Outside The Spotlight
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Outside The Spotlight
Rimi Deb
M.Sc. Economics(Population Studies And Health Economics) (2023-25)
Estimated Reading Time ~ 5 minutes
Source: Global Pet Industry
“Your local vet may already be owned by a private equity firm without your knowledge.”
Private equity does not work in the shadows; however, it certainly operates outside the spotlight for a long time. The book, Plunder: Private Equity’s Plan to Pillage America by Brendan Ballou offers insights into private equity which are pretty esoteric.
How does a private equity firm operate?
Private equity firms operate on a simple business model: they invest a small portion of their own money, combine it with funds from investors, and leverage significant borrowed capital to acquire companies. The goal is to enhance these companies’ financial or operational performance, ultimately selling them after a few years for a profit. Private equity firms are attracted to companies or industries with stable and reliable cash flow. Since these firms often use debt to finance acquisitions, they prioritize consistent revenue to ensure they can service the debt. An example of this would be Carlyle’s acquisition of ManorCare. Hang on! I’ll explain who these companies are. The former is one of the largest private equity firms while the latter is the second largest nursing home chain in the US. Carlyle acquired ManorCare using substantial debt, which the company had to repay. To manage this, they cut staffing, leading to an increase in health-code violations and a rise in resident complaints.
Well, what are the consequences? Why is private equity perceived so negatively?
When a patient named Annie Salley died under ManorCare’s care, her family attempted to sue ManorCare and Carlyle. However, Carlyle claimed in court that they were not the actual owners but merely advisers to funds that owned ManorCare through a series of shell corporations. Despite publicly stating that they had purchased ManorCare and seemingly having operational control, Carlyle avoided liability due to legal technicalities, such as the doctrine of piercing the corporate veil. This case highlights how private equity firms can exert control over companies without being held accountable when things go wrong, thanks to certain legal protections.
Private equity and pet-care
The pet boom has caught the attention of private equity firms, which have been acquiring significant portions of various industries, including financial services, education, healthcare, and even car washes and pawn shops. It’s no surprise that the pet industry is now a target as well. In fact, your local vet may already be owned by a private equity firm without your knowledge.
When a successful small business is bought by a larger firm and consolidated with other small companies into a conglomerate, it promises benefits like increased efficiency, more resources, and potential financial rewards for the founders. Ideally, this could also mean better deals for customers. However, the real impact of such acquisitions, especially on something as personal as the care of your beloved dog or cat, raises questions about how often these promises are actually fulfilled.
About 25% of general veterinary practices in the U.S. are now owned by corporate consolidators, a significant increase from 5% just a decade ago. For specialty veterinary practices—such as emergency care, surgery, and cancer treatment—corporate ownership is even higher, at around 75%. These practices are particularly attractive to private equity firms because they generate higher revenues and are growing much faster than general veterinary care.
The growth in pet ownership has been fuelled by both an increase in the number of pets and a heightened humanization of pets, where more people are treating them like family and visiting vets more often. This trend was further accelerated by the pandemic, which saw pet ownership rates triple or quadruple their previous growth rate of 1 to 1.5% per year. This surge in demand and attention to pets creates a strong incentive for consolidators to further consolidate the veterinary industry. In a consolidated veterinary practice, individual practices that previously managed their own finances and purchases would be streamlined under a single corporate management. This centralization could lead to cost savings, especially on bulk purchases of medicines and supplies. These savings might increase profits or potentially be passed on to customers.
Should pet owners welcome this increased efficiency?
While the consolidation of local vet practices by private equity firms could potentially bring increased productivity, economies of scale, and possible cost savings, the primary concern is not efficiency but the creation of monopoly power. As private equity firms buy up practices, they may gain significant market control, which could lead to higher prices and reduced competition, ultimately impacting pet owners negatively despite the initial promises of efficiency and savings.
The buy-and-build strategy used by private equity firms involves acquiring a large pet-care company and then systematically buying up its competitors. Their goal is to dominate the market, not out of a genuine concern for pets, but to exploit the fragmented market where pet owners are eager to provide the best care. By monopolizing the industry, they aim to ensure that pet owners have to go to their owned facilities for procedures and care.
In certain regions, private equity firms may not dominate the entire industry but can become the primary provider of veterinary care. If you live in one of these areas, your choices may be limited, and you should remain vigilant during your pet’s treatment. These firms can leverage their large footprint to charge higher prices for procedures because they control multiple local practices under various names, effectively eliminating competition.
The answer to the question of how the rise of private equity in pet care affects us and our pet isn’t quite so simple. However, that private equity does lead to unwanted consequences is not without doubt.
References
- Whoriskey, P. (2018) ‘Overdoses, bedsores, broken bones: What happened when a private-equity firm sought to care for society’s most vulnerable‘, The Washington Post. Available at: https://www.washingtonpost.com/business/economy/opioid-overdoses-bedsores-and-broken-bones-what-happened-when-a-private-equity-firm-sought-profits-in-caring-for-societys-most-vulnerable/2018/11/25/09089a4a-ed14-11e8-baac-2a674e91502b_story.html (Accessed: 22 August 2024)
- Dubner,S.(2023)’Should You Trust Private Equity to Take Care of Your Dog? Available at:’https://freakonomics.com/podcast/should-you-trust-private-equity-to-take-care-of-your-dog/(Accessed: 22 August 2024)