Specialist care needs reform

Ask an infrastructure fund manager invested in specialist care – nursing homes, care homes and/or educational facilities for children and young adults with learning disabilities – if this niche sector belongs in their portfolio and you’ll get a list of reasons why it does. These include the provision of essential services, strong demographic trends, stable cashflows and high barriers to entry. Add to that a long-term investment horizon, and infrastructure professionals will tell you the asset class is a better match than their private equity and real estate peers.

Therefore, from an infrastructure investor perspective, specialist care ticks all the right boxes. But perhaps a different way to look at it is whether or not infrastructure capital stands a chance to deliver the quality of service end users need, a question that goes to the core of the industry’s social licence to operate and one we explored in our recent feature on the sector.

One infrastructure GP we spoke to, who had considered such an investment and asked themselves that question arrived at the following answer: “When you overlaid the costs required to provide the level of care that you’d want to, it just didn’t make financial sense.”

That link between cost and level of care is what makes this sector quite unique, not to mention the social responsibility involved in caring for vulnerable populations. “Care work is time-intensive and not easily amenable to increases in labour productivity,” Christine Corlet Walker and her colleagues at the UK’s Centre for the Understanding of Sustainable Prosperity, wrote in an April 2022 editorial published in The Lancet. In other words, there is limited scope for achieving cost-efficiencies by either increasing carers’ workloads or reducing headcount without negatively impacting quality of care and patient outcomes.

It’s true that a number of infrastructure GPs are invested in the sector and, as far as we can tell, are doing so successfully. But when things go wrong, no matter how isolated that occurrence may be, it inevitably prompts a re-examination of how the sector operates.

After talking to a number of infrastructure GPs invested in specialist care – most of whom agreed to speak only on background – as well as academics and researchers focusing on the sector, we’ve come to the conclusion that some significant regulatory reforms would go a long way towards safeguarding the financial health of the sector and the wellbeing of its end users.

Here are some options regulators could consider: simplify operating companies’ corporate structure; limit the amount of debt the operating companies can be burdened with; prohibit asset stripping; and regulate the carer workforce.

Most of these recommendations are also put forth by Corlet Walker and her CUSP colleagues in the aforementioned editorial, welcoming them in the “immediate term”. But ultimately, Corlet Walker sees them as a stepping stone to a non-profit care sector.

We don’t think that is the answer, especially when considering that a July 2022 study by the same researchers that examined the performance and practices of UK care homes by ownership type, revealed that even within “the not-for-profit portion of the care market, there are corporate structures and financial tactics at play, including high salaries for directors, the splitting of the property and operating companies, related offshore entities, and tax minimisation strategies”, albeit on a smaller scale.

The reality is that private capital is required to add much-needed capacity to the sector. The public sector – in the UK or most other countries – does not have the resources or expertise to deliver the quality of care that is essential. It’s not, therefore, a matter of public versus private ownership – it’s a matter of accountability and creating the right framework to enable public-private co-operation.

That is a job for regulators, so that asset owners of all stripes can then be held accountable. We hope they embrace it.