531. Should You Trust Private Equity to Take Care of Your Dog? | Freakonomics

Intro

In this episode of Freakonomics, the hosts explore the rise of private equity in the pet care industry. With pet ownership at a record high in the US, private equity firms have been acquiring vet clinics and animal hospitals. This consolidation raises concerns about price increases, service quality, and the well-being of pets. The episode delves into the impact of private equity ownership and the ethical questions it raises.

Main Takeaways

Impact of Private Equity in Pet Care

• Pet ownership in the US is at a record high, with 70% of households owning at least one pet.
• Private equity firms have taken notice of the pet boom and have been buying up vet clinics and animal hospitals.
• There are concerns that prices may go up and service quality may go down as a result of this consolidation.
• There are also concerns about the impact of these acquisitions on the well-being of pets and the qualifications of the staff taking care of them.
• National Veterinary Associates (NVA) is a community of veterinary hospitals and pet resorts with about 1500 locations in the US, Canada, Australia, New Zealand, and Singapore.
• NVA owns about 1100 sites in the US, which is relatively small compared to the 27,000 veterinary hospitals in the country.
• The pet care market is becoming less fragmented as corporate consolidators like NVA and Mars acquire more veterinary practices.

Private Equity Strategies and Concerns

• Private equity firms are attracted to specialty practices like emergency care, surgery, and cancer, which yield higher revenues and are growing faster than general vet care.
• JAB Investors, which recently acquired NVA, practices buy and build investing, holding on to companies longer than other private equity firms.
• The Stop Wall Street Looting Act argues that private equity firms strip companies of assets and walk away from workers, communities, and investors if bets go bad.
• Leveraged buyouts, using lots of debt to buy big companies and get outsized returns, have a higher rate of bankruptcy compared to publicly traded companies.
• Private equity firms collect various fees from companies, even as they spiral into bankruptcy.
• Private equity partners benefit from the Carried Interest Loophole, allowing them to pay lower tax rates on profits.

Positive and Negative Outcomes

• Private equity investment can lead to negative outcomes for patients and students.
• Nursing homes owned by private equity firms have higher patient mortality rates, but during COVID, they were more responsive in buying PPE and applying good practices.
• Private equity firms tend to increase productivity and efficiency in the companies they invest in, but this can come at the cost of job cuts.
• Private equity firms are lightly regulated and can have monopoly power.
• Private equity firms have changed their strategies over the years, moving away from financial engineering to building up operating teams and looking for new kinds of strategies like buy and builds.

The Ethics of Private Equity in Pet Care

• Private equity firms acquiring market power can lead to price increases in an almost monopolistic fashion.
• Private equity firms are setting up sham companies to get around laws against the corporate practice of medicine.
• Emergency room doctors are challenging private equity ownership of doctors’ practices and hospitals.
• There are concerns about the quality of care provided by private equity-owned pet care companies, as well as the treatment of employees and animals.
• The rise of private equity in pet care raises important ethical questions about the role of money in the industry and the responsibility of companies to their customers and the animals in their care.

Summary

The Impact of Private Equity in Pet Care

The pet care industry is experiencing a boom in the US, leading private equity firms to acquire vet clinics and animal hospitals. However, concerns arise regarding potential price increases and a decline in service quality. National Veterinary Associates (NVA), a community of veterinary hospitals and pet resorts, is at the forefront of this consolidation. While NVA owns a significant number of sites, the overall pet care market remains fragmented.

Private Equity Strategies and Concerns

Private equity firms are drawn to specialty practices in the pet care industry that offer higher revenues, such as emergency care and surgery. JAB Investors, the recent acquirer of NVA, follows a buy and build investing approach, aiming for longer-term ownership. However, critics argue that private equity firms engage in practices that strip assets from companies and leave workers and investors vulnerable. Leveraged buyouts, a common strategy, carry a higher risk of bankruptcy compared to publicly traded companies.

Positive and Negative Outcomes

Private equity investment can have both positive and negative outcomes. While nursing homes owned by private equity firms have higher patient mortality rates, they have also shown responsiveness during the COVID-19 pandemic. Private equity firms often increase productivity and efficiency in the companies they invest in, but this can lead to job cuts. Additionally, the lightly regulated nature of private equity allows for potential monopoly power.

The Ethics of Private Equity in Pet Care

Private equity firms acquiring market power in the pet care industry can result in price increases that resemble monopolistic behavior. Some firms have been setting up sham companies to circumvent laws against the corporate practice of medicine. Private equity ownership of doctors’ practices and hospitals has faced challenges from emergency room doctors. Concerns also arise regarding the quality of care provided by private equity-owned pet care companies and the treatment of employees and animals. The rise of private equity in pet care raises ethical questions about the industry’s priorities and responsibilities.

Conclusion

The increasing presence of private equity in the pet care industry brings both opportunities and concerns. While consolidation may lead to price savings for pet owners, it also raises worries about service quality and the well-being of pets. The strategies employed by private equity firms and their potential impact on various industries, including pet care, require careful consideration and regulation to ensure ethical practices and the best outcomes for all stakeholders involved.