If someone, other than Houdini, has $1 billion and decides to buy something for $2 billion, the math simply doesn't add up. Aside from this, General Catalyst is saying all the right things.
While most corporate healthcare journalists (like those from Bloomberg, Forbes, Fortune, Axios) appear to have cozy relationships with private equity firms, with some even engaging in a "revolving door" practice, Bethany McLean stands out. She is one of the few nationally acclaimed journalists and world renowned authors who remains truly unbiased and never hesitates to reveal how private equity firms enrich themselves at the expense of patients.
The primary issue with private equity lies in its use of leverage—borrowing significantly more than they have in the hopes of realizing substantial profits. Unfortunately, more often than not, these deals go south, and it’s the patients who suffer the consequences.
As outlined in my recent article, the largest leveraged buyout that corporate journalists seem to avoid investigating is General Catalyst acquiring Summa Health. This deal allegedly involved borrowing a sweet $1 billion that General Catalyst doesn’t have.
My concern regarding the miscalculated risk of leveraged buyouts (LBOs) is substantiated by data: "Roughly 1 in 5 large companies acquired through leveraged buyouts go bankrupt within a decade. This is vastly more than the roughly 2% of comparable companies not acquired by private equity firms that do." (Source: Brendan Ballou, author of "Plunder: Private Equity's Plan to Pillage America", 2023.) The fact that the General Catalyst-Summa deal extends beyond mere financial considerations, impacting communities at large, renders this deal not only unethical but also irresponsible.
Hi Sergei, can you elaborate on why you believe a failed investment in Summa Health would entirely bankrupt General Catalyst the company even despite its diversified portfolio?
It's an excellent question, Chris, and it's really important to understand this in detail. For obvious reasons, neither General Catalyst, HATCo, nor Summa Health would share this because that would open a whole can of worms regarding their due diligence and ethics. Perhaps that's why the details of the deal were not disclosed.
However, in this particular case, we can easily figure out all the necessary details and conclude why this deal is extremely risky for many parties: not just General Catalyst, HATCo, and Summa Health, but also their employees and stakeholders, as well as GC investors (think fund of funds), and investors of every single name in the GC portfolio (think individual private companies).
First of all, let me just say that in general, when one takes leverage (i.e., buys something with money they don't have), they look really smart when the investment works out. But if things go south, you harm a whole bunch of parties, perhaps even the ones you wouldn't think you'd harm, as I demonstrate below. That's why leverage often doesn't just bring risk. It brings "black swan" risk.
So why is buying Summa Health a "leveraged buyout" (or LBO) for General Catalyst and HATCo? Well, the answer is simple: because General Catalyst didn't have the money to pay for Summa, and therefore I'm assuming they borrowed the money. And I don't even care how they did it: a bank, another venture capital fund, a swap, an equity financing, etc. It's irrelevant. The point is: They seem to have got excited about the terms of the deal, and they found a way to finance it.
How do I know this? At the first announcement three months ago, it was reported that the deal would be in the "$1 to $3 billion" range. I know that General Catalyst doesn't have more than $1 billion on its books. (Don't confuse GC's own money with the reported $25 billion of AUM - that's investors' money. They can't touch that.) So GC went ahead and founded a shell company called HATCo for the purpose of acquiring Summa Health. Let's assume, very graciously, that HATCo received half of GC's assets, i.e., $500 million. No matter how you slice it, there was no money to pay for this deal.
So, given the massive leverage HATCo is taking on in the Summa Health deal, now HATCO, and by extension, General Catalyst, are basically becoming Summa Health - because Summa Health, assuming it was valued (more or less) fairly, is larger than General Catalyst! It means that how Summa goes, so goes General Catalyst.
So, if everything goes perfectly, no slipups, and somehow magically HATCo turns Summa Health's loss into profit "through innovation", as they put it, even though they massively handicapped themselves by making some remarkable promises, such as "no layoffs", "the $210 million per year charity program continues", and "we will pay the $800 million debt", among others - which is another enormous "if" - but if everything they promised happens and happens quickly, then they would look super smart, for sure.
However, let's assume things don't go "by the plan", which I think is a real possibility because to make Summa profitable, a lot of pieces have to come into place. If the deal fails,
📍 Money is lost.
📍 The well-being of the Summa 8,500 employees is now in jeopardy.
📍 Now 1 million (!) Summa patients are thinking where they will go if the hospital reduces its operations or shuts down outright.
📍 HATCo won't be able to pay its creditors.
📍 Creditors would take HATCo to court to get their money.
📍 HATCo files for bankruptcy protection as it doesn't have enough money.
📍 I don't know what General Catalyst is thinking at that point, but I don't believe they are off the hook, as the bankruptcy judge would certainly notice that HATCo was founded by General Catalyst, who still has, say, $500 million on its books.
📍 The judge orders GC to pay everything to creditors and to start the winding-down process.
📍 ‘Winding down’ means for GC, among other things, selling its portfolio at a ‘fire sale’ - i.e., selling something in a market that doesn’t even have a secondary market or any form of liquidity. At that point, you're at the mercy of buyers, who know your situation and are trying to take advantage of you. In my article, when I gave an estimate that they may receive something in the area of $5 to $10 billion for what on paper is worth $25 billion, someone basically told me that I was delusional and that in a fire sale of private equity they would be lucky to get 20 cents on the dollar - i.e., $5 billion.
📍 Since every GC investment is private equity - i.e., it’s marked by the last transaction - not only GC investors just lost 80% overnight, investors of GC’s underlying private equity companies, who may have never heard of General Catalyst, HATCo, and Summa Health in their lives wake up screaming, couldn't believe their eyes that they just lost 80%.
It's a freaking chain reaction, with layers of complexity. And, as you see, it made absolutely no difference how diversified General Catalyst’s portfolio is. Leverage risk is very real and very dangerous, and it could affect a lot of unsuspected parties.
Just so we're clear, I'm rooting for this deal to go through and to become profitable, because, if all the things that have been said during the announcement come true, on paper, the deal promises a lot of great things for patients and physicians: innovative digital solutions, efficiency, scale through building their own state-of-the-art EHR system, and so on.
A must-read brand new article by someone passionate about uncovering the shady private equity transactions in healthcare and other industries: https://www.businessinsider.com/how-wealthy-investors-got-rich-looting-needy-hospitals-healthcare-system-2024-3.
While most corporate healthcare journalists (like those from Bloomberg, Forbes, Fortune, Axios) appear to have cozy relationships with private equity firms, with some even engaging in a "revolving door" practice, Bethany McLean stands out. She is one of the few nationally acclaimed journalists and world renowned authors who remains truly unbiased and never hesitates to reveal how private equity firms enrich themselves at the expense of patients.
The primary issue with private equity lies in its use of leverage—borrowing significantly more than they have in the hopes of realizing substantial profits. Unfortunately, more often than not, these deals go south, and it’s the patients who suffer the consequences.
As outlined in my recent article, the largest leveraged buyout that corporate journalists seem to avoid investigating is General Catalyst acquiring Summa Health. This deal allegedly involved borrowing a sweet $1 billion that General Catalyst doesn’t have.
My concern regarding the miscalculated risk of leveraged buyouts (LBOs) is substantiated by data: "Roughly 1 in 5 large companies acquired through leveraged buyouts go bankrupt within a decade. This is vastly more than the roughly 2% of comparable companies not acquired by private equity firms that do." (Source: Brendan Ballou, author of "Plunder: Private Equity's Plan to Pillage America", 2023.) The fact that the General Catalyst-Summa deal extends beyond mere financial considerations, impacting communities at large, renders this deal not only unethical but also irresponsible.
Hi Sergei, can you elaborate on why you believe a failed investment in Summa Health would entirely bankrupt General Catalyst the company even despite its diversified portfolio?
It's an excellent question, Chris, and it's really important to understand this in detail. For obvious reasons, neither General Catalyst, HATCo, nor Summa Health would share this because that would open a whole can of worms regarding their due diligence and ethics. Perhaps that's why the details of the deal were not disclosed.
However, in this particular case, we can easily figure out all the necessary details and conclude why this deal is extremely risky for many parties: not just General Catalyst, HATCo, and Summa Health, but also their employees and stakeholders, as well as GC investors (think fund of funds), and investors of every single name in the GC portfolio (think individual private companies).
First of all, let me just say that in general, when one takes leverage (i.e., buys something with money they don't have), they look really smart when the investment works out. But if things go south, you harm a whole bunch of parties, perhaps even the ones you wouldn't think you'd harm, as I demonstrate below. That's why leverage often doesn't just bring risk. It brings "black swan" risk.
So why is buying Summa Health a "leveraged buyout" (or LBO) for General Catalyst and HATCo? Well, the answer is simple: because General Catalyst didn't have the money to pay for Summa, and therefore I'm assuming they borrowed the money. And I don't even care how they did it: a bank, another venture capital fund, a swap, an equity financing, etc. It's irrelevant. The point is: They seem to have got excited about the terms of the deal, and they found a way to finance it.
How do I know this? At the first announcement three months ago, it was reported that the deal would be in the "$1 to $3 billion" range. I know that General Catalyst doesn't have more than $1 billion on its books. (Don't confuse GC's own money with the reported $25 billion of AUM - that's investors' money. They can't touch that.) So GC went ahead and founded a shell company called HATCo for the purpose of acquiring Summa Health. Let's assume, very graciously, that HATCo received half of GC's assets, i.e., $500 million. No matter how you slice it, there was no money to pay for this deal.
So, given the massive leverage HATCo is taking on in the Summa Health deal, now HATCO, and by extension, General Catalyst, are basically becoming Summa Health - because Summa Health, assuming it was valued (more or less) fairly, is larger than General Catalyst! It means that how Summa goes, so goes General Catalyst.
So, if everything goes perfectly, no slipups, and somehow magically HATCo turns Summa Health's loss into profit "through innovation", as they put it, even though they massively handicapped themselves by making some remarkable promises, such as "no layoffs", "the $210 million per year charity program continues", and "we will pay the $800 million debt", among others - which is another enormous "if" - but if everything they promised happens and happens quickly, then they would look super smart, for sure.
However, let's assume things don't go "by the plan", which I think is a real possibility because to make Summa profitable, a lot of pieces have to come into place. If the deal fails,
📍 Money is lost.
📍 The well-being of the Summa 8,500 employees is now in jeopardy.
📍 Now 1 million (!) Summa patients are thinking where they will go if the hospital reduces its operations or shuts down outright.
📍 HATCo won't be able to pay its creditors.
📍 Creditors would take HATCo to court to get their money.
📍 HATCo files for bankruptcy protection as it doesn't have enough money.
📍 I don't know what General Catalyst is thinking at that point, but I don't believe they are off the hook, as the bankruptcy judge would certainly notice that HATCo was founded by General Catalyst, who still has, say, $500 million on its books.
📍 The judge orders GC to pay everything to creditors and to start the winding-down process.
📍 ‘Winding down’ means for GC, among other things, selling its portfolio at a ‘fire sale’ - i.e., selling something in a market that doesn’t even have a secondary market or any form of liquidity. At that point, you're at the mercy of buyers, who know your situation and are trying to take advantage of you. In my article, when I gave an estimate that they may receive something in the area of $5 to $10 billion for what on paper is worth $25 billion, someone basically told me that I was delusional and that in a fire sale of private equity they would be lucky to get 20 cents on the dollar - i.e., $5 billion.
📍 Since every GC investment is private equity - i.e., it’s marked by the last transaction - not only GC investors just lost 80% overnight, investors of GC’s underlying private equity companies, who may have never heard of General Catalyst, HATCo, and Summa Health in their lives wake up screaming, couldn't believe their eyes that they just lost 80%.
It's a freaking chain reaction, with layers of complexity. And, as you see, it made absolutely no difference how diversified General Catalyst’s portfolio is. Leverage risk is very real and very dangerous, and it could affect a lot of unsuspected parties.
Just so we're clear, I'm rooting for this deal to go through and to become profitable, because, if all the things that have been said during the announcement come true, on paper, the deal promises a lot of great things for patients and physicians: innovative digital solutions, efficiency, scale through building their own state-of-the-art EHR system, and so on.