Trends in the City have always been similar to fashion; once one big name does something new, soon everyone else follows. In the 90s it was the dotcom boom; if you didn’t have a significant portfolio of internet start-ups you were out of step. But it was a trend that predictably followed traditional investment rules. Those who got in early and got out early were the ones who made their fortunes. The last in either got their fingers burnt or are still waiting for the payback.
The latest trend for the private equity markets has brought gasps of surprise from both commentators and the people suddenly being swooped on by global financiers with large chequebooks. Care homes are suddenly big business, subject to buy-outs with price tags that have got the financial pages buzzing with talk of stock market floats and bidding wars.
The Highclear nursing homes business was sold for £60 million to care group Ashbourne who were backed by the equity group Electra. It was Ashbourne’s 11th deal this year. US investment giants Blackstone bought Southern Cross Healthcare for £162 million in September and announced it has a cool £3 billion set aside for other purchases. And Barchester Healthcare bought Westminster Health Care for a massive £525 million – £75 million above the asking price. Venture capitalist firm 3i, which owned Westminster, made a profit of £175 million on a stake it bought for £267 million two years ago.
Adding flavour to this deal was the fact that the majority-owners of Barchester are the Irish horse racing magnates John Magnier and JP McManus who have been making headlines all year as the biggest shareholders in Manchester United Football Club. Barchester beat off four other global venture capitalist firms, as well as private healthcare giant BUPA, which has itself been snapping up homes in pursuit of an aggressive expansion policy.
Analysts have shrewdly pointed out that the new firm is worth £300 million more than United, without the glamour of footballers and their wives. Barchester’s chief executive Denis Brosnan, rejects claims of high risk and plans further expansion, possibly into Europe and America. “The price was high. But the synergies and savings we will get from putting the two businesses together are such that we could afford to pay more than the others,” he said. But the biggest deal so far was the £775 million sale of Four Seasons Health Care group to French investors Allianz Capital Partners in July this year. Predictions are that more deals will consolidate the private care home market into around six major providers and a small not-for-profit sector.
Why have financiers suddenly taken a shine to a traditional, low-tech industry?
“We expect the demand for care home facilities and services to continue to grow, based on the demographic development,” said Stefan Sanne of Allianz.
The figures put this more bluntly. The care market is worth more than £11 billion, according to the Department of Health, and employs more than one million people. The UK has 486,000 care beds places across the private, voluntary and public sectors, according to health analysts Laing & Buisson – around 89,000 places lower than the peak in 1996. Add to this Britain’s increasingly ageing population and it is clear demand will outstrip supply within 10 years.
Jon Moulton, managing partner at Alchemy – which owned 85 per cent of Four Seasons – believes fund managers are playing safe: “They are a stable business that offer long-term – but not spectacular – growth.”
It’s a fast change considering that three years ago, most care groups were largely broke. Things were even worse in the 90s when homes were chasing for business and standards were poor.
Des Kelly, director of the National Care Forum, reveals what went wrong: “Most companies that went public came out of the stock market because they were struggling with fees, meeting new regulations and other issues. The City reacts very harshly if you don’t meet your targets and issue profit warnings.”
Since then, regulations on even basic issues such as the size of rooms has squeezed out some (but not all) of the rogue operators and local authority fees have stabilised.
Chief executive of the Social Care Association Dick Clough said the flurry of recent sales would encourage owners to invest in training and reassure staff.
“Residential care is here to stay. Staff in the sector need to take note of the message that’s been sent by major investors. Groups like Barchester have done their homework and £525 million is a big commitment. There is a long term future for people working in the sector,” he said.
So care homes are a safe bet then. Well, not quite.
The rise of assisted living technology – IT systems, smaller medical equipment and devices such as heat sensors – mean more people will be able to live independently at home for longer. Think of the advent of domestic appliances at the turn of the 20th century that rendered armies of domestic help redundant. A survey by the Commission for Social Care Inspection revealed that the majority of the public want to be cared for at home. Demand for place may continue to fall.
And health minister Dr Stephen Ladyman has predicted that Extra Care housing – individual flats with care staff on hand – will increase over the next 20 years.
“I believe that extra care housing will, over the coming decades, become a real alternative to residential care homes, both in the public sector and in the private sector. There are real benefits for people in having their own self contained living space behind their front door. I believe Extra Care housing will be the most dominant form of residential care in the future,” he said.
Kelly believes the City will see long-term success but is cautious given the views from Whitehall.
“It’s a vote of confidence in the future of care home provision which is slightly at odds what we’re hearing from the centre,” he says.
The sector may have changed but City rules remain the same: the value of your investment may go down as well as up and caveat emptor – buyer beware!
