Venture capital in the welfare sector

– Status quo is not satisfactory: we are spending 18% of GDP on health care, demographics are challenging and management has to improve. In this situation we are struggling with solutions in the Western world, and private equity might be part of the answer. But this is truly an under-researched area.

Professor Josh Lerner, Harvard Business School and 2010 recipient of Global Award for Entrepreneurship Research, guided the audience in an Almedalen seminar of Swedish Entrepreneurship Forum through the state of the art in private equity knowledge, trying to answer the question whether this kind of ownership is good or bad in the welfare sector. Assuming a rather humble approach, Professor Lerner stated that private equity firms in general are characterized by better management, new jobs in new plants and increased productivity. However, it does not necessarily follow that the same development would come about in the welfare sector if private equity was let in on a larger scale.

– Private equity is not a long term investor which might make it less suitable for the welfare sector, but conclusions are based on rather limited evidence and more case studies are needed, said Josh Lerner.

 

Pontus Braunerhjelm, Professor at Royal Institute of Technology and Managing Director at Swedish Entrepreneurship Forum, asked if there is evidence of inferior management in the welfare sector and if this could be explained by the contractual arrangements there. Josh Lerner agreed that there is a case for regulators to look closely at this.

 

Thomas Berglund, Managing Director of Capio, privately owned group of companies running hospitals and health care centres in a number of European countries, surprised the audience by describing how he had discovered that production of health care wasn’t that different from other service industries where he had had top management positions in the last decades:

– Because you have a lot of well-educated people in hospitals, it takes longer time to convince people to implement decisions, that’s the main difference from e g Securitas, said Thomas Berglund.

– The fact that our owners are private equity firms does not influence the running of the firm. What does matter though are three main conditions:

  • You need to know the industry you are in (applies not only to the owners of course)
  • You have to have aligned interests between owners and management
  • And you have to respect “no politics” in the running of the company, I e the board cannot be divided into fractions with different values and objectives.

If these three conditions are fulfilled – and that can happen also with government run companies – then you have the foundation for good operations.

So the answer to the question whether venture capital in the welfare sector can work well is “yes and no”.

Thomas Berglund continued by stating that one factor that matters in the case of private equity is timing and availability of money when you need it.

–          Structural changes are needed in the sector and that takes time – often longer time than private equity investment periods.

–          The main challenge to the private equity industry though is that they are so bad at communicating what they are doing and what their value added is.

Martin Ådahl, Managing Director of the think tank Fores, added that another aspect is exit: while the investors can (and do) exit, that is not the case for the users, or in this case, patients. And because of this assymetry one has to take into considerations also other aspects when assessing the role of venture capital in the welfare sector.

–          There are intangibles such as life chances, survival, equality between people etc that have to be included in the analysis as well, added Martin Ådahl, who all the same suggested the tax system should be neutral between different kinds of owners.

 

Josh Lerner agreed with Martin Ådahl’s emphasis on values and intangibles and added that many of the larger groups are increasingly aware of this and for example include “social impact reporting”, audited by the same auditing firms that are used for financial reporting.

Thomas Berglund wanted to see a more varied spectrum of types of owners:

–          Today there is virtually only either government or private equity.
But what we really need to develop is management, and particularly local management. High quality management gives high profits, he stated firmly.

–          If you provide good service, no one minds if you make money, but you have to provide quality!

 

Josh Lerner finally pointed out that there is another hidden issue here: the correct pricing of services. – This is another question that should be studied in further depth.

Pontus Braunerhjelm concluded that this is a very important and fascinating topic and that it will be interesting to follow up how the huge markets for health services that are opining up will be dealt with by private capital as well as management and politicians.

 

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