01 July 2019

By Ben Crawford, University of Liverpool

Who would you trust to make decisions around an elderly relative’s care – care home workers, or hedge fund managers?

The prevailing wisdom appears to be the latter, if we take contemporary corporate governance as evidence. Yet even the most zealous exponent of the efficiency of capital markets would pale if asked to defend the harm inflicted upon the care home sector, its residents and workers, by 20 years of private equity sabotage, mismanagement and asset stripping. Figures from a recent survey by the Directors of Adult Social Services highlight the rolling crisis in the care home and wider adult social care sector, with over 3,000 people affected by care home closures in the last two years. In May of this year, the futures of the homes of some 16,000 elderly and disabled people were put at risk when Four Seasons Care Ltd collapsed into administration, having struggled for years under a debt burden accumulated through repeated private equity buy-outs.

The City has been targeting the care home sector since the early 2000s, with investors chasing returns on the underlying property assets of homes and speculating on rising profitability due to an ageing population and financial pressures on the NHS. Four Seasons’ problems began following its 2006 leveraged buyout by Three Delta LLP – a Qatari state-backed investment fund that quickly ran into trouble when the financial crisis hit the company’s property portfolio. Following financial restructuring in 2009, Four Seasons returned to profitability, encouraging its 2012 purchase by Terra Firma Capital Partners, which saddled the company with a new £565m tranche of debt. Servicing this debt cost Four Seasons £50m per year. Yet when reported profits fell by 39% in 2016, the company blamed care funding cuts and the introduction of the ‘national living wage’. Four Seasons’ collapse follows the fate of Southern Cross, formerly the largest care home provider in the UK, which went to the wall as a result of the financial engineering deployed by former owner Blackstone, a US-based private equity firm. Blackstone had grown its chain through buying up homes, selling off the properties and then leasing them back, using the revenues generated to continue expansion. The company folded in 2011 under the weight of the resulting rent bill. Blackstone had exited four years earlier with a tidy £1.1bn profit.

In both cases, the fingers of blame were pointed at the level of funding available from local authorities, and rises in the minimum wage, arguments which have been widely repeated across news outlets. However, this reflects the trade narrative put out by the major care home providers who have become adept at extracting money from the sector, driving a constant crisis due to the frequent sell-offs and debt-financed takeovers. The Competition and Markets Authority's 2017 report found that 5% of the funds going to the largest 26 providers leaves the sector in management fees to financial organisations – some £200m a year. On top of this the providers must take their profit of £60-80m, with another £177m going to banks and bond holders to pay off debt. Not to mention the £390m a year to landlords as a result of the sell-offs of property assets under private equity owners. Yet the CMA uncritically accept the loss of over £760m a year as the cost of doing business and call for an additional £1bn in funding.

Given the low operating margins of care homes, meeting private equity investor demands of 12-14% returns inevitably entails squeezing labour costs. Private equity takeovers are strongly associated with repressed wage growth, anti-union practices and – where management is appointed by PE groups – job losses. There is a strong relationship between financial cutbacks, declining job quality and quality of care. This puts quality of jobs front and centre to any strategy to improve care. Unison has demonstrated how staffing shortages are linked to serious care failings, with overstretched staff too rushed to provide adequate care – even when working through breaks. The union has been pushing councils to recognise the relationship between workers’ rights and residents’ interests through the Residential Care Charter, all the while fighting a rear-guard action to prevent closures of financially stricken homes around the country. Following the sell-off and closures of a number of Four Seasons homes in Northern Ireland, Unison emphasised the need for stakeholder rights to constrain market influence given that the majority of the sector “is now in the hands of the market, and in many cases subject to decisions beyond our shores which have little or nothing to do with the cost of care”.

But any such efforts are after-the-fact. Ultimately, unions and workers have zero rights to influence corporate decision making to protect homes, jobs and residents from financial takeovers. They are hamstrung under a legal ownership structure that places ultimate power in the hands of share capital owners, to whom a home is just another bundle of underperforming assets in need of the ‘shareholder value maximisation’ treatment. Existing worker ‘voice’ rights to information and consultation are weak and ineffective. Workers need real bargaining rights before the consummation of private equity deals, during restructuring and ‘exit’. This should include rights to veto value extraction through dividends, recapitalisations and fees. In short, workers need ‘owners’ rights to balance the power of finance and protect the integrity of social institutions such as care homes, upon which we all rely.