The highly profitable world of private equity has a basic MO -- the leveraged buyout, buying a company with mostly borrowed money, cutting the head count, loading it up with more debt to expand, then unloading it (and the debt) at a fat profit.
The process makes many private equity partners billionaires, but often eventually wrecks the target companies.
One good example of that is the fate of Britain's largest nursing home company, Southern Cross, after it was processed by the Blackstone Group.
In short, Blackstone owned Southern Cross from 2004 to 2007, made about 400 percent on its investment, and set it up to be practically bankrupt today, and needing a government bailout that may cost more than $1 billion.
Details, below.
The Daily Mail, a conservative, middle-market British tabloid, had three stories about the Southern Cross mess yesterday.
Calling it "the worst crisis ever to hit the care-home sector."
British nursing homes used to be run by local authorities, and were the equivalent of county nursing homes here. But in 1990, Margaret Thatcher and the Tories succeeded in getting legislation to privatize nursing homes "to bring the efficiency and cost-control of the business world into social care."
There is no doubt that Wall Street's London counterpart, the City, influenced the Tories' privatization of nursing homes program, because:
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.
The Blackstone Group (founded by and named for New Deal enemy Peter Peterson and Obama enemy Stephen Schwarzman in 1985) bought Southern Cross from another private equity firm in 2004 for £162 million, and also acquired another smaller nursing home company, NHP.
Blackstone reorganized the companies, with Southern Cross providing the nursing home care, and paying rent to NHP, which now owned the properties, largely bought from local governments at a good price, for Blackstone.
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 £425 million, 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 £770 million. 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 £250 million a year, because it no longer owns the homes.
From a peak value of £1 billion, the company’s estimated value yesterday was £12.2 million.
For Blackstone, which has taken its profits and moved on, this is of academic interest.
FYI, in 2006, Schwarzman's personal income was almost $400 million. It was double that in 2007, due in part to Blackstone's successful IPO that also made him a multi-billionaire.
Like most British papers, the Daily Mail lets a little editorializing into its new stories (maybe that's why it's so successful, though photos of movie stars and WAGs in bikinis also help).
Here's how it ends the story that focuses on Blackstone's "financial engineering":
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.
The first story, right under the online headline "Sharks who made a killing out of 'care': How City predators destroyed firm caring for 31,000 old people", deals with the overall crisis, and editorializes a bit in the lede:
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.
That story reports that Southern Cross cares for 10 percent of Britain's nursing home residents, and that the way that Southern Cross is trying to survive is by cutting its rent payments, to its former sister company, by a third.
Even Tory MPs are outraged, and possibly backing off from David Cameron's plan to privatize some of the National Health Service:
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.
A Labor MP's criticism was more pointed:
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."
The other story in the package is about the effect of Southern Cross' troubles on its residents and their families.
Faith Cox is concerned about her mum:
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.
snip
"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."
Finally, Schwarzman.
The Daily Mail package notes (in the overall impact story) that Schwarzman is "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 $1 million 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.
snip
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.
Presumably, that should read "$400 worth of stone crabs."
But still, for two people, in two days!?
BTW, that 60th birthday party was celebrated for its neo-Gilded Age excess, and cost an estimated $3 million, less than 1 percent of Schwarzman's earnings that year.
And many here may remember Schwarzman's Godwin comment about an early Obama administration proposal to tax private-equity and hedge-fund types the same way we tax maids and teachers.
“It’s a war,” Schwarzman said of the struggle with the administration over increasing taxes on private-equity firms. “It’s like when Hitler invaded Poland in 1939.”
One person who heard that, at the board meeting of an unnamed nonprofit group, and presumably leaked it to Newsweek, was nonplussed:
War? Hitler? Poland? A little over the top for a proposal to make hedge-fund managers pay their fair share in taxes.
It is shameful that no corporate newspaper or TV network in our country would publish/broadcast such a story about Wall Street predation.
And I'm 100-percent sure there are hundreds of Southern Cross stories right here.