Private capital in health and care can be an all-round winner


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The UK is entering a period of unprecedented political uncertainty, and there is nothing of greater concern to investors than uncertainty.

And yet capital needs to make a return, so reliable investments in growth sectors will be at a premium in the next few years. Health and social care are two of the safest bets around, according to the corporate team at Trowers & Hamlins, which has a longstanding reputation advising investors and operators in these complex, interlinked and heavily-regulated sectors.

Private equity is already quite active in the care sector, where long-term residential care beds are expected to rise from today’s 450,000 to 780,000 by 2040, taking sector revenue from £13bn to £44bn, but a few investors have had their fingers burned.

“The key thing for investors in the care sector to be thinking about is reputational risk,” explains Tim Nye, corporate partner in the firm’s London office. “Now, you might think you know what that means, but in care, risks can be magnified out of all proportion, because vulnerable people are involved. As an investor, you back a management team to do their jobs, but care is heavily-regulated and can get a lot of press attention, so you need to keep a very close eye on what is going on in the homes you’re operating.”

Fellow corporate partner Alison Chivers agrees. “It’s very important to have good regional management,” she says. “Referrals into a care home will be from the locality, and while a big scandal might hit the national press and affect your reputation that way, other incidents might not make the nationals but might be big news locally, so it’s important the investor is on top of things wherever they have assets.”

“Reputational risk needs to be managed proactively,” says Nye. “Spending money on setting up a separate quality assurance board with independent assessors – not just your CEO or operations director – makes good commercial sense. You shouldn’t just see it as an additional cost item.”

The Care Quality Commission has the responsibility of regulating the care sector but as Nye explains, if a CQC visit results in an inadequate (or worse) rating, “local authorities have a duty of care, and may well embargo referrals to care homes they or the regulator judge inadequate. That will affect your ongoing income stream, and have an effect on your exit too, it can become a vicious circle and so it’s best to avoid that happening.” ”The CQC has a very broad remit,” Chivers explains, “and they’re stretched in terms of time and resources, so relying on their – infrequent – inspections to alert you to problems is going to be far too late. The prudent investor is going to make sure that doesn’t happen in the first place.”

Another of Chivers and Nye’s recommendations is to set up a whistleblowing hotline for staff. “Whistleblowing is one of those things some employers run scared of,” says Nye, “but you need to think about it as a vital early warning system, an insurance policy for your investment.”

Long-term residential care is the sharp end of the care sector, but with the UK’s ageing population, housing with a care element can be a much more cost-effective, and less dramatic option. Nye and Chivers see considerable potential for retirement communities, a very popular option in the US but thus far an idea which has seen relatively modest activity in the UK.

“Retirement communities can free up housing stock, take care back into the community and put much less pressure on the NHS,” says Nye.

“They’re great,” agrees Chivers, “when they’re done right, but developers and operators need to think about creating true living experiences with amenities that are appropriate to the specific locality and demographic being targeted. It cannot be a one-size-fits-all model - not everyone in retirement wants their day to be filled with endless group activities. Research has shown that most people don’t want to move more than three or four miles from where they’ve been living, so there’s a need for these communities everywhere in the UK.”

While care has for some time been a focus for private equity interest, partnering with the NHS has been slower to crystallise other than in some discrete areas, primarily due to political factors, but the team see change on the horizon in the Health sector too.

“The outlook for private investment in the Health sector is very positive,” says Chivers. “The NHS is facing a very difficult financial climate, and everyone knows that something has to give. Hospital beds remain one of the most expensive items, but we all hear the stories in the press of bed-blocking, with beds being occupied by people who don’t really need to be there, for instance those waiting for an operation the next day or those who are convalescing after a procedure and require monitoring rather than clinical input.”

In Scandinavia, the concept of patient hotels is well known and popular,” she explains. A patient hotel creates additional bedspace, not just for patients but also for their relatives, with the creation of purpose-built accommodation on hospital grounds, using private capital for the build, and creating an income-stream for developers. “There’s capacity for a massive cost- saving,” says Nye, “because you need very few nurses in a patient hotel. Admission is according to medical assessment, and anyone needing to be in hospital still goes into hospital, but in the patient hotel, there will be other, regular hotel staff and care assistants. It’s much better for patients, they get their own room – which is not always possible in hospital – often room service, all the creature comforts such as a TV, and there is none of the anxiety of being in hospital.”

So far there are just a handful in the UK, something Chivers and Nye see changing, but there are obstacles.

“One of the major sticking points is that NHS Trusts don’t want to pay for voids – unused rooms – whereas if you’re an investor expecting a particular income stream, you need a degree of reliability,” says Nye. “So there are discussions to be had there, and it may involve some degree of central government underpinning.”

“Another problem is that you’re not just dealing with one bloc that is ‘the NHS’,” says Chivers. “You’re needing to deal with individual trusts, and they’re all under financial pressure and nobody wants to be one of the first to move on this, relatively untested idea, until some others do it. But it will happen, it just makes so much sense for everyone involved.”

As positive the climate, and reliable the rewards may seem to be, investing in health and social care is not for everyone.

Nye recalls one instance in the health sector, where a client bought a mental health services hospital in a ‘fire-sale’ from a company in distress. “Because the price was so low, they wouldn’t give any warranties,” says Nye. “We had to reverse- engineer the transaction to protect the buyer, put down a deposit so we could get in to the hospital to see what was happening on the ground and verify the limited information we had been given. To ring-fence risk we then created a separate structure into which we could decant the assets and manage the liabilities. We had to close down the old, distressed company and create a new one. All the while there were patients to think about, so we had to arrange transfers to the buyers other facilities and there were redundancies while our client built a new mental health unit on the site with staff either applying for transfers to other hospitals of the buyer or re-applying for what were effectively their old jobs in the new company once the facility was re-opened. There are a lot of angles in that kind of deal.”

Chivers points to clients also needing to take care in care, as it were.

“We had one client, already active in the care sector, who had found what looked to be a great, cheap asset, a care home owned by four members of the same family, and they wanted to do the deal quickly,” she recalls. “Six months later, we were still doing the deal. Every corner we turned, we found something else to worry us: financial information that wasn’t supported; non-existent corporate records; looking at the company’s assets only to find out that those assets were legally owned either by another company which the family owned or by the members of the family personally; vehicle leasings done through the company that the sellers wanted to keep because they couldn’t get personal credit for a car, stuff like that. We got it done, nothing was insurmountable, but it was a bit of a nightmare. The lesson is that if something looks too good to be true, it just might be!”

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