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What Home-Based Care Providers Should Know About How Private Equity Firms Think

The public perception of private equity (PE) firms is not always rosy, but for health care providers – especially founder-led ones – they can sometimes be a proverbial knight in shining amor.

Innovation, expansion and financial freedom can all be achieved through the backing of a PE firm. Like most things in the world, home-based care providers considering engagement with one will likely find there’s good and bad in the proposition.

What’s important to remember, however, is that not a single PE firm is exactly alike another. Therefore, it’s probably a mistake to take a broad brush to PE in general when considering the effect it could have on personal home care of home health care in the future.

“The one thing I learned is that … if you have seen one private equity company, you literally have seen one private equity company,” Ron Williams, operating advisor at Clayton, Dubilier & Rice (CD&R), said last week on a panel at the HLTH conference in Las Vegas. “There are a variety of different models.”

Williams was the CEO of Aetna from 2006 to 2010, and chairman from 2006 to 2011. He also formerly served on the former President Barack Obama’s management advisory board from 2011 to 2017.

On its end, CD&R is a very active health care PE firm. In terms of home-based care investments specifically, it just recently acquired the majority of Kindred at Home’s personal care and hospice assets from Humana (NYSE: HUM). That company will now become “Gentiva,” led by the former president and CEO of Kindred at Home, David Causby.

“When people say, ‘Well, what is it you actually do?’” Williams said. “The simplest way I find to explain it is: if we’re successful, we take good companies, and we make them great companies.”

For a lot of health care providers worried about their companies’ future, that sentiment is attractive for them. For one, survival often requires innovation, which means additional investment into the business that founders may be sheepish on committing to themselves.

Ari Medoff, the CEO of Arosa – a home care company that was acquired by the private equity firm Bain Capital Double Impact – talked about the need for innovation in home care models last week at Home Health Care News’ Home Care Conference.

“I think we desperately need new business models in our space,” Medoff said in Chicago. “I’m not just talking about trying to figure out how Medicare or some other third-party payer will pay the bill. A lot of energy goes into talking about that and dreaming about that, but I think it is incumbent upon us to think about how we bring value to clients in a different way that can lower bill rates and can raise pay rates.”

Arosa CEO Ari Medoff speaks at the Home Care Conference

Close to 2,000 miles away, Adaeze Enekwechi – operating partner at Welsh, Carson, Anderson & Stowe (WCAS) – was commenting on the same point while explaining the value in a PE backer, which Medoff’s company now has.

“Quite frankly, it’s hard to think about innovation, expansion and growth without private capital” Enekwechi said. “The government will not fund everything we want to see happen.”

Enekwechi spent time with the Congressional Budget Office (CBO), the Medicare Payment Advisory Commission (MedPAC) and the White House Office of Management and Budget (OMB) as the head of health programs under Obama before joining WCAS in 2021.

WCAS, similar to CD&R, is in business with Humana on its value-based, senior-focused primary care venture. It also currently backs the value-based, home-focused kidney care company InterWell Health.

Particularly with health care investments and home-based care investments – given the clear need in the U.S. for those services – PE players defend their strategies by pointing to the incentives. Essentially, if an investment is made, it bodes for both parties if the selling company succeeds and grows.

“The market will tell us if what we’ve done with that company is good or not. The market will tell you right away,” Enekwechi said. “Because if your multiple is not valuable to any buyer, then that obviously was not a wise investment, or you didn’t do the right thing with the company.”

Home health care and personal home care haven’t always been targets for PE backers. The former has a “stroke-of-the-pen risk,” which PE firms have mostly gotten over, while the latter is just starting to gain significant interest for a variety of reasons.

But theoretically, partnerships could make sense from the above-mentioned perspective. A direct incentive line can be drawn from the PE backer, to the provider, to the patient or beneficiary.

“Doing well here is also doing well on behalf of your beneficiaries, retirees and the other folks who are depending upon us to hopefully help them meet their retirement objectives,” Christopher McFadden, managing director at KKR, also said on the panel at HLTH.

McFadden joined KKR in 2018. Prior to KKR, he was a senior advisor for Athyrium Capital Management and a managing partner of Canyon Healthcare Partners. He was also a partner at Health Evolution Partners and a managing director at Goldman Sachs.

KKR also backs a wide variety of health care companies, including the home- and community-based services provider BrightSpring Health Services.

PE concerns

What can sometimes worry companies about taking outside investment is what change it may lead to.

While good change is likely inevitable, the perceived bad change could also mean leadership changes and other restructuring.

“Change is not a bad thing,” Enekwechi said. “You’re going to have to think about a business development function that’s well outfitted and well run. You have to think about the size – do you need this number of people doing X, do you need this number people doing Y? I don’t want to say it’s a science; there’s an art to it. I think it’s foolish to think that you can basically retain 100% of what you have when you make an investment and expect to see a completely new set of results. You have to rethink the company.”

That’s why that leadership change is also sometimes necessary, Enekwechi said.

While one person may have been the right leader to take a company from $0 to $500 million, another might be needed to take it from $500 million to $1.5 billion, or from one site to many across the country.

“We have to acknowledge that change is painful,” Williams said. “And none of us like to change, I don’t like to change. But when you lead a company, the market tells you change – or else – and the ‘or else’ is unpleasant.”

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