WHEB Commentary

Helping the aged – investing in elderly care


Ageing and care homes

The world is ageing. While this is a global phenomenon, it is a particular feature of European countries. In the year 2000, for example, less than 16% of the French population was over 65 years of age.[1] By 2020 this figure was over 20%. On current trends, by 2050, one in four people in France will be over 65.[2]

The vast majority of these people will be able to live their lives happily in their own homes and communities. A significant proportion, however, need specialist care.  The most common reason for moving into a care home is because of severe cognitive and/or physical decline that requires an individual to need full time care. In the UK, about 4% of the 65 and over age group live in nursing homes and other residential settings.[3] This figure rises to 15% for those aged 85 or over and approximately 40% of the total care home population receives specialist care for dementia.

Investing in care homes

In most European countries, growing demand for care homes is being met by the private sector. The European population of 85 years old and over is growing at c.2% per year.[4] Larger private care home operators have been growing at approximately twice this rate over the last decade as they have taken share in the market.[5]  Although the sector is not considered high growth, its progression is extremely predictable as it is driven by the long-term ageing of the population,. The sector also enjoys high occupancy rates; a consequence of the strict regulation governing the sector. In turn this supports pricing in the sector, which is another attractive feature from an investment perspective.

For these reasons, the sector has attracted private investment. However, there are significant risks. Care home residents are extremely vulnerable. The sector also typically relies on relatively unskilled labour to supply care to residents and wages are low. In combination, these factors pose risks to the quality of care as well as staff working conditions. Furthermore, the sector faces higher risk of corruption and fraud due to the need for close relationships with regulators.  Any investor in the sector needs to be highly attentive to these issues and how management deals with them.

WHEB’s approach and investment in elderly care

WHEB has had one long-term investment in the elderly care sector which we have traditionally viewed as offering critical care to a highly vulnerable community. The company, Orpea, is headquartered in France and we originally invested in April 2012.  Initially, the company was focused on operating care homes in the French market where it offered 43,000 beds in 2013.  Over the past decade the company has more than doubled the number of beds it offers to nearly 115,000 in 2020. It has also expanded into 22 other countries, mostly across Europe. Correspondingly, its share price has also more than doubled during the period.

One of the reasons for the company’s success is that it has been seen as one of the highest quality operators in its markets. The company manages care homes at the premium end of the market, offering higher quality care and facilities to its residents. It prided itself on its high standards, refusing to enter the UK market which it believed was characterised by poor quality, and exercising strict controls over its homes.

Due diligence and engagement

Over the many years that we have owned the company, we have conducted a range of deep-dive investigations into the company. We highlighted the sector as high risk following an internal ethics screen and had an extensive engagement with the CEO on how these risks were managed. We have visited Orpea’s facilities and met with the company’ executives numerous times over the years. We received copies of their internal operations manuals and consulted third party experts on the quality of Orpea’s approach and the care homes that they manage. The company routinely publishes independent resident satisfaction surveys which show that more than 90% of residents participating would recommend Orpea to someone close to them.

More recently we have been working alongside other investors and trade union representatives to engage the company on issues concerning the company’s labour policies. To date the company has been largely open and responsive to this engagement, including providing more detailed disclosures on employee welfare and training.

The company has also made progress on other important ESG issues during our holding period, including improving board independence, investing more in staff training and committing to setting a net zero carbon target.

‘Les Fossoyeurs’ (The Gravediggers) – allegations of malpractice at Orpea

At the end of January 2022, excerpts from the book ‘Les Fossoyeurs’ were published in Le Monde.[6] The book, which was subsequently published on 26th January, contained allegations of mistreatment of residents including systematic rationing of adult nappies, medical treatment and food as well as inadequate staffing, inflated government receipts and bribery of government officials. The author spent three years researching and writing the book and had assembled 250 witness statements alongside testimony from several whistleblowers. These were not one-off events, he claims, but the result of specific policies aimed at reducing costs and placing profitability over the welfare of residents.

Company response

In the days following the newspaper articles and book publication, Orpea’s stock price dropped dramatically. Initially the company rejected all the accusations which they considered ‘false, outrageous and prejudicial’.[7] In subsequent statements they argued that they have not pretended ‘that we never made mistakes’, but that allegations concerning systemic abuse were entirely false.[8] At the end of January, the Board terminated the CEO’s contract and announced that two independent investigations would be conducted to ‘shed light’ on the allegations.[9] Meanwhile, the French Government has announced its own investigations including a parliamentary commission to hear testimony direct from the author.

WHEB’s position

In the days following the allegations, WHEB’s investment team met several times to discuss our position. The ultimate veracity of the allegations is still to be determined. However, in our view, the extensive details supplied in the book as well as the credibility afforded to them by parliamentarians and reputable media outlets suggest that it is probable that some of the misconduct is likely to be proven true.

We contacted the company asking for an urgent meeting. We also canvassed views from our independent Advisory Committee asking them to provide their perspective on our potential courses of action.

We held a video conference with the company’s investor relations team at the end of January. The call did not shed further light on the allegations and there was little new information that the company could share on the investigation. The company did stress that the absolute scale of the allegations in the context of Orpea’s business was ‘a very small number’ and that they were not expecting to uncover any major issues.

Why we sold our position

Following the exchange with the company, we concluded that we would sell our position in Orpea. The specific allegations levelled at Orpea rightly remain the immediate focus of politicians, regulators and the media. However, we believe that the wider context is equally problematic. The absolute number of elderly requiring residential care is going to continue to increase in the coming decades. At the same time, the available budgets to support this care will almost certainly fail to keep pace. In a tight labour market, the challenges facing care home operators which typically pay just the minimum wage to care home workers, is going to intensify.

Investing in such a troubled sector that cares for individuals who are among the most vulnerable in our society, is extremely challenging. Even more so for listed equity investors who are inevitably far removed from day-to-day operations. It is likely, in our view, that Orpea is one of the highest quality listed operators in the care home sector in Europe. This seems not to be enough and increasingly we believe that in the absence of massive systematic changes in the industry, the sector will become increasingly uninvestable for investors concerned about the long-term health of the care home sector and for its residents.

Next steps?

While Orpea was the only investment WHEB has made in elderly care homes, we still consider a range of residential healthcare providers as investable in the strategy.  This includes companies that operate long-term acute care hospital and rehabilitation clinics, as well as providing care to patients in residential settings. As a consequence of our experience with Orpea, we are reviewing investments in these sectors to examine whether risks of similar types of malpractice and abuse are effectively mitigated by these companies and that long-term trends surrounding care activities are still positive.

[1] https://www.statista.com/statistics/753163/share-old-people-france/#:~:text=Population%20ageing%20is%20a%20phenomenon,in%202020%20with%2020.56%20percent.

[2] https://stats.oecd.org/Index.aspx?DataSetCode=POPPROJ

[3] https://www.mha.org.uk/get-involved/policy-influencing/facts-stats/

[4] Op. cit. 2

[5] FactSet

[6] https://www.lemonde.fr/idees/article/2022/01/24/les-fossoyeurs-un-livre-qui-ouvre-le-debat-sur-la-gestion-et-le-controle-des-maisons-de-retraite_6110753_3232.html

[7] https://www.orpea-corp.com/images/orpeafinance/pdf/Communiques/ENG/2021/PR_ORPEA_240122_EN_cca65.pdf

[8] https://uk.investing.com/news/stock-market-news/orpea-france-head-says-we-do-not-pretend-that-we-never-made-mistakes-2570425

[9] https://www.orpea-corp.com/en/press-releases/2022

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