It is not an easy game for an investor or operator to get debt financing in place for a care home acquisition or development project. Unless you find an asset that already operates as a cash cow, has stellar EBITDAR margins and a solid CQC history, you may need to find alternative sources of funding, writes Sameer Rizvi, CFA is the Managing Partner of RD Capital Partners LLP.
In fact, even for deals that fall in the “top end” category of high street banks’ lending criteria, it is hard to obtain funding greater than 60% LTV. Banks such as HSBC have a strict maximum LTV policy of 60%. Lloyds does not even have appetite for standard care home lending anymore. Thus it is important to look elsewhere for funding.
- Private Debt or Direct Lending firms
In the last decade, capitalising on the increasingly tough restrictions and regulations set on large high street retail banks, several private equity and alternative investment firms have also set up ‘private debt’ or ‘direct lending’ practices. Firms such as Ares Management, Blackstone and Cairn Capital now have over tens of billions in assets under management (AUM) purely dedicated to ‘mezzanine funds’ and ‘direct lending funds.’ They are constantly on the lookout for opportunities to lend where the banks do not.
- Debt Crowdfunding
‘Crowdfunding’ is another growing and equally viable option. Although some deals may be too small for the aforementioned private debt firms, no deal size is too small for a debt crowdfunding platform such as Funding Circle or Crowdcube. In fact, there is an increasing number of property technology or ‘PropTech’ platforms that lend against real estate development projects. It is just a matter of time before platforms such as LendInvest and Property Partner begin lending in other areas of commercial real estate, including healthcare real estate and thus care homes.
- Private Equity
The previous two options are typically structured as subordinated debt and obviously mean you do not lose any ownership in the project. However, if your goal is to get the development project funded and do not have an issue in sharing the profits, then private equity is another viable option. Private equity firms, including RD Capital Partners, look for care home investment and development opportunities that offer a healthy mix of both immediate cash flow from high occupancy care homes, as well as long-term fair maintainable EBITDA and free cash flow that comes from development projects.
- Initial Public Offering (IPO)
A fairly uncommon option for care home operators is an initial public offering (IPO) and listing onto a stock exchange such as the London Stock Exchange (LSE). In fact, the AIM (Alternative Investment Market) is a sub-market of the LSE, which was created to allow smaller companies to float shares with a more “flexible” regulatory system than is applicable to the main market. Companies with market capitalisations as small as £300,000 are listed. One of the first care home operators to list on the LSE was Duncan Bannatyne, when he listed Quality Care Homes (QCH) in 1992 and raised £26 million. This additional capital allowed him to develop a number of additional care homes and sell the whole portfolio for £46 million in 1997, just five years later.
Thus if banks are not willing to lend, do not fret; instead explore the various non-bank financing options that exist.
Sameer Rizvi, CFA is the Managing Partner of RD Capital Partners LLP, an investment management and advisory firm that invests into European healthcare assets, with a focus on UK care homes. He has previously worked as an Investment Banker at the Royal Bank of Scotland and at Commerzbank.