April 4, 2014 / 2:51 PM / 5 years ago

Private equity shies away from Swedish public services

STOCKHOLM, April 4 (Reuters) - Private equity firms have slashed new investment in public service provision in Sweden after successive scandals led to calls for more state control, raising questions over who will meet the growing cost of supporting an ageing population.

Media reports that a resident of a privately-run home for the elderly was denied medical care after a fall, and the bankruptcy of an education provider that left 11,000 pupils without a school, have left many Swedes uneasy with the idea of private companies providing vital public services.

Carema, which managed the retirement home and is owned by funds run by private equity groups Triton and KKR, denied that the elderly resident was refused treatment.

Danish private equity firm Axcel, which owned JB Education, said it had misjudged a demographic shift that led to a sharp drop in pupil numbers.

Private equity firms own most of the largest companies providing care for the elderly, health and schooling in Sweden.

Politicians from the left and right are now pushing for tighter oversight of their role in the 90 billion crown ($14 billion) a year tax-funded welfare provision market that for years was seen as a model of pragmatic Nordic reform.

The Social Democrats, which are leading in opinion polls ahead of a September national election, want to claw back money from companies seen as failing to invest in enough staff. The Left Party - which could be a junior partner in a Social Democrat government - is calling for all welfare services to be non-profit.

Even the centre-right government of Moderates, Centre, Liberals and Christian Democrats say reform of some kind is needed.

“There will be considerably tougher rules for private equity firms to operate in this sector,” Finance Minister Anders Borg, a Moderate, told Reuters.

The uncertain outlook has already had a chilling effect on new investment.

Private equity firms invested just 59 million crowns in welfare firms last year, down from an average of 2.3 billion crowns per year in previous years, preliminary figures from the Swedish Venture Capital Association showed.

“The political debate has cast a pall over the willingness to invest,” said Fredrik Naslund, a board member of private equity-owned healthcare company Capio, which runs Sweden’s only private hospital offering emergency services.

“If there is any sector that needs capital, it is the welfare sector.”


Not only are companies holding back: local authorities also appear to be more hesitant to farm out their services.

Consultants Grant Thornton said local authorities have handed out less welfare outsourcing work, pushing the rate of growth in private provision to around 7.7 percent in 2012 from 10 percent or above in previous years.

The profitability of that work has also fallen, it said, with operating margins falling to around 6.9 percent in 2012 from 8.1 percent in 2010.

Sweden brought private companies into the tax-funded welfare sector in the early 1990s. Local authorities are now obliged to open contracts to tender.

Investment in public services has continued to grow and in 2012 local government spent around 600 billion crowns on schools, hospitals and care for the elderly. The average male lifespan in Sweden topped 80 for the first time last year.

Around 15 percent of the 600 billion was spent in the private sector and around 5 percent of that by companies backed by private equity, according to Annika Wallenskog, an economist at the Swedish Association of Local Authorities and Regions.

Growth prospects should still be good. In Britain, for example, around 90 percent of long-term care for the elderly is provided by the private sector. In Sweden, the total is around 18 percent.

Attracted by double-digit revenue growth, private equity-backed firms have poured in capital, buying firms like Capio, Attendo and Aleris, which both operate mainly in geriatric care.

“We need more hospital beds, we need more old people’s homes,” said Mats Fagerlund, head of corporate finance at Grant Thornton. “That implies very strong growth for the industry and is what has driven investment.”

Attendo, one of Sweden’s biggest private providers of elderly care and owned by private equity funds run by IK Investment Partners, saw revenues rise 56 percent from 2008 to 2012, with operating profit growing 78 percent to 590 million crowns over the period.


Now, just as some private equity firms inevitably ponder their future in the industry, the chance of a quick, profitable exit has dimmed.

In 2012, IK Investment Partners dropped a planned sale of Attendo after criticism of Carema soured investor sentiment. An investment banker said Attendo was among private equity-backed welfare firms now looking at a stock listing.

“The idea is to exit before new legislation comes in,” said the investment banker, who declined to be identified since he was not authorised to speak publicly on the matter.

The political uncertainty could further depress sector asset prices, said Per Stromberg, Professor of Finance and Private Equity at the Stockholm School of Economics.

Swedes are now wondering who will sustain their globally admired cradle-to-grave welfare system if reforms scare off such an important source of private capital.

A study by the Swedish Association of Local Authorities and Regions showed taxpayers will need to find an extra 200 billion crowns in 2035 to fund today’s level of care.

“If, in the end, it (regulation) means you are not allowed to make any profit in welfare, then it will have a dramatic impact,” said Gabriel Urwitz, SVCA chairman and managing partner at private equity firm Segulah.

“But my own belief is that it won’t come to that. If you are talking about privatisation in the welfare sector, to me it seems impossible to put the genie back into the bottle.” ($1 = 6.4809 Swedish Crowns) (Additional reporting by Mia Shanley and Johan Ahlander; editing by Tom Pfeiffer)

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