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Cerberus Quadruples Money After Unusual Exit From Hospital Giant

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(Bloomberg) -- Cerberus Capital Management, demonstrating the rewards of Wall Street’s rush into health care, made a roughly $800 million profit on its investment in struggling Catholic hospitals, records show.

The New York private equity firm quadrupled its money over a decade, according to internal documents and a federal filing this month.

Co-founded by billionaire Stephen Feinberg, Cerberus executed an unusual exit. It offloaded its remaining interest to doctors who work in its hospital company, rather than pursue an initial public offering or sale to a rival.

Cerberus bought Caritas Christi Health Care in 2010, paying $246 million in cash for Massachusetts hospitals that included flagship St. Elizabeth’s Medical Center in Boston. The company that Cerberus created, Steward Health Care, expanded into a major hospital chain as it also became saddled with a heavy debt load.

Private equity firms, saying they are bringing corporate efficiency to an outdated industry, struck $288 billion worth of health care deals over the past five years, according to a report by consultant Bain & Co.

Such investments have drawn scrutiny from members of Congress, consumer groups and academics, who say the firms’ use of debt puts pressure on medical providers to cut costs and hurts quality.

In a statement, a Cerberus spokesman said its involvement with Steward enabled the spending of $800 million in infrastructure, technology and top personnel, helping to restructure and transform failing hospitals into “a world-class accountable care organization.”

Lawmakers have also raised questions about private-equity owned hospitals receiving tax money during the pandemic because they could instead get help from their investors. PE firms said they had a duty to act in clients’ best interests. The federal government provided Steward a total of $675 million in grants and loans, Bloomberg reported in September.

At Steward, current and former employees complained of under-staffing and supply shortages, and a state agency gave the company the lowest ranking for financial solvency, Bloomberg Businessweek reported in August.

Steward, which is based in Dallas, has said it improved care and has plenty of cash to meet its obligations. The company now oversees 34 hospitals in nine states, as well as five in Malta and Colombia, and an extensive network of doctors’ offices.

In the deal, Cerberus made its money through a series of complicated transactions involving a publicly traded real estate company, called Medical Properties Trust, which is based in Birmingham, Alabama.

In 2016, Cerberus made most of its money by selling valuable hospital property to the real estate investment trust, which then leased it back to the hospitals. That transaction enabled Cerberus to extract hundreds of millions in dividends for its investors. Medical Properties Trust also ended up owning a stake, now almost 10%, in Steward.In May 2020, Cerberus took a first step toward its exit. It transferred ownership of Steward to a group of the company’s own doctors in exchange for a note that would provide regular interest payments and could be converted back to equity.

“Under physician leadership, Steward Health Care continues to invest in the long-term health and wellbeing of our local communities,” the company said in a statement.

In January, Steward borrowed $335 million from Medical Properties Trust to buy Cerberus’ note, according to a May Securities and Exchange Commission filing. Cerberus said it sold the note at a discount.

Cerberus said it timed the transaction, its final exit, because of a desire to make sure Steward had access to enough capital if needed, and the investment was in a fund “deep into its liquidation period.”

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