Nursing Home Elder Abuse Litigation – The Dangers Of Private Equity Ownership #2
In our prior blog we discussed the fundamental misalignment between the motivations of private equity companies and the needs of patients residing in nursing homes and assisted living facilities. We discussed that private equity companies have one overriding goal – to maximize the profits of the target company for the benefit of their investors. Private equity companies are judged specifically on this singular “return on investment” criteria.
But private equity companies’ motivation to make their target companies profitable is much more personal than this. Private equity companies themselves stand to reap enormous personal rewards when their target companies are highly profitable. The industry standard is for private equity companies to secure an incredible 20% of a a target company’s increase in valuation over the time of private equity’s investment in the target company. A real world example of this places the extent of this motivation into full perspective. On year 1, Private Equity Company X purchased 80% of Skilled Nursing Chain Y for $150 million years. In five years, the value of Private Equity Company X’s 80% investment was worth $300. This amounted to $150 million of profit, $30 million of which went directly into the pockets of the private equity company (and not the investors in the private equity fund that invested in the target company).
This is not the end of the income private equity earns from “managing” its investments. It also typically secures a 2% “management fee” per year of all money invested. In the above example then, private equity would earn another $15 million in management fees over the five year period of its involvement.
In addition, private equity companies often get closing “transaction fees” that amount to another 2-3% of the sales price or, in the above case, approximately $3 million.
In short, the scale of the misalignment is enormous between the private equity company’s interest in maximizing profits and the needs of patients of nursing homes and assisted living facilities to have these resources used for their optimal care.
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