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This story is part of a new Prospect series called Rollups, looking at obscure markets that have been rolled up by under-the-radar monopolies. If you know of a rollup like this, contact us at rollups(at)prospect.org.
As I have said before, the most soul-crushing, exploitative, and just plain sleaziest industries in America today will invariably have private equity firms lurking behind them. Many of the biggest payday lending firms are private equity–owned. Just this week, Madison Dearborn Partners purchased MoneyGram International, which has been repeatedly cited for abetting money laundering and elder fraud. What was once the only for-profit detention camp for migrant children was owned by the private equity firm DC Capital Partners. Endeavor Capital owns the nation’s largest for-profit bail agency; the same company ran a network of for-profit colleges. One PE firm, HIG Capital, has birthed virtually all of the nation’s for-profit prison subcontractors, which exploit prisoners with high-cost food, communications, and medical services.
So the revelations in a new report from the Private Equity Stakeholder Project, provided exclusively to the Prospect, should come as no surprise. In youth behavioral services like “troubled teen” centers, for-profit foster care, and services for young people with intellectual and developmental disabilities (in particular services for people with autism), private equity has increased its investments, capitalizing on government health care dollars and a steady stream of at-risk youth.
Private equity’s goal isn’t to provide a safe and comfortable environment for those in its care, it’s to make outsized returns. And while private equity firms have pulled hundreds of billions of dollars in dividend and management payments out of these facilities, reports of inadequate staffing and training, substandard living conditions, physical and sexual abuse, and the use of restraints and solitary confinement have proliferated. They’re a by-product of the private equity business model.
“In a lot of these places, and generally with private equity–owned health care, the biggest cost is staffing,” said Eileen O’Grady, who authored the report. For private equity to get those high returns, they have to skimp on labor costs. “It creates a culture of very high turnover,” O’Grady said. “Companies will complain that they don’t have enough staffing, because they’re paying $11 an hour for a difficult job.”
Some of these PE investments are long-standing. Aspen Education, which has a number of youth residential treatment centers, was owned by Bain Capital as far back as 2006. But in the last few years, the investments have been growing. In 2020, VSS and Cimarron bought Ascent Behavioral Health. Last February, it was Pine Tree Equity gobbling up Innercept. Onex Partners took on Newport Academy in June. Even Bain is back in the mix with a purchase of Broadstep, which owns 86 facilities, in 2020.
Family Help & Wellness, a company owned by Trinity Hunt Partners that has 20 programs in six states, is a good case study. FHW grew by taking over shuttered facilities from other troubled teen companies. In one such site in Salt Lake City, knows as Elevations, calls to local police increased 40 percent after FHW took over, with state citations over abuse, lack of food, mold in bathrooms, and sexual offenses. Suicide reports also increased markedly.
The Mentor Network, now known as Sevita, is another good example. One of the largest for-profit foster care companies in America, Sevita has been in and out of private equity ownership for 20 years, with five different owners. Over a ten-year period of private equity ownership, 86 children died in Mentor/Sevita facilities, a rate 42 percent higher than the national average, according to a Senate Finance Committee report. But allegations of widespread abuse and neglect have not stopped the gravy train: The current owners, Centerbridge Partners and the Vistria Group, have taken $475 million in debt-funded dividends since 2019.
Foster care and other services have been almost entirely privatized, as a way to lighten strained government budgets.
It’s worth stopping here and asking why these facilities were privatized and pushed out to for-profit companies at all. The state has an interest in ensuring a safe environment for troubled, orphaned, or developmentally disabled youth. Anyone on the street hearing that these children were being exploited as a profit center for wealthy financiers would recoil. Yet foster care and other services have been almost entirely privatized, as a way to lighten strained government budgets. The horror show of private equity bottom-feeding is the result.
Worse, private equity, which has dabbled in owning these facilities for decades, now appears to be using another one of its business models: the rollup. “Private equity firms love to roll up industries, create a platform company and buy others,” said O’Grady. In 2021, for example, Sevita acquired at least five other companies that operate homes for children with intellectual and developmental disabilities.
Sequel Youth & Family Services, another rollup owned by Altamont Capital Partners, now has 10,000 patients in 21 states, and according to the report has seen complaints of abuse and neglect in almost every state in which it operates. Despite these allegations, and shutdowns of 14 residential treatment centers amid investigations, Sequel bought Pine Cone Therapies in 2020 and North Shore Pediatric Therapy in 2021.
The fact that the amount of money in youth behavioral services increased over the past decade, in part thanks to the Affordable Care Act, makes the sector even more attractive and ripe for takeover. States pay companies like Sequel to house kids in the foster care or juvenile justice systems, ensuring a steady revenue stream.
Autism services in particular have seen substantial private equity investment of late. A new and controversial technique known as applied behavior analysis (ABA) therapy is the likely trigger. “It has a lot of critics for having a punitive approach to behaviors that autistic children display,” said O’Grady. “It’s also the most profitable, covered by most insurance and Medicaid. It seems like it’s viewed by the industry as very lucrative.”
Private equity deals for autism service providers over the past five years have gone for as much as $700 million, with big players like Blackstone and Cerberus getting involved. This follows a spate of private equity investments in the health care space, I suppose based on the idea that people will always keep getting sick.
Which explains why, even though the track record of private equity in these youth behavioral sectors is disturbing, it looks to be just beginning. The only thing that might stop the industry is the rare prospect of actual aggressive regulation.
Last week, the Securities and Exchange Commission proposed a new rule under the Investment Advisers Act of 1940 that would add transparency for investors in private equity funds regarding fund performance and fees; require annual outside audits; and prohibit various junk fees extracted from investors and portfolio companies, as well as banning legal indemnification. The goal is to end the grifting that private equity managers use to maximize their own earnings at the expense of investors and the companies they own.
Making private equity less lucrative could boost sectors at risk of being rolled up and subsumed into the exploitative practices that are the industry’s hallmark. Without more disclosure and prohibitions, private equity will continue to live its accountability-free lifestyle. O’Grady highlighted the fact that private equity firms own companies accused of serious and flagrant violations, like Aspen Education, but never seem to be held responsible for those abuses. “Bain Capital owned Aspen for over a decade, and whatever happened at those companies, how many times sued, nothing bad happened to Bain,” she said. “Bain made a huge profit and is now buying up other companies that do essentially the same thing.”
