At the time it was the largest provider of private residential care homes in the UK and for the first ten years of its existence had been deemed a financial success.
The company was set up in 1996 by a businessman named John Moreton following Government changes to the care home system, resulting in financial cutbacks alongside the imposition of higher standards, which pushed many small independent, essentially family-run, providers out of business.
By 2002 Southern Cross had 140 sites and attracted venture capital interest from WestLB, and two years later, from US private equity firm Blackstone, which bought the business for £162 million.
It continued with acquisitions until the 2008 Financial Crisis, whereupon it became unable to pay a debt deadline of £43 million, its share values plummeted and it began selling assets to pay its debts.
It is a familiar story, but it does not seem to have diminished the appetite of private equity to invest in the care home sector.
However, there have long been concerns about its viability, the most recent in November 2018 being a warning from the regulator the CQC (Care Quality Commission) that Allied Healthcare, the UK’s current largest provider, owned by German private equity investor Aurelius, could cease operating within weeks, again because of loan repayments falling due.
Sustainability problems for the private residential care homes sector
Care homes’ income comes from a combination of self-supporting residents who pay a average of £830 per week for their accommodation and care and from local authority-funded residents, whose maximum payments are considerably below the required cost.
At the moment there are over 400,000 care home beds in England but a lack of public sector care home provision has led to warnings that there will be a shortfall of some 28,000 beds by 2025, according to AMA Research published in its The Care Homes Construction Report, which found that the majority of developers were concentrating on building in areas with a high concentration of potential self-funded residents.
In November 2017 the CMA (Competition and Markets Authority) warned that the sector was on the verge of collapse largely because there was a £1 billion shortfall in costs due to local authorities being unable to meet the actual costs of care provision.
Its analysis of the sector’s financial viability found that the industry was at a “tipping point” and that it had come across instances where local authority-focused care home providers were exiting the local authority segment and that some providers had handed back care home contracts to local authorities.
It concluded that providers have generated most of their profits, in aggregate and on a per resident basis, from non-local authority funded residents, where self-funded residents have made a higher contribution towards fixed costs and common costs such as overheads and that providers have been loss-making in economic terms, i.e. returns below the cost of capital, on local authority funded residents.
It also concluded that many providers were carrying unsustainable levels of debt.
In February 2018 the CQC introduced a new financial viability test on new care providers. It should be remembered that the CQC is responsible for vetting standards of provision and quality of care in care homes and rating them accordingly. Where improvements are required this will mean additional expense for the owners.
Given that investors in private equity and venture capital require a significant return on their money, and in recent times have been less than patient about waiting to get it, all this would suggest that the current model for financing care homes is not viable and significant changes are needed to the model of care provision for the elderly, both local authority-funded and self-funded.