The financial predicaments of some of the largest UK care providers have been well documented. In the recent past, the collapse of Southern Cross emphasised the very real impact that the failure of such a care home has on not only the people within its care but also on the people it employs.

The history

Over the past three decades the financing of care homes has changed beyond recognition. What was once mostly a state run sector in the early 1980s has now become a largely privatised sector in the twenty-first century. However, in a privatised sector over half the users of the services are state funded. In other words, the care home sector is privately run, but to a large extent still relies on state funding since many of its service users rely on local authority funding.

The problem

As with most sectors, the 2008 financial crisis had a profound effect on care home providers, not least because of the squeeze on available credit but austerity has resulted in less money for local councils to subsidise care home bills. This creates a challenge for care home providers to deliver an affordable and quality service (as determined by the Care Quality Commission), yet still turn a profit.

This challenge sets to become greater over the next decade. Recent reports suggest that the care home population could rise by up to 34% by 2025. The rising number of service users and the reduced level of local authority funding, in gross terms, could result in a £2.5 billion shortfall in the care sector. As a result, the need to find suitable long term financing is becoming an ever greater question for the sector.

The problem created by a lack of suitable funding was highlighted seven years ago with the collapse of Southern Cross. In 2018, a similar story has developed in the financial management of Four Seasons Health Care. Piled with significant debt and high interest payments, Four Seasons has reached the point where repayment has become unsustainable once again bringing to the fore the difficulties for care home providers to remain profitable whilst delivering an affordable and quality service.

In order to continue operating and administering care home services to its clients and providing jobs to around 25,000 employees, Four Seasons has entered into an agreement with its main creditors to defer payment of its debts in an attempt to restructure its finances. This agreement is intended to run until April 2018 when Four Seasons will be expected to make further interest payments. The ability of Four Seasons to restructure will only be determined in the coming weeks; however, if talks fail then it appears likely that another large care provider will be staring down the barrel of liquidation.

The implications

The potential repercussions of a collapse of Four Seasons are far reaching.

There is a human cost to the failure of a care home. The first thing to mention is the thousands of service users will need to either find new care homes or become accustomed to a new provider taking over the care home in which they are resident. Employees will at worst lose their jobs and at the least be subject to uncertainty as to the future security of their job.

From a financial perspective, stakeholders such as landlords, suppliers and agencies would all be adversely affected by the collapse of Four Seasons. There would likely be a knock-on effect on the local community in which the care homes are situated.

The lessons

From an outside perspective, the main cause of these financial woes is the disparity between the economic needs of the care provider and the financial desires of private equity investors. Generally speaking, the nature of a care home is that they are low risk investments with steady returns over a long period of time provided they are managed correctly

Those looking to invest in care homes need to understand the fundamentals of the sector and the macroeconomic issues which impact the sector. For example, there are many EU nationals who work in the care sector whose rights to work and stay in the UK could be altered in the wake of Brexit. Additionally, the cost of borrowing could rise for companies with the recent announcement that interest rates are to rise, which would lead to increased interest payments and additional financial pressures. Other points to consider are the impact of the national living wage on the care sector as well as the impact of the recent decision relating to sleep in pay. Therefore, when considering investment, care home directors and owners should determine the motives of potential investors and ensure that these are aligned with the nature of the care sector.

The collapse of Southern Cross and the current financial state of Four Seasons highlights this mismatch. The financing of care home providers through private equity is a difficult model to balance and make work for both care home managers and those expecting a return on their investment. Moving forward, both investors and care home businesses should acquaint themselves with the motivations and expectations of the other; failure to balance these needs could lead to a similar situation arising in the future.

The failure of care homes is newsworthy, but so too are the success but they are less often reported. As such, it is worth noting that the balance between care home needs and investment desires is often met. There are a number of care home providers, both large and small, that have managed to deliver affordable and quality care, whilst managing to turn a profit for their investors.  Let’s hope these successes continue as we enter more uncertain times.

About the author

Monica Macheng Partner

Monica advises clients on buying or selling a business, merging with another business, company reorganisations/restructurings, shareholder enquiries, shareholder agreements, setting up a company or Limited Liability Partnership or general partnerships and corporate governance.