Are City investors really the right owners for care homes?

The City came to see care homes as cash cows. But as the turmoil at Southern Cross and Castlebeck shows, this sector is much more complex than that.

by James Taylor
Last Updated: 19 Aug 2013
The financial problems of Southern Cross, following hot on the heels of the abuses uncovered by the BBC’s Panorama at a Castlebeck hospital, have prompted much debate about the private sector’s role in elderly care provision. But one of the most interesting aspects of this sector is the extent to which it has become the preserve of the financial engineers: both Southern Cross and Castlebeck have proved to be lucrative investments for private equity firms, and the latter is still owned by Lydian Capital Partners, a vehicle backed by those lovable Irish millionaires John Magnier and JP McManus…

For financial investors, the attractions of the sector were obvious: a growing market with a pretty steady and secure income stream (from the state) and a property element that allowed for cash-generating sale-and-leaseback schemes like that employed by Southern Cross. But since the cheap debt dried up – and that reliable income stream started to dwindle – the shortcomings of this strategy have become very apparent. Southern Cross may have become the biggest private care home operator in the UK, but its expansion was not predicated on its operational excellence.

Castlebeck provides another cautionary tale. The rehabilitation specialist is currently in its third period of private equity ownership, and it made lots of money for the previous two.  But these operational issues uncovered by Panorama are bound to have an effect; all this controversy presumably won’t help its chances of winning future public sector work, thus potentially affecting future income streams.

The question is: are these exceptional cases? Apparently, the Care Quality Commission, which regulates the sector, reckons that one in seven privately-run care homes is ‘poor’ or merely ‘adequate’. This doesn’t sound like a frightening proportion (and we don’t know what the equivalent figure is for publicly-run homes).  But it’s hard to imagine that the same people who piled into the sector in the boom years will be the right owners in an age of austerity – particularly in a business where cutting costs without compromising care is incredibly difficult.

Equally, if the state is having to provide a safety net anyway – as per the Government’s guarantees to re-house any patient turfed out of a Southern Cross home – perhaps it would make more sense for the state to own them in the first place? Otherwise people will claim that – just like the banks – this is becoming another sector where profits are privatised and losses are nationalised…

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