Browsing by Subject "Private equity"

This dissertation studies the incentives of private equity (PE) fund managers. In the first chapter, I study how the management fee structures of funds shape their incentives. I find that one of the most common management fee structures in the industry - changing fee bases at the end of the investment period from committed capital to invested capital - creates an agency problem where the managers overinvest to receive more management fees. Importantly, this finding implies that that the investors face a trade-off when choosing this fee structure. Changing fee bases in this way reduces management fees, but it also creates an overinvestment problem.

In the second chapter, I examine what determines the nature of the operational changes that the PE fund managers bring to their portfolio companies. In the context of PE ownership of nursing homes in the U.S., I find that the PE fund managers improve quality of care of their nursing homes by hiring more skilled nurses, but only at the nursing homes in competitive markets. In contrast, in concentrated markets, PE fund managers fire nurses which lowers quality of care. Overall, this chapter shows that the competition in the product market largely shapes the effects of PE ownership on consumer welfare. Importantly,this finding implies that policy makers may use pro-competition policies to assuage negative effects of PE ownership on consumer welfare. Consistent with this finding, this chapter shows that PE-owned nursing homes responded more strongly to the introduction of the star-rating system at the end of 2008.

In the final chapter of this dissertation, I examine how the incentives of the PE fund managers change in times of crisis. To do this, I examine the effects of PE ownership on nursing homes during COVID-19. In the media, there were several accusations that the PE investors make nursing homes more vulnerable to COVID-19. This chapter shows that PE-ownership is actually associated with a lower likelihood of having a COVID-19 outbreak, and a lower likelihood of nursing homes being short of Personal Protective Equipments for their nurses and patients. These findings are consistent with the view that PE investors help their portfolio companies survive through crises by bringing both management expertise and capital injections to their portfolio companies.

This dissertation explores the effects of private equity (PE) investment on product quality among healthcare providers. In the first essay, I study the determinants of PE manager behavior, focusing on the role of product market competition. Using the nursing home setting as a backdrop, I consider the broader question of whether and how product market competition shapes the impact of PE acquisitions on consumers. By studying acquisitions of skilled nursing facilities by PE firms, I find that PE-owned providers exhibit greater competitive sensitivity—in that they compete more aggressively when competitive incentives are comparatively strong, and exploit market power more aggressively when competitive incentives are comparatively weak.

To investigate whether PE managers respond differently than non-PE managers to competition, I consider two sources of variation in competitive incentives facing nursing homes. First, I exploit the fact that nursing homes compete with one another in geographically segmented markets to contrast facilities according to the levels of local competition they face. I find significant heterogeneity in the effect of PE ownership according to levels of local market concentration. In highly competitive markets, PE owners increase staffing by $101,783 worth of care annually (enough to increase registered nurse (RN) hours by 20.8% of the mean), while actually reducing staffing in less competitive markets. Second, I show that PE-owned nursing homes respond more strongly to policies intended to spur competition. I study the introduction of the Five-Star Quality Rating System, a policy that increased the salience of staffing for consumers. Following its introduction, PE-owned facilities increased their staffing by an average of $39,118 worth of care more than their non-PE counterparts. Moreover, PE managers more aggressively shift their staffing composition towards RNs in response to the rating system's specific emphasis on RN staffing (RN expenditure increasing by 14.7% of the mean, with licensed practical nurse (LPN) expenditure decreasing by 4.9% of the mean): in total, the share of RN staffing increased by 1.9 percentage points (17.3% of the mean) more than non-PE facilities.

In the second essay, I assess how PE acquisitions influenced the readiness and outcomes of nursing facilities during the onset of the COVID-19 pandemic. With over 40% of U.S. COVID-19 deaths occurring in nursing homes, long-term care is a critical setting in which we must better understand the impact of PE ownership during the coronavirus pandemic. I find PE ownership to be associated with a mean decrease in the probability of confirmed COVID-19 cases among residents by 7.1 percentage points and confirmed staff cases by 5.4 percentage points. PE was also associated with a decreased probability of PPE shortages—including N95 masks, surgical masks, eyewear, gowns, gloves, and hand sanitizer. However, facilities previously (but not presently) owned by PE firms did not fare similarly well. I observe that prior PE ownership may result in increased PPE shortages and a potentially greater likelihood of resident outbreaks. This suggests that the contribution of PE ownership to improved COVID-19 outcomes is a result of active management during the pandemic, rather than the legacy of interventions undertaken beforehand.