Rhode Island Treasurer Seth Magaziner announced that the state plans to stop buying future funds from private-equity firm Leonard Green in the face of controversy over their control of Prospect Medical, a hospital system with facilities in Rhode Island, Southern California, Pennsylvania, Connecticut, and New Jersey. Magaziner controls the $8 billion fund, and cited Prospect Medicals track record of siphoning millions of dollars in excessive fees and mortgage payments from patients and employees in his decision to stop future purchases
“[Leonard Green] has extracted value from Prospect Medical hospitals, including St. Joseph’s Hospital and Our Lady of Fatima Hospital in Rhode Island, at the expense of patients and employees. These actions have left already-vulnerable communities with fewer healthcare resources,” Magaziner wrote in a public letter to Leonard Green. “Under my administration, the Rhode Island pension system has adopted new standards to avoid investment risks associated with socially destructive business practices,” Mr. Magaziner added, concluding that Rhode Island would no longer purchase funds from Leonard Green.
Prospect Medical was bought by Leonard Green in a $363 million deal in 2010. Rhode Island first invested in Leonard Green’s fund, Green Equity Investors V, in 2007. Since that purchase, the Green Equity fund has produced a return of 18.39%, or 2.33 times net return on investment multiple.
Leonard Green has come under fire recently from all sides, with activists and even Congress joining in. The mismanagement of Prospect Medical may be inappropriate, and it’s fair for individuals and lawmakers to call foul where they see it. While this move from Rhode Island may therefore be cheered on by some, it is important to remember that the Treasurer and state of Rhode Island have a fiduciary responsibility to public employees paying into the state’s pension.
Adopting “standards to avoid investment risks associated with socially destructive business practices” may be good politics, but it’s not clear that this is good for retirees who deserve to receive their promised benefits. Refusing to purchase funds from one firm limits the ability of the state of Rhode Island to maximize their overall pension returns by excluding one possible area of investment. This move by Magaziner brings into question the nature of his role as a fiduciary, and deserves more scrutiny.