Britain’s hard lessons from caring for the elderly in private equity

LONDON — More than a decade ago, Four Seasons Healthcare was among Britain’s largest long-term care home companies, operating 500 sites with 20,000 residents and more than 60 specialist centres. Domestic and global private equity investors supercharged the company’s growth, betting that growing demand from older Britons would deliver big returns.

The Four Seasons brand may be out of business in a few weeks.

Christie & Co., a commercial real estate broker, spread a summer sale across its website that signaled the death knell: the last 111 four-season properties in England, Scotland and Jersey were on the market. He has already sold 29 homes in Northern Ireland.

Four Seasons collapsed after years of private equity investors buying its businesses, selling its real estate and reaping multimillion-dollar profits through sometimes complicated debt schemes — until the last big equity fund, Terra Firma, paid about $1.3 billion for the company in 2012. Billions are paid, small is caught.

In a country where public health care is a right, the Four Seasons story exemplifies the high-stakes growth — and eventual decline — of private equity investment in health and social services. Hanging over society’s most vulnerable patients, these burdensome transactions fail to account for the costs of their care. Private equity firms are known for making profits on quick-turnaround investments.

“People often say, ‘Why have American investors, as well as professional investors here and in other countries, poured so much into this sector?’ I think they were startled by the demographic potential,” said Nick Hood, an analyst at Opus Restructuring & Insolvency in London, which advises care homes — the British equivalent of US nursing homes or assisted living facilities. They “saw the aging of the baby boomers and thought there would be infinite demand. .”

What they missed, Hood said, “is that almost half of all UK home residents are funded by the government in some way. They’re not private pay – and they don’t have any money.”

Residents as ‘Revenue Stream’

As in the US, long-term care homes in Britain serve a mixed market of public and private-paid residents, and those whose balance sheets rely heavily on government payments are under pressure even in better economic times. Andrew Dobbie, community officer for Unison, a union representing care home workers, said private equity investors often saw homes like the Four Seasons as having “two revenue streams, the property itself and the residents” with the ability to absorb.

But investors don’t always understand what caregivers do, he said, or elderly residents need more time than calculating spreadsheets. “It’s a problem when you’re looking at operating care homes,” Dobie said. “Care workers need to have soft skills to work with a vulnerable group. It’s not the same skill as stocking the shelves in a supermarket.”

A recent study, funded by Unison and conducted by University of Surrey researchers, found major changes in the quality of care following private equity investment. More than a dozen staff members, who were not identified by name or benefits, said companies were “cutting corners” to cut costs because their priority was profit. Staff said “these changes mean residents sometimes go without appropriate care, timely medication or adequate sanitary supplies.”

In August, the House of Commons received a stark reckoning: the number of adults aged 65 and over who will need care is rising rapidly, projected to rise from 3.5 million in 2018 to 5.2 million in 2038. Yet care homes are understaffed. Health care is provided.

“The Covid-19 pandemic has put a spotlight on the adult social care sector,” according to the parliamentary report, which noted that “many frustrated and burnt-out carers have left for better-paid jobs”. The report suggests a year of upward inflation and fuel costs? The government should add “at least £7 billion a year” – more than $8 billion – or risk care deteriorating.

Britain’s care homes are separate from the much-lauded National Health Service, which is funded by the government. Care homes rely on support from local authorities such as counties in the United States. But they have seen a sharp reduction in funding from the British government, which has cut its payments by a third over the past decade. When the pandemic hit, the differences were stark: Care home workers weren’t given masks, gloves or gowns to protect them from the deadly virus.

A few years ago, care homes were mainly run by families or local entities. In the 1990s, the government promoted privatization, triggering investment and consolidation. Today, private equity firms own three of the five largest care home providers in the country.

Investors have benefited from less financial oversight, said Chris Thomas, a research fellow at the Institute for Public Policy Research. “Accounting practices are meant to be horribly complex and complicated,” he said. Local authorities “try to control more, but they don’t have the skills.”

Financial transfer

In season four, the pace of change was dizzying. From 2004 to 2017, a lot of money came and went, often with revenue threads through a number of offshore vehicles. Among the groups partially or wholly owned by Four Seasons are: British private equity firm Alchemy Partners; Allianz Capital Partners, a German private equity firm; Three Delta LLP, an investment fund backed by Qatar; American hedge fund Monarch Alternative Capital; and Terra Firma, the British private equity group suffering from debt claims. H/2 Capital Partners, a Connecticut hedge fund, was the lead lender to the Four Seasons and assumed responsibility. As of 2019, Four Seasons was operated by bankruptcy experts.

Pressed on whether Four Seasons will continue to exist in any form after the current sale of its assets and businesses, MHP Communications, which represents the company, said in an email: “It is too early in the process to speculate on the future of the brand.”

Vivek Kotecha, an accountant who examined the Four Seasons financial shift and co-authored the Unison report, said private equity investment — in homes for elderly residents and, increasingly, in facilities for troubled children — is now part of the financial mainstream. Consulting firm McKinsey estimated this year that private markets manage about $10 trillion in assets, making them a dominant force in global markets.

“What you get in America with private equity is the same here,” says Kotecha, founder of Trinava Consulting in London. “They’re often the same organization, doing the same thing.” What was notable about the Four Seasons was the huge liability from the high-yield bonds that underpinned the deal — one equal to $514 million at 8.75% interest and the other at 12.75% interest for $277 million.

Guy Hands, the high-flying British founder of Terra Firma, bought the Four Seasons in 2012 shortly after losing an epic court battle with Citigroup over the purchase price of music company EMI Group. Terra Firma acquired care homes and then a gardening business with over 100 stores. Easier, or better, bets don’t prove. Hands, a Londoner who moved offshore to Guernsey, declined to discuss the Four Seasons through a representative.

Kotecha, however, helped the BBC try to understand the Four Seasons’ holdings by tracking financial filings. It was “the most complicated spreadsheet I’ve ever seen,” Kotecha said. “I think there were more subsidiaries involved in Four Seasons Care Home than General Motors in Europe.”

As Britain’s smaller houses were swept up in consolidation, some financial practices were questionable. Many times, businesses sell buildings as lease-back deals — not a problem at first — that, after multiple buyouts, leave operators paying rent with heavy interest to drain operating budgets. According to parliamentary evidence this year, by 2020, some care homes were estimated to spend 16% of their bed fees on debt repayments.

How can that happen? In part, for-profit issuers — backed by private equity groups and other corporations — have subsidiaries of their parent companies act as lenders, setting rates.

Aged care in Britain was unheard of in a generation. By 2022, private equity companies alone will own 55,000 beds, or about 12.6% of total for-profit care beds for older people in the United Kingdom, according to Langbuisson, a healthcare consultancy. LaingBuisson calculated that the average residential care home fee by February 2022 was about $44,700 a year; The average nursing home fee was $62,275 a year.

According to the non-profit Center for Health and the Public Interest, from 1980 to 2018, the number of residential care beds provided by local authorities fell by 88% – from 141,719 to 17,100. Independent operators — nonprofit and for-profit — controlled 243,000 beds by 2018, it said. Nursing homes saw a similar shift: Private providers accounted for 194,100 beds in 2018, compared to 25,500 a decade earlier.

Out of government control

British lawmakers last winter tried – and failed – to strengthen financial reporting rules for care homes, including banning the use of public funds to pay debts.

“I have no problem with offshore companies that make a profit by providing good service. I have no problem with private equity and hedge funds providing good returns to their shareholders,” Rose Altman, a Conservative Party member in the House of Lords and a pensions expert, said in a February debate. “I have a problem if those companies are taking advantage of some of the most vulnerable people in our society without oversight, without regulation.”

He cited the Four Seasons as an example of how regulators “have no control over the financial models used.” Altman warned that economic headwinds could make matters worse: “We have too much debt now [homes] In an environment where interest rates are moving upwards.”

In August, the Bank of England raised lending rates. It now predicts double-digit inflation – as much as 11% – by 2023.

And it leaves care home owner Robert Kilgore wondering whether the government understands the risks and opportunities facing the sector. “It’s a struggle, and it’s becoming a struggle,” he said. A global energy crisis is the latest unexpected emergency. Kilgore said he recently signed a power contract, for April 2023, that will increase rates by 200%. That means an extra $2,400 a day in utility costs for her home.

Kilgore founded his first home, the Four Seasons, in Fife, Scotland in 1989. His ambitions for its growth were modest: “Ten by the year 2000.” That changed in 1999 when Alchemy began expanding nationally. By 2004, Kilgore had left the Four Seasons to pursue other ventures.

Nevertheless, he saw an opportunity in aged care and opened Renaissance Care, which now operates 16 homes with 750 beds in Scotland. “I miss it,” he said in an interview in London. “It’s people and it’s property, and I love it.”

“People asked me if I had any regrets about selling private equity. Well, no, the people I dealt with were very fair, very straightforward. There was no molestation,” Kilgore said, adding that Alchemy made money but also made investments.

Kilgore said the pandemic inspired him to improve his business. He is spending millions on new LED lighting and boilers, as well as training staff in digital record-keeping, all for expenses. He raised hourly wages by 5%, but workers suggested other ways to retain workers: shorter shifts and workdays that fit around school schedules or allow them to care for their own elderly relatives.

The debate over whether the government should go back to elder care means little to Kilgore. Britten has had personal care for decades, and he doesn’t see that changing. Instead, operators need help balancing private and publicly funded beds “so you have a blended rate for care and some certainty in the business.”

Consolidation is slowing, he said, which could be part of a long-overdue bill. “The idea of ​​200, 300, 400 care homes – that bigger is better and bigger is better – those days are gone,” Kilgore said.

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