Circle Health – the ‘social enterprise’ run by the world’s hardest hedge fund managers
The private company about to take over an NHS hospital has a bold and innovative – if opaque – corporate structure. But don’t confuse it with the John Lewis Partnership
Circle Health – the company that last week became the first private healthcare operator to take over the running of an NHS district general hospital – has variously been described as a "John Lewis-style mutual", a "third-sector provider", and a "social enterprise majority owned by employees". It is none of these things.
If it were, it would not have attracted about £120m of investment from highly astute and profit-driven venture capital and hedge funds, including Odey European, Lansdowne, Balderton and BlueCrest. These funds are run by ruthlessly brilliant investment managers whose reputations are built on spotting trends in the capital markets before anyone else.
Anyone who thinks their investment criteria might include a social dimension would do well to cast their mind back to 2009. Some of these funds made millions from identifying weaknesses in Britain’s banks, and betting the Treasury would be forced to intervene to rescue them. It might be too much to say they caused that banking crisis, but they saw it coming, and saw an opportunity to profit.
So what exactly is Circle Health? In truth, it is a subsidiary ultimately controlled by Circle Holdings, which in turn became a publicly listed company following its flotation on Aim on 17 June. Almost 95% of those shares have remained in the hands of six investors, including the above-mentioned funds. Behind all the spin, the simple fact is that Circle Health remains a loss-making, growing, private business run by a chief executive, Ali Parsa, who has a fiduciary duty to maximise returns for his shareholders.
Circle Health’s majority shareholder is Circle Holdings, where former Goldman banker Parsa personally holds about 5% of shares and is again chief executive. In terms of who pulls the strings, it is Parsa and his hedge fund pals: end of story.
But what, then, about the much-mentioned 30m shares Parsa has handed out to more than 2,500 staff, including doctors, nurses, hospital managers, porters and cleaners? These are, in fact, shares in an entity registered in the Virgin Islands called Circle Partnership. This offshore firm has a minority investment of 49.9% in Circle Health, making it a joint venture minority partner to Circle Holdings.
Both Partnership (ie the staff) and Holdings (ie the hedge funds) have an equal number of seats on the board of Circle Health, but the small print makes it clear, on almost all issues, that it is Holdings that makes the decisions.
So how should clinicians and hospital workers at the soon-to-be-Circle-run Hinchingbrooke hospital in Cambridgeshire regard their shares? Will they be entitled to a say in how the company is run? How financially valuable are these pieces of paper?
Even after wading through the fuzzy language of "social enterprise" – in which it seems both the Parsa and the Department of Health are prepared to indulge –, it becomes very difficult to get a handle on how empowered staff at Circle Health have become, or indeed how well they are being rewarded. (For those hospital workers watching the share price of Circle Holdings, it is important to note this is not a proxy for the value of shares in Circle Partnership.)
Circle Health made a pre-tax loss last year of £44.3m. The likelihood of shares yielding a dividend can only be a medium- to long-term goal. These enigmatic and illiquid share certificates in an offshore company look destined to gather dust in of thousands of hospital workers’ box files. This is very far from the kind of employee ownership found in the co-operative movement or share option plans. John Lewis it is absolutely not.
That said, as Circle management insists, this equity structure is a radical departure from ownership models on offer elsewhere in British healthcare. This is a company that appears to be able to recruit the cream of the investment world as well as offering significant, if opaque, ownership rights to hospital staff. The model is unproven, but it is a pioneering concept in a politically sensitive arena.
If it proves successful, and genuinely delivers meaningful rewards for staff as well as investors – without upsetting patient care or taxpayers – Circle could yet spawn a host of imitators.
If any one of these stakeholders are short-changed, however, the model will quickly be condemned to the dustbin. The stakes are high.
Waiting to see how UBS plays the casino
The writing had been on the wall for the investment banking arm of UBS even before Kweku Adoboli’s alleged rogue trading activities blew a $2.3bn hole in its third-quarter profits. But as Oswald Grübel, the chief executive who quit to "bear full responsibility for what occurs" at the bank, put it: "This incident has worldwide repercussions, including political ones."
He was referring to the pressure for investment banks to be scaled back and take fewer risks. It’s a pressure UBS is feeling domestically but one that is also very relevant in the UK following the report by Sir John Vickers, whose independent commission on banking might have stepped back from full-scale separation but came up with an idea to ring-fence high-street banks from the "casinos".
The future of the investment bank, which employs around 6,000 in London, will become clearer on Thursday when it will hold an investor day, scheduled when Grübel was still in charge. At the event in New York, UBS is not expected to kill its investment bank off, but curtail some of the most risky and capital-intensive businesses.
Analysts at Morgan Stanley believe it will shrink the investment bank by up to Sfr130bn (£90bn) of its so-called risk-weighted assets over three to five years. They reckon it could pull back from fixed-income – the bonds businesses that require lots of capital and have been hard hit by the eurozone crisis – and focus on operations which can be used to support its private banking clients: equities and foreign exchange, for instance.
The bank has hinted as much. When Grübel quit in September, it explained that "in future, the investment bank will be less complex, carry less risk and use less capital to produce reliable returns and contribute more optimally to UBS’s overall objectives".
Investors will want to know if Sergio Ermotti, the internally promoted stand-in for Grübel, will remain in charge to streamline the investment bank in the long term. But the action UBS takes will also be watched closely by rivals around the world, all facing the same constraints on capital and pressures from regulators.
Safe haven? Not for pension funds
Bond yields at 7% are unsustainable. Ask Silvio Berlusconi. But are bond yields at 2% much better? On capital markets this week, gilts became the surprise bedfellow to German bunds, with yields pushed down to levels last seen when Queen Victoria was on the throne. Britain’s total personal, corporate and government debt is substantially worse than Italy’s, but the bond markets now freakishly rate London a safe haven, with the interest rate on gilts falling to 2.1%, just a smidgen over German bunds. The government coffers will pick up a welcome £4bn windfall as the cost of servicing the national debt falls. But there’s a price to pay. Every time the 15-year gilt falls by 0.1%, the liabilities of Britain’s pension schemes rise by 2%, so pension deficits will explode in the next few months. Finance directors might well say: if this is a safe haven, get me out of here.