384 comments · paimapi

NegativeK · 1789944184 · focus · HN ↗
Can someone steelman private equity, please? I'm honestly looking for the upsides (for non-investors) of when PE moves into an industry like medicine and begins buying up businesses that traditionally aren't already large chains.
I already hear the downsides frequently from someone whose work is directly affected.
1. tbrownaw · 1789950347 · focus · HN ↗
  > Can someone steelman private equity, please?
  Step back and look at what it fundamentally is.
  Person A has a business they want to sell.
  Person B has a pile of money and thinks that that business is (or can be) a good investment.
  That's it.
  So, what happens if person A is prohibited from selling their business? Are they forced to keep working because they don't have enough other savings to retire on? Do they shut the business down in order to retire? Something else?
  .
  Calls to ban private equity are attempts to play "shoot the messenger".
  1. sandeepkd · 1789952235 · focus · HN ↗
    May be categorizing the different private equities can be helpful here. A PE interested and invested for growth is always the best outcome. A PE only looking to salvage and squeeze is that gives the bad branding to PE.
    0xDEAFBEAD · 1789952972 · focus · HN ↗
    It basically comes down to interest rates right? If interest rates are low, the discounted-cash-flows analysis will favor maximizing long-run profitability. If interest rates are high, you can do better by squeezing the business in the short term and placing the money you obtained into some sort of high-yield, low-risk investment vehicle.
    sandeepkd · 1789954008 · focus · HN ↗
    The positive argument about PE adding value is around efficiency of processes and scale. Interest rates can make a difference however in reality I doubt that it effects the outcome in most cases. Companies have already invested in staff with certain type of expertise and they are unlikely to change their plans or rehire based on the interest rates in short run.
    works_at_pe · 1789958470 · focus · HN ↗
    It's not always "efficiency".
    My PE is SaaS heavy portfolio. Pricing strategy, GTM, product roadmap; companies have rev, good moat, good customer base. But clear opportunity to grow rev.
    Many companies are held by original founders. Leadership teams in eng and product have been the same for a decade+; lacking exposure to how the industry is shifting. AI, for example, has slow adoption in some cases.
    Xirdus · 1789955301 · focus · HN ↗
    When interest rates are low, it's most profitable to invest in extremely high risk, extremely high reward unicorn startups. That makes way more money on average than any long-run profitability. In fact, long-run profitability is basically never the most efficient use of money regardless of market conditions.
    TylerE · 1789954872 · focus · HN ↗
    Why does everything have to be obsessed with growth? Especially with practically every (first world, at least) country having a birth rate well below replacement.
    lotsofpulp · 1789956924 · focus · HN ↗
    Because everyone promised themselves a lot of benefits in old age that they want someone else to provide them.
    nradov · 1789960301 · focus · HN ↗
    Not all businesses are obsessed with growth. Many mature businesses are managed for value rather than growth and focus on returning profits to shareholders through dividends or stock buybacks.
    works_at_pe · 1789958175 · focus · HN ↗
    > A PE interested and invested for growth is always the best outcome.
    (Throwaway) I work at a top ~10 PE.
    This is what we do. One portfolio company has a product on old tech. We bring in a product team, a CTO, internal tech teams. Help shape a roadmap to tackle the most egregious tech and product debt so teams can move faster. Fix non-existent or outdated pricing strategy that has not evolved with the industry. Fix, grow, or evolve GTM to reach new customers. Help bring fresh leadership resources in when needed.
    Industry is typically "boring" and systems are valuable, but aging. We invest, modernize, and try to grow new rev streams, new customers. Portfolio is SaaS focused (can't speak for those that invest in real estate and healthcare).
    The employees of the PE also co-invest so everyone is aligned to help the portfolio companies grow and exit. This is a multiyear process.
    sandeepkd · 1789964858 · focus · HN ↗
    Naming couple companies that you acquired for whom you changed the trajectory would be a lot stronger signal without revealing your identity.
    On side note, its rare to see anyone fixing the old tech, its hard to fix, needs a different kind of talent thats hard to hire for the PE money. The folks who can understand some one else's decade old code and run their imagination through all the possible assumptions or trade off that might have been made in code/system are rare to find.
    Finding new customers, finding more things to sell, finding synergies with other items in your portfolio, increasing the price for existing products are more realistic.
    works_at_pe · 1789983551 · focus · HN ↗
    We have portfolio level CTOs that specialize in this playbook. Fixing the tech means many things. Many companies don't even have CI (forget CD). Some have really broken processes and handoffs between teams. And yes, some are running COBOL backends.
    Sorry, naming a portfolio company would reveal the PE.
    bruce511 · 1789965168 · focus · HN ↗
    I'm going to side-track a bit, but since I'm being courted by PE I thought I'd ask.
    >> The employees of the PE also co-invest
    Is this voluntary, or mandatory?
    I ask because I've seen clauses along the lines of "75% of bonuses are paid in shares, not available for sale for 5 years."
    Using bonus money to buy shares props up the share price, but delays the employee actually seeing the bonus for 5 years. Seems pretty win-lose to me, and kinda puts me off.
    Is this a standard practice you mean by co-invest?
    (As an aside, I'm not a fan of buying shares where I work, that's not a good portfolio-diversification model. If the business goes under it's not good to lose both your job, and investments, on the same day.)
    works_at_pe · 1789983962 · focus · HN ↗
    Differs by company. Best thing you can do: check CalPers (CA pension: <a href="https://www.calpers.ca.gov/investments/about-investment-office/investment-organization/pep-fund-performance" rel="nofollow">https://www.calpers.ca.gov/investments/about-investment-offi...) listing of investments for your PE's internal rate of return and historical performance for some funds.
    There is carry and co-invest. Carry is a grant (like options). Co-invest is additional funds that you commit for capital calls when the fund invests. My comp is base + cash bonus (1.#x base) + carry (~2/3 of my base every year for 10 years).
    Yes, locked away until some distribution event. Bonus is cash (YMMV), but if you don't already have the capital for a capital call, you're right that your bonus effectively ends up in the fund to meet capital call requirements at some point.
    Co-invest is "strongly recommended at the amount specified". Legally, they cannot compel you to, but basically the way it is worded...
    Should you co-invest? Look at CalPers for realistic rate of returns. Look at the PE portfolio; do you think it holds? Ask them to walk you through a case study of their timeline with a successful portfolio co. CalPers is not playing around. Some funds will 3x, 4x over the lifetime (historical performance not indicative of future perf). You pay capital gains tax on that earning.
    Best case: you already have the cash to cover the co-invest capital calls. Worst case: you are borrowing money or using your bonus to plow more into the portfolio.
    bruce511 · 1790017418 · focus · HN ↗
    Thanks
  2. what · 1789952387 · focus · HN ↗
    Except they always strip mine the business. Cut the quality and push unnecessary shit. But, hey, you can fill out your forms on an iPad instead of pen and paper. Very cool.
  3. Xirdus · 1789954947 · focus · HN ↗
    > So, what happens if person A is prohibited from selling their business?
    I actually made that thought experiment. Disallow selling businesses. Disallow selling shares. Disallow stock market. Disallow mergers. The only way to acquire a business is to found it or to inherit it. The only way to quit a business is to shut it all down, with all assets liquidated, all liabilities settled, and all contracts terminated.
    The main downside is that it's harder for to make money. Otherwise... I only see positives. And no, it wouldn't kill innovation. The investors would just have to invest the old fashioned way - by founding companies or expanding their existing businesses. As for job security, we already don't have it in the current system.
    tacostakohashi · 1789956670 · focus · HN ↗
    Private property is theft!
    Disallow eyeglasses. Abolish money.
    Any other good ideas?
    Xirdus · 1789987623 · focus · HN ↗
    You can sell all your offices, desks, printers, laptops, machinery, land, inventory, intellectual property, and anything else you want to your heart's content, to anyone you want, for any price you want. The only thing you can't sell is the legal entity itself.
    NegativeK · 1790080079 · focus · HN ↗
    I don't agree with the parent of your comment, but saying they're a Maoist is way too far from my request of steelmanning.
    alex43578 · 1789956889 · focus · HN ↗
    That's such an incredibly shortsighted view of the downsides.
    In your model, the only possible business owners would be those with major capital resources to begin with, encouraging the spread of existing businesses into a sprawl: Walmart is now your doctor, pharmacist, and pharma manufacturer. Nobody would start a small business because they'd have to carry all liability, any new ideas are limited to spread at a glacially slow pace, because companies can't be aquired or acqui-hired, but can instead only scale on their own revenues.
    bruce511 · 1789964624 · focus · HN ↗
    It's worse than that. When the owner retires, all staff lose their jobs. That's a fairly big bummer.
    I'm currently part of a "small" business/factory (around 50 employees). The owner is nearing retirement. Are all 50 of us gonna hit the streets tomorrow? Should our customers, many longstanding over 20 years get their contracts terminated? Do they get any warning? Can they easily switch to other suppliers? Is our offering somewhat unique?
    Frankly, I think the thought-experiment is very incomplete if you can't see major downsides.
    Xirdus · 1789992528 · focus · HN ↗
    Recently, the owner of the factory my grandfather worked for the last 30 years has retired and sold their business, as a single package, fully operational, with employees and pending orders. It was still shut down and all employees were let go without any severance. From what I know, this is the norm for retirement sales, not the exception.
    In this thought experiment, the result would be very similar to what happened, except with less wealth concentration, and with fewer Boeing-McDonnell Douglas mergers that ruin good companies in pursuit of short term profits (because short term profits are harder to realize by design).
    Lost jobs are also a lot less of a problem in countries with functioning safety net.
    Xirdus · 1789991988 · focus · HN ↗
    > In your model, the only possible business owners would be those with major capital resources to begin with
    Or you get a loan. Or you get an investor on board. How is that different from the current situation?
    > encouraging the spread of existing businesses into a sprawl: Walmart is now your doctor, pharmacist, and pharma manufacturer.
    It's happening anyway. My last vaccination was done 100% at Walmart.
    > Nobody would start a small business because they'd have to carry all liability
    How is that different from the current situation?
    > any new ideas are limited to spread at a glacially slow pace, because companies can't be aquired or acqui-hired
    Acquisitions are a relatively recent inventions, acqui-hires even more so. People have been doing massive inventions at rapid pace for like 200 years before being bought out by FAANG was a viable business strategy.
    > but can instead only scale on their own revenues.
    And loans. Don't forget loans.
    cyberax · 1789957303 · focus · HN ↗
    OK. Your job is from now is dung transport. Because you inherited it, whether you like it or not.
    Sure, you are allowed to start a new business. But where would you get money? You can't sell your dung transport business, and you don't have enough money of your own to just start a new business from scratch.
    AngryData · 1789964661 · focus · HN ↗
    They can't sell "Xirdus's Dung Service", but they can still sell their assets like the dung cart, shovel, dung pit, etc.
    cyberax · 1789970901 · focus · HN ↗
    Sell it to whom? Who is going to be buying the assets? And what about employees?
    (never mind that "selling assets" is just a workaround for "selling business")
    Xirdus · 1789988528 · focus · HN ↗
    It makes it impossible to share part of a business, including stocks. It also massively increases the friction of takeover by killing all employee, vendor, and client contracts, so the buyer cannot benefit from any of these without arranging for it separately. It also invalidates the strategy of leveraged buyout. But yes, it can be done in principle. Which is especially important in the "who will take over the local dentist's office" scenario - this system would heavily favor small business owners who want to do the business personally over holding corporations and PE funds.
    cyberax · 1790023763 · focus · HN ↗
    Nope. It will result in a large company moving in and buying all the assets (still allowed), and forcing the employees to work for less money. Because why not?
    Xirdus · 1790026274 · focus · HN ↗
    It already does literally just that. You're basically saying nothing would change.
    cyberax · 1790028162 · focus · HN ↗
    Yes. So your system not only fails to solve the issue in question, but also makes everything worse.
    Xirdus · 1789988743 · focus · HN ↗
    It's crazy what some people will come up with just to have something to criticize instead of the actual contents of the thing they're replying to. Nobody said continuing an inherited business is mandatory, least of all me.
    I am all for serious discussion about shortcomings of my idea. But this isn't it.
    cyberax · 1790023703 · focus · HN ↗
    No, I'm just describing the dystopia that will be the result of your idea.
    You basically want to reinvent the feudalism with its nobility and peasants.
    Xirdus · 1790026112 · focus · HN ↗
    The dystopia you're describing has nothing in common whatsoever with my idea. Now please stop misrepresenting my words.
    cyberax · 1790026482 · focus · HN ↗
    Yes. It absolutely does, because your system heavily favors inherited capital that HAS to stay within the family. It also heavily discourages capital mobility, risk-taking, and entrepreneurship.
    Say "hello" to dynastic marriages, noble lineages, etc. The _best_ case is the system of medieval guilds.
  4. __MatrixMan__ · 1789961776 · focus · HN ↗
    The business itself need not be a sellable thing.
    Sell the assets maybe, potentially to somebody who wants to use them to run the same kind of business in the same kind of location with the same employees.
    It's hostile to the consumer to call it the same business. A name change gives them the opportunity to decide for themselves whether the new owner is worth supporting. It's similarly hostile to the employees to assume that their loyalties can be bought and sold. Let the new owner of the assets re-hire them for the same position in the same location if he wants to, but lets not have them be for sale.
    1123581321 · 1789962430 · focus · HN ↗
    I think that last point is opposite; it’s seen as heartless when the new owner of a business goes through rehiring existing employees instead of assuring them they still have a job.
    __MatrixMan__ · 1789965199 · focus · HN ↗
    Isn't offering them a job that's equivalent to their old one indistinguishable from assuring them that they still have a job? No need to make people reinterview, but at least give them the option to turn down the offer.
    Maybe I'm making too big of a deal out of semantics, but every time somebody buys me it makes me angry.
    1123581321 · 1790017458 · focus · HN ↗
    I don't think it's equivalent because it's paperwork they now have to think about, they're wondering if it's wiping away old employment promises or systems, did everyone get one of these offers, etc.
    Definitely see how some would prefer the job reconsidered, though. There's no system that makes everyone happy, including to never sell a business.
    These things are good to think about; appreciate it.
    solidsnack9000 · 1790100718 · focus · HN ↗
    The business itself need not be a sellable thing.
    Well, that is actually a wild thing to say. How could it not be a sellable thing?
    The people who presently own the business have a property interest in it -- that's fundamental.

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