Regulators and legislators are looking closely at private equity investments in key industries.
At the state and federal level, lawmakers are concerned about rapid price increases and consolidation in the health care industry as a result of private equity investment. Federal legislators are also looking into private equity and venture capital support of companies in technology subsectors including semiconductors and artificial intelligence. They argue that investments in tech companies in adversarial nations like China are undermining U.S. competitiveness and national security.
These combined efforts could limit where private equity funds can invest and could raise fiduciary concerns for institutional investors with exposure to these funds, sources said.
HEALTH CARE A FOCUS
In February, California Assemblymember Jim Wood introduced a draft bill that targets private equity and hedge fund investment, ownership and management of health care facilities in the state. The bill would give the attorney general more power over change-of-control transactions involving private equity and hedge funds and health care facilities or provider groups.
Wood isn’t alone. Lawmakers in other states — including Illinois, Pennsylvania, New York, Rhode Island and Oregon — are seeking to monitor and potentially limit rapid consolidation and price increases within health care.
Rep. Ben Bowman in Oregon brought up a similar bill during the state's most recent short session. House Bill 4130 would prevent private equity firms from controlling medical practices and dictating patient treatment or making hiring decisions. The bill was successfully stalled by Republicans using the short session to limit voting, but Bowman said he plans to bring the bill back in the next session.
"I firmly believe that providers should be in control of clinical decision-making," Bowman said in an interview. "I am strongly opposed to the idea that it is acceptable for private equity and large corporations, who have an obligation to their shareholders and not their patients, to be in charge. Medical decisions should stay between patients and their providers."
There are multiple federal investigations underway as well.
In December 2023, the chair and ranking member of the U.S. Senate Budget Committee — Sens. Chuck Grassley, R-Iowa, and Sheldon Whitehouse, D-R.I. — launched an information-gathering effort that is ongoing to understand the impact of private equity on health care.
The White House also announced in December that it was taking action to promote competition in health care, including greater scrutiny of acquisitions and “a cross-government public inquiry into corporate greed in health care.”
Following up on that announcement, the Department of Justice, Federal Trade Commission, Department of Health and Human Services and Centers for Medicaid and Medicare Services announced a joint investigation this year into private equity practices across health care.
Policymakers cite recent research in the Journal of the American Medical Association showing a significant negative impact on patient outcomes when private equity is involved in health care. According to the report, private equity acquisition of hospitals was associated with a 25.4% increase in hospital-acquired conditions.
Private equity has invested over $1 trillion in the health care industry over the past decade, according to data from the Commonwealth Fund. A recent study from the American Antitrust Institute shows that in 13% of metropolitan areas, a single private equity firm owns more than half of the physician market for certain specialties.
If these efforts are successful, sources said, specialized health care private equity funds could find themselves with a diminished opportunity set and note that investors may want to look closely at the regulatory risks of current exposures.
SAFEGUARDING CRITICAL TECHNOLOGIES
Federal policymakers are also seeking to limit venture capital and private equity activity in what the government considers to be critical technologies such as semiconductors, artificial intelligence and surveillance. Some of those efforts have already come to pass.
Provisions in the Creating Helpful Incentives to Produce Semiconductors Act — or CHIPS Act — seek to cut off U.S. dollars from funding primarily foreign companies that are deemed adversarial to U.S. interests.
A Commerce Department rulemaking formalized last year put guardrails around chips that are critical to U.S. national security needs, including current-generation and mature-node chips used for quantum computing, in radiation-intensive environments and for other specialized military capabilities.
The House Select Committee on the Chinese Communist Party wants to take it even further. The committee adopted 150 policy recommendations at the end of last year and released a report highlighting how venture capital and private equity investments in some Chinese companies working on critical technologies are creating national security concerns. Some Chinese companies have already been blacklisted in the United States.
In an interview, a congressional aide said the committee’s goal was additional legislation that would limit the flow of American money into Chinese companies working on critical technologies similar to those outlined in the Commerce Department’s rulemaking.
"Critical and emerging technologies that pose a particularly acute threat to national security should be the focus of legislation and a focus of outbound investment prohibitions," the aide said.
The committee’s policy recommendations report gets specific about who might be the target of those prohibitions.
“Congress should also enact legislation that requires private equity firms, as well as employee retirement plans governed by the Employee Retirement Income Security Act (ERISA), to disclose their continuing investments in companies based in or controlled by foreign adversaries,” the report said.