Care UK and private equity: another Southern Cross?

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Suggestions from the Department of Health that the companies running care homes across the country be more strictly regulated provoked a quick response from Care UK, which warned “an inappropriate monitoring regime” could hamper its operations and cause “reputational damage”.

Looking through its accounts it is not surprising Care UK, which was bought by private equity firm Bridgepoint in May 2010, is worried. The company, which runs 85 residential homes and provides care for over 17,000 people across the UK, has already slipped from profit to loss since it was bought, largely due to the 9.75% interest payments it has to pay on the £250m bond Bridgepoint had to issue to afford the acquisition.

History repeated?

And Bridgepoint appears to have similar plans for Care UK to those that sunk Southern Cross this summer, forcing the government to guarantee that 30,000 elderly people across the country would not be thrown out of their homes (see here).

Southern Cross notoriously hit trouble eight months ago after Blackstone, its private equity owner, broke up the company and sold the ownership of its care homes to an investment fund, leaving Southern Cross to only manage them. Blackstone and the new landlords made a fortune but Southern Cross could not keep up with the ever-increasing rent payments on homes it no longer owned.

Care UK's annual accounts show that when Bridgepoint bought the company it immediately created another company called Silver Sea Holdings. Silver Sea will build and own care homes and then “enter into an agreement for lease and development with Care UK”. In other words, instead of owning and managing the care homes itself, Care UK will rent them from the newly established Silver Sea.

The advantage of splitting into separate companies is that they will be easier and more profitable for Bridgepoint to sell: the homes can be sold to property companies that would not be interested in buying a large healthcare provider, for example. But the danger is that whoever buys Silver Sea can then raise the rents, increasing the pressure on Care UK's finances and its capacity to provide adequate care, especially if it continues to carry huge amounts of debt.

Care UK told Corporate Watch there are no plans to transfer the freeholds of any of its existing homes over to Silver Sea. However, a residential home in Orpington, Kent is already being built, to be owned by Silver Sea then leased to Care UK and according to the annual accounts “a number of other sites have been provisionally approved for development” in this way. A Care UK press release says 30 new homes are planned over the next five years, meaning Silver Sea would raise a sizeable amount for Bridgepoint even it does not gain Care UK's existing freeholds.

Who's paying?

Private equity firms invest other people's money and take a share of the profits made from their investments, setting up special funds to do so, in this case the £4bn Bridgepoint Europe IV. In addition to its care homes, Care UK is already the largest private provider of NHS services and stands to be among the biggest beneficiaries of the coalition's reforms, which it has been vigorously supporting. Further privatisation would make healthcare companies more attractive to investors around the world, leaving even more opportunities for companies such as Bridgepoint.

So who are these investors? Bridgepoint Europe IV is using money from, among others, the California Public Employees’ Retirement System, the New York State Common Retirement Fund and the Ohio School Employees’ Retirement System.

That the pensions of public sector workers in California, New York and Ohio are being used to gamble with care for the elderly and privatise more of the UK's healthcare could cause "reputational damage" to more interests than just Care UK. Another reason it doesn't want any “inappropriate monitoring” of its business perhaps?

See also:

The vultures circle: private equity and the NHS
May 10, 2011

Under the microscope: pathology gets the Serco treatment
November 9, 2011