Simon English: Who thought it was a good idea for private equity to run such businesses?
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Your support makes all the difference.To critics of the private equity industry, the business model is roughly this: (1) Buy an already existing, perhaps perfectly healthy company, using borrowed money. (2) Give management a stake in the new venture, an incentive to shove profits up and costs down. (3) Use every method possible to slash those costs, probably including axing as many staff as you can get away with while still keeping the show on the road. (4) Present a spruced-up set of accounts and sell the business back to City shareholders as a going concern. Walk away, loaded.
That might be a slightly jaundiced view, but private equity does appear to have been most successful during bull markets, when, by definition, most things are doing well in any case.
There are examples of private equity turning around failing businesses with strong management – but not so many as to entirely refute the idea that this industry is good for itself, but hardly for everyone else.
Why it was good to run care homes as if they were just another business looks less clear by the week. And why it made sense to split the property arms from the rest of the company is now unfathomable.
The old folks' homes Four Seasons and Southern Cross both ran into trouble, in the latter case when councils cut their spending and the company couldn't keep up rent payments (it had sold off its freeholds to make a quick pound).
The private equity giant Blackstone had earlier pocketed £500m on an original investment of £162m by selling its interest in Southern Cross. It was a result for Blackstone, which got out at the top. In 3i's case, its ownership of Green Corns didn't even work out well for 3i.
Perhaps the optimistic note to come out of all this is that wealthy individuals and the private equity industry might conclude that the care of vulnerable people isn't a commodity to be bought or sold like anything else – that it requires long-term investment, not get-rich(er)-quick operators.
Private equity would say there is no fundamental reason why it can't run good care homes and that it might do it better than the average local authority.
The evidence is in the other direction just now.
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