Halfway through my first decade in Private Equity, we used this scheme to raise money for investment.

Step One: Start by creating a partnership agreement that outlines how everyone will work together.

Step Two: To show you a case study with numbers, lets assume that the hospital pays $10 million of gross compensation to the doctors. If the docs form a partnership then the partnership would have net income of $10 million.

Step Three: The docs agree that 25% of their gross compensation ($2.5 million) will be at risk for debt service. This would let them borrow between $30 and $62.5 million.

• $30 million is $2.5 million total repayment per annum, 15 years, 3% cost of funds
• $62.5 million is $2.5 million interest only repayment, 4% cost of funds

You could top this up with an equity investment from the docs. I seem to recall that we committed about 20% of the amount that we raised in debt. Let’s ignore that for now.

Step Four: When we used this structure we invested alongside a financial partner. In our case, this was the private equity funds that we advised.

If you were buying a hospital then you might want to have the hospital administration as part of your partnership.

Your partnership could joint venture with a deep-pocket financial partner (private equity fund or insurance company) or an operating partner (hospital management company).

This could double the amount of equity that you had available and take you to $60 to $125 million.

Step Five: Depending on the cash flow strength, and asset structure, of the hospital you are acquiring, you might be able to raise debt that is 2-4x the value of your equity investment.

That gives a range of $180 to $600 million total deal size.

I wonder if there are restrictions on leverage for hospitals?

Step Six: Keep doing what you are already doing.

When we used this structure:

• We invested in a range of deals, rather than a single business
• Debt was recourse against the partnership, but not the partners. Putting this in context of the above example – the bank that lent the money to could come after your medical practice but couldn’t come after the doctors
• Proceeds from the deals (dividends and capital gains) were sufficient to cover the cost of partnership debt service. Putting this in context – structured properly, the hospital investment generates enough cash flow so doctor compensation stays the same

Step Seven: Run the hospital to pay down debt and generate cash for the doctor’s investment vehicle.

The structure came about because the partners realized that the assets (in our case investment funds) were useless without the investment team.

The deal we did was part of a restructuring that enabled the workers to control their means of production.

Nobody mentioned the irony.