Taxpayers are going to have to pay for another big care home operator, throttled by tax avoiding financial predators. According to its chief financial officer, Four Seasons, which runs 450 care homes and 50 specialist care units, ‘is reviewing its finances with all options considered’. One option would be to close down, leaving the taxpayer to pick up responsibility for its 20,000 residents and patients.
Four Seasons is carrying debts of £500million on which it is paying interest of around £50million. It’s not immediately obvious how they got into so much debt nor why they should be paying interest at 10% pa when the official bank rate is 0.5%.
£500million of debt is a popular care home sum. When private equity Blackstone acquired Southern Cross, then leading UK care home operator, it sold the freehold of the care homes, pocketed £500million proceeds, lumbered the care home business with the costs of leasing back their homes, floated the business on the London Stock Exchange and beat a rapid retreat. It took around 5 years before the rental payments bankrupted Southern Cross. Meanwhile Blackstone were able to repeat the predatory exercise with the £500million.
The tax avoiding financial predator that acquired Four Seasons was private equity Terra Firma Capital Partners, owned by Guernsey based Guy Hands. The acquisition was completed a few months after the collapse of Southern Cross had demonstrated how profitable such deals could be.
Terra Firma was in the news earlier this year with demonstrations against subsidiary Annington residential homes’ proposed demolition of 142 homes on the Sweets Way estate in north London. They were accommodating families on Barnet Council’s waiting list, but Hands’ plan was to replace them with 229 houses and flats for sale on London’s booming property market.
Four Seasons is losing money at a rate of knots, £26million in the second quarter of the current year. While they blame the losses on various extraneous factors, it is clear that public funding of social care for the elderly is inadequate. But the only way it will be increased is when the mess has to be sorted at public expense when Four Seasons goes bust. That the taxpayer has to pick up the tab is a major attraction of care homes and any privatised NHS services. Once privatised, the new operators can profit by delivering sub-standard service, till they go bust and the state has to pick up the pieces.
Guy Hands explains his perspective on private equity on the Terra Firma website http://www.terrafirma.com/private-equity-investment.html:
“The private equity funds we raise are used to acquire asset-backed businesses that can be transformed through fundamental change.”
This is a rather more sophisticated way of making the asset stripper’s case as succinctly expressed in The Times by Jim Slater protégé, John Bentley, forty five years ago:
‘The theory of what we are doing is to release half the cash, half the assets and half the number of people employed.’
By not having shares which are publicly quoted and therefor vulnerable to wheeling and dealing, private equity is at a tremendous advantage over the traditional publicly quoted company. It would be possible to use that advantage positively in ways which would benefit the economy as a whole, increasing the common good, as does James Dyson’s company which enjoys a similar advantage through family ownership, but uses it to take the risk of research and develop in new technologies.
Or it can be used merely to increase the wealth of tax avoiding private equity owners, by screwing the rest of the economy. So far, as reported in Harvard Business Review, ‘there has been a multi-trillion dollar transfer of cash from US corporations to their shareholders over the past ten years’ (see posting this site July 2012). Similar UK disinvestment, with private equity playing the main role, was exampled by the fate of Boots the Chemist where the sum was £10.5billion rather than £500million.
The question ‘what will replace the public company?’ was asked on this site three years ago. Private equity is the predator’s answer, but one that could serve the economy would be for stock exchanges to enforce the European company format with two tier boards giving non-shareholding stakeholders half the membership of the supervisory board. Such an arrangement has served Germany well, protecting the real economy against financial predation with great benefit for the German economy. Alternatively, there are many different categories of voting and non-voting shares which could be designed to provide similar protection from private equity predators.
Till such options are available, private equity will continue to flourish at taxpayer expense. So look out, especially if you’re running a decent sized care home business.