By Tim Shipman
- Care-home bailout could cost £600m
- Second biggest care company also in trouble
Shark: Stephen Schwarzman's U.S. private equity firm Blackstone bought out Southern Cross Healthcare in 2004 before selling them three years later
Taxpayers face having to rescue more than 31,000 vulnerable people amid financial meltdown at the UK’s biggest care-home company.
The bill could run into hundreds of millions of pounds after ruthless City speculators left Southern Cross Healthcare in dire straits.
There is anger and outrage that so many lives have been thrown into turmoil through the actions of City venture capitalists.
The U.S. private equity firm Blackstone, led by Stephen Schwarzman, bought Southern Cross in 2004 for £162million and sold it three years later. It is believed to have quadrupled its investment.
But to achieve this it sold off the company’s homes, robbing Southern Cross of its capital and forcing it to lease the properties back from another company.
Downing Street announced yesterday that the Government will use public money to ensure those in the 750 affected homes can stay – amid warnings that moving them would lead to the deaths of the most vulnerable.
The crisis is the worst ever to hit the care-home sector.
Ten per cent of all elderly people in residential care are currently with Southern Cross. And the second-biggest company, Four Seasons, is also in trouble.Yesterday Southern Cross announced that it is cutting rental payments to its landlords by a third to avoid going bust.
It recently unveiled losses of £311million in the first six months of the financial year and the firm which was once worth £1billion was valued last night at just £12million.
Local authorities have a legal obligation to provide care for those in need.
But cuts in the care grant from central government mean ministers might need to launch a new raid on taxpayers’ cash to save thousands from homelessness.
The Prime Minister’s official spokesman made clear that No 10 would not stand by and see people thrown on to the streets.
‘Our concern is to make sure there is effective protection in place for residents who might be affected,’ he said.
Facing closure: Lauriston House in Bromley, Kent, is one of the 750 care homes that could be closed if Southern Cross does go under
‘It may well not be in the interests of residents to move them. Our interest is making sure that people are cared for effectively.’
Asked if the government is seeking to ensure they will stay where they are, he said: ‘Exactly right.’
Ministers are in close touch with Southern Cross. They hope that the cut in rent will help the firm survive.
BIGGEST RIVALS IN TROUBLE TOO
Britain's second-biggest care home firm, Four Seasons Healthcare, has amassed debts of more than £750million which must be repaid by September 2012.
And the firm faces further problems because it owns 40 properties which house the care homes run by beleaguered Southern Cross – which has announced it is cutting rent owed to its landlords by 30 per cent.
The reduction in rent coming in from Southern Cross could hinder Four Seasons’s ability to pay off its debt.
In 2006 the Middle Eastern investment fund Three Delta spent £1.4billion on its debt-fuelled acquisition of Four Seasons Healthcare. Some of the loans were raised on the prospect of future earnings the care homes looked likely to deliver.
But Three Delta was unable to pay the interest on the loans and its lenders ended up taking ownership of the homes as collateral.
In its latest company report filed last August, Four Seasons said that 2009 had been a ‘challenging year’ and that it had faced ‘unprecedented challenging economic conditions’.
A spokesman yesterday said: ‘We are confident that our refinancing negotiations with our lenders will be successful.’
If that fails to make it a viable business, other care providers could step in to buy the homes most at risk of closure.
But in the unlikely event that Southern Cross went under and its homes were to close, rehousing all 31,000 residents would cost councils and Whitehall £600million a year.
Care Services Minister Paul Burstow said: ‘Our number one concern is the welfare of the residents living in Southern Cross homes.’
But he made clear that ministers will not actually bail out the company itself. ‘It is for Southern Cross, its landlords and those with a stake in the business to put in place a plan to put the company on a firm footing,’ he said.
In 2007, Blackstone chief Stephen Schwarzman had the dubious honour of being declared the ‘new King of Wall Street’ just months before the biggest crash in that gilded kingdom’s history.
He was certainly the king of conspicuous consumption. While other private equity moguls tend to be shy of publicity, Schwarzman – a graduate of Yale University, where he was a member of its exclusive Skull and Bones Society – liked to advertise his self-indulgence at every opportunity.
In 2007, he paid Rod Stewart a reported $1million to perform at his extravagant 60th birthday party at which Patti LaBelle led the Abyssinian Baptist Choir singing He’s Got The Whole World In His Hands in his honour. Guests included Colin Powell and the New York mayor Michael Bloomberg.
In the same year, Time magazine listed him as one of the 100 Most Influential People in the World.
It was also revealed that his personal chef often spent $3,000 for a weekend’s food for Schwarzman and his wife, including $400 stone crabs, and that staff at his 11,000-sq ft home in Palm Beach had to avoid wearing rubber-soled shoes in case they disturbed his poolside bliss.
Care Service Minister Paul Burstow, left, said that the welfare of residents was their 'number one priority' while John Healey said ministers must get a 'plan B' in place for companies who cannot sort their own problems
Ministers are facing calls from across the political spectrum to make it impossible for venture capital firms to meddle in businesses which have such an important impact on the old and vulnerable.
FATTEST CAT WHO LAPPED UP A MILLION A DAY
When Blackstone became a public company in 2007, it revealed that chief executive Stephen Schwarzman was paid more than a million dollars a day the previous year.
That same year he had the dubious honour of being declared the ‘new King of Wall Street’ just months before the biggest crash in its history.
He was certainly the king of conspicuous consumption. While other private equity moguls tend to be shy of publicity, Schwarzman advertises his self-indulgence at every opportunity.
In 2007, he paid Rod Stewart a reported $1million to perform at his 60th birthday party at which Patti LaBelle led the Abyssinian Baptist Choir singing ‘He’s Got The Whole World In His Hands’ in his honour. Guests included Colin Powell and the New York mayor Michael Bloomberg.
Raised in suburban Philadelphia, Schwarzman, 64, who is estimated to be worth more than £4billion, went to Harvard Business School and was managing director of the investment bank Lehman Brothers by the time he was 31.
In 1985, he set up the Blackstone Group (schwarz is German for black) with Peter Peterson, a former Lehman’s colleague and former US Commerce Secretary under President Nixon.
It originally specialised in company mergers and acquisitions but after two decades of clever investments in almost every sector of the economy, it had grown into the world’s biggest private equity investment firm.
Its deals have included Legoland, Madame Tussauds, Universal Studios Parks and Hilton Hotels. Schwarzman once said of his work: ‘I’m in it because I like to be excellent and to win.’
He lives in a huge apartment on Manhattan’s Park Avenue which was previously owned by the industrialist John D Rockefeller. He reportedly paid more than £20million for it.
In 2010, he compared one of President Obama’s plans to limit the financial rewards of Wall Street bosses to Hitler’s invasion of Poland in 1939.
Tory MP Sarah Wollaston, a GP, told the Mail: ‘It can’t be right that people can make a fast buck and clear out leaving taxpayers to pick up the bill. It means thousands of vulnerable people uncertain whether they will have to move homes, which we know increases mortality.’
She also warned that unless the Government gets to grips with the crisis, it will undermine its planned reforms of the NHS, which promote a market for private firms providing health services.
‘The idea that competition drives up standards in healthcare isn’t necessarily the case,’ she said.
Health Secretary Andrew Lansley will face questions from at least three MPs in the Commons on Monday.
One of them, Labour’s Sheila Gilmore, said it was ‘morally questionable’ that a private equity firm was allowed to profit and run. ‘I would like it to be legally questionable too. We need to have stricter regulation to ensure that this sort of thing doesn’t happen again.'
Stephen Dorrell, the Tory chairman of the Commons Health Committee, said that he would be holding hearings into failures in the car
e sector. He said the Government did not need to bail out Southern Cross but it must ensure that the company could ‘trade its way through’.
He said: ‘The Government’s responsibility is to ensure that the care needs of the residents are met. It is not the Government’s responsibility to underwrite an investment decision that has gone wrong. There does have to be a proper insurance that public funds are being used in a way that delivers the care needs to the quality that we all want.’
Shadow health secretary John Healey added: ‘Thousands of very vulnerable people and their families will be worried sick by what’s being reported about Southern Cross.
‘Ministers must get a plan B in place if the company can’t sort out its problems. People need to know they won’t be left high and dry by the decisions of City hedge fund managers.’
Labour MP John Spellar has tabled a question to Business Secretary Vince Cable asking if there will be an investigation into Blackstone. He will ask if it is a ‘fit and proper company to conduct business in the UK’. The picture is bleak across the care-home sector. Four Seasons, with 19,800 places, has 400 care homes and £750 million debt.
Craegmoor provides residential care and services for adults with mental health problems or learning disabilities. It has 3,300 places, 174 care homes and £37.8million debt.
Care Principles provides similar services and has 450 places in 17 care homes and secure hospitals. Its debt is £45.77m
Care UK runs care homes and services for elderly. It has 3,100 places in 57 homes, and debt of £127million.
My mother has dementia... if they move her she will die
By ZOE BRENNAN
Loving: Mary Thick, pictured with her daughter Faith Cox moved into a Southern Cross home last year. Mrs Cox says a move from the home could cause her mother's death
When Faith Cox settled her 97-year-old mother into a private home for the elderly, she naturally thought it would be the last time the venerable great-grandmother would have to move.
Mary Thick had just suffered the loss of her husband, George. And after a lifetime of caring for others, she had also recently been diagnosed with Alzheimer’s.
No wonder Mrs Cox was delighted to find such an agreeable home for her at Hygrove House in Minsterworth, Gloucestershire.
Naturally, 63-year-old Mrs Cox, who has just been through a battle with cancer, wants to see her mother in safe hands.
Imagine her horror, then, to discover that Hygrove House could very soon be closed. Gloucestershire County Council is reportedly drawing up contingency plans to move 335 pensioners from their current homes as concerns mount over the financial stability of the Southern Cross group, which runs them.
Mrs Cox says of her mother, who has eight grandchildren and 11 great-grandchildren: ‘I don’t want her moved. She has dementia and she has only just got over being moved from another home last year, and the death of her husband. She is just starting to recover from that, and now she may be moved again.
‘If they move her she will die. I would rather put her to sleep than put her through this. That sounds awful, but I love my mum.’
Imagine this horror repeated across the country for 31,000 families. For this is the awful threat facing legions of elderly and their adult children as Southern Cross teeters on the brink of insolvency.
Annual fees for a place in their homes average at £30,000, but despite this Southern Cross is struggling to meet annual rental payments of £250million – and fees paid by local authorities to look after many of its residents are being slashed by up to 10 per cent as part of the cuts programme.
Mrs Cox is one of thousands of families who are aghast at the possibility that their relatives may have to be be moved from care homes
Local councils have a responsibility – under the 1948 National Assistance Act – for adults who have been assessed as needing care, but no specific powers to prevent the closure of a care home by its owner or a liquidator.
Most of the elderly in the care of the company – which has three brands, Southern Cross, Ashbourne Senior Living, and Active Care Partnerships – are in their 80s and 90s, and many suffer from dementia. Its homes also cater for around 1,000 younger people with special needs.
Clearly, the residents’ families – people like Faith Cox – are aghast at the possibility that their relatives could be forced to leave their care homes.
‘What are they going to do with all these old people – build a pyre like they did when mad cow disease happened, and pile them all on it?'
The chief executive of Age UK in Gloucestershire, Christina Snell, says statistics show people are twice as likely to die in the 12 months after a move. ‘It is certainly an issue when old people are moved because they can’t be prepared in the same way as younger people, and they have no choice.’
So how is it that the fate of so many elderly people is in the hands of a private firm which is now in grave difficulty?
National policy relating to care homes changed under John Major’s government, leading to the creation of a new network of independent providers. During the two decades from 1990 to 2010, an additional 110,000 beds were opened in private homes, while 95,000 were closed in council-run homes.
Today, almost 90 per cent of all residential provision is independent, and most of it is for profit, as Southern Cross’s American bosses were all too aware.
Under threat: Hygrove House in Gloucestershire is one of 750 homes run by Southern Cross Healthcare
For now, the Department of Health has been instructing councils to put contingency plans in place for if homes are closed.
One woman, who did not want to be named, says that she is desperately worried that her 92-year-old father will be made homeless – particularly because he lives in the North East where there are 50 other Southern Cross homes. Their collapse would mean huge waiting lists at other such homes in the region.
'How has this been allowed to happen? The worry is keeping me awake at night.'
She says: ‘My father lives in a lovely home. But I don’t see how the council can find high-quality places for everyone overnight. How has this been allowed to happen? The worry is keeping me awake at night.’
As for Faith Cox, she is painfully aware that this crisis could rob her mother of any peace in her final days. Mary – who worked as a dinner-party caterer – had to have an operation for breast cancer five years ago, but displayed a remarkable strength of spirit by insisting on leaving hospital early ‘because I’ve got to go home and make my jam’.
Mrs Cox says: ‘What are they going to do with all these old people – build a pyre like they did when mad cow disease happened, and pile them all on it? What is going to happen to us when we get old if these homes close?
‘My mother is a little old lady of 97. She deserves to die in dignity and with peace of mind, and I will not let her be moved again. If I don’t fight for her, who will?’
For Mrs Cox and her mother – and thousands other like them – this is a disaster unfolding in slow motion. And it might be about to get much worse.
Private equity giants filled their boots and walked away
By RUTH SUTHERLAND
Fat cat in chief: Stephen Schwarzmann is the head of Blackstone which bought Southern Cross in order to make quick money
Just like the banks which fell before it, the fortunes of Southern Cross were founded on a mountain of debt and the flimsy assumption that property values were a one-way ticket to wealth.
To understand the plight of the frail occupants of its homes, it is necessary to enter a very different world – the secretive gilded realm of the private-equity barons who, before the financial crisis, lorded it over London’s financial scene.
The seeds of the problems at Southern Cross were sown during its time under the ownership of the leading private equity firm Blackstone, whose London offices nestle in an exclusive Mayfair enclave.
Back in the euphoric days before the credit crunch, clever financiers such as Blackstone’s billionaire boss Stephen Schwarzman realised that as Britons were living longer, more of us would be in need of residential care.
Elderly people, seen through their eyes, were not well-loved grandparents so much as ‘marketable beds’ – as care-home places are described in the Southern Cross annual report.
The private equity princelings who strutted around the capital were hungry for deals, and no target seemed out of bounds.
Some of the UK’s best-known names, including Boots the Chemist, Debenhams and the AA fell into their hands. Blackstone was one of the firms to spot the money to be made out of elderly folk.
In 2004, the company, which also acquired a string of other investments including the London Eye and the Alton Towers theme park, bought Southern Cross from another private equity operator for £162million. It also acquired another care-home company, NHP.
Private equity firms and other investors were enabled to become involved by legislation in 1990 allowing local authorities to farm out the care of the elderly to private-sector providers.
Rapid expansion: Southern Cross grew because it borrowed hundreds of millions to buy homes, which it hoped to invest in patient care - until the credit crunch hit
The theory was to bring the efficiency and cost-control of the business world into social care.
Having made its purchases, Blackstone set about organising the two care-home firms so that Southern Cross acted as an ‘operating company’ carrying out the actual business of care. NHP was left as a pure property company which owned leaseholds to the homes.
Southern Cross expanded rapidly by borrowing hundreds of millions of pounds from banks, using the money to buy homes. The strategy was to sell them on to new landlords including NHP at a profit, and use the proceeds to fund the care of the residents.
Elderly people were not well-loved grandparents so much as ‘marketable beds’ – as care-home places are described in the Southern Cross annual report.
All was well while the financial boom lasted. In 2006, Blackstone floated Southern Cross on the stock market in a listing which valued the company at £425million, an increase of more than 150 per cent in two years.
It also sold off NHP to an investment fund, Three Delta, owned by Qatari investors.
A year later, when Blackstone sold out its remaining holding in Southern Cross, the company’s value had almost doubled again to £770million. In total, Blackstone is reckoned to have quadrupled its investment in just three years.
When the credit crunch hit, Southern Cross was left with large debts and a crippling rent bill, currently running at £250million a year, because it no longer owns the homes.
From a peak value of £1billion, the company’s estimated value yesterday was £12.2million. For Blackstone, which has taken its profits and moved on, this is of academic interest.
The major shareholders now are investment banks and other financial institutions – Credit Suisse, JO Hambro, Deutsche Bank, UBS, and Wintrust (Guernsey), a Channel Islands investment trust.
London HQ: Based in Berkeley Square, Blackstone has taken advantage of some of the UK's biggest names including Boots, Debenhams and the AA
Private-equity players believed the residential care business was tailor-made for their money-making technique of borrowing heavily to buy businesses, subjecting them to some financial engineering, then offloading them at a hefty profit a few years later.
Blackstone did just that.
But when private-equity firms entered the care market, no one stopped to ask whether the human stakes were too high, or whether the ruthless, dog-eat-dog values of the City were remotely compatible with the care of our oldest and most vulnerable people.
While the private-equity panjandrums made millions – as did former Southern Cross bosses – the 31,000 residents and more than 40,000 employees, many of them on low wages, are left to reap the consequences.
Explore more:
- People:
- John Spellar,
- Paul Burstow,
- Vince Cable,
- Colin Powell,
- Rod Stewart,
- Andrew Lansley,
- John Healey
- Places:
- London,
- New York,
- United Kingdom,
- Poland
- Organisations:
- Department of Health,
- Commons Health Committee
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