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Private Equity Interest

Karen Minich-Pourshadi, for HealthLeaders Media, August 15, 2011
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Brideau says seeing other Catholic hospitals financially flounder—only to be sold to non-Catholic entities—aligns with the organization's mission to grow its network of Catholic hospitals. The vision to strengthen Catholic healthcare was another driver for Ascension's partnership with Oak Hill Capital. Once the management team opted to go the private equity route, selecting a partner was a lengthy process. Finding firms with funds wasn't the issue, Brideau says; what made the process challenging was ensuring the right cultural fit. One of the deciding factors was Oak Hill Capital's agreement that Ascension Health would remain the sole authority over its Catholic healthcare identity, and that extends to any acquisitions.

Defining goals through due diligence

The core goal of a nonprofit hospital or health system is to provide patients with high-quality, cost-effective care, while earning a healthy margin; private equity firms have a different end goal. The general aim of a private equity firm is to achieve a large return on investment in the form of capital gains. How the private equity firm achieves those ends is where hospitals need to do their homework, Miller says. "Each equity firm has its own mission and values, and there are as many types of equity firms as there are hospitals," Miller says. "It's up to the hospital to do the due diligence and reference checks and to look at deals that these firms have done successfully and the ones that have gone south."

Though each agreement is different, in many instances the pathway to financial success is through an exit by the private equity firm, which may be through the sale of the equity stake rather than through a dividend income. In the case of Ascension Health Care, Brideau says there is no set exit date on Oak Hill's investment. Another key to its selection of this private equity firm, Brideau says, was the firm's approach to getting its return on investment.

"Many firms pay themselves a finder's fee so they can give it to the investors. Then they either charge a management fee or pay dividends to themselves as they go along. Oak Hill Capital doesn't take its profit until they exit. As the operator of a company, when you think about it, that's a terrific benefit because then their incentive is to make you as strong as possible for when they sell … and they aren't going to keep you capital-poor [in the process]."

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