Latest / The Buyout Show with Fexingo: Private Equity, Roll-Ups, and Business Acquisitions / How Private Equity Is Buying Up Home Care Agencies
Transcript
- Lucas: Luna, I want to start with a number: seven point five percent. That's the compound annual growth rate for the home care industry over the past five years. It's not flashy like AI or crypto, but it's steady, demographic-driven, and it's pulling private equity money in a way we haven't really seen before. Luna: And when you say home care, you mean non-medical, in-home support — aides who help with bathing, dressing, meal prep, that kind of thing? Lucas: Exactly. Skilled nursing is a different beast. I'm talking about the agencies that send certified home health aides or personal care attendants into someone's house. No doctors, no nurses — just the frontline workforce that lets seniors age in place. And PE firms have been buying these agencies at a pace that's picked up noticeably since 2021. Luna: What's the typical deal look like? A single agency might have what, ten to twenty aides on the roster? Lucas: That's the mom and pop end. But the targets PE is going after are regional players with maybe 200 to 500 caregivers and three to five million in EBITDA. Multiples have been running eight to ten times that EBITDA. So a ten million dollar agency might sell for eighty to a hundred million. Not life-changing for a megafund, but perfect for a search fund or a lower middle market sponsor. Luna: And the thesis is basically: aging demographics, predictable demand, fragmented supply. Consolidate, standardize, sell. Lucas: Right. The US population over 65 is growing by roughly ten thousand people per day. Most of them want to stay home. Medicare and Medicaid increasingly reimburse for home-based care to avoid more expensive nursing homes. So the demand curve is almost vertical. The supply side is a patchwork of tens of thousands of independent agencies, many run by former nurses or social workers who are great at care but not especially focused on margin. Luna: So the PE playbook — I've seen this in other service industries — is to centralize the back office, standardize training, and then layer on higher-margin services. What does that look like in home care specifically? Lucas: First thing they do is replace the scheduling system. Most independents use something like a whiteboard or a basic spreadsheet. PE brings in software that optimizes caregiver routes, reduces travel time, and flags no-shows. That alone can cut labor costs by 10 to 15 percent, because travel time is essentially unbilled overhead. Luna: Second move? Lucas: They standardize the caregiver training curriculum. Instead of each office doing its own thing, you have a centralized onboarding module. That improves consistency, reduces liability, and makes it easier to cross-train aides when one agency is short-staffed and another has slack. Then they add private-pay services — companion care, light housekeeping, dementia specialty — that aren't subject to Medicaid reimbursement rates. Margins on private pay can be 30 to 40 percent versus maybe 10 to 15 on Medicaid. Luna: I want to push back on one thing though. The biggest cost in home care is the caregiver. And turnover in that workforce is brutal — I've seen numbers like 60 to 70 percent annual turnover in the industry. If PE cuts costs and pushes productivity, doesn't that make turnover worse? Lucas: It's the central tension of the model. The whole value creation thesis depends on keeping caregivers longer. Every time a caregiver leaves, you lose the cost of recruiting, background checks, training — that can run three to five thousand dollars per hire. So the smart operators are actually raising wages modestly and offering benefits like health insurance or even tuition reimbursement. One search-funded roll-up I looked at in the Midwest gave every full-time aide a $500 quarterly retention bonus. Their turnover dropped to 40 percent, still high but much better than industry average. Luna: But that's an extra cost. How does it pencil out against the efficiency gains? Lucas: You run the math on a 200-caregiver agency. At 60 percent turnover, you're replacing 120 people a year at, say, four thousand each — that's nearly half a million in churn costs. If you cut turnover to 40 percent, you're replacing 80 people, saving 160 grand. Meanwhile, your scheduling software saves maybe 200 grand in travel waste. So net net, you're ahead. And you can also cross-sell services — a client who started with a Medicaid-funded aide might add private-pay companion care for a few hours a week. That's pure margin expansion. Luna: What about the regulatory risk? Medicaid reimbursement rates vary wildly by state. I've seen reports that some states haven't raised rates in years, and agencies are basically subsidizing care out of pocket. Lucas: That's the biggest external risk. In 2025, several states — Texas, Florida, and Ohio among them — either froze or cut their Medicaid home care rates. That squeezes margins on the core book of business. PE firms try to hedge by geographic diversification. A roll-up that agencies in five different states can absorb a cut in one state better than a single-state operator. But if a major state like California cuts rates by 5 percent, that can wipe out a year's worth of operational improvements. Luna: So the smart buyers are looking at states with supportive rate environments — like New York, which has a fairly generous Medicaid home care program, or states with strong aging-in-place mandates. Lucas: Exactly. And some are moving toward a value-based care model where they get paid based on outcomes — like reduced hospital readmission — rather than per visit. That aligns incentives, but it requires data infrastructure most small agencies don't have. So PE's capital becomes a competitive advantage there. Luna: Let's talk about a concrete example. I know of a mid-sized agency in the Pacific Northwest — let's call it Cascade Home Care — that was acquired in 2023 by a search fund backed by a single-family office. They had about 350 caregivers, four million in EBITDA, and sold for around 35 million. Lucas: I've seen similar deal profiles. What did the buyers do post-close? Luna: First they consolidated the five separate office locations into two, cutting rent by 40 percent. Then they implemented a centralized scheduling platform and mandated quarterly caregiver training on dementia care — which let them charge premium rates for dementia clients. They also started a small private-pay division offering overnight respite care. Within eighteen months, EBITDA went from four million to six point two million. That's a 55 percent improvement. Lucas: And the dark side? I've heard stories of acquisitions that squeezed too hard — cutting caregiver hours, reducing training time, pushing aides to do more clients per day. That can lead to burnout, lawsuits, even state investigations. Luna: There's a well-known case from 2022 where a pe backed agency in the Southeast was fined by the state for falsifying caregiver visit logs. They were under pressure to meet utilization targets, and middle managers fudged the records. That kind of reputational damage is hard to recover from. The fund ended up selling the agency at a loss. Lucas: So the line between smart operational discipline and dangerous cost-cutting is razor thin. And it's especially sharp in home care because the product is a human relationship. You can't just swap out a caregiver like a part on an assembly line. Luna: That brings up another angle: the so-called 'roll-up risk'. Most PE home care deals are structured as add-on acquisitions — buy a platform, then bolt on smaller agencies one by one. But integrating 15 different cultures, each with its own caregiver relationships, is messy. You lose some clients every time you rebrand or change scheduling. Lucas: And client retention matters hugely because the revenue is recurring. A home care client typically stays with an agency for 18 to 24 months before they either pass away or move to a facility. So if integration causes a 10 percent client churn spike, that can torpedo the deal math. Luna: What about exit strategies? Who buys these roll-ups when the PE fund wants to cash out? Lucas: Larger PE funds are the most common buyers — a platform with forty million in EBITDA might get acquired by a firm like KKR or Apollo. There's also strategic interest from health insurance companies. Humana and UnitedHealth both own home care assets. They see it as a way to manage the total cost of care for their Medicare Advantage members. And there's talk of some publicly traded home care chains doing buybacks, though interest rates have made leveraged exits harder. Luna: So the cycle looks like: small PE buys fragmented mom and pops, builds scale, then sells to big PE or insurers. And the ultimate beneficiaries are supposed to be seniors who get more consistent care. Lucas: That's the thesis. Whether it works in practice is still an open question. We've seen enough blowups to be cautious. But the demographic tailwind is so powerful that the money will keep flowing. It's a classic PE paradox: huge opportunity, but execution risk is everything. Luna: Speaking of which — if this conversation has been useful to you, if it's helped you think about your own business or investment decisions, that's exactly why we keep the show ad-free. If it's worth the price of a coffee to you, you can support us at buy me a coffee dot com slash fexingo. Lucas: Yeah, it's a small gesture that makes a big difference to us. Keeps the lights on and lets us keep digging into these deals. Luna: And we appreciate every single person who's done that over the first 99 episodes. Now, back to the home care question... I wonder if we'll see a major quality scandal that forces regulators to tighten oversight. Lucas: I think it's inevitable. States are already starting to require more transparency around ownership changes. California passed a law in 2023 requiring pe owned home care agencies to disclose their owners to the state health department. More will follow. The question is whether that regulation chokes off the deal flow or just forces better behavior. Luna: And on that note — episode 100. Thanks for sticking with us through a hundred of these. Lucas: Here's to a hundred more. And to the next roll-up we haven't even thought of yet.