The extraordinary story of how one care conglomerate uses opaque corporate structures and a web of financial tools to suck wealth from the care of Britain's most vulnerable.
Adult social care in the UK is in crisis. This much we are told by those in the sector and this much we can see in the statistics. To cite but a few of these: around 1.86 million people over the age of 50 are not getting the care they need; approximately 1.5 million people perform over 50 hours unpaid care per week; and the proportion of GDP the UK spends on social care is among the lowest in the OECD, with budgets having undergone an overall reduction of over 30 per cent since 2010.
Reflecting on the severity of the situation, Ian Smith, chairman of the largest care home chain in the UK, Four Seasons Healthcare, recently declared himself to be ‘embarrassed to be British at the state of our health and social care.’ As with the NHS, a mood of impending catastrophe hangs heavy over social care.
Yet whilst attention has overwhelmingly been focused on the impact of austerity in reducing levels of state support, something murkier and altogether more complicated is going on in the shadows.
According to a groundbreaking new report by the research organisation CRESC, large care home chains – which account for around a quarter of the industry – are rife with dubious financial engineering, tax avoidance, and complex business models designed to shift risks and costs from care home owners on to staff, the state and private payers. Where Does the Money Go? Financialised Chains and the Crisis in Residential Care is a stark warning that the problems of adult social care in the UK run deeper than a lack of state funding, damaging though this is.
Often cited as a victim of the latter, Four Seasons is in fact a ‘poster boy for opacity and the kind of financial and operating mess which is the legacy of debt based financial engineering in a foundational activity like adult care,’ the report tells us. It is a case worth discussing in detail, with serious consequences for the future of adult social care in the UK.
‘Pass the Parcel’
Prior to its purchase in 2012 by Guy Hands’ Terra Firma Capital, Four Seasons passed from one private equity firm to another, as each debt-leveraged buyout was followed by a larger one, with the seller making a profit from the willingness of the buyer to pay more and cover the cost with debt. Debt levels reached an apogee in 2008 when, under the ownership of Three Delta, Four Seasons was servicing a staggering £1.5 billon debt, with the interest alone claiming £100 per week on each of its 20,000 or so beds.
This game of Russian roulette – often accompanied by processes of value extraction – soon ended with a bang, and debt write-offs and restructuring followed. A new and calmer dawn apparently broke with Four Season’s purchase by Terra Firma, which invested £300 million of its own capital, repaid £780 million of old debt and issued a seemingly more sustainable figure of £525 million of new debt through bonds. ‘Terra Firma,’ proclaimed Hands soon after, ‘has bought stability to the company’ (Four Seasons).
As the report makes clear, much of the media has absorbed this narrative and with it the implication that Four Seasons’ problems – financial losses and care quality failures resulting in embargos on new residents – are a consequence of the state not putting enough money in.
Yet the stability that Hands claims to have brought is anything but sustainable, and Terra Firma’s ownership of Four Seasons is characterised by a complex corporate structure and financial engineering, with costly consequences for a range of stakeholders.
Under Terra Firma, Four Seasons consists of over 185 companies in fifteen tiers, registered in numerous jurisdictions including multiple tax havens. As the report dryly notes, ‘a chain of largely publicly funded care homes apparently needs as many operating subsidiaries as a giant car company selling volume product in 20 European markets.’
The primary purpose of this ludicrously intricate corporate structure appears to be tax avoidance – no small irony when considering Hands’ and Smith’s respective laments for the lack of state funding for social care.
Yet so too does this structure obscure Four Seasons’ financial operations to all but a few insiders, making it extremely difficult to understand how Terra Firma turned what was (using the earnings before interest, tax, depreciation and amortisation metric, which indicates the ability of a business to generate cash surplus over operating expense) in 2013 and 2014 a cash generative business into a loss making one.
The reason for this, the report explains, is a series of discretionary accounting and financial decisions in the form of ‘charges’ that, whilst their nature cannot be clarified exactly, point towards a business model in which cash is extracted and the owner is positioned with claims in the event of liquidation or sale.
Of these ‘charges’, the interest payable on intra-group lending is most illustrative of the latter practice, and calls into question the true cause of Four Seasons’ losses.
Whilst press coverage has so far focused, if at all, on the £50 million annual interest Four Seasons pays on its external debt of £525 million, by analysing the accounts of one of the high level holding companies, Elli Investments, CRESC have shown that Four Seasons also has over £300 million of internal, intra-group debt. This is money lent from one of the many companies that constitute Four Seasons to another in the same group, and its presence here arguably undermines Hands’ claim of responsible recapitalisation to lower the debt burden following Terra Firma’s purchase of the care home chain.
Interest on this debt is charged at an extortionately high rate of 15 per cent compounded – a conscious management decision that furthers pushes Four Seasons into the red. Crucially, although the interest is charged against profit it is not claimed in cash but rather accumulates (£41 million in 2014 added to the £36 million from 2013) as a liability to be discharged if/when Four Seasons is sold or liquidated.
To simplify this, whilst the interest appears as a negative charge contributing to Four Seasons’ yearly ‘losses’ – which, again, are typically presented as entirely a consequence of a reduction in state funding – should the care home chain be sold or liquidated it will be Four Seasons (through one of its many companies) lining up to collect this accumulated interest, effectively acting as a creditor to itself, with Terra Firma the ultimate beneficiary. As such, a loss isn’t what it first appears to be.
Summing up the significance of these practices in the care home industry, CRESC explain that ‘the declared profit of operating subsidiaries in financialised chains is not a hard indicator of surplus in one year accrued after necessary expenses. Rather, it is the malleable result of manoeuvring over several years to reduce tax, extract cash and rearrange obligations with an eye to exit.’
Thus any claims made by large care home chains regarding a financial crisis in care must be considered within the context of these highly complex and irregular financial practices and duly scrutinised.
The simple narrative that equates crisis solely with a reduction in state funding necessarily leads to a one-dimensional response that will by its very nature be insufficient. Adult social care is in crisis, but it is a complex one that defies a simple solution. As CRESC surmise, ‘Putting more money in to the system via higher weekly payments per bed will not produce a robust and sustainable care home sector when the financialised providers are so adept at taking money out.’
Admittedly, without more specific information regarding the financial practices of Four Seasons and other care home chains, there are limits to what can be concluded with absolute certainty. But what we don’t know is as much a problem as what we do, and here a powerful idea presents itself: considering the vast sums of public money that goes in to adult social care, it is surely necessary that the business models and financial practices of its recipients, such as Four Seasons, are open to public scrutiny and accountability.
As it currently stands, ‘the problem is that in each chain nobody except the upper tier owners knows where the holes in the bucket are, so that public money can disappear without political debate or social accountability,’ CRESC explain.
This, ultimately, points to a more fundamental contradiction: notions of debate, accountability and social responsibility sit uneasy with complicated models of financial capitalism, the purpose of which is typically immediate value extraction with little thought for the public good.
When we consider the long-term challenges of providing high-quality adult social care in a country with an aging population and declining social spending, alongside the more immediate sector problems of low wages and poor working conditions, an innovative and long-term response is needed. What’s more, it’s increasingly clear that the unsustainable and socially irresponsible practices of private equity firms like Terra Firma should have no place in it.