Private equity and public services: the real issue is not PE, it is leverage, bargaining power, and weak counterparty

Private equity in care and other public services is causing justified alarm in the US and Europe. But the core problem is not PE, it is the economic setup we create when we outsource essential services, in a shortage market, to financially sophisticated buyers, and allow providers to load the business with debt. Do that and you have designed a system that will overcharge taxpayers, underdeliver quality, and then force the state to rescue the service when things go wrong.

Why private equity ends up in public services

Private equity needs stable, predictable cash flows to support large amounts of debt. It is hard to think of a better fit than essential public services.

Care is not discretionary. Demand does not fall in a recession. That is exactly the kind of cash flow profile that can support heavy leverage. Add to that structural shortages. In children’s care, elderly care, fostering, and increasingly veterinary and healthcare services, supply is constrained by staffing, regulation, property and planning. When supply is scarce and demand is legally or medically unavoidable, prices become remarkably resilient. From a debt-financing perspective, this is close to ideal.

Consequently, PE in care is not new, not even in the UK. Southern Cross was bought in a management buyout backed by West Private Equity in 2002 and sold to Blackstone in 2004. The business expanded rapidly using sale and leaseback structures, and the company was highly leveraged. When the company collapsed, the state had to step in to manage continuity of service.

What has changed since then is scale and reach. After 2009, ultra-low interest rates and a surge of institutional capital pushed private equity to look harder for assets with bond-like cash flows (such as public services). After Covid, the logic became even stronger. Governments were fiscally strained (much more debt plus higher interest rates), and so, outsourcing accelerated. Private equity funds were sitting on large pools of committed capital raised in the low-rate years. Even if debt was more expensive, an asset with stable revenues, and a desperate seller is a great asset to buy. This is why private equity repeatedly shows up in foster care, healthcare, childcare, elderly care, vets, etc.

Hard numbers on the problem
The National Audit Office reports that the cost of supporting looked-after children in residential care in England almost doubled between 2019–20 and 2023–24, reaching £3.1bn. The Competition and Markets Authority concluded the placements market is not working well: shortages, rising prices, high profits at some large providers, and high debt that raises the risk of disorderly failure.
NAO report: https://www.nao.org.uk/reports/managing-childrens-residential-care/
CMA final report: https://www.gov.uk/government/publications/childrens-social-care-market-study-final-report

The real mechanism, shown in other sectors
This is not unique to care. Eaton, Howell and Yannelis show that in higher education, a heavily subsidised, LBOs are associated with higher tuition, more student debt, and worse student outcomes. Owners capture public subsidies; consumers are worse off.
RFS published version: https://academic.oup.com/rfs/article-abstract/33/9/4024/5602331

A close European parallel
A recent Dutch study (Bansraj and Xu) using data on over 9,500 daycare centres finds private equity owned centres charge higher prices and raise prices faster when childcare allowances increase. That is textbook rent capture in a subsidised market: public money plus limited competition and savvy operators equals scope to extract.
https://www.eur.nl/en/news/private-equitys-influence-dutch-childcare-costs-quality-and-market-dynamics
And there are many more serious studies on PE effects on hospital etc.

Competence asymmetry matters
Private equity teams negotiate for a living. They understand covenants, leases, tax, where cash can be extracted without it showing as a simple profit line, etc. Public purchasers usually do not have the same deal skills or, in fact, the same incentives. Their job is to close a deal. Often they are judged on getting a solution, not on increasing value for the taxpayer. The outcome is predictable then.

I have a short case study and film that makes this point visually. It shows how a financially literate civil servant can restructure a deal to protect the public purse while still delivering the project, but faces a mountain to climb to get this attitude even accepted.
https://pelaidbare.com/spofford-2/

Not PE per se, leverage
In my care-home research for England during the first Covid wave, the headline finding is stark: leverage predicts death. But the channel is financial fragility (leverage) not PE per se. But, yes, PE shows up with leverage.

That means the policy target should be leverage and resilience, not PE.

If we allow essential services to be provided in markets with chronic shortages, weak oversight, and heavy leverage, then we are effectively allowing those services to be run as monopolies funded by public budgets. In that setting, high prices, cost cutting, and periodic crises are the predictable outcome.

The policy implications are therefore concrete. Leverage in essential services (and probably everywhere else) should be tightly constrained. The tax system should not subsidise debt. Public purchasers need far greater financial expertise and authority, so that contracts, pricing and capital structures can be negotiated and enforced properly. And where the state cannot credibly do this, it should retain provision rather than outsource risks it will inevitably have to absorb.

If we do none of this, we should not be surprised when the bill arrives and the public sector is asked, once again, to step in.