|
Web Page History |
|
|
|
||||||||||||||||
Private equity investment in Australia
The Senate Standing Committee on Economics
August 2007
Summary
The rapid growth of private equity investment was causing some anxiety. The issue was referred to the senate standing committee on economics. Two submissions were made describing the extent to which profit focused private equity groups had entered the health and aged care sectors. The potential risks to this sector were stressed.
The committee did not see private equity as a threat to Australia or to these sectors. Some weeks later the New York Times published an expose of private equity practices in aged care in the USA.
Introduction
Private Equity investment had been growing steadily across the world but particularly in the USA. It had become a global phenomenon. Unlike publicly listed companies private equity was not closely scrutinized so that they were not only protected from the pressures engendered by constant disclosures and share price panic but they had greater freedom in the way they operated and could take more risks. Many large market listed companies sold themselves to private equity groups. In the USA health (eg. HCA) and aged care were prime targets. Their presence in Australia was expanding rapidly. The senate decided to examine the implications.
Health and aged care have both been targeted in Australia by a Citigroup private equity subsidiary. It had purchased Mayne Nickless, Australia's largest health care company, without our realizing its tawdry past in the USA. Later it purchased our largest nursing home operator, DCA.
Submissions
There were two submissions about health and aged care. I made one and Marie dela Rama from UTS made the other. I looked at the track record of market listed companies and of Private Equity groups in the USA. I pointed out that private equity moved decision makers even further from the coal face than market listed entities, and increased the financial pressures, while reducing oversight. This posed an increased risk for vulnerable sectors like health and aged care,
The report did not see private equity as a threat. It was unconvinced by the arguments I made.
Several weeks later the New York Times published the results of its investigation of private equity making serious allegations. These were followed by government inquiries and a number of other reviews. The economic downturn in 2008 reversed the growth of private equity which had taken larger risks than others. This took the pressure off temporarily at least.
I start with an outline of my submission.
Submission to the Senate Economics Committee (J M Wynne)
Inquiry into the Private Equity Investment and its Effects on Capital Markets and the Australian Economy
Summary
This submission asserts that the explosion in private equity will potentate and exacerbate serious problems existing in vulnerable sectors of Australian society. It also addresses deeper problems across Australian society and the consequences for these.
It urges that the threat posed by the private equity phenomenon be the trigger for a change in strategy and a re-evaluation of the direction in which we are going. It uses developments in health and aged care to illustrate the problems that already exist and the likely consequences of these new developments
Anxiety is expressed about the narrow economic terms of reference which fail to specifically invite comments about critical issues for society and its members.
The development of prevailing economic theory and its political expression is examined. The consequences for vulnerable sectors like financial advice, health and aged care are documented. Reasons are suggested to explain why the market has been so dysfunctional in these areas and why regulatory control has been ineffective. The reasons and social mechanisms for this are explored. Wider consequences for the Australian political system, for democracy and for the community are documented.
The specific problems inherent in private equity are examined and the way they will augment and accentuate the problems which already exist is addressed. Some of the recent misdemeanours of the global financiers that both dominate the private equity phenomenon and act as role models and advisers to the sector are noted.
The involvement of the financiers, banks, trusts and other financial vehicles in health and aged care is addressed. A link is provided to a web page that documents the actual involvement of private equity conglomerates, banks and others in aged care.
The submission urges that advice given by the health department in Western Australia in 1993 to set up a process for developing a legislative state and federal response to the problems in health and aged care be followed. Other sectors might be treated similarly.
The private equity phenomenon will have far reaching consequences for our communities as business executives who are a part of each community and seek to serve them are replaced or controlled by market technocrats operating out of ivory towers in distant lands.
The submission urges a rethink of the sort of society we want to be. It urges the temporary quarantining of "at risk" sectors like health and aged care. This should be followed by the creation of political and reflective community processes that will neutralise the problems inherent in ideology. This should enable us to progress towards a society that is more balanced and inclusive than the one we have today. Some possible strategies are suggested.
The submission refers to issues in health, aged care and society with which some might not be familiar and where others have misconceptions. Over half of this submission consists of appendices that supply more detailed illustrative information on these issues. These illustrate the failure of markets in these sectors.
CLICK HERE to download the full submission.
Submission from the UTS Centre for Corporate Governance
Marie de la Rama from UTS Centre for Corporate Governance has been a strong critic of private equity investment in health and aged care. She made a submission critical of private equity in aged care. In this she described the ownership structure of the companies operating aged care facilities in Australia, She described the shift away from not-for-profit community focused on care, to care focused ever more strongly on profit and provided initially by for-profit market listed groups and culminating in private equity.
CLICK HERE to read or download a copy of the UTS submission
Report
Private equity investment in Australia
The Senate Standing Committee on Economics Report
August 2007
The committee did not see private equity as a threat and it did not suggest any restrictions
The evidence received by the committee suggests that private equity is not a threat to the public capital markets in Australia.
---------------------------
The committee does not consider that any convincing case has been made for any further regulation of private equity activity in Australia at this time. It recognises and endorses the ongoing watching brief maintained on this issue by the Treasury, the RBA, the ACCC, ASIC and the FIRB.
---------------------------
The committee believes it is important to continue to attract foreign investment into Australia and does not accept the narrowly held view that some sectors of the national economy should be protected from private equity activity.
In regard to our submissions about health and aged care they said.
5.24 The committee received comment that private equity activity in not-for-profit and community based organisations was counter to their service-based objectives. This view was put by two submitters-Ms Marie de la Rama from the UTS Centre for Corporate Governance and Dr J Michael Wynne.
5.25 Dr Wynne argued that national interest grounds should apply to protect the health care industries because of the adverse consequences from private equity involvement in the sector. Citing examples from the US, he claimed that the focus on financial outcomes rather than service delivery inherent in the private equity model was unsuited to the health sector, which relied on attention to proper process, probity and an understanding of the community they are providing for. The committee is unconvinced, however, that private equity activity in Australia's health care sector has contributed in any substantive way to problems that have arisen in the provision of private health care services. The connection claimed by Dr Wynne is unclear. The case for greater regulation of private equity activity in the Australian health care sector on national interest grounds is thereby also unclear.
The full report can be found at
Click Here to go back to the main report page
|