How the pursuit of shareholder value weakened the economy

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The growing involvement of private equity, hedge funds and real estate investment trusts in the care sector in recent decades has brought about a rise in the use of predatory financial techniques, justified in the name of enticing capital into a sector that the government has persistently failed to adequately fund. According to data from the Care Quality Commission, these firms now own one in eight care home beds in England.

A screen of financial jargon helps investors avoid public scrutiny, but a slew of recent reports has begun to detail the many tactics used to ensure “healthy” returns on investment – and the profound and troubling consequences that these strategies have for the care sector.
In 2012, the UK-based private equity firm Terra Firma Capital bought Four Seasons Health Care in an £825m debt-leveraged buyout, backed by US-based hedge fund H/2 Capital Partners.

Leveraged buyouts are a common technique used to increase return on investment. They allow investors to pay only a fraction of the purchase price using their own capital; the rest is covered with a loan. In theory, the target social care company then pays off the debt using their cashflow, increasing the equity portion owned by the investment firm, meaning a larger windfall for investors if the care company is sold on.

However, recent research has found that these kinds of buyouts are associated with an 18% increase in risk of bankruptcy for the target company. In the case of Four Seasons Health Care, onerous debt payments contributed to the company’s collapse into administration in 2019. Two of the other largest care home providers in the UK – HC-One and Care UK – have also undergone leveraged buyouts and, as a result, their corporate group structures remain saddled with significant debts.

The implications of this debt-heavy model are significant. Among the five largest care home chains backed by private equity in the UK, interest payments on leveraged buyouts and other debt obligations absorb about 16% of the average weekly bed fee. But interest payments on debt aren’t the only additional cost some care providers face. Other strategies for increasing return on investment see investors selling off care home properties for a one-off lump sum, then leasing them back – sometimes from a new landlord, sometimes from other entities within the corporate structure.

Care UK’s accounts, for example, state that it paid £4.1m in rent in 2019 to Silver Sea Holdings – a company registered in Luxembourg, a low-tax jurisdiction, which is also owned by Care UK’s parent company, Bridgepoint. These financialised structures demand an ever-growing revenue stream, not to fund more and better quality care or higher wages, but to keep up with growing interest repayments on the debts they carry and rising rents, and to line the pockets of investors, some of whom are astutely located in low-tax jurisdictions.

Predatory financial tactics are putting the very survival of the UK care system at risk | Christine Corlet Walker | The Guardian