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

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