Cerberus paid $246 million to the Boston Archdiocese for the chain of six nonprofit Catholic hospitals, then operating as Caritas Christi Health Care, in 2010. A spokesperson for Cerberus confirmed to the Globe that the buyout firm more than tripled its investment.
The chain was converted into a for-profit system and rebranded as Steward, launching a national expansion and moving its headquarters to Dallas. Cerberus sold its interest in Steward in 2020.
In response to questions from Senators Elizabeth Warren and Ed Markey, meanwhile, Cerberus indicated for the first time that the 2010 investment was its only cash outlay in Steward. Additional funding for the hospitals — including for upgrades required by the state attorney general — came from Steward’s balance sheet, the firm said.
“Cerberus total profit was about $800 million,” a spokesperson for the New York private equity firm told the Globe this week. “Hundreds of millions were reinvested into [Steward] from company cash flow.”
The Globe asked about the financial return after the firm answered a battery of questions from Warren, Markey, and House members of the Massachusetts delegation, but didn’t specify to the lawmakers how much money was returned to Cerberus and its investors.
In his statement, the Cerberus spokesperson noted, “Cerberus held the investment for nearly 11 years. It was not a short-term hold.” Private equity firms often are criticized for seeking a fast return on investments by cashing out of portfolio companies in three to six years.
Buyout firms typically seek to more than triple their investments within five years, said David E. Williams, president of Health Business Group, a Boston management consulting firm. By that standard, the Cerberus stake in Steward generated “an OK return,” he said, while noting private equity partners may also collect hefty management fees during the time they hold their investments.
“Was this an outsized return?” Williams said. “The answer is no. This would be an average investment over a 10-year period. This investment was not a home run.”
Still, the divergent fortunes between Cerberus and Steward are sure to come up when a subcommittee of the Senate’s Health, Education, Labor and Pensions Committee convenes at the State House on Wednesday.
The subcommittee, chaired by Markey, has titled its public hearing “When Health Care Becomes Wealth Care: How Corporate Greed Puts Patient Care and Health Workers at Risk.”
At the center of what Warren and Markey called Steward’s “whole dirty saga” is a controversial sale and leaseback agreement struck in 2016 with Medical Properties Trust, a real estate investment trust.
That deal brought in $1.25 billion, which enabled Cerberus to recoup its investment while giving the Alabama-based real estate trust an equity stake in Steward, and “generated a significant dividend” for Cerberus investors, according to the firm’s response to the senators. But it saddled Steward hospitals with multimillion-dollar rent obligations.
Four years later, in 2020, Steward and Cerberus crafted a deal that transferred a controlling interest in Steward to a hospital management group led by Steward chief executive Ralph de la Torre in exchange for a $350 million promissory note. The following year, MPT loaned the new owners the money to buy out Cerberus. Steward, for its part, has said it spent about $400 million to retire debt in 2016, and more than $400 million on hospital upgrades.
Warren and Markey issued a joint statement Tuesday maintaining Cerberus worked with de la Torre to “create complicated financial schemes that put health providers in impossible positions” while undermining access to quality care.
The senators sent a letter to de la Torre on March 7 demanding detailed financial information on Steward’s transactions but said they have yet to receive a response. They’ve also invited de la Torre to answer questions at Wednesday’s hearing, but on Tuesday said he’s declined to testify.
Financially troubled Steward now operates more than 30 hospitals nationally, including Eight in eastern Massachusetts: St. Elizabeth’s in Brighton, Carney Hospital in Dorchester, Good Samaritan in Brockton, Holy Family in Methuen and Haverhill, Morton Hospital in Taunton, Nashoba Valley in Ayer, Norwood Hospital, and St. Anne’s in Fall River. It closed a rehabilitation hospital in Stoughton in March.
“Cerberus looted Steward, failed to invest in Massachusetts facilities, and it appears that the company walked away with a profit of at least $800 million, leaving Steward with massive, ongoing lease payments to Medical Properties Trust that are a major source of the hospitals’ financial distress,” the senators’ statement said.
The senators said the Cerberus response to their questions was incomplete, because it did not disclose how much the firm itself and its executives extracted from its Steward investment. That, in turn, has led Warren and Markey to question whether the firm may be understating its return from Steward.
“Cerberus’s answers still don’t provide a clear answer for how much Cerberus made off of the people of Massachusetts,” the senators said.
In its response to the senators, Cerberus took issue with their contention the firm “literally stripped out and sold the property from underneath these hospitals, creating hundreds of millions of dollars in profits for private equity executives, while leaving the facilities with long-term liabilities” fueling the financial crisis.
Cerberus said that characterization “incorrectly insinuates” that profits went only to Cerberus employees and partners. It said investors, including pension funds representing teachers, firefighters, police, and municipal workers, were the primary beneficiaries. Cerberus also said Steward “hospitals were in far better shape financially and operationally when we sold our interests four years ago” to de la Torre and his partners.
While many of the financial transactions it detailed were previously known, the Cerberus response to the senators provided new context to the deal making that transformed Steward over the past decade.
Cerberus acknowledged its fund invested no additional capital in Steward hospitals between the MPT sales-leaseback deal in 2016 and its transfer of ownership in 2020. It also confirmed capital improvements to Massachusetts hospitals between 2010 and 2016 were funded from Steward’s balance sheet or from borrowing, not by Cerberus.
As part of its purchase agreement, approved by the state’s then-attorney general Martha Coakley, Cerberus agreed that at least $400 million would be invested in hospital infrastructure, facilities, technology, and operations over four years. The attorney general confirmed in a 2015 report that the firm had complied with its commitments.
Cerberus told the senators its capital commitments to the original six hospitals were exceeded within its first two years of ownership. As the Steward systems expanded, it said about $880 million was invested in various facilities between 2010 and 2016.
The senators faulted Cerberus for failing to specify how much profit its partners and executives personally collected from Steward. Cerberus indicated some proceeds from the sales-leaseback deal were retained for future investment in its funds, while some were distributed to investors. Because the firm doesn’t disclose how its deals are structured, it’s not clear what share went to Cerberus principals.
“We need to find out who at Cerberus received these huge profits — and claw them back from the private equity executives responsible for this mess,” Warren and Markey said in their statement.
Robert Weisman can be reached at robert.weisman@globe.com.
