Cashing in on the baby boomers

Private equity investors are seeing big opportunities in the shifting demographics of the US, but challenges—and bad memories—remain. By Paul Fruchbom.

In a recent issue of the New Yorker, writer Louis Menand described what happens to people as they start getting older. “It’s not long until you find that you are unable to stop talking about real estate,” he wrote, “which is the first step down an increasingly rocky and overgrown path that leads, almost always—all right, always—to death.”

Though growing old and real estate may not necessarily go together the way Menand describes, the connection between the two is drawing increasing attention from private equity investors, who are finding that the aging of America presents a growing (and hopefully profitable) set of opportunities.

Last month, Fortress Investment Group, in partnership with Brookdale Senior Living, announced the acquisition of American Retirement for $1.2 billion. The deal, which is expected to close in July, would create the largest operator of senior-living facilities in the US. To raise equity for the transaction, Fortress has lined up a number of co-investors, including CalPERS and CalSTRS, in a private equity vehicle reportedly called RIC Co-investment Fund.

In Canada, private equity firms including Madison Dearborn had been circling nursing home operator Extendicare for reported values of approximately C$2 billion until, at the end of last month, the company announced it was converting itself into a real estate investment trust.

And, in Europe, The Blackstone Group has built up a sizeable portfolio of assets through its portfolio company, Southern Cross Healthcare Group, the largest UK operator of nursing care homes. Earlier this month, the company announced that it would raise approximately £275 million in an IPO on the London Stock Exchange.

These deals, and many others, mirror a trend that took place in the mid-1990s when private equity firms piled into nursing homes, drawn by the sector’s strong cash flow, significant real estate holdings and attractive demographics. Unfortunately, for many firms—not to mention their limited partners—changes in Medicare reimbursement rules effectively decimated the industry’s cash flow and led to a number of bankruptcy filings. In one notable example from 1997, Texas Pacific Group and The Cypress Group each committed $210 million to Genesis Health Ventures, which filed for bankruptcy four years later.

Regnier: not your grandfather’s retirement home

Today, just as leveraged buyout firms have been renamed private equity firms, nursing homes have been re-branded assisted-living and senior housing facilities. That said, there are significant differences between the strategy of the current crop of private equity and real estate investors relative to those of a decade ago, many of whom focused on nursing homes that provided extensive services for their patients, often the very elderly or disabled, which often necessitated Medicare reimbursement. Today, given demographic shifts, investors are increasingly looking towards age-restricted housing and assisted living communities, which are more oriented towards younger, more active retirees. As Victor Regnier, a professor of gerontology (the study of the elderly) at the University of Southern California, recently told sister publication Private Equity Real Estate: “[Baby boomers] don’t want to feel like they’re in their father’s retirement community.”

Whether or not today’s crop of senior housing investors can avoid the ghosts that plagued their own forefathers, only time will tell.