Invest With Care

Social care investment has a troubled track record, but more sustainable models are now meeting strong appetite from asset owners.

The UK social care sector is ripe for investment. Worth an estimated £245 billion and boasting long-term growth drivers as the population ages – care expenditures are among the fastest-rising in the EU, expected to increase to 2.5% of GDP by 2050 – there are obvious attractions for investors, especially those seeking reliable income streams.

Investing in care, particularly through property such as care homes, hospitals and special education facilities, appears to offer opportunities for investors to bolster allocations to socially responsible projects. But there have long been accusations that ‘financialisation’ of the social care sector is detrimental to those it is supposed to serve.

In particular, private equity firms have been accused of prioritising return over care.

A report from think tank Transformative Responses into private equity’s impact on the care home sector across the UK, France and Germany finds: “the public good of healthcare has also become subject to the risky investment strategies of financial actors like private equity firms, where financial returns may take a higher priority to care, leading them to consolidate and re-engineer care companies into large consolidated corporate groups, generating tidy returns for them and their investors”.

These risky practices include debt-leveraged buyouts, intra-group loans, ownership structures leading to offshore locations, and sale and leaseback arrangements – seen by many as a form of asset stripping. Transformative Responses regards these tactics as part of an “explicit strategy to shift costs, socialise risks and privatise the benefits of investing in social care”.

“Not only do such practices heighten the risks of financial and operational failures, they can also lead to a lack of transparency and accountability, poorer working conditions for staff, lower quality care for residents and potentially higher prices for care,” the report states.

Cause for complaint

Research shows that leveraged buyouts lead to an 18% increase in the risk of bankruptcy for social care operators – as evidenced by the collapse of Southern Cross and Four Seasons Healthcare in the UK.

Meanwhile worrying stories from care home residents in facilities run by for-profit organisations are ever more common.

Analysis by the BBC’s File on 4 found that the for-profit sector provides 69% of children’s home bed spaces across England and accounted for 78% of lodged complaints between 2018-21. It also recorded more than three quarters (76%) of all serious incidents involving the police last year.

But given the UK needs an estimated £14.4 billion by 2030/31 to meet the necessary improvements in social care, private investment in the sector is essential, particularly from institutional investors with long-term horizons and considerable financial clout.

Research shows that despite the challenges in the sector, there is investor appetite for social care, with many encouraged by commitments from the UK government to reform the sector including promises of £4.5 billion in public funding between 2022/23 and 2024/25.

One in three UK pension schemes surveyed by Downing LLP – which provides development capital to the social care sector – expect their appetite for investing in social care to “increase dramatically”, while more than half (54%) believe the social care sector is “poised to benefit from institutional investors shifting focus to the S of ESG investing”.

Nearly nine out of ten (88%) say the firm commitment from some local authorities and local governments to social care provision and the potential income this can provide means investing in social care assets can offer strong defensive features for investors.

Meanwhile research from Alpha Real Capital shows 94% of UK Local Government Pension Scheme (LGPS) professionals plan to increase investments in healthcare. Within the sector, LGPS more than half (55%) indicating an appetite for financing elderly care.

A virtuous circle

Reputable investors concerned about the potential harm from financialisation of social care need vehicles that will raise standards of service, not contribute to any further disruption and upset in the sector.

At least part of the answer, according to Mark Gross, Partner and Head of Development Capital at Downing, is to find providers with a demonstrable track record in financing the sector responsibly. This approach, he argues, means investors do not need to shun private equity investment in social care.

“It shouldn’t be a choice between financial reward and quality of care; a sustainable business needs the two together. If you can’t generate sufficient profit from your service to be able to reinvest in it, or you can’t generate sufficient income to be able to pay your staff the right wages and attract the best people, then your business isn’t going to survive.”

Gross says that while reports of wrongdoing in the social care sector and the poor practices of private equity investors are often justified, these do not indicative of behaviour from all participants.

“Where a resident or service user that isn’t getting the right care then absolutely that should be highlighted. But that isn’t true of every operator. And the same can be said for investors; not all of them are in it solely for the money.”

He adds that it is incumbent on private equity investors to carry out due diligence and ensure private care homes have appropriate resources in place that safeguards residents and service users.

“If you’re investing in the sector, you need a level of experience and understanding. We conduct financial and regulatory due diligence, and have clear oversight of policies and procedures. We understand where weaknesses are, and we can look at addressing those.”

Alternatives to private equity

Outside of private equity, there are options to invest in social care through traditional asset managers.

Roger Skeldon, Portfolio Manager of TIME Investments Social Long Income fund, an asset manager that owns properties such as nurseries and hospitals, which it leases back to the care sector, says his approach focuses on sustainable finance models.

“We want rents to be affordable in the long term because it makes for a more secure investment. Lower rent makes it easier for tenants to reinvest in the properties and in their business, which makes them a stronger tenant overall. It creates a virtuous circle,” Skeldon says.

Octopus Real Estate, an asset manager with £3.7 billion under management finances the property lending and healthcare sectors, is also keen to demonstrate its commitment to responsible investment.

The £1.4 billion Octopus Healthcare Fund which is a signatory of the Operating Principles for Impact Management has built 80 care homes and has another 20 under construction which Mike Toft, Portfolio Manager, says amounts to 1.5% of total beds in the UK care sector.

“We have to get a return on capital, but we are also focused on having an impact on the care sector. In the first year of measuring our impact in 2021 we delivered 15% of all new care beds into the UK. Last year we delivered 6%, which shows that we’re having an impact and punching above our weight,” he says.

Toft says Octopus applies equal weighting to financial returns and clinical and ESG considerations.

“We have experienced, qualified nurses who are talking to and assessing any operators coming into the fund, and revisiting assessments of the operators in which we already invest. That gives us an early warning system if there are any issues in the portfolio and, if so, the clinical team have the expertise to liaise with operators and work at solutions.”

Toft says that Octopus Real Estate will not align with “big beasts who have indebted exposure through private equity partners” and instead works with operators focused on delivering “the best long-term care”.

The Transformative Responses report concludes that “services as essential as the provision of care, which receive public money to provide an essential service to society, are not consistent with the risk appetite and demand for returns of financial actors like private equity firms”.

With a funding gap of tens of billions of pounds in the UK alone, private finance looks unavoidable.

However, it need not be a necessary evil so long as investors take time to find those financial partners that operate with integrity.

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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