Winter for Four Seasons?
As one of the UK’s largest care providers goes into administration, is it time to consider a more sustainable investment model to provide security for the country’s most vulnerable citizens?
It will surprise few in the healthcare investment community that the care home provider Four Seasons has gone into administration. Struggling to meet debt payments in excess of £50 million a year, the company has been running on empty for some years.
When Scottish entrepreneur Robert Kilgour founded Four Seasons in 1988, he can hardly have predicted both its meteoric rise nor its ignominious fall. In the late 80s, the care home business was essentially a cottage industry with most operators running homes in no more than two or three locations. For Kilgour, who exited the business in 2005, a year after it was sold for £775 million, the thought of it becoming the largest care home operator in the UK must have seemed an unlikely prospect.
But the industry rapidly became attractive to investors who saw the potential for consistent returns with long-term stability. The argument was that there will always be old people who need looking after and, in a country where home ownership is a national obsession, a vast seam of unmortgaged equity that could be mined to fund that care. Add to the mix the government’s obligation to fund those who cannot pay and the proposition became even more compelling.
This is essentially the model we have to this day, with the only barrier to providers’ success being a shortage of real estate that can be converted to accommodate the UK’s burgeoning elderly population. No wonder the care home business is seen as such an attractive opportunity by so many.
So what went wrong at Four Seasons? The answer lies in its aggressive business model.
Its rapid expansion from small-time Scottish operator to the biggest player in the UK was funded by debt readily available from lenders who saw the combination of a buoyant property market and continuing demand for healthcare as something close to a sure bet.
But, as any bookie will tell, there’s no such thing and when City bigshot Guy Hands and his fund Terra Firma stepped in to pick up Four Seasons for a song in 2012, the company was in dire straits after being loaded by Qatar-backed fund Three Delta with debt it could no longer service. The truth was that revenue from state-funded care, a large proportion of Four Seasons’ income, just wasn’t enough to pay its debts.
Terra Firma soon found itself in difficulties, despite heavy write-downs by lenders, and began selling properties to meet debt repayments.
In 2016 it reported a 39% drop in profits, blaming cuts to the social care budget and the introduction of the UK living wage.
Eventually unable to meet debt repayments of over £50 million a year, Four Seasons last year found itself effectively controlled by US hedge fund H/2 Capital Partners, the major bondholder.
The whole sorry saga came to its inevitable conclusion last month when the company was placed in administration.
The most likely outcome is that Four Seasons will be broken up and sold piecemeal to interested parties. Its self-pay division, brighterkind, for example would make a juicy cherry for any potential pickers.
Perhaps the time has come to rethink the nature of investment in the care sector? In the wake of the Four Seasons debacle, some are wondering if US hedge funds and high-risk operators like Terra Firma should be allowed anywhere near an industry that serves the most vulnerable in our society.
A combination of realistic government funding and sustainable, secure investment strategies is surely a far more responsible way to go about things.
