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Can capitalism care for the old and vulnerable?

18 June 2011

12:00 AM

18 June 2011

12:00 AM

Can capitalism care for the old and vulnerable?

The collapse of the Southern Cross care homes group is a big story not just because 31,000 elderly residents are waiting to discover whether they still have anyone to look after them when
it’s all over, but because it illuminates a pattern of financial engineering that prevailed in the boom years and could now unravel with very disruptive consequences.

Southern Cross was bought in 2004 by the US private equity firm Blackstone, which tripled the number of homes, floated the company on the stock market and sold the last of its own shareholding in
2007, having made a 300 per cent return while four senior Southern Cross executives pocketed £35 million between them. As Blackstone has said, the company was financially healthy and well
regarded during that period. But the point is that this was just one of several billions of pounds worth of private-equity deals in the care-home sector over the same period, and that the sky-high
valuations and complex structures involved can now be seen with hindsight as a formula for future disaster.

How exciting prospects looked at the time, however. Rising longevity meant rising demand for care, most of which would be paid for by the taxpayer forever. A flood of immigrants helped keep staff
costs low. Ownership of the homes could be separated from the operating businesses, allowing even more money to be borrowed against the value of the properties in a rising real-estate market; and
banks, needless to say, were falling over each other to lend to the sector. No doubt there were useful tax breaks too.

Thus a Qatari sovereign investor (which came to own Britain’s biggest portfolio of care homes) was able to bid £1.4 billion for Four Seasons, a rival to Southern Cross, in 2006 —
all but £50 million of it lent by banks and £600 million from Royal Bank of Scotland alone. When Four Seasons defaulted, the banks accepted a debt-for-equity swap that triggered a huge
loss for RBS, which also found itself the temporary owner of The Priory hospital group, famed both for its celebrity patients and its rollercoaster finances. Barclays, meanwhile, assumed control of
another homes group that had passed through Qatari hands, Care Principles, where £200 million of debt had to be written off.


The investment boom produced an ample supply of care places to fill demand that could not have been met by the state. But these and other deals started falling apart as soon as credit dried up and
property values started falling. Now cuts in state funding of care are biting as well, so more trouble in the sector is to be expected. Combined with headlines about abuse of patients at the
private Winterbourne View hospital, the Southern Cross debacle is provoking a chorus of opinion that care of the vulnerable simply cannot be left in the hands of private-sector financiers.

At best it might be left to not-for-profit entities such as Bupa or charities such as Abbeyfield, leftists argue, but it also needs much fiercer regulation. Even if you believe at heart that no
form of service is intrinsically unsuitable for profit-driven private enterprise, so long as there is proper alignment of the long-term interests of owners, managers and customers, the record of
raw 21st-century capitalism in the care home sector may prove hard to defend.

21-gun salute

My comment last week about the building industry coming back to life as private sector developers get back in the saddle is illustrated by the forthcoming sale of the St John’s Wood Barracks,
home of the ceremonial King’s Troop, Royal Artillery, who are moving to Woolwich. This five and a half acre site, with planning permission for 74 posh houses and flats and 59
‘affordable’ ones, is being sold by the Eyre family trust on behalf of descendants of a wine merchant called Henry Samuel Eyre who bought the whole of what is now St John’s Wood
in 1723 when it was still farmland, poorly served by roads.

The artillery arrived in 1804, and their Riding School will be preserved in the new scheme as a swimming pool. The rest of the 19th-century barracks were knocked down in the 1960s, making way for
brutalist blocks. But that desecration, no doubt lamented by heritage buffs at the time, will have produced the financial equivalent of a 21-gun salute for the Eyre Estate, since the site would
surely have been worth a lot less if it was still covered with handsome listed buildings.

As it is, bids of up to a quarter of a billion pounds are expected from what a source close to the sale describes as ‘the usual suspects’, including Middle Eastern sovereign funds
— though perhaps not the Qataris, who are still sitting on the controversial Chelsea Barracks site for which (with the Candy brothers) they paid almost a billion pounds in 2007, and who still
have thousands of care home residents to look after.

Champagne Showgirl

Strolling along Lombard Street at midnight on Saturday, I found myself in a world so weirdly different from the stone-faced City I know so well that I wondered whether I had strayed into a location
shoot for some avant-garde film. A young and peaceable throng was strolling with me. Some seemed lost, or perhaps confused by intake of stimulants; some men had painted faces, most girls were
dressed (or undressed) for clubbing, one wore a Duke of Edinburgh cardboard mask. Traffic was heavy, and cars with darkened windows cruised with a menacing air — though they may just have
been minicabs touting for fares out to Essex.

Having few residents to disturb, and having lost many banks to Canary Wharf, this quiet quarter of London is the new nightlife zone, with venues such as the Anthologist on Gresham Street shedding
its weekday pinstripes for ‘Soul Saturday’ and Proud Cabaret in Mark Lane (where, rather to my surprise, I had just spent the evening) offering a burlesque show to a packed house of
screaming hen parties; five stars for Miss Banbury Cross’s ‘Champagne Showgirl’ routine, by the way. All harmless fun, which is more than you can say for the financial activities
that used to monopolise the district.


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