Our cross-border investigation on for-profit elder care reveals a common pattern across Europe: elder care homes are underfunded and have fewer employees than they should. But an increasing share of government spending on elderly care is flowing into the coffers of transnational companies who are engaged in a growing and very profitable business. By transferring their revenues to offshore centres, anonymous financial investors are taking ever-larger shares of the business and are avoiding taxation on their profits — most of which is made with public money.
Domus Vi is the third-largest operator in Europe, with 355 residences and more than 33,000 beds. What looks like one single corporation is, in reality, a cascade of companies located in France, Spain, Portugal, Ireland, the Netherlands and Latin America. They are owned by other companies in Luxembourg, which in turn can be traced to a financial fund on the Channel island of Jersey. Lord Davies of Abersoch, a former minister of state in the last British Labour government is chairman of Intermediate Capital Group (ICG) plc, a “global alternative asset manager in private debt, credit and equity”, which manages the fund (whose ultimate beneficial owners are not known) that owns 55.5 per cent of Domus Vi.
But the story only begins here. The company is expanding at a dizzying pace. According to interviews conducted by Investigate Europe and InfoLibre, the price for this expansion is often paid by the nurses who work for the company, or by the residents living in the care homes.
In early July, Domus Vi made a capital increase of €333 million. It incorporated three of the companies that it owned in France into one, paying shareholders a 316 per cent increase in value after three years of investment. A new fund, Mérieux Equity Partners, became a shareholder in the nursing home network, but the value of its share is not yet known.
In just four years, this is the third investment fund to enter Domus Vi. In July 2017, the ICG fund in Jersey bought Domus Vi from another private equity fund, PAI Partners. It was a big deal. Just three years before selling it again, PAI paid €639 million for Domus Vi. In those three years, the value of the company multiplied by four: ICG paid the PAI fund €2.4 billion.
Domus Vi, as PAI Partners explains, was a “leveraged buyout” (or LBO in financial parlance). This means that the buyer does not actually invest its own money in the purchase. The acquisition is made using a significant amount of borrowed money to meet the cost. The assets of the purchased company are often used as collateral for the loans. Put more simply: when it bought Domus Vi, ICG used borrowed money and may have given the homes’ buildings, for example, as collateral to the bank.
What this example shows — apart from the huge valuation of the company in a short space of time — is how quickly these funds move in and out of a sector where the social impact of management decisions is extremely sensitive.
Let’s take a closer look at a concrete example to better understand how the business of moving profits offshore works. In Portugal, Domus Vi runs three nursing homes — in Porto, Aveiro and Viana do Castelo. This sounds simple. But the Spanish company Geriavi, which owns the operation in Portugal, is linked via no less than 11 connected subsidiaries to the offshore Jersey fund. This is the very fine art of filigree financial engineering. An investigation by Investigate Europe’s Spanish cooperation partner InfoLibre reveals the contours of a business that hides profits, imposes debt on the real companies (those that run the homes), and lives off the interest on these loans between companies in the same group, thus avoiding taxes.
As of 2020, Geriavi had signed loans amounting to €503 million with the French company that is its sole shareholder (Domus Vi SAS). It has already paid interest amounting to €55 million, in addition to repaying another €143 million in capital. Geriavi used the money it borrowed from Domus Vi to buy homes in Spain and Portugal. By returning the money to France, through interest, it is transferring a large part of its operating profits to Domus Vi SAS.
In France, there is another company, Kervita, which has issued convertible bonds worth over €640 million. Who bought this debt? Two other companies of the same group, this time in Luxembourg. Topvita Investment Sàrl acquired €535.8 million, at an interest rate of 9.2 per cent, and Topvita Financing Sàrl another €104.7 million, at an interest rate of 11 per cent.
The international accounting standards used by the auditors indicate that since these are transactions between companies in the same group, the interest on these loans should have been at market prices. This would be that of a similar bond plus two percentage points, meaning an interest rate of between 3.5 and 4 per cent. In European operations, a maximum of 5 per cent could be accepted, although this is already well above the common rate. There are no circumstances in which interest rates of 9.2 per cent or 11 per cent are common practice. Acquiring debt at an interest rate of 11 per cent would only be logical if there was a high probability of default. In other words, if we were dealing with a rating equivalent to “junk”. But, logically, ICG would not allow one of its own companies, Kervita, to issue junk debt, with interest at twice the market price, to be bought by two other companies (Topvita), because then it would be cheating itself.
The logic behind this operation is different: charging 11% interest rates to Kervita makes this company lose money, within the group. In other words, it transfers the profits from managing the homes to Luxembourg by paying interest on the bonds.
Kervita SAS is the company that consolidates the results of more than 200 subsidiaries in France, Spain and Portugal. This means that all the companies in the group are taxed as if they were one, so that the profits of some companies are offset by the losses of others, thus reducing the tax bill. All companies have their own accounts, but the only one liable for corporation tax is the parent company that consolidates the accounts. Thus, in 2019, Kervita SAS saved €22 million in tax. This is perfectly legal, regulated almost identically in all EU countries. But in practice, it ends up benefiting large groups with many subsidiaries because it is very likely that some of them will make losses.
As Kervita is the company that would have to pay tax on the profits of the whole group, the imposition by ICG of that exorbitant interest rate means it can declare losses. In 2018, Kervita had a negative financial result of €82.6 million and in 2019 of €70.3 million. In total, €152.9 million served almost entirely to pay interest to Topvita Investment Sàrl and Topvita Financing Sàrl.
But the profits do not stay in the Topvita companies, even though they have a very attractive tax regime in Luxembourg. On the same day (July 27, 2017) that it bought the debt of French Kervita SAS for €535.8 million, Topvita Investment Sàrl took out a €600.8 million loan. The interest rate paid to its creditors is also 9.2 per cent and this debt was fully approved by seven companies that are shareholders of Topvita Investment, directly or indirectly. The main product used was the so-called CPEC (“convertible preferred share certificates”), which are tax-exempt in Luxembourg. Also, Topvita Financing issued debt instruments for €103.7 million, for which it pays the same 11 per cent interest rate it charges to Kervita. This debt was also bought in its entirety by its shareholders, who are the same as in Topvita Investment.
In this way, the money that started its journey in a residence in Portugal, Spain or France, generated by the monthly fees paid to care for elder residents, climbs the last stages of the corporate structure until it reaches the parent company created by the ICG in the island of Jersey.
We have contacted Domus Vi (both in Spain and in its headquarters in France) several times in recent weeks for comment on this description of its structure. We have received no reply.
Retaliation in Galicia
In large care home companies that have subsidiaries across Europe, tense relations with workers or trade unions seem to be quite common. This is also the case at Domus Vi.
Maribel Barreiro, 54, speaks to us via video call. She sits with her right leg resting on a chair, with full-length splints. She ruptured the lateral ligament in her leg in June when she slipped and fell while changing in the wet changing room of a Domus Vi care home in the Spanish city of Vigo. “Now I have to spend the day at home with my leg in splints, not being able to bend it,” she says.
The way she sees it, the accident was not a normal mishap during a day’s work. Barreiro was secretary to the management of the home when it was publicly owned. She was always a member of the workers’ committee. When Domus Vi was handed ownership by the Galician government (the chain runs another 31 nursing homes in the autonomous region, and 140 across Spain), Maribel Barreiro was demoted. “They put me to work in the warehouse, unloading weights that I can’t carry. I got a back problem and had to take sick leave and do physiotherapy.”
As a consequence — along with Sonia Jalda, who was a nurse in the same care home — Barreiro founded TREGA, the first association of female nursing home workers in Spain. Jalda reports a different challenge that she faced with the company. “The first thing Domus Vi did when they arrived was to ask us for a meeting,” she shares. “They were used to our union at the time (the UGT) and they found us, who were like a wall. They asked me if I wanted to work from Monday to Friday only on the morning shift, and how much I wanted to earn. They got the wrong person.”
Jalda describes a dramatic accident that occurred eight years ago, after which she left the company. “I burned my hands on a chemical that should have been diluted in 100 litres of water but was pure,” she describes. “I was off sick for a year and asked the medical commission to let me go back to work, but they wouldn’t let me. This was in 2013. Even today, they still haven’t paid my work insurance.”
Today, Jalda is retired on disability, but teaches at the public university in Pontevedra. “Being retired is very hard,” she says. “I love my profession.”
All these labour complaints help us understand part of the problem. These big nursing home companies cut costs to increase their profits. A study by the independent think tank CHPI in Britain estimates that for-profit care homes make profits of more than €1 billion a year, which is about 10 per cent of turnover. The author of the study, Vivek Kotecha, explains in an interview with IE that once profitability is achieved, this is a difficult sector to make big profits in because “it’s a stable type of investment, which is low risk and relatively low return”.
For Kotecha, these profit margins “seem unreasonable, given the risk that is involved in the service. [These companies] seem to generate really high levels of profit compared to what should exist in a labour-intensive industry.”
But what is also true is that public funding is a very reliable source of income— a security blanket that that other sectors don’t offer to their investors. According to the OECD, the EU states plus the United Kingdom, Norway and Switzerland contribute more than €220 billion a year for elder care. Residents and care receivers contribute a further €60 billion from their own pockets. And this figure is increasing every year. “The rapidly ageing population across Europe will be the biggest driver of growth in the long-term care homes market,” says management consultancy Knight Frank, praising the continuing boom. According to European Commission estimates, the cost of long-term care in Europe will more than double from the current 1.7 to 3.9 per cent of GDP by 2070. This makes the business completely crisis-proof, explains Matthias Gruß, sector expert at Verdi, the German industry union. “It is such an attractive business for investors because there is a secure cash flow.”
And that’s why this is so relevant for us — the main assets in this business story.
A version of this article was published by our Portuguese media partner, Público.