(Bloomberg) -- Rhode Island’s $8 billion public pension fund so far is standing alone in its boycott of Leonard Green & Partners LP over the private equity firm’s management of a hospital company it owns.
Seth Magaziner, Rhode Island’s treasurer, last month sent a letter to the firm saying he would not invest with Leonard Green in the future over its handling of Prospect Medical Holdings Inc., which owns 17 hospitals in five states, including Rhode Island. Magaziner said the firm has siphoned money out of the hospitals while cutting back on pensions and capital improvements and has allowed patient care for the poor to slip.
Once committed, investors in a private equity fund that disagree with its management or investments have few options. They can either engage the firm, publicly or behind the scenes, or they can decline to do business with the firm in the future, said Eileen Appelbaum, co-director of the Center for Economic and Policy Research, a non-profit public policy organization.
“You can’t get out of anything that’s happening in a fund you’re already in,” Appelbaum said. “Your only leverage is to say ‘we’re not going in again.’”
A Leonard Green fund purchased Prospect Medical Holdings in 2010 for $363 million, including debt. Since then, Prospect has borrowed to pay out more than half a billion dollars in dividends to shareholders including Leonard Green. It has also sold and leased back some of its properties to pay down its debts.
Rhode Island, along with the California Public Employees’ Retirement System -- the biggest public pension in the U.S. -- and the Washington State Retirement System, the Teacher Retirement System of Texas, the Oregon Public Employees Retirement System and the New York Common Retirement Fund are some of the investors in Green Equity Investors Fund V, the Leonard Green buyout fund that owns a stake in the hospital company.
Officials from Calpers, as the California pension is known, as well as the Texas Teachers and New York funds declined to comment. The Washington State and Oregon pensions did not respond to a request for comment.
Leonard Green said it has invested hundreds of millions of dollars to acquire and improve the operations of hospitals, many of which had been on the verge of closure prior to being acquired by Prospect, and that without those investments many communities would not have hospital access or would be underserved.
“We are disappointed that the General Treasurer has made a decision based on false and misleading information without giving us the opportunity to apprise him of the facts,” Leonard Green said in the statement. “Our 2007-vintage fund in which the Employees’ Retirement System of Rhode Island invested has produced top-quartile returns for the hard-working beneficiaries of the Rhode Island pension plan.”
Prospect said it offered separate retirement plans to employees after their pension plan became insolvent under previous ownership and that it has built extensive new infrastructure, invested in technology, expanded services, and bolstered physician recruitment.
Read more: PE-Owned Hospitals Paid Owners Millions and Got Low Care Ratings
Magaziner’s announcement that the state would cut ties with Leonard Green came after five members of Congress, including Katie Porter of California and David Cicilline of Rhode Island, sent the private equity firm letters in June and July voicing concerns about Prospect’s practices in their states.
The Private Equity Stakeholder Project, an advocacy group that scrutinizes private equity investments, has raised the issue at board meetings for some of the pension investors in the funds.
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