Lately, investment firms are buying up vast swaths of Canadian businesses, including veterinary practices, drug stores and retirement homes. Is this a much-needed cash injection in a sluggish economy or are we sleepwalking into a world where profits are the only measure of success?
Companies in Canada are being bought up by private equity at an incredible rate. The list includes Rexall, MEC, Value Village, WestJet and Sleep Country.
But it also includes local businesses: vets, dentists, retirement homes and more. Critics say it’s an unchecked shift in the economy that results in negative, often dangerous outcomes – where the profit motive can mean higher prices and lower quality of care.
We’re speaking to someone who has brokered such deals: Rachel Wasserman is a lawyer and former investment banker who left that world behind to become a researcher for the Canadian Anti-Monopoly Project. Her forthcoming paper is called The Private Equity Playbook: Understanding the Secretive Industry Hollowing Out the Canadian Economy.
She joins us to talk about the cutthroat world of leveraged buyouts, the risks of corner-cutting, and what a private-equity future means for Canada’s economy.
Plus: producer Jay’s cat, Leo, is doing his own investigating to find out why his vet stopped giving out so many treats.
This is Lately. Every week, we take a deep dive into the big, defining trends in business and tech that are reshaping our every day.
Lately is hosted by Vass Bednar. Our executive producer is Katrina Onstad. The show is produced by Jay Cockburn. Our sound designer is Cameron McIver.
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Find the transcript of today’s episode here.
We’d love to hear from you. Send your comments, questions or ideas to lately@globeandmail.com.
Vass Bednar I'm Vass Bednar and I host this Globe and Mail podcast.
Katrina Onstad I'm Katrina Onstad and I'm the show's executive producer.
Vass Bednar Okay, it's time to level set and listeners. Here's how the sausage is made here lately. We keep a running list of business and technology trends that the team is noticing. And this summer, I know it's fall right now, but over the summer there was one phrase that kept coming up in our notifications. I know what it was. It was Brat Summer. It was them. That's not a business trend. But somebody is profiting from a bright summer. Not us. We're going to get to the bottom of it. Next episode. Now, the phrase we kept hearing, it sort of felt everywhere, but also had kind of an invisibility. It was two words, first word, private, second word equity.
CTV News reporter Rexall, along with Well, dots have both been purchased by a private equity firm known as Birch Hill Equity Partners.
CBC News reporter Birch Hill hospital owners blamed financial woes on low U.S. Medicare payments while paying out millions in dividends. That U.S. hospital is one of hundreds bought with backing from private equity firms companies.
Bloomberg reporter In fact, private equity has flown into the UK at an unprecedented rate since Brexit, hoovering up scores of high street names such as Burger King, New Look and Pizza Express 17.
CBC News reporter The Chronicle Herald's owners went on a shopping spree, buying up almost all of the newspapers in Nova Scotia, Newfoundland and Prince Edward Island. Now the private equity fund that financed those acquisitions is trying to dissolve the company, putting the future of those papers at risk.
Katrina Onstad Yeah. It was recently announced that a Swedish private equity firm called Alterra is buying a majority stake in CCM. That's the 125 year old Canadian hockey equipment maker. If you learned to skate in Canada, you know that logo, that heavy srif logo and our very own Globe and Mail reporter Chris Hannay has extensively covered the corporate sprint to buy a dentist's office. Veterinary cli nics, daycares, long term care homes,.
Vass Bednar Private equity. It's basically a pool of money that's collected from investors, and the resulting fund purchases. Companies typically transforms them and then sells them off for profit on a kind of short time span of a few years.
Katrina Onstad Profit emphasis like that feels categorically different when you're talking about ice skates versus like my grandmother in a long term care home.
Vass Bednar I think that's an excellent point. And those shareholder first demands are why there's often such a negative charge around private equity and how we talk about it. Right. It's a type of funding that's playing a bigger and bigger role in our economy, and many resent it. Critics label private equity players as corporate raiders or plunderers. We see them in pop culture as kind of the bad guys on shows like Billions. And lawmakers in the U.S. are starting to pay attention to this. Not the show billions specifically, but the growth of private equity. But here in Canada, we just haven't had much of a conversation about how comfortable we are or aren't with the rise of private equity in our lives. Although it is starting, Canadian researchers have found, you know, a kind of really scary stat that a disproportionate number of deaths occur in long term care residences that are owned by private equity firms and large chain.
Katrina Onstad That's that's an alarming statistic. But if I'm you know, in private equity, I'm going to offer my counterpoint here. Right. Which is that Canada needs investment. We need capital flowing. So today we're going to come at this from all sides. We're going to unpack how private equity is actually playing out in our lives because it has arrived and it's sort of invisible to a lot of us. Right. You might not even know how it's playing out. So, for example, while we were researching this episode, our producer, Jay, who loves his cat, Leo, shout out to Leo, 16 pounds of fun. Leo He was surfacing stats. Jay not Leo on vet rollups. And Jay had been noticing these rising costs and his fat and what he considered a decline in care. So he sluiced a little bit and just by looking on the Ontario business registry, he found out, my God, a firm bought his vet's practice last year. In fact, corporate chains now control an estimated 20% of veterinary hospitals and employ about 40% of vets. So this kind of consolidation does not really sound like a good thing, right? It could introduce a fragility to the economy.
Vass Bednar Yeah. And it's starting to migrate to health care services that are for humans, right? Not just animals. I do want us to be clear about that. And this kind of quiet transformation is happening with minimal regulatory oversight. It's reshaping industries. It's impacting us, consumers, communities and employees alike. So to talk about the impact of private equity, we found someone who's calling from inside the building. Rachel Wasserman is a corporate and commercial lawyer in Toronto, and she used to broker a private equity deals herself. But she's no longer in that world now. She's on the other side as a researcher. To that end, she's the author of a forthcoming paper called The Private Equity Playbook Understanding the Secretive Industry Hollowing Out the Canadian Economy For. The Canadian Antimonopoly Project, Rachel sounding the alarm about what a private equity economy means for Canada's future and our cats. She joined us in studio. This is lately.
Vass Bednar So the term private equity is a phrase I feel like you kind of are hearing all the time nowadays. So maybe we can just lay it out. What is private equity?
Rachel Wasserman Yeah, absolutely. So if you think about our financial markets, there's generally two segments. So you've got the public markets that I think most of us are familiar with, which is the stock market. These are companies that are publicly listed and you can buy their shares on the stock market, but then there's private companies. And these are companies that are owned by individuals or institutions that are not publicly traded. These are companies that have different sets of regulations than the public companies because they're not public. We don't need to protect investor interests in the same way we do with public companies. And so private equity is effectively taking the investment mechanics of the public market and bringing it to the private market. So this is investors investing their money by buying up private companies.
Vass Bednar Okay. So where would we be surprised to learn that private equity is present in our lives?
Rachel Wasserman So Private agrees everywhere. They like to really get themselves in places where there's predictable cash flow and loyalty amongst the customers. So you're going to see it in places like child care, dental care, physiotherapy, funeral homes. These are businesses that were traditionally owned by sole proprietors, individuals, and now have become kind of super corporate. And we're also seeing on a larger scale, a lot of manufacturing shops. So, you know, selling nuts and bolts to landing gear companies. They're in school busses, they're in refrigerated storage, and nursing homes are also being bought up by private equity, like, wow. They're everywhere.
Vass Bednar So do we know how big a force it's become?
Rachel Wasserman So we know that private equity is worth about $10 trillion globally. Huge. That is bigger than the capitalization of Alphabet, Amazon, you know, Facebook or Twitter all combined. This is a giant industry. And so one of the reasons why it is so big is that there's just so much capital available. And what does that mean? Capital means money. It means people looking to grow their wealth. So they're looking to invest that money into an investment product. A private equity fund that's going to give them a return. It's really emerged after the banking crisis in 2008 when low interest rates came out, quantitative easing, and it was just pumping the economy full of cheap cash. And investors were looking for ways that that could be invested.
Vass Bednar You worked as a corporate lawyer in private equity and as an investment banker convincing companies to sell to private equity funds. Take me inside that world a little bit. What was it like to be making those deals?
Rachel Wasserman It was a lot of fun. I'm not going to lie. I was what, in my early 30s and negotiating these big deals. And yeah, especially as a woman getting to negotiate against some really aggressive men and winning is a real fun feeling, especially for me. I love to negotiate and it's a glamorous life. You're, you know, you're doing things that are in the news and you're 35 years old negotiating $500 million deals.
Vass Bednar So you're no longer in this world. Yes. Glamor aside, maybe it was a moment. Maybe it was more of a process. But can you tell me more about how the thoughts and feelings that led you to choose a different path kind of crystallized inside you?
Rachel Wasserman I was so busy working for so long, you know, all nighters, sleeping under my desk, working till 4:00 in the morning, and then getting back into the office at 8 a.m. every day. You don't really have time to think. You're just doing your surviving. And Covid really afforded me the opportunity to slow down and to be with my thoughts and put the pieces together. And how private equity works. It thrives on taking something that is well-built at the kind of mature end of the company's lifecycle and extracting value. You know what I've always known and I think it's well known that the middle class is the driving force of our economy, the consumer economy, which is the biggest segment of our economy. And when we were selling. Companies. When I was doing sell side banking, we were building the financial models and showing how if you bought this company today, what you could grow it into. And, you know, it's coming from automation. It's coming from reducing headcount. It's coming from consultants recommending all these different ways that you can tweak things to make money in the next three, five, seven years. Our companies should not be run on three, five, seven year timelines. That's not healthy for the economy. It needs to be in perpetuity. Employees don't go to a job and say, I only want to be here for three years and move on. You know, obviously that happens. But we're looking for a place that we can call home and contribute. And so something wasn't adding up for me.
Vass Bednar Was it hard to leave?
Rachel Wasserman No, it wasn't. I thought to myself, This is who I want to be. Just to be clear, I worked with private equity as a lawyer and as a banker, so I was never in the firms, but they were my clients. And so, you know, it's tough. They want everything. Yesterday, there were some really nice people I met, but for the most part, it was a tough job. And. I saw things I didn't like. I looked at the people above me and I didn't want that for myself. And that was really what made me want to leave. I don't want to be like these people. Very competitive. Yeah. You know, even within the same firm, people are taking each other out and. I wanted to be in a more. Comfortable environment where I didn't have to worry about who was stepping on my neck that day.
Vass Bednar So what is that typical private equity playbook then? Once investors have purchased a business or multiple aspects of that business, what's next?
Rachel Wasserman Yeah. So once they've identified a business that they want to acquire, the first play of the playbook is the leveraged buyout. And so this is effectively the acquisition of the company. So a leveraged buyout is effectively using the company that you are buying to pay the majority of the purchase price. So if let's say you're going to buy a company for $1 million, typically you need to have a check for $1 million. Okay. Okay. But in this instance, they're only writing a check for $100,000 or maybe $200,000. And then what happens is, concurrently, with the closing of the transaction, they get the company to sign up for a loan for the balance of the purchase price. And so this all happens at the same time so that effectively the money from the loan gets sent directly to the bank account of the seller. So that loan is paying the majority of the purchase price. And so what happens in practice is that over the time that the private equity firm is running this company, that loan is getting paid down with cash. Okay. And so this is debt that this company would not have. But for the private equity acquisition, because, you know, debt is not a bad thing. Companies take out debt all the time to invest in infrastructure, capital investments. But this is different. This is using a loan to pay the purchase price so this money isn't being put through the business. It's going right from the bank into the pockets of the shareholders.
Vass Bednar Okay. And one area that we know private equity is moving into in Canada quite a bit is health care. A single private equity firm already owns the largest network of independent surgical centers in Canada. That's 53 operating rooms spread across six provinces. PE firms are scooping up nursing homes in Ontario. How is that playing out for health care? Businesses on the ground, for their workers and for their residents?
Rachel Wasserman So we're fortunate enough to live in Canada, where some of our health care is not privatized. I was at a conference at Oxford University a few weeks ago and we were presented with papers on the subject. And so this was a research study done in California where they looked at private equity owned hospitals and whether or not they outperformed public hospitals. And so what the research showed was that when economic times were good, mortality rates were better, when economic times were bad. Mortality rates were worse. Whereas public hospitals were consistent throughout. And so now we're starting to see in the Canadian economy, luckily, our hospitals are not privatized. But in the Canadian economy, everything kind of around our health care. Our dentists are physical therapists. Fertility clinics are all starting to get gobbled up by private equity. And so what I think is really important is when people are going to these institutions to know who owns them and what their motives are. Because when we used to think about private companies, it was a very different world. You know, I'm going to open a fertility clinic because I'm passionate about helping women have babies. Now, that same fertility clinic is opened by someone who is just interested in making money. So if you're going to a fertility clinic, going through what is probably one of the most emotional and expensive moments in your life, do you really want to go to someone who has a sales target? That's trying to sell you and in nursing care. So long term care, this is becoming a real problem. There are several studies being done, but there's one in particular that has stuck out at me where mortality rates at U.S. nursing homes are 10% higher by using leveraged buyouts and the private equity playbook. Their cash on hand is reduced by 38%. So what does that actually mean? Cash on hand is reduced. It means that money is being taken from the profitability of the business and being put into shareholders pockets instead of investing in inventory, workers, research and development. Fixing broken windows, whatever the business needs. Yeah, 38% of that cash is now taken away.
Vass Bednar It's a big chunk..
Rachel Wasserman And so how are they going to make up for this? Well, we know that from that same study, the average bill is 10% higher. But if I'm paying 10% more for a private long term care home for my loved one, I would expect 10% better service potentially. But no, they're actually 50%. And this stat blows my mind. 50% more likely to be placed on antipsychotic meds. And this is to keep labor costs down, to keep patients in their beds so that they need less care so that these firms can increase profits.
Vass Bednar I do want to kind of unpack what those who are either in private equity or tend to defend or uphold private equity counters. The upside By talking about another case study with IVF, there is a paper by two researchers from UC Berkeley and the Copenhagen School of Business that shows that when IVF clinics are acquired into a chain, they tend to perform more IVF cycles with greater success. To me, that does sound like a success story. So what's what's wrong with that?
Rachel Wasserman So that is great. And, you know, more babies going to families who want them. But I want to see the financial statements. I want to see what they're paying their people. Where are they cutting corners? How are they getting this? Not every private equity fund is bad. Like, I think that that's also really important. There are some funds that are doing some really great things. But I think it's important for us to know that we are living in a different stage of capitalism that I think most people are not familiar with.
Vass Bednar What is the end game here? What do private equity firms do when they've sort of rolled up or purchased all of the companies that they want to and they can't really grow anymore as easily? What happens?
Rachel Wasserman They sell.
Vass Bednar To who?
Rachel Wasserman They sell to another private equity firm, most likely. There's many different groups of private equity. So there's venture capital that invests in really start up companies. And I'm all for that. I think it's fantastic because we're growing businesses. The money that's going into this business is actually growing it. It's going into research and development capital expenditures. And then as the company gets more and more and more mature, growth becomes less profitable. Extraction becomes more profitable once a company is kind of in its mature stages and needs effectively a huge injection to reinvent itself. Or just, you know, wither away and die. And there are private equity firms all along that chain that will take it all the way into bankruptcy. Or frankly, there are private equity firms that will take bankrupted companies or poor performing companies and bring them back to life. So we use this term, but there's only one segment of private equity that really is the problem, in my opinion, which is the buyout firms. Okay. Okay. And so private equity does bring a lot of value to our economy in terms of investing in companies. But with buyout private equity firms, they don't invest in companies they extract from companies.
Vass Bednar I want to talk more about buyouts. So I'm a local veterinarian. Okay? I have built a successful small business. I've got happy employees and customers. I'm loving seeing all the pets, but I'm also kind of worn out. Running the business side is tiring, and I get a fantastic offer from a private equity firm. It looks pretty tempting. They promise to make the place a better business on top of it all. Why shouldn't I sell to private equity, make my money and sip cocktails on a boat somewhere?
Rachel Wasserman It's a hard argument. There's not a big market in Canada to sell a business. And so you've got an entrepreneur who's got a vet family business that they've had for a long time and they want to retire. But what are you going to do? Who are you going to sell it to? So the traditional model would be to sell it to your number two. Sell it to the junior vet, and that was the model. But when private equity came in, they were just offering a far more lucrative paycheck. And so you've got to think about what kind of country do you want to live in? You know, do you want to walk down the street and the butcher, the baker and everyone on your street is just an employee and no one has ownership over the businesses in which are operated. In my personal experience, the further removed the decision maker is from the business, the easier it is to compromise on product quality and service.
Vass Bednar You mentioned retirement. And something else I want to keep in mind here is that the Canadian pension plan, our national pension plan that we all contribute to keep a full third of their assets, maybe slightly more than $190 billion are comprised of private equity. And I do think this would really surprise people. It surprised me to know that their retirements are kind of bound up with the success or failure of these private equity deals. What do you think that means for the financial future of workers in Canada? Should we be worried?
Rachel Wasserman So Canadian pension plan doesn't really invest all that much in Canada. The opportunities are too small, frankly. And so a lot of what CPP is doing is abroad. And so we're all going to retire. I hope I can retire. And when we collect our CPP, Are you okay knowing that that money came from jacked up costs that a consumer had to bear or massive layoffs all to produce profits? The other thing to think about is there are other ways in which private equity could be making money. So they're flipping companies. Well, what's wrong with just holding a company over time and just declaring dividends? You know, there's so many different options, but as Canadians, you know, we're in a pickle. Canada is one of the largest private equity investors in the world. CP is the second largest institutional private equity investor in the world. And so with CP, I think we really just need to think as Canadians. Is this a really Canadian way to be investing money? I want to make sure that the money that I'm taking has been earned in an ethical way.
Vass Bednar Do you ever worry that private equity has become a bit of a boogeyman or a boogey person? Like, isn't there an argument for efficiency and economies of scale here? Don't we want an economy that's nimble?
Rachel Wasserman Absolutely. We want an economy that's nimble. Economies of scale kind of counteract that to a certain extent because you can be too big. And there was one on your podcast that you talked about earlier. I love the term too big to care.
Vass Bednar Thank you for these call. I.
Rachel Wasserman I love your podcast but too big to care. And I think that that's where these companies are headed. You know I don't think most people want that. There used to be deference to customers that, you know, we want your business. Now you go into a store and it's kind of like you're you're lucky to be here.
Vass Bednar Well, on the too big to connote I, I feel like they care about this so much more in the U.S. and that they're way ahead of us here. Right. U.S. Senator Elizabeth Warren has called private equity firms vampires. The Securities and Exchange Commission has recently brought in new rules for private funds. But in your research, you suggest that Canada is behind the eight ball in acknowledging how big a force private equity is becoming in our economy. Where are our regulators on this?
Rachel Wasserman To my knowledge, nowhere. And I think that stems from multiple different reasons. One private equity is huge in Canada, has a lot of influence. But I think it really does stem from, you know, our media and that we're much smaller country. So we have fewer resources, therefore fewer reporters who are able to do the hard hitting investigative journalism to bring this out. Like, you know, there's some pretty bad stuff out there.
Vass Bednar Well, let's put it into the bigger picture, right? Canada's economy, it's not really growing fast enough. Certainly, we have a productivity problem. Private equity investors are going to say. Private equity is what we need. It's investment. It's money in the economy. So what's the private equity future for Canada?
Rachel Wasserman Well, that all depends on the government. You know, whether the government steps in or regulators step in and try to change things. If we continue on the status quo, more and more small businesses are going to get bought up by private equity because that is the market. There was a great report done by the Canadian Federation of Independent Businesses that said that 76% of small, medium sized business owners intend to leave their business within the next ten years, and that's worth about $2 trillion. And about half of those are going to sell to a third party. So we've got $1 trillion of Canadian assets. They're going to change hands over the next ten years. So you're ready to sell your vet clinic or. I'm ready. Machine shop. Who are you to sell it to? If you don't have a number to. Private equity is probably going to be your only option. And so what I want to advocate for is creating alternatives to that. Because as private equity acquires, they roll up. So what's a roll up strategy? And that's when they take all these different vets and put them into one unit and harmonize the expenses while the revenue stays the same. So you're cutting costs and creating a corporation, a big corporate entity out of all these small, independently run clinics. That takes the character out of a business. It takes the culture out of the business. And it just we're becoming these sterile, large institutions that are focused on one thing and one thing only profit. Yes, they care about dogs. But if a dog's care is going to require them to make less money, it ain't going to happen. Now more than ever, Canada needs an economy that is geared towards building the great companies of tomorrow rather than hollowing out the companies of yesterday.
Vass Bednar Rachel, thanks so much for explaining all of this to us.
Rachel Wasserman You're welcome. I'm glad to be here.
Vass Bednar I know you've been listening to lately a Globe and Mail podcast. Our executive producer is Katrina Onstad. The show is produced by Jay Cockburn, and our sound designer is Cameron McIvor, and I'm your host Vass Bednar. In our shownotes. You can subscribe to the Lately newsletter. That's where we unpack just a little more of the latest in business and technology. A new episode of Lately comes out every Friday wherever you get your podcasts.